Berkshire Hathaway annual meeting, 2010 Opening remarks Warren: I can see, he can hear, we work together for

that reason. What was a sputtering recovery seems to have picked up steam. We saw a pretty good uptick in March and April, particularly in our housing-related businesses. Trends seem stronger in the last few months. An undue focus on quarterly earnings is not just a bad idea for investors; it's a terrible idea for managers. A study came out a few months ago, taking out quarterly earnings one further digit. The result was a statistically impossibly small number of four tenths showed up. Suggesting that if you get to four tenths, you find a way to get to a place where you can round up instead of rounding down. Charlie: I agree with you. Warren: He's the perfect vice chairman. Q: Goldman and the SEC lawsuit. Clearly they have lost reputation. Put this in the context of Salomon Brothers and the "shred of reputation" comment. A: Warren: The transaction is the important part, Abacus. There's been some misreporting of the nature of that transaction. I would like to go through it, first. There were four losers. Goldman was one. They didn't intend this, but they kept some of it because they couldn't sell it, and lost about a hundred million. The main loser was ABN Amro. Why did they lose money? They guaranteed the credit of ACA. They fronted a transaction. We do this at Berkshire. It's a way of guaranteeing a credit. In the seventies we lost some money doing this, with syndicates of Lloyd’s. ABN guaranteed about 900m, and got paid seventeen basis points for this. ACA went broke. A bank made a dumb credit deal; it’s hard to be sympathetic. ACA was a municipal bond insurer, like MBIA, Ambac. Like these other guys, they moved from munis to insuring structured credits. Like Mae West said: "I was Snow White, but I drifted." These guys drifted into things they didn't understand, and every one of them got into trouble. There's nothing wrong with this business of insuring bonds, but you've got to know what you're doing. Berkshire around this time went into insuring munis. Here's an example of a deal we did insure (shows exhibit). We are in the business of insuring bonds. A big investment bank asked us to insure some state bonds for the next ten years, 160m premium. It was Lehman Brothers asking us to do this. Did they own the bonds? Were they negative on the bond market? Did they have a customer who owned them? Did the customers want to short the bonds? We don't care. Ben Bernanke could have been on the other side of the trade, it doesn't matter. ACA negotiated a bit with Paulson on which bonds were included in the deal. If we want to insure bonds, we have to be prepared to deal with the result. The central argument seems to be that Paulson knew more about the bonds than the insurer, but that doesn't make any difference. Charlie: My attitude is simple, it was a 3-2 decision. I would have voted with the minority. Warren: Ironically, it has probably helped our investment in Goldman. Goldman has a call at 110% of par on the preferred stock; it would be $5.5 billion if they called it today. If we got that money today, we'd have to put into some short term securities, which would pay us much less than the preferred stock. Every day they don't call our preferred is money in the bank, it's fifteen dollars a second. So it's like, as we're sitting here, it's 'tick-tick-tick-tick.' I don't want those ticks to go away. Goldman would love to get rid of it. The Feds have
Joshua Kennedy Liberty Square Asset Management


But every firm ought to decline more business. Q: What's the impact of the legislation on Berkshire.5 million. then we will reassess. On reputation. Banking should be restricted to a simpler and safer mode of business. Savings and loans should have a restrictive repertoire. Recent developments (the SEC investigation). In 1967. now we have less than 100. the system was going to sink itself. go play golf. Our governmental system was so permissive. it hurts morale. It's $500m a year instead of the $20m a year we could get in short term bonds. I called (Goldman chief) Gus Levy and Al Gordon at Kidder Peabody. They don't owe us a divulgence of their position. it should be higher than that." But they asked us to leave their names off the tombstone. I would make Volcker look like a sissy.000 positions when we bought Gen Re. The banks hate the idea of losing flexibility. Charlie: I agree with all of that. The partners of the firms don't even understand the complexity. If they go back and decide all past contracts need to be collateralized. They both said "we'll take a big 2 . They have helped build Berkshire. But allegations don't fall in the category of a loss of reputation. Warren: Insurance is about when the prices are right and the premiums are wrong.effectively been telling Goldman that they can't call the preferred until all the TARP stuff is done. the requirements would be zero. Q: Thoughts on financial reform currently under discussion in Congress? A: Charlie: I don't think anybody. we were having trouble raising the money to buy a department store. they didn't want their name to be associated with us! I feel a deep sense of loyalty to Goldman. They've proven they can't control it. they will go plumb crazy. We had 23. Reduce the activities that are permitted. they had a connection to Boesky. We don't use them as investment advisors. it's 1550 pages. our very first bond issue. We do trade with them. Warren: Charlie. We need a new version of GlassSteagall. They had a Penn Central connection. They haven't even read the bill. Give human beings unlimited anything. especially relating to posting collateral on derivatives contracts? A: Warren: As I understand the bill now. The standard should not be what's legal. We've bought more businesses through Goldman than anybody else. have had the effect of delaying the call of the preferred. But what's good for the country is to change that. do you think we should have done our (Lehman Brothers) deal? Charlie: I think it was a closer case than you do. and the investment banking culture was so bad. that will be a different story. That's not a fiduciary position. when you are brokering a transaction. Warren: Would you vote for it? Charlie: If I were the benevolent dictator of America. on derivatives for example. If we were regarded a danger to the system then we would have to post collateral. knows what's going to happen. the press coverage hurts the company. You have to turn down business. The deal was $5. including Congress. If something is proven. But we're 1% of the size of some other players. It has to be changed to prevent this again. But this is not the first time we've seen this. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare.

