Berkshire 2015 Annual Meeting - Fang's Notes: Saturday, May 02, 2015

Berkshire 2015 Annual Meeting - Fang's notes
Saturday,May02,2015
1. I thought that Berkshire was ethical but now - Seattle Times predatory lending on Clayton Homes,
and 3G capital partnership. You once balanced capitalism with compassion. I cannot make a case for
Clayton or 3G. I wonder how you can do so?
Let's start with Clayton, there are a few mistakes, but it's important to back up even to mortgage
lending, and why Clayton follows a pattern that is exemplary and rather extraordinary in the
home mortgage lending business.
If you look back at the housing bubble that ended in 2008, one of the great problems, and in fact
the greatest cause, was that the mortgage originator became divorced from the homebuilder.
The homebuilder built the house, sold the house, made a profit and be done. And then the
originator would originate, package, and then sell them around the world. So nobody had any
connection with the transaction. And the originator suffered no loss if the loan went back. So
they had no connection with the actual outcome if it was a good mortgage or not
At Clayton, unlike virtually anyone, a few, we offer mortgages to the buyers of our homes. And
we've retained $12bn of mortgages on 300,000 homes. When a mortgage goes bad, two people
loses - the person who owns the house loses, and the person who owns the mortgage. And in this
case we have a consistent interest - we don't want to sell houses to someone who can't have the
house. And there are rules about making sure that the mortgage originator keeps some skin in
the game, 3%, to make sure they care about who they're lending to. But we keep 100% of the
mortgage so we have the same interest as society has and the homebuilder has, to not give bad
mortgages out.
The question is - can you lend intelligently to people who have a good chance of making the
payments and keeping the house, and clayton has been exemplary in doing that. About 3% of
mortgages default each year, and when they do we lose money and the person who buys the
house loses money, but 97% of them don't and most of these people wouldn't be able to do so
without the financing that Clayton makes available and others make available.
I invite you to look at that house for $69,500, that house will be transported and ready to go.
And you have to have the land, but for $69,500 the house has appliances, air conditioning, and
everything else, and probably you have to put another $25,000, so it's $95,000 total, and you can
make your own judgment. But there are those who wants to move to $95,000 homes and we help
them to move into those homes, and if we make a mistake it hurts them and it hurts us and that's
very unusual in the financial industry
I read the story, I saw something that's untrue - [quote on the average profit margin on Clayton
Homes = 20% profit" - this was just a misquote. That's gross profit
[showed math of how they got to 11,000 number]
[showed example of macy's, target, difference between gross profit and net profit]
For Clayton - we make 20% gross profit, but only 3% EBIT margin - so I want to point out the
mathematics
There's one other item you should see - in every retail Clayton establishment, we have a lender
board, which shows exactly what a variety of lenders are willing to do and what their terms are
We also have a sheet, it's less than a full page, it sets out the lenders who are available, and at
the very top of it says to check out more than one lender, and people sign at the bottom, and
there's no small print on this page. So people borrow from others, the local bank is very big. So
I make no apologies whatsoever about Clayton's lending terms.
I receive a lot of letters from people complaining about our business. I can say that in the last 3
years I haven't received one call about Clayton loans
We're also regulated by states - we've had 91 examinations in the last 3 years. 91 exams - they
come in, they examine us, and in these 91, the largest fine has been $55, and the largest refund
was $110, and we're regulated not only by those states but by all times by all types of people
When we can we try to get them a FICO loan, but most of our buyers are below 650 FICO
And while it's true that 3% of people lose their homes, but it's also true that you can get a home
for $600 monthly payments. I'm proud of the clayton management, I'm proud of the fact that this
year they put 30k people in homes, very good homes, very low cost.
CM: I don't know about Clayton's mortgage practice but I do know that they are 50% of the
manufactured house market. I often wonder why manufactured homes isn't a greater part of the
economy. Clayton is a very important part of the economy but we can't make it 100%. We
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wouldn't be running the business right if the default rate were 0, too many people wouldn't be
able to get credit
The big causes of foreclosure are loss of a job, death, or divorce. It happens with higher-priced
houses as well but it happens more often with those who live on the edge, and I don't think that's
a reason to deny them a house, and it happens with so many
The 2008-2009 recession was an interesting time - the default rates on those are a lot higher
On 3G, and I don't think you can ever find a statement that Charlie or I have ever made for
Berkshire companies or anyone else that there should be more people working at the company
than they should be. The 3G people have built some wonderful businesses, and while it's true
that they have purchased companies that had too many people, but the thing is after they've
bought the companies, the companies have done very well. You've seen BK do much better,
you've seen Tim Horton's. I hope that our Berkshire aren't being run with more people than they
need either. If they find out that 100 people are doing what 50 can do, they'll get 50 to do it
CM: The alternative to people being rightsized, is what happened to Russia, where everybody had
jobs, and workers said "they'll pretend to pay us and we'll pretend to work" so of course you want
the right amount of people in the job
In the Railroad business in 1.6mm people in the railroad business, and it was a lousy business,
and capital was short for any type of improvements - and now there are 200k. So they've gone
from 1.6 to 200k, carrying more freight, much more efficient, and safety has improved
significantly. Efficiency is required in capitalism.
2. Van Tile's sales culture? Can you change the culture?
If a change is required, it will be made, and I don't the answers to which way it will go on that.
It's true that people are - and that's not new, and that's been tried before where people have
tried a one price system where there's no haggling or negotiating, and a lot of people want to try
that system, except when they get in that system, they don't like it. There's negotiation going on
in any system, and people say they don't like it, but that's what ends up happening. Van Tile will
adapt to what the customer wants, and I don't think there's a problem with how Van Tile will
work with it.
CM: I like that acquisition partially because I think we can do more like it. It's been amazingly
resistant to change my entire life.
It happens in the jewelry business. And it happens in real estate. Let's say some real estate firms
that took business only where they weren't going to negotiate. When people are dealing with a
big ticket item, their natural tendency is to negotiate and particularly when it's built in the
system, but we'll do fine, no matter what which way it goes
3. Can you name 5 characteristics of a company that gives you confidence to predict its earnings
power 10 years in the future and can you use IBM as a case study?
CM: we don't have a one-size-fits all system for all companies. They're all different, every
company is different, we're also getting better, so we can't give you a system
If you look at the BSNL railroad, there's a lot of things going through our mind, and most of the
things going through are mind are things that will stop us. Including who we are dealing with,
will stop us from going on to the next layer. It's different for different businesses. We're looking
for things where we think we have some reasonable fit in 5 years. But there's no 5 things.
Certainly when we're buying someone who will keep running it with us, one of the questions is do
we trust them and want to partner with them and will they keep behaving in the future when
they don't own the business as when they do, but I don't have a list
4. Charlie, you broke Warren from his cigar butt habits. Is IBM = to textile mills of 1960s? Did you
try to talk him out?
CM - No. IBM is very interesting. they dominated power machines. Then when they met electronic
computing they dominated that as well. It's very rare that when tech changes come they adapt
as well as IBM has. Now they have the personal computer and that's been a mixed bag. But I
think IBM is a very credible company. We own a lot of companies that have had temporary
reverses or aren't the same company as they are now. IBM is a wonderful enterprise.
Incidentally we get asked about the investments we own and people always think we want to talk
the company up. We don't want the stock to go up because we may want to buy more or the
company may buy up. If we talked our book, we would say pessimistic things about all of our top
holdings because they're repurchasing shares. So I don't get why people talk up their names Charlie, do you have any idea?
CM: Warren if people weren't so often wrong we wouldnt be so wrong

