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5/7/2010 By Clint Vogus

The Wisdom of Warren Buffet and Charlie Munger from the Berkshire Hathaway Shareholders Meeting on May 1, 2010

Over 40,000 people from all over the world gathered at the Quest Center in Omaha, Nebraska on May 1, 2010 for the Berkshire Hathaway Annual Shareholders Meeting. Many were there to gain some insights and wisdom from the most successful investment team in modern business history-Warren Buffett and Charlie Munger. As an indication of their financial success, a $10,000 investment in Berkshire Hathaway in 1965 (the year of Berkshire·s start) would be worth over $80 million today. No other investment team or business executive has had that type of consistent performance over such a long period of time. What is note worthy about Berkshire Hathaway·s success is that both Warren and Charlie have done it without creative accounting, high leverage or high risk investments. They have done it by consistently investing in ordinary businesses over a long period on time. Both Warren and Charlie are conservative individuals who have demonstrated very high integrity and moral values over their life-times in both their professional and personal lives. They both have a common sense and basic approach to investing and life. These traits came through during the six hours of questions and answers at this year·s annual meeting. As the world continues to recover from one of the worst financial crises in history, attendees at the Berkshire Annual Meeting were eager to hear Warren·s and Charlie·s insights into the causes of the financial crisis, their thoughts on the prevention of future crisis, and their outlook on investing in general.

What follows are summary responses to some of the questions posed at the meeting. The responses provide some additional insights into Buffett·s and Munger·s philosophies of business, management and investing in the context of some of the issues currently facing the economy and the investment world today.

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Financial Crisis: they attribute much of the cause of the recent financial crisis to the combination of permissive government regulations and an aggressive Wall Street. They acknowledge that the complexity of the financial system is counter2

productive and maintain that a new version of the Glass-Siegel Act is needed to properly regulate the financial industry. (Warren Buffett)

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European Financial Crisis: they maintain that a major cause of the current European Financial crisis is related to basic credit issues where government debts have become very high relative to GDP (e.g. Greece, Spain, and Portugal ). In the case of European countries who are using the Euro as a common currency, they cannot print their own money to solve their debt problem and therefore are dependent on the EU and others for loans. Borrowing in foreign currencies has often been a problem for foreign countries in times of financial stress as it devalues the home currencies, making in more difficult (and more expensive) to repay debt denominated in foreign currencies. Due to financial conditions around the world, (high debt and slow growth) most currencies are subject to the risk of future devaluations. Economic growth is required to solve these problems in the long-term. (Buffett)

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Organizational Cultures: Organizational Cultures are generally entrenched and therefore it is easier to build a new organization (if the culture is not right) than to change an existing culture. That is a reason why looking at an organization·s culture is an important part of the process of evaluating a company for investment. This is one of the things that Warren Buffet pays a lot of attention to when evaluation investments.

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Inflation Outlook: prospects for inflation in the future are significant around the world as debt is generally high relative to many country·s GDP·s (it is particularly high in developed countries) The danger is that as in the 1970·s and early 1980·s it can become a destructive expectation. (Warren Buffett)

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Future Financial Crises: Financial crises will occur from time to time due to human nature (the madness of man). One should develop good financial habits early in life (the right values regarding earning, saving and investing). As an example, McDonald·s does a good job in training managers in sound business values as well as teaching personal responsibility. The lack of integrity on the part of some contributed to the recent financial crisis as did the mentality and pressures from: ´everyone is doing it, so I mustµ or situational ethics (which is a big problem). To 3

prevent financial crises in the future we must create an environment that will minimize behavior that is not ethical. Decision makers must pay the consequence for their behavior (this is the way systems should be designed to prevent or minimize the risks of future financial crisis). (Warren Buffett)

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Deficits and Taxation: governments cannot continue to spend 25% of GDP and only tax at 15% of GDP (as currently in the US and other developed countries). As a solution, there is a need for a balance of lower government spending and higher taxes. Since we cannot tax the lower income group much more, the higher income earners must pay more. (Warren Buffett)

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Wealth: Charlie Munger stated ´celebrate wealth only when fairly earned and wisely used.µ This is a good summary statement on how both Charlie and Warren have lived their lives both as investors and citizens. Both Warren Buffett and Charlie Munger state very strongly that they will not trade their reputations for money under any circumstances. This seems to be different from the practices of some investors who focus on profits for the sake of profits. (Charlie Munger)

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View on Financial Derivatives:µ what useful purpose do they serve? They should all be banned except perhaps commodities futures, but these need to be well regulated. They seem to be the result of Wall Street·s casino mentality. ´(Charlie Munger)

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Oil: it is required to get ahead as a developing country during periods such as the industrial revolution, but we may not need as much for future prosperity. (Warren Buffett)

C. Vogus May 2010

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