we would feel we were due substantial money. responsible voices are realizing that we're nearing trouble. we used it to win wars. There would be an opportunity cost. well . Warren: It’s important to distinguish between countries that borrow in their own currency and countries that are not allowed to do that because other countries don't trust them. That's not what they want. to generate prosperity for decades.. The problems are miles bigger. The Euro is really interesting. which we're never going to sell. Charlie will explain to you why. Warren: The net effect of forcing firms to post collateral ex post facto would be to pull a lot of money from real uses in the economy and send it to Wall Street. if you sell me a furnished house and then the government says you can charge me extra for the furniture after we agreed to a price. because the unfunded promises aren't counted. Charlie: The published stats are quite misleading. But the events of the last few years should make you bearish on all currencies. but then we would see what qualified as collateral. The past conservatism of the US gives it wonderful credit. How do we prepare? How is Berkshire prepared? A: Warren: Charlie and I haven't talked about it recently. You may be seeing a test case play out here. another. It's dangerous when governments push their credits so hard. it’s a lot of fun. Q: Who should run Goldman Sachs. did they disclose that to you? Any comment on the Galleon allegation. have you been contacted in that investigation? Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. we benefit in certain places and lose in other places. Just a week ago we were offered a put contract. For example maybe our Coke stock. The government doesn't have quite so good a credit anymore. If you really could run deficits for a long time. the world would have been doing it forever. could be used as collateral. unfair and stupid. Charlie: It would be of dubious 3 . It will be high drama. fiscal discipline. in which case that might result in a competitive advantage for Berkshire. Its like the price for a furnished house vs. I can't tell you what our net balance is on any given day and I am not concerned about it. How will we wean ourselves? It will be interesting to watch. if not Lloyd Blankfein? The Wells notice. If the Euro depreciates. believe me. Geithner has testified about the need for the sanctity of existing contracts. though. Q: Greece. the Euro. You can afford those promises if you have good growth. I don't know how this movie ends. on both the asset and liability side. because Greece has their own budget but can't print their own currency. So right now I don't see any consequences. we can print our own currency. We used that credit to rebuild nations like Germany and Japan which were the best foreign policy decisions this country has ever made.5m vs. sovereign risk. We seldom develop a strong view on one currency vs. The prices are different for collateral contracts and uncollateralized contracts.. I don't think they are that crazy. Greece is just the start of an interesting period. In this country and others. So Japan and the USA are a different case. I try not to go to movies like this. Greece is an interesting problem. Charlie: We're agnostic about the relative values of currencies. We have a lot of exposure to the Euro. $11m was the difference in price between the collateralized and uncollateralized contracts. we will have enormous social strains. but without growth. an unfurnished house. The USA won't default. $7.

I'd rather have the world to choose from. China and India doing well may mean we do better.A: Warren: We have not been contacted about Galleon. We didn't get notified about the Wells notice. Cell phones are clearly not among them. I've never sold a share in my life. the stock might be lower. but boy we live better. you'd have too much meaningless information. Warren: We didn't buy Burlington with the idea of moving it to China. We're not even close to realizing our human potential. We've had incredible progress in the status in mankind in the last two centuries. We got one on Gen Re. thanks to technological innovations. We love that it's in the US. I don't really consider it material. You've got more important things to worry about. I'd go for Lloyd's twin brother if he had one. biological attack. It's a free country. and nothing came of it. Charlie: I consider it a nonevent. Cars have become safer. Q: Do the regular gifts to the Gates Foundation and other gifts impact the stock price of Berkshire? Do they exert downward pressure on the stock? A: Warren: I give money to five foundations. It's about 1. Barring a massive nuclear. Will Geico and/or the Gates Foundation make a bet on these technologies? A: Warren: Auto deaths per mile driven have diminished. Warren: On who should run Goldman. Charlie: I've got nothing to add. which I think is responsible for more deaths. I'm quite sure we disclosed it. It's hard to know the impact of these things. This country has a system that unleashes potential. which is well over 100% of shares annually. We prefer some countries to others. there might be more of an overhang. and maybe a good event in terms of getting it into the S&P500. but do not run from the USA. the more we like them. I don't think at all about who should run Goldman other than Blankfein. We have to have a materiality standard. in terms of reducing deaths in this country is mostly focused on smoking. Geico works on 4 . the US will be OK. I have been on the board of one company where they received a Wells notice and they didn't publicize it. the more responsible countries seem. Everybody has an interest in bringing down deaths. This crowd is not smarter and doesn't work harder than 200 years ago. Charlie: There are plenty of CEO's I'd like to see gone. Blankfein isn't one of them.5% of the outstanding every year. Q: The US economy's strength and resulting thoughts about investing globally? A: Charlie: We haven't made our way in life by having broad global allocations. Q: There have been improvements in technologies to reduce distracted driving. Charlie: If every company reported every little thing. I can't pronounce the name of the guy who runs Galleon. The Gates Foundation. Contrast that with trading on the NYSE. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. Warren: If no stock had been given away. I would be perfectly content if Berkshire were forced in some way to limit itself to the USA.