5. Do you agree that you can't repeat your insurance success even if you were young and smart?
Well, I had many many many pieces of luck but I had 3 extraordinary pieces of luck in the
insurance business. One was when I was 20 years old, having a fellow on a Saturday, named
Lorimor Davidson, be willing to spend 4 hours with some 20 year old kid who he never heard of
before, explain the insurance business to him, so I received an education at age 20 that I couldn't
have gotten at any business school in the US. I just happened to go to washington, I had no idea
that he would be there or he would talk to me, so let's chalk that up to pure luck
In 1967 I got lucky again, that Jack Ringwald about 5 minutes every few years he would want to
sell his company because of some claim, so when one of those moments hit I got him to sell me
his company.
In the mid 80s I got really lucky when some guy came into the office said "I've never worked in
the insurance business, but maybe I can do you some good" and that was Ajit Jain
If you asked me could I repeat that trifecta I probably wouldn't be able to
The whole thing in business is being open to ideas as they come along
It just so happened that Lorimer and me hit a chord ,and it just happened that I could
understand National Indemnity.
There are an awful lot of accidents in life, and if you keep yourself open to good accidents
and don't get crushed by bad accidents, and it may not be insurance but things would be fine
I think if we were starting over again we would find something else to do
CM: I don't think we will have that kind of success. Mostly we find good businesses and nurture
them but the reinsurance business was created out of thin cloth.
6. Germany - you are regarded as role models for integrity and Berkshire. How do outside investors
judge Berkshire's culture after you're gone?
I think it's fair to come with a questioning mind in regards to me and Charlie, but I think you will
be pleased with the outcome. I think Berkshire's culture runs as deep as any company in the
world
It's interesting you're from Germany, because just 3 or 4 days ago we closed a transaction with a
woman named Louie in Germany, and she and her husband had built a business ,over 35 years
they built a business, a retail shop dealing with motorcycle owners, and her husband had passed
on and Ms. Louie, she wanted to sell to Berkshire Hathaway, and that would not have happened
30 or 40 years ago. So it's a deep part of Berkshire to have a deeply embedded company culture
that is in our company, our subsidiary companies, and it's even reflected in our shareholders.
Our directors sign up for it, and we behave on it consistently. Instead of directors who want to
sign up to get $200-$300k a year, we have directors who want to be stewards ,and represent that
stewardship by buying their stock in the market just like you do.
People who join us believe in it, and people who shun us don't believe it, so I think it's selfreinforcing.
And once Charlie and I aren't around it will become so clear that it's not force of personality, it's
institutional and no one will doubt that it will really continue for decades and decades and
decades to come
CM: Berkshire will do fine when we're gone, higher in dollars, maybe smaller percents, but there
are worse things in life [WEB:name one] well I have one not very far ahead [WEB: OKAY]
Culture runs deep in Berkshire. It would have been hard to turn Salomon into Berkshire, and I
don't think we could have done it. It's a different world, it doesn't mean that Berkshire is a
monastery. Berkshire and it's managers are more concerned with doing a great job for Berkshire
7. For last 50 years, we've been long sugar consumption via Coke, See's. But via science, there are
costs to sugar. And we see It in changing behavior - carbonated sugar companies are declining.
Have we reached the inflection in human behavior on sugar, do you think coke's moat is
narrowing and what would make you change your mind?
I think it's an incredibly wide moat and I also think the trends you are describing are continuing.
There will be 9.8 [trillion] coca cola products being consumed today. I don't think the trends you
are describing are revolutionary and I think you will see all food and beverage companies will
change their business to the expressed preferences of the consumers
I would predict 20 years from now there will be more coca cola cases consumed than there will
be now
In the 1940s Fortune ran an article that Coca Cola was all over. And when we bought our coke
stock in 1980 people weren't enthused.
For the last 30 years, 1/4 of the calories I've consumed have come from coca cola. I think there's
a lot of things to be said about being happy with what you're doing. If I had to eat broccoli I
don't think I would have lived as long. Every meal I would have approached, it was like going to
jail. Charlie's 91, and his habits aren't any different, slightly better.
CM: There's no question about it. The way I look at it, it's an incredibly useful substance. It
prevents premature softening of the arteries. And the way I look at it, if I die early, I just avoid
a few months of drooling at a nursing home
There obviously are some shifts in preferences, although it's remarkable how durable items are in
this field. BRK was the largest shareholder of General Foods from 1981 to 1984 when it was
bought by Philip Morris. That's 30+ years ago, and those same brands - they went through PM,
spun out as Kraft, got moved to two pieces -and now we're going to own those brands, and
they're terrific brands. Heinz goes back to 1868, the ketchup came out in 1870. Coke dates 1866.
it's a pretty good bet that an awful lot of people are going to like drinking the same thing. And
when I compare drinking Coca Cola to something that someone would sell me at Whole foods, I
don't see many smiles at Whole foods.
8. Van Tile - what made you attracted to the deal? roll up auto dealerships or tapping advantages
from full services?
There aren't huge advantages to scale in owning lots of dealerships, but running dealerships well
is a very good business, it's a local business. There are 17k dealers in the country, and if you
asked the people in Omaha for some dealers they'd come up with a lot of local names. I don't
think you get much economies of scales from having 1000 deals. We'll be buying more dealers
but it will be on a local business. We dont see much finance advantages. WF is here - they are
the largest dealer lender, and they only have a 1-2bp advantage. So we're not going to be in the
finance business.
We're going to keep looking for dealerships or groups of dealers, it doesn't give us an advantage
from scale, but we hope that we run the local businesses very well
So you'll see us buying more, but I don't think you'll see us widening margins unless we can run a
local dealer better
CM: Van Tile has a system of meritocracy where the right people get the power and it reminds
me of the Kiewit company. and Van Tile and Kiewit are kissing cousins and I think they have a
very good thing going for them.
9. [ wrong mike, WEB I apologize - apology accepted - we would have cut off your mike if you
didn't ]. I'm building Materran Capital Management, want to get some tips on how to build a
great culture and values?
Culture has to come from the top, it has to be consistent, it has to be part of written
communication, it has to be lived, it has to be rewarded when followed and punished when
wrong, and it has to be done for a very long time. It's much easier to inherit a culture, and it's
easier in small firms. I can think of many very big companies and if Charlie and I were around for
10 years it wouldn't be able to accompany anything. It's like a grain of sand, it's people like your
child see what you do and not what you do it's the same thing in business, people see how people
above them behave and they move in that direction.
They don't all move in the same way, we have 340k people working for BRK, I can guarantee that
there is some number - maybe a dozen, maybe 50, maybe 100 - are doing something they
shouldn't be doing. The thing you have to do is when you find out about it, you do something
about it. I didn't like what they were doing at Clayton with 30 mortgages, and when we bought
Kirby, there were some policies we didn't like so we put in a policy with Kirby for people who are
over 65 and they buy something, they can send it back and I encourage people to write me if
they have problems so it takes a lot of time.
We work all the time to trying to behave with other people as if our positions were reversed and
we try to follow it and we're certainly not perfect at it but if you keep doing it
CM: we were always dissatisfied with what we knew, and we always want to learn more.
Berkshire, if we had been frozen in time, it would have been a terrible place, and it's what we
did learning that made it better
10. Two indicators you've discussed in the past about stock market: % of total market cap vs. GNP "the best single measure of where valuations stand at any given moment" - this is at 125%, about
where it was in 1999. #2 corporate profits as % of GNP - "that number ranges from 4-6.5% over
long periods of time, 1951-1999" - as of Friday, it's 10.5% of GDP - way above the range you
mention. Are the current levels of either or both indicators a matter of concern for the investing
public?
The second figure, profits % of GDP might be a concern for other segments of society - it
indicates that American business is doing incredibly well. The first comparison is very much
affected by the fact that we live in an interest rate environment that we would have thought was
almost impossible not too many years ago. And obviously profits are worth a whole lot more if
the government bond is 1% than if the government bond yield is 5%. Charlie in that movie talked
about alternatives and opportunity cost and for many people the opportunity cost is bonds which
pay nothing or expensive stocks. I look at those numbers, but I also look at them in the context
of the fact that we're living in a world that has incredibly low interest rates and the question is
how long will those interest rates prevail, will it become like Japan for decades and decades. If
we get back to regular interest rates, stocks are expensive, but if these interest rates prevail
then stocks are cheap so now you have your answer
CM and I in our memory, I can't ever recall us making an acquisition or turning one down because
of macro factors. Burlington we bought at a terrible time. It just doesnt come - we know that
we don't know what the next 12 or 24 months - but that doesnt matter if we're buying something
to hold for 100 years. What matters is the average earnings power and the sustainability of its
competitive differentiation.
11. How can you improve crude by rail infrastructure? Also why BSNF buy its own rail cars?
These rules just came out 3 days ago and they're 300 pages and I haven't read them yet. Clearly,
we have an interest and the country has an interest in developing safer cars and we've found that
some cars we thought were safe turned out to be less safe than we thought going in. The most
dangerous thing, as a common carrier, we have to carry chlorine, ammonium, we'd rather not
carry them but we have to carry them . There are dangerous products that have to be
transported and it's safer to carry them by rail than truck or pipeline. Probably everybody will be
unhappy with the rules but it is up to Washington and the govt to devise the rules under which
something which is potentially dangerous is transporting and transporting by pipeline has its
problems and transporting by rail has its problems. Railroads have gotten dramatically safer over
the years and BN leads the industry in safety and the safety figures get better year by year but
you're going to have derailments and you'd better have very safe cars carrying it and nothing will
be perfect
CM:L big companies and successful companies like BN and Chevron have a lot of engineers and
they have long histories of trying to be safer than average and knowing how to do it. And you
would be an idiot to run a big company without focusing on safety. Safety is going to be
improved.
I can tell you that BN has the best safety record among the big records and BH energy it's
extraordinary their safety record among utilities and every utility we've purchased has gotten far
better after we've taken over
[for question list: Ask about safety record. It is a signal that people CARE - just like Alcoa]
12.
Nirav Patel - what advice to network with influential people but doesn't have the network
CM: I think you should do the best you can. Play the hand you've got
Charlie's very old testament.. He doesn't get much past the genesis
CM: I never had any business school training why should you have any?
I would say that BS training was a handicap 20 years ago when they were preaching EMT. They
were saying that you couldn't beat the markets - imagine paying 40k a year to hear that
CM: Modern law school is like a pie eating contest, and if you win you get to eat a whole lot more
pie
13. One risk is a large railroad accident. How would a worse case scenario impact BNSF and BRK, and
are you guys insured?
Our reinsurance arm went to the four major railroads with very high limits. We offered $5-6bn
on excess over $1.5bn. There's no question that if you had the exact wrong circumstances, a
train with a lot of ammonia or chlorine in a terrible urban area. Things that are very small
probabilities, but if we run trains millions of miles year after year after year something will
happen just like they happen with every other accident way. So you minimize it and you run
trains slower in urban areas. They've brought it down to 35mph in towns of 100k, so you're
always working to be safer, you'll never be perfectly safe.
We have some insurance at BN, but we don't need insurance at Berkshire, we have the capability
to take any loss that comes along. So we're more likely to be offering that insurance, and we did
offer that insurance, and the railroad industry didn't like our rate so they didn't take it, but they
may sometime in the future
Btw we're not going to be buying those 5,000 railcars, there's a lot of work to retrofit cars, prob
our own, prob other cars. The industry has been waiting to see what the requirements will be
before moving ahead.
In 2013 we haven't ordered new tank cars because we needed to see what the regulations are
[check tank cars?]
I think the present method of having car lessors like we do will continue
14. Why all the movements at insurance subs?
Huge capital at insurance is at National Indemnity. We've moved premium volume at Geico or
Medco to the parent company, because there's just extra layer after extra layer after extra layer
of capital, so it makes it simpler. It makes it simpler to make it all invested to have a couple of
main pockets instead of 50 pockets. There's no change in certainty of payment on the policies, it
just makes it easier to manage the money to have most of the money concentrated at National
Indemnity
We ended up with a few companies at Geico corp and it just seemed that we should get them up
to the company level and we put them there
Our general policy is to keep every place loaded with more capital than they need and that's
probably going to result in more and more funds concentrated in Nat Indemnity
15.
US involvement with Asian development bank?