and 15% is a good return. Our standard has become: can we put the money to work intelligently if not brilliantly. We have some very able people who would like very much to be managing money for Berkshire. but if it's not growing it doesn't soak up capital at good returns. but the seniors help you sleep better. The way I eat. but in 2009 they did pretty darn well. the CEO job would be filled within 24 hours if something happened to me tonight. it’s wonderful. I like a business where your customers tattoo your name on their chest. but you'd be better off buying the stock. To buy the equity you have to have a view on the margins and so forth. We run this place to withstand anything. A: Warren: Tough question. It just can't work brilliantly in capital intensive businesses. but you can't put his much money into better businesses. that's why they are wonderful. Ben Graham wrote about that. Charlie: Often in distress. Q: Why did your investments lean towards debt instruments during the crisis? Harley Davidson stock is up a lot more than the returns on the debt Berkshire has generated. If I think I can make very good money on just answering "are they going to go broke?".com 5 . that's easy. Warren: We have the strongest culture of any large company in America. Q: How do you change the culture of an organization? Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. This is not as urgent as the CEO position. but I didn't know enough to buy their company. my doctor wants to find something wrong but he can't and it drives him nuts. I just had a physical and it came out fine. but I don't know what the equity is worth. None of them used leverage. Q: Berkshire has shifted to investing in capital intensive businesses.Q: How did the four CIO candidates do? Has there been any change in the list? A: Warren: In 2008 they didn't distinguish themselves. The wonderful businesses don't soak up capital. See's is not growing. . Charlie: I'm just as good at not knowing as you are. which is the opposite of what you have described as 'wonderful businesses' in the past. maybe I was wrong. Does this mean lower returns? A: Warren: That's as important a question as you can ask at Berkshire. Were putting big money into good businesses. Warren: It's not the same four people. You can't get brilliant returns from this base. Harley Davidson. The directors could wait a few months to fill that job. This is a limitation. I knew enough to lend them money. But we can't find a big enough Coca Cola. you feel good buying the bonds. Charlie: One guy did 200% with no leverage. Warren: You often do better in the junior securities. I can go on vacation on investments. Charlie: I am optimistic the culture of Berkshire will outlast the founder. But I knew Harley wasn't going out of business. So why not pay it out? We will not pay it out if we think we can make more than a dollar in earnings by keeping the money.

the Jesuits have nothing on our guys in terms of discipline.A: Warren: It's a lot easier to build a new organization than to change an existing culture. You can't imagine a more disciplined organization. It would be tough to change the culture of Berkshire. Deficits as a big percentage of GDP will result in diminution of the currency. China forty years ago. I tried to change the culture. Countries learn from each other and they adapt. Q: Does National Indemnity have any competitive advantages other than Ajit Jain? A: Warren: It does. Charlie: The governments have a fair amount of restrictions. Q: Thoughts on inflation? A: Warren: I've always worried a lot about inflation and there’s been a lot. India will do well. This is what Secret Millionaires Club is about. If you have to bet. I agreed to go there next March. other than an acquisition. You can steal a few good ideas. We do not rule it out. Equitas was a real find three years ago. At Salomon. zoning is hard. It's not going to change the world but it could be a plus. Impediments to growth can be resolved. Charlie: The failure rate at trying to change a culture is likely to be 100%. bet on inflation being higher and possibly a lot higher. Since 1930. Ajit would be a huge loss. Ben Franklin taught these habits. the dollar’s down 90%. But the insurance operation would still be a unique 6 . there are limitations on what a non-Indian company can do. We've got sixty billion now. It took decades to build the culture. Getting good lessons about money early in life is important. Iscar belongs in every industrial country in the world. I understand it and we have terrific people. It has become the premier insurance organization in the world. My preference would be in insurance. but we've done OK. The prospects for inflation have increased. (Founder of modern Singapore) Lee Kuan Yew favors China because India has more paralysis due to the government. Warren: It's not ordained. If anything I have understated Ajit’s value. but I wouldn't get an A-plus for that effort. but I don't see how we can increase it from here. and they were developed by Ajit. possibly as bad as the sickness in the first place. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. But mankind has gone mad throughout history. Q: 1 of 6 people is Indian. I admire the democracy. I was ready to quit at twenty billion. As to our float. Why not invest in India? A: Warren: In insurance. The actions of governments in the last few years will have consequences. We're just trying to teach ideas. etc. Both China and India limit us and I don't want to take my best talent and put it to work on a company that we only own 25% of. Q: What can we teach children about preventing financial mayhem? A: Warren: Conventional wisdom in leading business schools has been one source of the problem. they are the processes. The medicine will be tough to wean ourselves from. Posco has big plans for India. I think it has peaked every year. you wouldn't have dreamt of what could happen. Ajit has looked a lot. Good learning at the elementary level is more important than business schools. Iscar is doing well there.