That's a subject I know nothing about - CM I know even less than you do
I really apologize to you about that - do you have any other questions?
[dollar as reserve currency?]
I think it's fine
CM: I'm more nervous about printing a lot of money and spending it. there's time when you have
to do it, we just went through one, but I'm happier printing money and using it on infrastructure
instead of spreading it around with a helicopter
16. Why did you rebrand things as BRK?

The sub asked us if we could use the name, and I told them they could use it but we would yank
it if they misbehaved
We have no idea that BH would become a household name and that would create a lot of value.
But we are going to create a brand and if it does well it will be fine
We're renaming some Van Tile dealerships BH auto. If there are problems it's fine, I don't mind,
I'd just as soon hear about it because our name is in the name.
But we don't anticipate that we're going to turn it into an asset by branding it a certain way
17. Distributed generation - but you couldn't store the energy. But now you have Tesla energy. How
long before distributed generation becomes a threat to utility?
Storage is the key. But distributed energy is something we pay a lot of attention to. Probably
the best defense is to have very low cost energy. MidAmerican has done an amazing job. Huge
improvements in storage would make a difference in a lot of ways
CM: We're going to use a lot more renewable energy because fossil fuels aren't going to last
forever. BH is well positioned in this regard. I grew up in these parts and to have 20% of the
power to come from renewable sources is an amazing result. And of course we're going to have
to have a lot better storage and the tech is improving. It's not a threat it's a huge benefit to
humanity and it will be a huge benefit to Berkshire. I love owning MidAmerican and having more
storage and more grid. We're so lucky, what the hell would we do if we didn't have the sun. And
of course there's going to be a lot more storage and there's going to be some disruption, but I
think there's going to be more opportunity than disruption.
Just last week we announced two projects in Nebraska. Charlie mentioned it was 20%, I think it's
a lot greater percentage than that. What % will we be in Iowa and Nevada?
Greg: At the end of 2016, ~58% of energy in Iowa will be coming from wind
$18bn committed to renewable assets across all of Berkshire assets. We're going to retire
70% of coal by 2019, and a large part will be replaced by renewable energy
Distributed generation and solar bring great opportunities to our utilities
MidAmerican has a huge advantage because it can push tax credits across Berkshire, so it's going
to be the #1 pusher of wind and solar among utilities (most who don't have enough profits to gain
tax benefits)
18. What was your most memorable failure and how did you deal with it?
Dexter - paid $400mm for something that would go to zero. And on top of that, I gave the
purchase price in stock, which would be worth $6-7 bn now, and it makes me feel better when
the stock goes down. nobody misled me, I just looked at it and came to the wrong answer. I'd
say anytime we've issued stock, it's been a mistake.
We probably could have pushed harder in the early years. We've had all our own net worth, a lot
of our family's net worth, and we had all of these partners who came in, many of whom put half
or more of their net worth with us. There were probably times where we could have stretched a
little and done something big. But I wouldnt want to take a 1% chance of wiping out my aunt
Katy's net worth, I'd rather be 100x too cautions than 1% uncautious.
CM: if we used leverage, Berkshire would be a lot bigger. But we would have been sweating at
night. It's crazy to sweat at night
WEB: over financial things.
19. What happens if high inflation happens?
So far we've been very wrong. I would not have predicted that you would have 5-6 years of close
to zero rates and run a fairly large deficit (although the current deficit isn't very large - the
country could sustain 2-3% deficits forever and not increase the ratio of debt/GTP so the word
deficit is not a dirty word, but very large deficits are unsustainable). We've done a lot of things
that haven't been in my economics 101 class and nothing bad has happened except that people
who've kept their money in savings have gotten killed. But it's hard for me to see that if you toss
money from helicopters and there isn't inflation. But I've been surprised by what happened.
When Poland issues bonds at negative interest rates - I did not have that in my forecast a few
years ago. I think we're operating in a world that Charlie and I don't understand very well. To
the second part of that question, I think Berkshire will do better than most big companies in any
kind of environment. We're sitting with $60bn in cash - we will be very willing to act if economic
turbulence of any kind occurs, we'll be prepared and most people won't be
CM: we have made very little progress in life by trying to outguess these macroeconomic factors.
We're just swimming all the time and we'll let the tide take care of itself
And we haven't seen great successes by others who have been involved in macroeconomic
projections.
CM: the trouble with making all these pronouncements is that people start to think they know
something. It's much better to be ignorant.
20. Cumulative difference between cash taxes and reported taxes = $37bn. Is this sustainable? Or
does it go back to zero
There's two forms of float from deferred taxes. One is the unrealized gains from appreciated
securities. If you move to the depreciation - it's $37bn (out of $60bn total unrealized). That's a
form of accelerated depreciation, and that's been around for a long time. Certainly in our utility
business, it helps our customer and it doesn't help us - the regulatory commissions take it into
account for rates.
21. Any lessons from Teledyne?
There's a lot to be learned from what he did as well as what happened after
CM: Henry Singleton was a lot smarter than either Warren and I. He got 800 on every test and
left early. Played chess blindfolded. But Warren was a lot better investor than Henry because
he focused on business. The interesting thing about Singleton was that he had very clever
incentives on the key executives. And in the end he had three defense departments that got into
trouble - the incentives got so strong and the culture of performance got so strong that people
went too far in dealing with the government. So we haven't had any trouble like that I can think
of.
Charlie and I really believe in the power of incentives and there are these hidden incentives that
e try to avoid . We have seen more than once really decent people misbehave because they felt
that there was a loyalty to their CEO to deliver certain numbers because the CEO went out and
made a lot of forecasts about what the company was going to earn. If I was going to say that BRK
was going to earn X this year and we had a lot of execs at the insurance who could set loss ratios
or people who could load up the channel, I've seen a lot of misbehavior that doesn't profit
anyone, just makes the CEO not look bad. When ego gets involved. So we try to eliminate
incentives that would cause people to misbehave not only for financial rewards but also ego
satisfaction
CM: In the end, Henry wanted to sell his business to Berkshire for stock, so he was smart to the
very end
You really should understand human behavior if you get around business, because when National
Indemnity. Jack Ringwald was a marvelous man and he had another marvelous man, his tennis
partner, that man was in charge of claims. And jack used to joke about the claims, and then the
guy started to hide the claims. He didn't have any financial interest at all, he just didn't like to
walk into the office and have Jack kidding him about it. You have to very careful about the
message you send as a CEO. If you tell your managers that you never want to disappoint Wall
Street and you want to report X per share.. We really try to avoid all that at Berkshire and set
the right example
22. If Bark's reinsurance is "too big to fail" how would government regulation affect Berkshire?
Two reg agencies - Financial Stability Oversight Committee - they have systemically important
financial institutions. Large banks are in this, and non banks include GE, Prudential,
Metropolitan
The question is not just if you're large, Exon, Apple, Wal Mart are large, but nobody thinks about
them as SIFE's. The definition of a non-bank SIFE is 85% of revenues is financial and we're not
even remotely close
The real question is whether problems that Berkshire may encounter would destabilize the
financial system in the US, and we have not been approached. They spent a year with
metropolitan before they were designated, and nobody has even called me. We have no reason
to think that Berkshire would be designated as a SIFE. During the last time of trouble we were
the only party that was supplying help to the financial system. And we will always be applying
ourselves in a way such that the problems of other won't hurt us in a significant way. I think
were unique among financial institutions in terms of the layers of safety and security we've built
into our systems. It's a moot question. The law exists, we haven't been approached, it takes a
year even if they approach, and I don't think BRK comes within miles of qualifying as a SIFE
CM: that's true. Generally speaking there's still too much risk in high finance. The idea that Dodd
Frank has removed it is nonsense. Trading derivatives as a principle if you're shrewd, it's a lot
like a bucket shop or a gambling shop. You say it's sharing risk, but really it's a gambling parlor.
I think there's still danger in the financial system, and I also think that our competitors don't like
it that they deserve regulation and we don't.
When you have a panic, you need someone who will say that they will do whatever it takes and
be believed, and if you don't have that, panics will accelerate like you cannot believe. In the old
days, the only way you could stop a run is to have someone pile up gold. If the ceo said "our
basel 2 ratio is 10.5%," the line would go longer. Bernanke and Paulson got the job done. They
got it done by saying we're guaranteeing commercial paper, we're guaranteeing money market
will not break the bank. And I think Dodd frank weakens that, and that's a terrible thing to
weaken
23. Direct workers comp? Issue with channel?
Channel conflict is not a big problem for us
We write commercial auto through Geico, it's growing but it's small, it hasn't achieved private
passenger proportions but we'll find out. We believe in experimenting at Berkshire, and we've
got the knowhow, and we'll find out if the customer wants to buy it that way
We've got a great insurance business but the insurance business has changed. Geico was all direct
mail back in the day. The basic principle of saving people money hasn't changed. It went from
direct mail, to TV, and now it's on the internet, and mobile. The world has moved on, but the
key is to save them money, and whatever way does that the best will win.
24. After all these years of interviews and meetings, what is the one question you would like to be
asked and answered?
[joked] I think I've been asked all of them
25.
Are you sure 3g is the same as Berkshire? If 3g took over Berkshire?