what are the key metrics that you look at? Catalysts for inflation taking off? A: Warren: You give me credit for too much brain power on this subject. If inflation gets in the saddle. You can command your share of the resources around you. Warren: If I gave it all to the government. But hey. A lot of people get into better lives thanks to working at McDonald’s. Warren: I learned a lot from mentors. We lost a lot of money. You can't get there without taxing the higher income people. I stayed in the textile business for twenty years. the property tax is basically that. sometimes conditions are extraordinary. why did it take so long to correct? A: Warren: We make mistakes from time to time. We also let our operating costs get ahead of recurring revenues. Based on what I see around the world. you leave it all behind. Talent is the best inflation hedge. I was like Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. Some were new planes. We had a demonstration project thirty years ago about what happens when people get fearful about money. once it gets going. Q: On inflation. you say your tax rate should be higher and yet you reduce your own tax bill through charitable gifts. We had to write down inventory. Alan Simpson and the deficit reduction committee will have to recommend both higher taxes and lower spending and that will not be popular. I have an unused carryforward of seven billion dollars from charitable contributions. Charlie: When you die. a manager at the Washington paper where I worked when I was 14 years old taught me a lot about business. The yellow light is flashing. we wouldn't be better off. But trend is not destiny. many were planes coming back from owners. It's not bad to dodge taxes with charitable contributions because the money goes to better use than the government could use it for. Q: On taxes. Charlie: The best defense is to contribute to civilization and counter inflation's effects on your own merits. we will certainly have higher taxes. Inflation creates its own dynamic. Charlie: Trying to outsmart everybody and somehow profiting from inflation is a mug’s game. Q: You have said Netjets has proven to be a mistake. How should the system be changed? A: Warren: You could have a wealth tax. But if we keep spending like this. So the ultimate tax rate is 100%. but they learn to show up for work on time and learn discipline and they go on to much better jobs. it's very unpredictable how fast it can accelerate. we will have a rerun. They hire marginal people. simple stuff like try doing things a certain way. Here the mistake was buying planes at prices that we couldn't ultimately make a margin 7 .Charlie: McDonald’s is a better educator than most universities. currencies are a poor bet. you just can't generate enough income from lower income people. There's no metric. Warren: Talent doesn't get inflated away. especially when I was younger. that's what I was tying to convey in an editorial last year. If we don't change our policies.

reputation is the only thing we don't have enough of. Warren: We send a letter periodically asking each manager who we should ask to take over if the manager died that night.Rip Van Winkle. typically hated in the field. It's worked for us and we'll keep doing it. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. That's pretty subjective. Warren: We get worried when people agree with us. never engage a compensation consultant. he helped convince Warren. they suffer. Q: Could you describe Berkshire’s compensation methodology. Communicate the rationale for how somebody’s compensation is set. Warren: It does not change our management approach at all. Consultants are nonsense. it works out well generally and in this case we lost some profit but we protected the franchise. particularly for the CEO's of the subsidiaries? A: Warren: First. if we 8 . so we have no standard. Nobody's ever left us over compensation. What makes you intervene? What about ethical violations? A: Warren: We have a hotline. We won't trade reputation for money. Headquarters are Q: Berkshire managers operate with minimal interference. Some businesses are so good a chimp could run them and some are so hard than Albert Sloan couldn't run them. We pay some good money. some do neither. We want to protect the reputation of Berkshire. We have an internal audit function. Others. Some managers make in the tens of millions annually. others consume it. we have the opposite and that works for us. Again Dave Sokol helped. We let managers do their stuff. Now Netjets is making a decent profit. Charlie: It's amazing how simple it has been and how well it has worked. that's not good enough. It's not rocket science. If the only reason you're doing something is because the other guy is doing it. Anything alleged with bad behavior gets investigated and it does happen from time to time. it doesn't take many hours of my time in a year. Our businesses have many different economic characteristics. We have no HR department. Charlie: We care more about that than business mistakes. I get letters directly sometimes about ethical or legal problems. so they must be reasonably happy. Insurance generates capital. We just got things in line that needed to be in line. Charlie: The episode ought to be reviewed in context. David Sokol deserves enormous credit. and it shows the old men are continuing to learn. is this an uncharacteristic investment? A: Charlie: We wouldn't have done it five or ten years earlier. The thing I want to pay managers for is widening the moat. Q: BYD is a technology company. and we don’t want to be hated. What is a sensible way to compensate somebody considering time and the economic characteristics of a business? The managers stay with us. We have many big businesses. What are those people actually adding to the company? Charlie: The US Army and General Electric have centralized policies and they work for them.

In Chile. The idea is not to just make money. they just don't want to do it. We'd still have wheat if we had no derivatives. Charlie: If we have a big loss. shareholders will still love Warren. Warren: I had a friend who was insistent on owning 100% of everything and he said it was because when he looked in the mirror he wanted to know all his shareholders still loved him. Business Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. is the net benefit vs. you could argue for a change. Everybody else wants to smooth earnings. not because a lower appetite but the rates have not been so good. Warren: Our competitors know what we do. I wouldn't use any. and that is precious to us. the disadvantage positive? If we got rid of everything but the hedgers. how are these different from Wall Street’s reliance on models to assess risk? A: Warren: Risks come from earthquakes. Warren: Burlington hedges diesel fuel as well as having cost-plus provisions. If I were running the place. Q: Comment on regulatory allowable returns in transportation and utilities? A: Warren: It's about ten and a half percent. Keynes’ Chapter 12 of his General Theory. rather than run the railroad? But I don't run that. it’s the best description of 9 . do they serve any purpose? A: Charlie: The usefulness of derivatives has always been overrated. The whole thing has been rebuilt over the last few decades. In utilities you use return on equity. so you want the allowable return to be high as a regulator. it doesn't faze us because it actually makes our advantage greater. A big loss on something like Katrina. why not just do that. Charlie: The railroads have been a hugely successful system in terms of regulated business.Charlie: Berkshire is admired. we celebrate wealth only when it has been fairly won and wisely used. Q: Derivatives. If you had a major change in interest rates. They are down from a few years ago. the world would be a better place. In railroads. And if you do. We lost $3 billion in Katrina. because we're the only player in that market. heavier. Railroads have more downside than utilities if you have a big industrial recession. If the rates are better. Our peak risks are hurricanes and earthquakes. It's a huge advantage. we lost $2 billion in 9/11. although it starts a little slow. It comes close to a permanent advantage. you have no edge. we like larger. Charlie: We are deliberately seeking a business that will result in a big loss in a single year. That’s not true for other decision makers. You want the railroads investing more than depreciation. they use return on invested capital. the bridges are stronger. so that allows for different uses of capital. Everybody should read it. Q: Reinsurance uses models. There is much-needed investment. we'll have losses. I have a great manager who does that. Wall Street has always had a socially important operation with a casino attached to it. The test is. lumpier earnings. (Quotes from the chapter). the trains are longer. then we'll take more risks.

What can we do to encourage this behavior. We occasionally have a death or resignation or something. The managers hire their own people. Both sides. A: Warren: There are six thousand 10 . Academia was applauding all along the way and getting hired as consultants. When the index options became available in 1982. Any synergies that come about do so at the operational level. Warren: It’s less work. Charlie: If I remember it this was perhaps the only letter against this new world of better gambling for all. The accountants get very little criticism and that's a mistake. You have to be responsible. Look at the efficient markets theory. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. short and long. About sixty stores are company-owned. We don't control the franchisees. I could create a false run on a bank by hiring 50 people to stand outside it in line. Charlie: You're criticizing the wrong people. Some franchise operations have more control than some others. long or short. but I'm not a very good employment agency. other than asking people to do a good job. But there's nothing wrong with people making statements. before McDonald’s or anything else. Q: What do I have to do to be hired by a Berkshire company? More specifically. So we have less control than some franchisors. Any institution will attack the source if they see a threat. The enlightened ones serve Coke. what do I have to do to become your successor? A: Warren: Probably shoot me.schools got to the point where they were teaching more about how to value an option than how to value a business. Any time you attack the conventional wisdom. the communication from short sellers? A: Warren: People have to be responsible for the statements they make. There are bad practices on both the long and short side. But keep asking for Coke. the small group will get its way. Charlie: It's neither fair nor sensible. Warren: The tax treatment on index derivatives is insane. It basically says the whole idea is insane. I make no decisions about who gets hired at any of these companies. speculation for all. We have twenty one people at headquarters. Bismarck said don't watch sausages or laws get made. and the franchise arrangements are the sort that were written on the back of a napkin. Q: Short sellers speaking out to criticize companies have generally been attacked in recent years. but have also largely been vindicated. It favors short term holding periods. They are responsible for their operations. Dairy Queen wouldn't take my Amex card and served me Pepsi. But if a small group cares deeply about something and the rest of us are indifferent. Dairy Queen goes back to the thirties. that was a sea change. but it’s entirely their business. Charlie: We like it the way it is. it will be unpopular. for the general public. Q: Comment on synergies at Berkshire. I warned against it at the time. we don't ask anybody to do business with each other.

Sprite outsells Coke two-to-one. But we do not have the same advantages in other markets. For two hundred years. Charlie: I like people who look at documents and make calculations and find mistakes. but Berkshire is not the social safety net. Before long. Can't Berkshire create more jobs? A: Warren: We will hire people when we have something for them to do. Q: Car ownership in India and China are booming. Charlie: Chinese people always had potential for huge and rapid progress. you could see it in Chinese Americans. you'll be running something. we know there are cars in other countries. We tried to make the textile mills work. The growth is going to be dramatic in China. so we’re not likely to work hard there if we don't own the company. it was not well thought out. society owes some minimum living standard to people who want to work. Warren: But when you do find somebody outstanding. In terms of India and China. and we don't have the advantages. over time we would have reduced human hope. If the stock market went down over five years. In terms of advancing. though. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. But it is still intellectually honest. Q: What’s the most important thing you've learned from China? A: Warren: They prefer Sprite to Coke. they rose so rapidly. it's going to go away but not fast. relatively little progress was made despite the Chinese having all the native abilities that Americans had. Charlie: If we hired to create hope. Q: Will you pay a dividend and buy back stock? You have stated that over any five-year period the increase in the market value of Berkshire should meet or exceed the retained earnings if you are succeeding in producing in excess of a dollar for each dollar of retained earnings you keep. they stand out. We want to expand Geico. Carpet is down six thousand jobs from the peak. I underrated how fast it could happen that they could advance their civilization so fast. Can you grow the car insurance business overseas? A: Warren: There's no shortage of drivers. but there is so much opportunity in the USA. in Burlington and some other businesses. But people will not stop buying carpet forever. Q: What America needs is hope and jobs. we can only own 24% of an insurance company.Charlie: There's no indication we'd be any good at it either. A: Warren: It’s in the economic principles in the annual report. In my view. think and work like an owner and you'll find you don't have that much 11 . And we're hiring now. We would have flunked the test at various points in time. Canada may be an exception. I actually rewrote that section last year. It's fun to watch. They haven't taught me how to eat Chinese food. but retraining doesn't mean much to a fifty year old person who's been only doing textiles their whole life and speaks mostly Portuguese. We’re going in September. But this has not always held true. so when I wrote that in 1984. We love the idea of expanding but yes. But in recent decades the potential is being unleashed. we would have looked wrong. We have significant unemployment. boy. they are just starting to exercise their potential.