I think there may be some changes, but I think we run things the same
Geico is run very efficiently, just the way they would run it
I think headquarters is run the same way, 25 people
And our newspapers have had to cut back. The idea that you have to run a fat operation just
because you're making a lot of money.
The textile mills, I fired a lot of people. Every time there was a proposal that if we put in a
loom, we could get rid of 8 people - we put in the loom. We probably have some businesses that
they have a few extra people, but I think better of the 3G method of operation than I do of our
operators who run with too many people. I would never advocate running a business at a loss,
and that's going to continue. And the same goes for having excess people around, and I think
you'll see our attitude about excess people is expressed in our headquarters where we have 25
people and Charlie's office in LA which has two people
26. When we look at the body of work at 3G, we get the view that the average consumer goods
company is underrun
There will be deals in the future. The strong brands - look that Gen foods had and Kraft has
now - I mean, coca cola sold more cases of beverages last year than they did any year in their
history and they'll sell more next year. A strong brand is amazing - Heinz is 60% in US, much
higher in other countries. You're always going to have the fight between the retailer and the
brand, and the retailer is going to do everything they've got. And the retailer may want to shift
to private label, and that's been around forever in the retail business - I remember when Sam
Walton sent me his first pack of Sam's Cola.
The brand, you have to nourish them, you have to take very good care of them, they have to
stand for what the people think of them. RC Cola came up with the first diet cola, or [someone
else] came up with a disposable razor first, but Gillette is still 70% of razors by dollar value
That's the question we face with See's - See's was at $1.90/lb., Russell Stolar was cheaper, and
you needed to figure out how much damage they could do if they copied our stores
CM: we've almost exhausted this topic. There's no topic that waves of layoffs frighten people. A
job is a very important part of a person's life, and It's no small thing to lose it. But where would
our country be if we were still on the farms? We need our businesses to be right sized.
27. Do you think value investment can be widely applied across all markets? How do value investors
be happy?
Value investing principles don't change across borders - if I were investing in china, or India, or
UK, I'd apply the same principles:
Stocks are small pieces of business
Fluctuations benefit me
Only businesses where I understand the competitive differentiation and where it will be in
5 years
CM: Chinese have a history of being entrepreneurial and gambling and it creates volatility. And
when things get bouncy and prosperous like in our internet craze, China looks like our silicon
valley. I think China would be a great place for value investing.
We would do best over decades in a market where people act irrationally. Irrational markets is
where you can make the most money from securities - although it's not as good for society.
We've benefited hugely from a few periods - especially 1973, 74 - when you could buy stocks so
cheap, cheaper than they were in 2008.
If you're a young investor, and can stand back, and value stocks as businesses, and invest when
things get very cheap, and sell when things get expensive, it's really not a very hard game. It's an
easy game if you can control your emotions
[words don't do it justice - gotta experience it to really know it]
CM: I think china is a wise dam of speculative moves, I don't think value investing will ever go out
of style. Who doesn't want value when you buy something. How can there be anything else
other than value investing? People are looking for an easier way. But in fact that's a mistake . It'
looks easy, but in fact it's harder. There's a lot of misery to be found.
28. You've been optimistic about the US for a long time. What about the risk of huge issues? Nuclear
attack?
They are the great threats to the US. We have a great economic system. There are fits and starts
and ups and downs. This country has a great future but that can all be nullified by madmen or
rogue states or someone else.
There are already a huge number of people that would wish harm, particularly on the US, and
others at well, and those people aren't going to go away. We need an extremely vigilant security
op, and we will have threats. That's something we live with.
We also live in a country that's going to do exceptionally
[WEB: would you want to be born today or when you were born?] CM: That's too hard. I don't like
theoretical questions. I'd rather think about questions where I can gain an advantage or help
someone else to gain an advantage
29. Why can't the CEO also be CIO, and then add a COO?
It's not inconceivable, it's very unlikely. As you said the CIO should have a significant array of
skills that would also be useful for a CEO. But I would not vote to put someone whose sole
experience had been investments to run Berkshire. I've said that I've been a better investor
because I've been an operating manager and a better operating manager because I'd been an
investor. But I learned a lot of things about operating by operating, so unless there is someone
who has both, I wouldn't go with it.
CM: the bulk of our value is owned businesses, so less about securities
But the CEO should be run by someone who understands investing - but actually our operating
managers, some of them know a lot about investing
30. Ted Weschler, what's so good about him?
Both of them are awesome investors
But on top of that, they have qualities of character that are very important to Charlie and I. We
used to drop in on top investors all the time. When I closed my partnership, I knew 20 people
who had great records. But I chose Bill for Sequoia, and $10,000 in that fund would be $4mm
now. I want people who do more than their share, who don't lie, and who every aspect of their
personality is one where you want to be around them, and give them more responsibility.
Charlie met Todd first and I met Ted first. And when we talked about them we talked a whole
lot more about their personality than their investment style
CM: I think the whole thing is going rather well. Each one has helped buy a business recently.
And they're going to help oversee it too. Each one of them is smart on business.
How to deal with people
Charlie and I run into more dysfunctional people with 160 IQ's than anyone alive
CM: Trustworthiness is more important than brains. We wouldn't hire anyone if we didn't trust
them
[warren had prepared ahead of time for Clayton because he knew people would be asking questions
about it; Carol didn't tee up the question ahead of time]
31. Which Berkshire businesses will do well in inflation, and which will do poorly?
The best businesses in inflation are ones you buy once and you don't have to keep making capital
investments subsequently, so you don't face the problem of continuous reinvestment involving
greater and greater dollars because of inflation. That's one general reason real estate is so great
during periods of inflation, if you bought your house 50 years ago like I did or Charlie did, it's a
one time displacement
Now if you're in a business like utilities or railroad, it just keeps eating up more and more capital
as there's inflation
A brand is a wonderful thing to own during inflation. See's Candy's value increases during
inflation just as the value of any strongly focused goods. Gillette bought the entire rights to the
world series in 1939 for $100,000 - and they were getting in the minds of young guys like me and they did it in those dollars then, and of course you were going to try to go out and have
similar impressions on millions of minds now, it's a lot more expensive, and part of it is inflation
and part of it is other things, and it's something that they made in 1939 that pays off in 1960 and
1970
CM: yea but if the inflation goes out of control, you never know where things will end up. If not
for Weimar, no Hitler - twosome of inflation and depression brought us that . We don't want
inflation because it's good for See's Candy
32. Large commercial insurance company?
It's almost certain that we won't take over a large insurance company. We've got the ideal
company in Berkshire Hathaway, we have the right people running it, we have more capital than
any other commercial insurance company in the world. So we've got all these things going for us,
and if we bought something we would have to pay a high premium, whereas if we do it ourselves,
we're making money in the building phase
33. What practical mental models would you recommend?
WEB: Charlie, you're the guy who wrote it
CM: reputation you get over a long period of time, very few people are like Charles Lindbergh
who suddenly get a good reputation, most people have to acquire it slowly, so for most people
you just have to get the best reputation you can in the years and time you have available. It may
work out well and it may work out poorly but it's a good use of time. I've seen so many times
where the opportunity they got was because of reputation, so I think hardly anything is as
important as behaving well as you go through life.

CM: We actually try to behave better as we've gotten more prosperous, and I think you'd be crazy
if you didn't, so I certainly recommend you follow those old fashioned principles. I don't think
there's any way to guarantee a powerhouse brand, if a result is a 1 in 50mm result you can't
guarantee it
In Fiat - when you get old, you will get the reputation you deserve. For a while you can fool
people, but when you get to my age, whatever reputation you have is probably the one you
deserve. And it's probably true of companies. And frankly it has helped Berkshire a lot that it
has gotten a reputation to be somewhat of a different type of company. I don't think we set out
to do it but it has worked out that way.
34. You said global warming hasn't affected Berkshire payouts. But others say its' expensive. Are
your models different?
Of course SEC requires all these risk factors and the lawyers want you to put in everything
thinkable - you'll develop Alzheimer's or whatever - so people do put in weather risk, and maybe
they put it in based on some model that shows it. But we price our business every year - it's not
like a life insurance where you have set a price for 60 or 70 year sin the future, that's not the
P&C business which we're in, we set our prices one year at a time. I see nothing that tells me on
a yearly basis that global warming is something that should cause me to change my prices a lot.
It doesn't mean that it's not a threat to humanity or terribly important, it just means that if I'm
going to set a 1 year insurance policy, I may care a lot about fire protection, or things adjacent
to that, but I am not thinking about global warming. It doesn't change the situation one way in a
one year policy, in my judgment
If I were writing a 50 year wind policy in Florida, I would think very hard about what Global
warming would do to the propensity or intensity of hurricanes. But I don't think it has any impact
on likelihood or intensity next year. So it's not something I would put in the 10K as a threat.
CM: I don't think it's totally clear what the effects will be, I think there's a lot of guesswork, and
a lot of howling
Would it change your 1-year prediction?
CM: No. A lot of people get very invested in a crazy ideology. It's not that global warming isn't
happening. It's that you can get so excited about it you can make all kinds of crazy extrapolations
on it.
For our underwriters, I want them thinning about the types of insurance. Marvel the torch: "I
don't burn buildings, I create vacant lots"
35. Conoco Philips - lost a lot of money. Exon Mobile - you bought again in 2013. While you sold at
breakeven, why do you invest in energy assets?
There's nothing we like better than to back up Greg in buying utility properties. We call it energy
but it's not oil & gas in BH energy, they're in a dramatically different business. We're looking
constantly for opportunities for BH to spend big money, and it will. BH Energy, we paid $35.05 in
1999 to buy the stock, I was at $35 and I don't change my prices, and MidAmerican hired some
investment bankers from NY who spent a week here doing nothing, and they said you have to give
us something because we're going to send them a big bill, so I told them that I would give them
$35.05 and you can say you got the last nickel out of me. It's never paid a dividend, it's probably
going to earn $30 this year and that's a tribute to Greg. It's not at all analogous to CP or Exon
investments. As it turned out we wrote down CP because auditors made it, and we made some
money on Exon too. We will not be buying many oil&gas stocks, but this will not be the last one.
We look at the cash, we look at the opportunities available for buying businesses, and we will
make decisions. We've not distinguished ourselves in O&G, we've made a little money, probably
passed on a few where we could have made a lot of money
CM: Given dividend and interest rates, EM wasn't a bad cash substitute [interesting they think of
this]
36. I believe you two are the most knowledgeable people on planet Earth on US tax code. Our tax
code is obviously broken. What can be done to make the tax code more simple?
It takes 218 reps of house of reps, and 51 senators, and a president who will sign the bill
The question is how much do you think the country should spend, and from whom do you get it,
and I would point out that despite the tax rates that all the corporate chieftains complain about,
the share of GDP of corporate profits is at a record. Corporate taxes 40 years ago were 4% of
GDP, and now they're at 2%, they've decreased significantly while payroll taxes have increased.
It's a real question, and once you get special provisions in the code, it's hard to get them out
unless you get major revisions of the code.