we’re losing something there's no substitute for. But the math is really tough. and I don't know what to do about it. The numbers are bad. But it's a form of distribution of information and entertainment that has lost its immediacy. I haven't changed that 12 . two very intelligent and interested people but with the caveat that they have been gone for a year. They are capable of understanding everything. On look-through-earnings. Q: Last year you were down on the newspapers industry. and we will continue to do that. we think it’s the information we would like to have as shareholders. communities are thriving and people are still dropping their papers. this is a conflict in the investment industry. I still look at the circulations of newspapers. Warren: Newspapers are as vital to me as ever but their value has clearly changed to the populace as a whole. people still make the same mistakes. In a reasonable number of words. but if you’re not working with a lot of money there will always be opportunity. The whole report is guided as ever by the idea that I'm writing to my two sisters. but I don't see any change. How about now? Is it possible that technologies like the iPad can change the decline in the newspaper business? A: Warren: My opinion on the technology is relatively uninformed. Philadelphia is not going away. What happened to the discussion of look-through-earnings? Financial statements of the group companies? A: Warren: We break them down into four groups. The Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. you don't do that anymore. We looked at the Philadelphia Inquirer. we think it's logical. You used to look in the paper for stocks. we don't do them every year. There are plenty of things I don't understand. regardless of technology changes. Will there be fewer opportunities? Perhaps I shouldn’t go into investing? A: Warren: Probably there will be fewer. I can't help it. Q: Considering the tax opportunity this year. Charlie: Local papers had impregnable economic strength. They were called the fourth estate. It’s not good for the country. Newspapers used to be bulletproof. but the paper’s not worth what it was because the advertiser doesn't need you anymore. Charlie: The politicians are not behaving better. They were the only game in town and that’s no longer the case. Q: It seems like most young investors today think of themselves as value investors. Newspapers become less valuable as the advertisers float away and so the advertisers float away even more. Adding a hundred pages may obfuscate rather than illuminate. Asset gathering can become more important to your income than investment performance. so if anything people are dropping papers faster due to these new technologies. sports. but some years it’s more relevant. if our positions were reversed. The papers have become less useful to advertisers. Opportunity with a smaller amount of money will still be there. the newspapers are weakening. but they don't know the lingo. Charlie: It's perfectly natural that the focus should shift as the company had evolved.Q: There have been some changes in the annual report. they helped keep government honest. does it make sense to convert to a Roth IRA? A: Charlie: I have an IRA and yes I will convert.

it is still a darn good business. I don't think about it. But some need it. we pay no attention to ratings for bonds. with egalitarian remedies. it’s not complicated. Certain parts of the world need them. They made the same mistakes that everybody else made. People should get accustomed to doing less well on their investments. If they are not forced to make wholesale changes. but correlation is the concern. Finally in 2009 they spent the cash on stocks and made money on it. Integrity still matters. Part of the problem is asinine business education. Harrisburg is in trouble now and the bond insurer is paying the interest. There will be a backlash. Charlie owns it. Maybe nothing terrible will happen. will they? Are there bailouts coming? A: Warren: We’re not insuring a lot of muni’s now because the prices are not right. I was too impatient to move up through the ranks. I'd like equities. I've yet to hear a single apology from business education about their huge contribution to our current difficulties. It will be hard in the end for the federal government to turn away a state when they have saved GM and various other entities. it has a lot of cash. The ordinary returns will be lower for a long time. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. And I knew then I could say the long term would be better in stocks. Q: What can you expect from stocks going forward? A: Warren: I write articles about the stock markets infrequently. but that’s in part because I am unenthusiastic about the alternatives. Q: Municipal defaults haven't materialized yet. It's hard to tell how that will play out. they couldn't see a world where residential housing would collapse. They are not dramatically attractive. that's outsourcing investment opinion. I have no idea what the stock market will do. Warren: We like owning businesses that have an advantage. and they got in trouble just on structured securities. Stocks will give you some modest positive real return over time.Daily Journal Company. Warren: There will be opportunities for talent. it’s just because it’s very hard to think contrary to the crowd. Charlie: Try to invest in places that are prosperous and disciplined. it’s far less crowded. mostly because you can't shop prices. How do you stiff-arm a governor? Many bond insurers had extraordinary liabilities relative to capital. Charlie: One piece of advice. regardless of what you do. Over twenty years. Q: What is the future of the Moody’s investment. At Berkshire. I think they are too optimistic. Charlie: They have overall been a very constructive influence for many decades. but I don't know how it’s going to play out. Charlie: I think you’re right. but they are better than cash or bonds. Ben Franklin said it’s hard for an empty sack to stand up. But they drifted. I don't think that was because of incentives. and in 2008 I was premature. take the high road. For me it was faster to scale up in managing 13 . and how is it affected by regulation? A: Warren: The ratings agencies under current conditions still have a wonderful business. and they have pricing power. but that was compared to bonds or cash. they take no capital. You have to be patient.