I actually think that the two ranking members of the senate finance committee, I think they're
capable of working out something that neither of them likes, but they each like it more than
before, and it can be more rational
But in the end if we're going to spend 21% of GDP we should probably raise 19% of GDP. We can
take a gap of 2% without getting further into debt, so we've got that leeway. But you take 19% of
17.5 trillion, you're talking "real money" as senator Urch said. And how much you get from
corporations, individuals, estate taxes, It's a fight up and down the line.
And in terms of the cash aboard, you can bring it back, you just have to pay the corporate rates.
It's at 35%, and most of our lives Charlie and I lived when it was 52% and the country grew well. I
don't shed any tears for American business for tax rates at all - I think there could be a more
equitable code - but I do not think that the 2% of GDP that is being raised by corporate taxes, I
do not think that is an onerous number. For people who are getting .25-.5% on CDs when they
are retired, with American businesses earning 15% on tangible equity, I think equity holders are
being treated exceptionally well compared with debt holders in this economy
CM: I live in California, where there's a 13.5% tax on capital gains that's crazy. That drives rich
people out. Hawaii and FL are smart enough to know that it's a low. It's amazing - the idea of
driving rich people out - FL is so much smarter than CA on that subject. Who in the hell doesn't
want rich people to come in and spend in their state?
I would say that I think there is some chance this year - I know both of them, they want to do the
right thing, and I think the real opportunity is if they work out of the public eye to get something
done. Charlie is always pointing out what would have had happened if the constitutional
assembly had been done if every delegate came out after every point to tell the TV camera
where they're right and the other ones are wrong.
I don't think it's impossible that we will have a new tax code in a year.
37. What did you learn from Adam Smith's the Wealth of Nations and how did it shape your
philosophy?
It didn't shape my investment philosophy but it certainly taught me economics. Bill Gates gave
me a first edition. If you read Adam Smith, if you read Keynes, Ricardo, and if you also read that
little book we got out there called Where are the Customer's Yachts, you'll have a lot of wisdom
We also have Berkshire bomber underwear and shirts out there
CM: Adam Smith is one of those guys who has really worn well. He's recognized as one of the
wisest people around. The lessons he taught back then were taught again when communism
failed, and when China Taiwan and Singapore came up so fast. The productive power of the
capitalist system is simply powerful.
He talked about specialization of labor - and he talked about pins, but I've taken that to
philanthropy. I've taken that from mowing my lawn to philanthropy. Just work in the field that
you're best at and leave the rest to the others
38. You've talked about telling management to focus on widening moat, but I find that former public
managers may manage more to short term
I don't think we've had any particular problems with public companies vs. private companies
we've bought. I think if you took the aggregate of the public vs. private companies, I don't know
which group I'd rather own or which group delivered the better results. And I can't think of the
results. And if I tell them to think about it as 100 years, I think they know we mean think it as
100 years, and I think they know that we run Berkshire that way. And we try to put it in the
annual report, and we try to talk about it in meetings like this.
We don't ignore yearly results at all, just we don't live by them. I get figures every month from
every business, and I read them and I think about them all the time. I don't live by them.
But if we're subpar in some area, I wouldn't accept that just because we're working on 10 years
should mean we should throw away 1 year.
39. What differences in corporate culture and performance do you see between German and US
companies?
CM: We've had a tough time buying companies in Europe, families, etc. Germany has a great
history of technology. Germany actually work fewer hours than anyone else and they produce a
lot more, and Warren and I are familiar with that. We admire the Germans, particularly the
engineering side, we've been trying to buy one for a long time and just bought our first
I think we're going to buy another one in the next 5 years. We have a woman who brought Louie
to us and she is going to hear a lot more. I would really be surprised if we don't make another
deal in Germany over the next 5 years. I've had 4-5 letters in the last few months, since the
Louie deal has been announced. we'll get one - we're eager, and we've got the money. We do fit
the family situation occasionally. Price is maybe a little more attractive there than in the US. I
would say that there's a reasonable chance that the price of something we're offered over there
would catch my attention more than US prices currently.
40. Geico couldn't beat our rate for comparable companies, why not?
We will beat other rates 40% of the time, and 60% of time we won't. We have our own
underwriting criteria, and one of them is age. We have many many variables, and we make our
calculations, and very good competitors like All State, and they have different ratings, and
sometimes they come in below us
But I don't think that any company of size will be lower than Geico. We give out quotes to
people on the telephone to many people every week, and I get the number of quotes and the %
of quotes sold, and I can tell you it's a very high percentage, and we're not selling to people
unless it's a good rate. And some of the people you referred to, should get good rates, but they'll
get better rates from someone else 60% of the time. And since we're only 11% of the market right
now, it means we have a lot of growth.
Then you think about the drivers. 16 year old boys are the worst. 16 year old girls are a class
better, and it doesn't mean they're better drivers - It could be that they show off less, they drive
less.
CM: If you're in an age group, and you find that you're not deteriorating as much as your
contemporaries, you may be paying an unfair price for your insurance but it's a fair tradeoff
41. Reinsurance market has gotten a lot of excess capital coming in, making it less probable that
there's going to be huge opportunity after the next huge event?
Wouldn't our competitors like to know? The reinsurance business isn't as good as it was, and it's
unlikely that it will be as good as it was. There's a lot of money coming in not because they want
to reinsure people, but it's because 1) it's become a cool "uncorrelated" asset class, 2) it's a beard
for asset management. So if you go to Bermuda and start a hedge fund, and you need a small
business to make it seem like it's a reinsurance and not running a hedge fund. So when you've got
people coming in using it as a front business, you're probably going to get less returns, and that's
been happening on a large scale. So I would expect that reinsurance over the next 10 years - and
I'm talking about the whole industry - I wouldn't expect it to be as good as it has been over the
last 30 years. It's a business whose prospects have gotten worse and I'm not sure there's' anything
we can do about it. There are a few things that Berkshire only can do - e.g. 8 contracts bigger
than $1bn, we did all 8. There's certain parts we're strong, but generally it will be harder
42. CM: Generally speaking it will be harder, and competition from promoter finance is getting more
intense. But they're searching for a robust narrative - we're not doing that, we're playing the
game for the long pole
43. We've had the opportunity for a long period of time to promote reinsurance type money and
really take advantage of people on it because we would have the best reputation and we could
attract a ton of money and we could get a big overlay on it - but it's not our game.
44. CM: and we don't particularly admire the way it's being played
45. How do you make lots of friends and get people to like you and work with you?
CM: well I was pretty obnoxious when I was your age and asked a lot of impertinent questions.
And not a lot of people liked me. And the only way I could get people to like me was to get very
rich and very generous
People will see all kinds of virtues in you if you can write a big check
Both Charlie and I were on the obnoxious side. But you will get better about human behavior as
you go on. And I've had some great teachers. I've looked at other people - they weren't teachers
in the standard definition - but they were people I admired, I thought why do I admire these
people? And if I want to be admired, why shouldn't I take on some of their qualities
If you look around you, look at people you admire in your school, write down 3-4 qualities you
like, and then look at people you don't like, and write down 3-4 qualities you don't like. And if
you like it in other people, people will like it in you - and if you don't like stuff, do the same.
CM: it really works in marriage - if you can change things in yourself rather than your partner
Charlie said the most important thing in a marriage partner - you don't look for intelligence, or
humor.. You look for someone with low expectations
43. Net jets? Pilot strike? ROE on new jets? Was it mistake?
No it wasn't a mistake. It's a decent business. We have a very decent business, pilots have a good
job. You shouldn't think about it on ROE because we resell these planes to owners. We have a
core fleet that represents an investment, but the investment is held in large part by the owners
themselves. I own 3/16 of a plane that my children use, I own 1/8 of a plane that I use. That's
my investment, not netjet's investment
In labor relations- we've had hundreds of unions at Berkshire, and in 50 years we've had 3 strikes.
We had a 4 day strike at Berkshire Hathaway textile, 4 day at Buffalo news, and another strike at
See's Candy. So we have no anti-union agenda whatsoever. We think we have sensational pilots.
I've flown netjets, and my family has flown Netjets for 20 years now, and we've had nothing but
professional pilots. It's human nature to have disagreements about how people get paid. Our
pilots make $149k annual, 7 days on / 7 days off, we pay for their time to get to where they live.
And compared to our competitors, flexjets / charters, we pay well, but it's perfectly
understandable that employers and employees have differences sometimes, we'll get it worked
out although not necessarily in a day or month. Our volumes are up, in US not Europe. It's a first
class operation, we give our pilots more training than anyone else. I'm flying on Netjets, my kids
are flying on it, in most cases our management is flying Netjets so safety is key, and I'm flying the
same planes. We've got an intense focus on safety and professional pilots.
CM: I've never had a Netjets pilot that I didn't think was a wonderful fellow and a skilled reliable
person. And I can think of no Netjets pilot who has ever said that they were dissatisfied with
their life, in fact I think they love it, I just think the union is misrepresenting the pilots
44. Duracell / P&G share trade - core business is in decline. How much did tax planning matter for
the deal? Would you have done the deal without the tax benefit?
Both P&G and BH got tax benefits from the tax benefits. They wouldn't have sold it at that price,
nor would we have bought it at the same price, without the taxes. It's somewhat similar to the
real estate agreement, where you can exchange the real estate and keep the tax basis. We don't
get a new tax basis, we just keep the old tax basis.
As to the declining business part, the battery business will be a declining business, but it will be
around for a very very very long time. It is a good business, but it will have unit declines over a
period of time. But I think we'll do very well on the Duracell investment, and I think it will close
in Q4
45. Why did you do the giving pledge? How do you balance leaving an inheritance to your family vs.
assets to charity?
It depends very much on the personal situation. Actually I promised to give over 99%. As you
know the estate tax exemption has been moved up very much in the last few years. I might have
a very different feeling if I had a child who worked actively and helped me build the business and
I wanted to give him the business. But that can be done without estate tax if you plan it.
When you get to figuring out what you want to do with your money, the options get limited. As
Charlie said, where he's going, it's not going to do him very much good anyways.
The question is, where does it do the most good? And for my children it does a lot of good.
But if I look at a bunch of stock certificates in a safe deposit box that had been put there many
years ago, and it can't do any good for me. Here these things have that have no utility for me
and they have enormous utility to people elsewhere in the world. So why should they sit there
for me, or some 4th generation down, where they can get it. But that's my personal philosophy,
but I think everyone should develop their own philosophy. But I do think they should ask
themselves, where will it do the most good? And it can be pretty dramatic between what it can
do for millions of people that don't have remotely the same shot for having the same life I had.
So what can it do for me? I can have 10 houses, I can buy a hotel. Would I be happier? That'd be
crazy. The one thing Charlie I have is that I know what I like and I know what I don't like.
CM: They recently changed the estate tax that you can leave $5mm to your kids - that was a
great change - we shouldn't assume our politicians are always crazy. that was a very desirable
change.
46.
Would it be possible for Berkshire to distribute its assets to tax holders in a tax efficient way?
I don't think Yahoo solved I
CM: I don't think we can do that with Amex. It's a bad example, we have no way to do that
There used to be ways to do that many years ago. Not by us. But not any more. There's no way
to distribute appreciated securities to shareholders without paying taxes. Even what Yahoo is
doing, they aren't getting rid of the tax. It's juts deferring it. I've known all kinds of cases
where corporations have had large unrealized gains in marketable securities and I've not seen any
ways where they've been able to get the money to shareholders without paying a tax at the
corporate levels
47. Berkshire owns lots of companies that benefit from single family home construction. After
financial crisis, you said that there would be a reacceleration of household formation when the
economy comes back. Jobs are back, but formation isn't bad. Could this be secular? Could US
become more like Europe? Or is this cyclical?
I don't the answer but I think the latter is more likely. I may be wrong, when's the last set of
figures. I've heard that it's turned up a fair amount in the last six months. I should know the
figures for the last 6-9 months but I don't, but my impression is that they are starting to turn
It always turns down in a recession, and my guess is that the recession hasn't turned about yet
CM: I think the same way, and I have some grandchildren who I wish would marry someone
suitable soon
48. My son is working in Indonesia. You've been a model for caring for others. How can corporations
be encouraged to make an even greater impact in the lives of those who are not shareholders?
I agree entirely in your need to increase philanthropy. I am much more a bigger believer in
individual philanthropy than corporate philanthropy. I very much feel that I am working for the
shareholders and that they should be the ones to determine their philanthropic activity. We
encourage our companies to be more supportive, but I don't feel that it's my money to write a
check to my alma mater. I view this as a partnership. We had a donation system that I thought
it was a good system but we had to give it up
I have never given a penny to any organization that has caused me to give up anything, never a
movie ticket, never a vacation. It's people like your son who I really admire
CM: My case for giving away someone else's money is also quite restrained
I was on the board where we were giving a big amount of money. So they asked me to call on 4
or 5 corporate chieftains. They said, be sure not to ask them to give anything personally, just
corporate money. I said I wouldnt do it. If they wouldn't put up their own money, why should
they use shareholder money. So I've got real reservations about corporate philanthropy on the
personal side of the CEO or directors
49. Has the Euro currency had a positive or negative effect? Should France leave the euro?
Too easy for me to answer so I'll give it to Charlie
CM: I haven't the faintest idea. The Euro had a noble motivation and had the promise to do a lot
of good and undoubtedly has done a lot of good. but it's a flawed system to put companies that
are so different together. And there are strains. The big strains aren't France, they are Portugal
and Greece. And I do think it was unwise. They got countries in there that shouldn't of been
there. you can't form a business partnership with your shiftless drunkard brother in law. I think
they lowered their standards.
I think it's a good idea that needs a lot of work still. And I think it has been a good thing net to
this point, but it is flawed and the flaws are apparent, but that doesn't mean it can't be
corrected. We wrote a constitution in 1789 and it took a few amendments that took a long time
that addressed some very important factors. If there are flaws you have to face up to them.
We could have had a common currency with Canada and made it work. We could have had a
north American currency with Canada and we would have worked it out, and it might have even
been useful. We couldn't have had a hemisphere wide currency [CM: Argentina]. He loves to
name names Praise by name, criticize by category.
I think it's reasonable to have a currency with rules that are enforced. There were rules on the
Euro that were broken very early on that were broken by Germany and France.
CM: Investment bankers helped them prepare phony financial statements. Investment
banker aided fraud. Not exactly novel.
Returning to our main point, I think the Euro can and will survive, and it will probably take some
changes but I think it can. It's going to go towards more cohesion not less, and I think if we can
figure out a way to do it with more cohesion, overall it would be a good thing.
50. Van Tile synergies with Geico?
Yea, I don't think so. You always have these things that IB'ers will tell you produce synergies and
most of the time it doesn't work. And historically selling auto insurance through dealerships
haven't been effective. And if we did it we would have to compensate people. Geico is a lowcost model and It's a wonderful low cost model. Tony has done an incredible job in keeping costs
down and you can see it in our expense ratio. We spend a lot of money of advertising. Its success
depends on the quality of the insurance we provide. So I would doubt we do anything on that
long. Those companies will do better as independent businesses than if we try to push through
something. Charlie and I have seen a lot of things that seem like it's good on paper but a lot of
them don't succeed
CM: Well I agree it's a very dumb idea
51. What value in silver?
I don't follow it anymore. At one time we owned over 100mm oz. in silver, and I knew a fair
amount about the supply and demand and prospective supply and demand, but I really don't, I
haven't paid much attention to it for a very long time.
The interesting thing about silver, there are a few pure silver mines, but most of the time it's a
byproduct of copper mines. So it doesn't respond as much to its own supply, it's more dependent
on copper.
We came out better than [ ] brothers, but we don't think much about silver anymore.
52. Activism. If Warren gives away his shares, and activists become more power. How do you defend
against activism? And would you sell at a premium?
If it's run right, there will be no premium to spinning out. Some may say that sub A will sell at 20
whereas the whole thing is at 15, but the whole thing wont sell at 15 if you spin out Sub A. As I
laid out there are a lot of benefits on the corporate tax return to it. So I think it's highly unlikely
on a long-term or intermediate-term basis that the value of the parts will be higher than the
value of the whole.
The best defense against Activists is performance but lately there's so much money pouring into
activist funds and it's done well over the last years and the institutional consultants push it. So
most of what I see as activism today is a stretch.
By the time my estate is sold all, by then Berkshire will be so high market cap, it would be
impossible for anybody to activist, even if they all banded together
CM: and there's super voting shares
I have friends who have activists, I tell them to send them my way because they will buy the
stock and not get anywhere. So hopefully Berkshire will be a place where activists go to die
CM: Activists are pushing people to buy stocks for more than they're worth. It's so dumb.
There is more stupid stuff written and stupid stuff done - it's a very simple view of purchasing
back stock - you do it if you have more cash you need, and you can buy it at cheaper than what
the business is worth. if you look at the history of stock repurchases, it tends to fall off when the
stock is cheap and go up significantly if the stock gets expensive. You won't see that at
Berkshire. it's not a complicated question. I've been around a lot of management that
announce they will buy it at X worth at a price, and a lot of times the price makes sense, but a
lot of times the price doesnt make sense, and if that's the case nobody stops them.
CM: I don't think It's a great age of activism. I can't think of many activists I'd want to marry
into my family
I'd better stop before he names names!
53. Amex has created a network effect. How does it defend its moat?
Amex has been pretty good at that, especially when Ken Chenault has been running it.
Everybody's under attack, I still think Amex is an exceptional company. Ken has been good at
anticipating these attacks, and guiding it into different markets, debit cards. I think there's a lot
of loyalty with Amex cardholders. I do think that a proprietary card is worth more than a
cobranded card. I shouldn't get into Costco with a Costco director sitting next to me. I'm very
happy with Amex, would be even happier if the stock falls and the $4-5bn of cash they spend
buying back stock good.
CM: Well I like it a little less now that there's more competition, but I still like it.
The company has an incredible history of adapting. They started as an express company, moving
trunks around. then railroads, so they moved to travelers checks. Then credit card came out so
they moved into the travel and entertainment cards. And the interesting thing is Diner's club,
which was first, priced their card at $3, and looked like they were sewing up the market, and
then Amex priced their card at $5 and made it look better. They have been very nimble and very
smart and especially in recent years under Ken in beating back challenges and I think they will
continue to do so in the future, and I'm delighted to own 15% of the company.
54. Young students in developing countries don't know about saving money. I want to provide
opportunities to bring people to help. Any advice?
CM: I failed in this with some of my relatives. If you don't know how to save, I can't help you
The important thing is to get good habits early on. "The chains of habit are too light to be felt
until they are too heavy to be broken". Habits are super important. Secret millionaire's club our goal is to present good habits to young kids (in an entertaining way) through a comedy series
and I think it's actually having a pretty good effect and here in a few days here in Omaha we're
going to have 8 finalists young kids from around the country and I'm always incredibly impressed
by these kids. But the importance of having good habits and encouraging your kids to have good
habits can have such an impact on your life. I had $8-$9k out of college and started a family and if I didn't have that head start I'd be in trouble.
55. Would you unwinding the S&P 500 puts?
We hope that we can put excess cash (cash beyond $20bn) we can put to buying a business. But
you can't do it once a week or once a month it's opportunistic, but we will get calls, we will put
money to work. But we won't do it in an even flow. We have virtually no debt. If someone told
us 50 years ago that we could borrow money 1%, we may have ended in a different direction.
Money is so cheap that it causes people to do almost anything on the asset side. We don't
want to do that because we don't want to drop our standards just because the liabilities are so
cheap. Obviously if we could unwind our derivatives trade where we were mathematically ahead
we would do it, but it's unlikely that's going to happen so we're just going to unwind it over time.
Our contracts are $4-5bn against $400mm of value, so it's hard to unwind. We're not going to
delever Berkshire because it's as unlevered as it could be. The float is virtually permanent,
maybe 1% a year, and we have very little debt, and I wouldn't want to pay it down. Logically we
probably should probably take on more debt at these prices, but that's just not something that
appeals to us. Maybe if we found a really big deal we would take on a bit more
CM: we'd love to find something where we felt capital constrained. We haven't felt capital
constrained in a long time. something so attractive that you would stretch a little. We
haven't felt that in a long time.
56. Does scale benefits car dealers? How about china?
I don't know about China. I don't think we'll get significant benefits of scale in auto. I just don't
see where it would come from. We don't need it. what we need is managers in those individual
dealerships that have skin of their own and run them as first class businesses independently.