Don't ever give up on humans’ ability to innovate and solve problems. he has much to answer for. listing one as preferred and one as unpreferred. FASB offered two 14 . Warren: And the adjustment will be gradual. but it’s not impossible now. and other companies have different systems. And everybody said they did it because the other guys were doing it. so it's hard to tell the difference between mouthing and doing it. I would pick today. the world will not be dependent on that windfall. But Kraft is still selling at a discount to its constituent parts. 498 took the unpreferred method. If you could pick a time to be born. some are gone. It was impossible at times. But we've done some dumb things. Everybody mouths integrity. contemplating a world that goes off oil. As someone said of Cardinal Richelieu: If there is a God. Of five hundred companies in the S&P500. and corporate America fought back and the FASB backed off and Congress backed the executives.Q: You often cite optimism about the prosperity of future generations. Warren: Think of when stock options were an expense. We try to create as few situations as possible in Berkshire that could create Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. Q: Has the crisis changed the integrity of management? A: Charlie: Integrity and lack of it is what led us here. then he's done rather well. Freeman Dyson has written a lot. especially if you value it the way they valued Cadbury. The pizza deal is a tax-inefficient deal when a tax-efficient deal was possible. it shouldn’t bother you too much. but if not. On compensation. so I've become more tolerant. we've got a rational system. There will be other free lunches available. We need it now as chemical feedstocks more than anything else. Charlie: We are very stupid in many ways. Q: How would you grade Kraft's board and the board’s compensation based on their M&A strategy? A: Warren: We’ve made some dumb deals. Warren: An army of people with a strong economic interest will always push you to do deals. It has contributed to prosperity in a huge way. I would have voted against it. but now we can get ahead with other technology. But in my view. We've faced all kinds of predictions of dire futures. but we have avoided a subset of stupidities. Charlie: Managers always yearn for a better set of competitors and generally overestimate the value of strategy. They sold pizza which was growing ok to buy Cadbury at a higher multiple which was also growing ok. Charlie: Back then they needed the oil to get ahead. The frozen pizza deal was particularly dumb. important ones. Fortunately. If it doesn’t bother Freeman Dyson. How dependent is our current and future prosperity on oil and the economic windfall it has brought in the last century? A: Warren: The discovery of oil changed the world and its only 150 years ago and since then we've been sticking straws in the ground. a few Irish banks and other things.

If you want to put in solar panels. Buy it based on the merits and then forget about it for a long. Otherwise you'll just be a broker’s friend. it always seems like it can go down more. You have to have a mental attitude. It's human behavior. That extra cost is a blip compared to what is in our economic future. Charlie: So much of the bad behavior doesn't come from malevolence. look at a stock the way you look at a farm. Charlie: I developed more courage after encountering hardship. I'm quite negative about growing corn for energy. What explains the contrast? A: Charlie: Many human problems are energy-related and we have good solutions on the 15 . they're going to get cheaper. it is unconscious and generally due to poor cognition. long time. if there were just fewer quotes. You talk of inflation. But I am optimistic. And yet you also have made many optimistic statements about the future. Q: In terms of market declines. How do you know when to act? A: Warren: Ninety percent of the time you don't know where you are. are we out of the woods? When the market is down. You even hear people say "the market’s saying" this or that. because they would fudge. Don't look at quotations. wait. technological problems are being solved. I'm optimistic about the culture of Berkshire Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. people would be better off. because it's obvious we need it.this dynamic. Q: A married couple asks: How can we gauge what impact on Berkshire overall the recent purchases will have? A: Warren: The degree of undervaluation in our portfolio today is not dramatic. You don’t buy a farm and then look for a price the next day or the next week. it often doesn't scream at you. We love it when prices go down because we can buy more. we'll have a better grid. Q: You both seem to be expressing reserve. The systems on Wall Street therefore are inherently irresponsible and it is immoral to have systems like that. but not a lot of things that will increase a lot in value. That is a huge benefit to civilization. I don't make people submit a budget. and has been exceeded many times in the past. We've got a lot of good businesses. Q: BYD is entering the solar business. Get your feet wet with some hardship. Berkshire also owns companies in roofing and utilities. I always decline to put solar panels in because I think they are going to get a lot cheaper. Solar can cost twice as much as what were used to and still be a good solution. it’s a stunningly stupid idea. A solar solution is coming. Warren: Keynes talked about this. it’s unbelievable. People think they did fine. Charlie: On marriage. If you have a temperament that gets scared when others are also scared. Who do you see apologizing? There are very few. just try to accept the other point of view. you are probably not going to make money in securities. Can you get these businesses to work together? A: Charlie: On solar. The cure is to have a system where the people who are making the decisions bear the consequences. of reducing expectations.