That's what we'll be looking for, we're not looking for scale.
CM: I don't think we'd be very good at running dealerships in China, and I think people who run
Van Tile are very good at running dealerships here
There's 17k dealerships and we have 800 of them, so there's room to expand. The problem is
price. Our purchase caused people to move up their multiple by 1-2x. We pulled a full and fair
price for Van Tile, and we'll be using that price as a yardstick, and we really felt like we bought
the best, so we would like to pay less for others. We've had a good quarter, and profits had been
good. But when profits are good we want to pay a lower multiple. We're going to own it for a
long time, and we'd rather to pay 12x a bad year than 8x a good year, and that's now how the
sellers think.
57. How do you keep so young and energetic and quick? Will you pay more attention to the internet?
I love it. I use search. It's been a huge change in my life. And it costs me $100 a year. IF I had
to give up the plane or the internet. The plane is $1.5mm a year. I wouldnt want to give up
either one of them, but I would give up the plane first.
CM: I think everybody is going to be doing more things on the internet, but it's growing in
importance. So I think we're going to be dragged into it. I don't like multitasking. I have to
think hard about a thing for a long time and the idea of multitasking my way to an answer doesn't
appeal to me. Like it or not the younger people are more prone to use it than we are.
58. Campaign to raise the minimum wage (Tilson)?
Income inequality is extraordinary in the US
For example since I was born, the average GDP per capital has gone up 6x. If you had asked
them in that time and they knew that, they would have said that everyone in America will be
living a terrific life and that's not the case. And there are a million causes and I don't know the
solution. But I do think that everyone that is willing to work should live a decently good life in
the US. I am much more a proponent of reforming the earned income tax credit that rewards
people who work. I think it can be improved, there are a lot of fraud, there's lump sum payday
loans, but I think the answer lies closer than minimum wage reform
CM: I think if you raise the minimum wage a lot it would hurt the poor, I think it would help the
poor if you reformed the minimum wage reform
59. How will the average American family pay college costs?
CM: the average American family pays less. Either cheaper place or get subsidies. Most people
are paying less or getting subsidies. I think it is a big problem that education keep raising the
price, raising the price, raising the price. Maybe college people do better because they were
just better, and they just don't tell you that. There is a big tendency for prices to rise to what
can be coopted, and people rationalize it, and I think that's what's happened in higher education.
And a lot of what's taught in higher education isn't very useful to the people it's being taught, and
a lot of the people who are taught wouldn't learn anything anyways, and are wasting their
money.
60. China economy?
I think China's going to do very fine over a long period of time
CM: I'm a big fan of what's happening in china. One of the things that Singapore was stopping the
corruption, including hitting some of his friends. And China's doing the same thing. And I think
it's the smartest thing they've done. What Singapore did was paid civil servants better and he
created a better system, and China's copying him. I think it's very likely to work. They've
actually shot a few people - that really gets people's attention.
What has happened in China over the last 40 or so years, it just strikes me as totally miraculous.
I could not believe that a country of that size could move that far that fast.
CM: it has never happened this fast in the world. When I was a boy, 80% of China was illiterate
and mired in despondency. It's one of the great achievements of the world. I give China a lot of
credit for copying Lee Kuan Yu. That's all Berkshire does, we copy the right people.
[talked about how much China has accomplished over 40 years] It's the same human beings but
they found a way to unlock their potential. As Charlie said earlier, China and the United States
are going to be the superpowers for the next long period of time.
61. How did you figure out the operational metrics for a new industry when you didn't know?
We basically looked for companies where we understood what the future would look like 5, 10
years in the future. And it didn't mean we had to know it to 4 decimal places. And at that time
prices were different, so in terms of knowing we were getting enough for our money, it was a
much easier decision. There were no planning sessions, it wasn't elaborate, we kept reading
and thinking and comparing opportunity a with opportunity b. and in these days we were
capital constrained, so we usually had to sell something, and that's an interesting challenge. And
we leaned towards things where we were certain of a decent result rather hopeful that we
would get an extraordinary result.
CM: there's nothing that improves wisdom more than having your own nose whacked pretty hard
We've had a lot of experience with bad businesses and that makes you appreciate good ones, and
to some extent it helps you distinguish the two. And we had a lot of fun doing it, if you're
enjoying what you're doing it, it helps a lot than if you're going to work with teeth clenched all
the time
CM: I think we were helped by coming from families with admirable people which helped us
identify the good people, which helped us identify them more easily than if we had come from
more disadvantaged backgrounds
62. How were you able to persuade your early investors to overcome their doubts and fears and
believe in what you were doing? You used to be 90% graham / 10% fisher.
CM: we didn't do very well until we had a winning record
I started selling stocks here when I was 20 years old. Although I was 20 I looked 16 and behaved
like I was 12. so I did not make a huge impression selling stock. I used to walk around downtown
calling on people. When I came back, the people who joined me - one of my sisters, her
husband, my father in law, my aunt allice, a guy I roomed with in college, his mother. My father
in law gave me everything he had, and to some extent they all did. They knew I did reasonably
well at that time, that was 1956, I'd been investing 5-6 years, I had about $175k and I was retired
so I guess they figured if I was retired at age 26 I must have been doing something right. And
then it unfolded like that. An ex graham holder came by, and then another fellow called. A lot
of stuff comes along if you just keep plodding along. The record of the partnership attracted
people later on, but at first it was just people who believed in me.
CM: we've watched a lot of other people start. The people who have followed the G&D path,
they've all done well. So if you just avoid being a perfect idiot, and have a good character, and
just keep doing it day after day, it's amazing how it works
It was accident, really. If a few of people didn't ask me, what should I buy, and I said I'm not
going back into the stock broker business, but we can form a partnership, and I won't tell you
want I'm doing. And if I didn't meet Charlie, and if I didn't tell him law was a terrible business.
63. What matters to you most, and why?
CM: I think that I have an unfortunate channeling device. I was better at figuring things out than
I was at anything else. I was never going to succeed as a movie star or athlete or actor or
something. And I early got the idea that really your main duty is to become as rational as you
can be. Rationality was totally worshipped by my family. And since I was good at that and no
good at anything else, I was steered into something that worked well for me. And I do think that
rationality is a moral duty. That's why I like Confucius. He had the same ideas years ago. And
Berkshire is a temple of rationality. And what's really admired at Berkshire is someone who
sees it the way it is. So that's the way I did it. It goes beyond a technique. It's a moral
principle. I think if you have an easily removable ignorance and keep it, I think it's dishonorable.
I think it's dishonorable to stay stupider than you have to be. And I think you have to be generous
because it's crazy not to be - we're a social animal and we're tied to other people.
I will say that - it doesnt sound very noble - what matters to me most now and probably for
some time - and there are things that matter that you can't do about - health and other. Actually
what matters to me most is that Berkshire does well. We've probably got a million or more
people who are involved with it, and it happens to be incredibly enjoyable to me so I can
rationalize it. I would not be happy if Berkshire were doing poorly, if I felt that we weren't
building something every year that was better than the year before, I would not be happy, and I
get this enormous fun out of it, and I get to work with people I like.
CM: it's easy for us to lose our own money, but we hate losing someone else's
That would be the only thing that would keep me up at night. We can lose money on individual
money. That doesn't bother me in the least. What bothers me is if I cause something that loses
Berkshire intrinsic value
64. What is the most intelligent question I can ask you right now?
CM: everybody tries that question, and it would be wonderful if it could solve your problems, but
I don't think it's a terribly good question. You're asking too much of someone.
I get asked by the students a lot, but I don't have much success in answering
65. How did you do so well early on? how could you improve?
Great teacher, exceptional focus, and the right emotional qualities that would help me.
I enjoyed the game. You do give it all back. The game was enormously fun. Gene McCarthy
said - it's hard enough to be interesting, but not so hard to be beyond your capability to
understand it. It's actually a pretty easy game, and it does require a certain emotional stability.
I went at it, the manuals and everything, but I was enjoying what I was doing
Between ages 7 and 19, I had the same enthusiasm, but not the guiding principle, but then I ran
into the intelligent investor and Ben Graham, and now I have a philosophy that made a lot of
sense, total sense, and I found that I could employ, and so the game became more fun, and it
wasn't more complicated than that
CM: It's an easy game for someone who has the temperament for it and keeps at it because he
likes it and has the temperament it. I don't want to be an example for people who want to be
shrewd and buy stocks and get rich from stocks. I don't think that's enough for life. I like it
when you're investing for an endowment or pension fund or your family. I never considered
it enough of a life to be passively holding.
Berkshire is incredibly more satisfying.
CM: So if you're good at investing your money, I hope you'll move into doing something more
66. What advantages did WSJ have? What happened?
Dow jones, which owned WSJ, in the 60s and 70s, going into the era into the enormous spread
and value of financial information, they owned the filed. They had the news ticker, they had the
journal which anyone interested in finance in the country identified with. And starting with that
in an incredible growth industry (finance) for the next 30-40 years they went into a couple
ventures, they bought a chain of small ventures ,they just totally missed what was going to
happen. Here comes Bloomberg and takes away information. They had SUCH an advantage and
didn't see various areas they could have pursued and could have turned the family into hundreds
of billions of dollars. They had a situation where the family owned it and a lawyer controlled the
behavior. They were sitting pretty, getting dividends, but there was nobody in there with any
imagination. They were a trusted name, and they couldnt have been in a better place with a
better position, they had a very good balance sheet, and they just let the world pass them by.
Rupert is doing a different game, putting them in competition with NYT, and that's the game he
likes, but it makes for a very interesting proposition

Berkshire 2015 Annual Meeting - Fang's Notes: Saturday, May 02, 2015

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Berkshire 2015 Annual Meeting - Fang's Notes: Saturday, May 02, 2015

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Berkshire 2015 Annual Meeting - Fang's notes

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CM: Warren if people weren't so often wrong we wouldnt be so wrong

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US involvement with Asian development bank?

16. Why did you rebrand things as BRK?

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Are you sure 3g is the same as Berkshire? If 3g took over Berkshire?

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important as behaving well as you go through life.

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unless you get major revisions of the code.

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