Phil Fisher wrote about this. to some it says stay out. Q: Comment on the impact of zero percent interest rates? A: Warren: Well it’s tough if you've got your money in short term. it’s more important than written word today. It won't work forever to run deficits and have easy money. You're soliciting shareholders? The shareholder list won't be empty. somebody has to own it. you can be judged by your own words. too. So what you do is convey exactly what kind of a place Berkshire is. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. And yet there are terrible problems. They select you. etc. Q: How do you get loyal shareholders? A: Warren: If you run a public company. Charlie: Stocks are up because you can’t do anything else with your money. whether you’re kidding. To some the sign on the door says come in. we came up from a different place. It can’t last. You'd have doubled your money once since Columbus landed at these rates. not the other way around. and if it does that is not a good scenario either. If we get a bunch of people looking to hit the quarter. I’m 86 years old. whoever. Warren: The pressure from low rates on the price of everything else cannot be overestimated. During the Charlie Rose taping there was a section about railroads and the video segment had images of Marilyn Monroe and Grace Kelly. French food vs. Buffett’s escalating media exposure really the best use of his time from the perspective of Berkshire shareholders? A: Warren: It's not the best use of my time. as it has in Japan. the blame goes to Congress. don't try to be everything to everybody. We don't want people to be disappointed with us. Hamburgers. anybody can buy your shares. And if we do run into trouble. the 16 . I don't think we deserve such credit. Warren: Also we don't have an investor relations department. It won't last forever but it feels like forever to people who live on a fixed income. So it's easier to be on television. and so we've always thought about it as family. But you even have to be careful about broadcast. it’s clearer. You just want people who know what to expect. The last year of stock prices has been the result of the agony that people are being put through that have savings and expect to be living on fixed income. But in the final production they cut out the railroad video segment so they just came back to me saying out of nowhere how I wished Marilyn Monroe and Grace Kelly had been thrown into the Burlington deal! So broadcast is clearer but still it can be tricky. People look at becoming partners in this business and they know we'll treat them like partners. and when we came back from that segment I said how I would have paid a higher price if they had thrown in Marilyn Monroe and Grace Kelly. Charlie: We started out investing money for family and friends. Other people can’t get to this point because they don't come from the same place. they are just ridiculous. Osama bin Laden. Look at Blankfein with the “God’s work” comment. not the Fed. The best way to be happy is to get your expectations down. Q: Is Mr. It’s called ‘easy money’ but it's not easy for the people on a fixed income. you all can handle a little inflation. if I can be optimistic about the future. it’s much easier than getting your results up! Hey.preserving in the future. but I play bridge on the internet twelve hours a week! Broadcast television is a good record. We just had enough sense to preserve it. they are going to be disappointed.

what fails? Have that temperament. Charlie: It's amazing to me we have been successful with our model. We’re as interested as ever. Warren: I had never heard of Iscar. You don't have to find very many good ideas. I never thought I'd be buying Korean stocks. because it’s a monopoly. The key with a circle of competence is not the size of the circle but where the perimeter is. People who sell to us are revolted by the alternatives. We like those. Charlie taught me a lot about durable competitive advantage. the subscribers pay up front. A great magazine operates with negative capital. people that do that almost never fail. Charlie: The formula never changes. it was a guarantee against failure.Q: How do you get better and better at valuing companies? A: Warren: Ben Graham taught me how to value a certain type of company. Blue Chip Stamps. We might get 3-4 calls a year. We lay out the parameters in the annual and there just aren't that many businesses that meet those criteria. Always remember the margin of safety. remember. There's not much we can do to accelerate the process. If you take the rulers of the businesses. they are more disciplined. we wrote a big check for BNSF. But you can predict who's going to win. and recognize your limitations. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. and practice a lot. but with the right temperament you'll rise. but so does everybody else so they go for a high price. keep doing that. it's human revulsion that helps us. Apple doesn't need much capital. It's hard to get near the top and it’s hard to hold that position. See's is a good example. but it can’t grow much because there's only so much candy you can eat. I didn't take any business school classes other than accounting. that's a good year. There are lots of things I don't understand. do it a lot. but the opportunities dried up. keep asking yourself. they said they either won't sell or they will sell to us. We get offered things by people who would not sell to anybody else. but I would love it if we could do another big deal. Warren: You don't have to be brilliant. Great consumer businesses. I started valuing companies when I was a little boy. just avoid the big mistakes. that is really peculiar. Get up each morning and try to go to bed that night a little wiser. Maybe you’ll have some bad luck. Think of every business. Incredible pricing power is illegal. where people pay you in advance. you have to keep learning. or what we bought it for? We think of a good business based on how much capital it requires. What works. a lot went broke. it generated float. Q: What are the best return-on-capital businesses? A: Warren: Are you looking at the capital required. talk to other people. and that's marvelous for us. Sports Illustrated operates with negative capital. Service type businesses like Businesswire. Q: What are the growth prospects for Berkshire in terms of acquisitions? Has the phone been ringing? A: Warren: The phone hasn't been ringing 17 . they care more. Charlie: If you want to get good at something that is competitive.

and I think it will work out. But we’re learning. Some people are lucky in finding what they enjoy early on.” Find your passion. But that's not so bad considering we’re all so much richer than we were. But we've come a lot further than I would have thought thirty years ago. We do things our way because it suits our temperament. But she loved what she was doing. If you haven't found it 18 . I hope everybody’s comfortable with this. are more disciplined. It’s great in Japan and China. And at that point we'll do something good for shareholders. too. Among our managers. If you find something that turns you on. they’re those guys. For me it was dumb luck. so it’s unusual. Q: Does the US need a high-speed passenger rail service? A: Warren: By its nature it is noneconomic. The cost is awesomely large if the area is already densely populated.” Remember what Emerson said: “the power that lies within you is new in nature. Warren: Can you keep employing capital effectively for a long time? And I think the answer is yes. but unusual is OK sometimes. We wouldn't normally have been involved in something like that. B. the ones that work harder.Charlie: Our growth isn't over. If you choose the race. some went to school. Q: What question would you ask yourself? A: Charlie: It's strange that we're involved in BYD. keep doing it. B never went a day. Unless it’s heavily subsidized. The Burlington deal was better for their shareholders than for ours. there is. Just think of how hard it would be. there won’t be that many that are faster than you. because we'll keep doing it. you've got to keep looking. We're getting a fair amount of engineering into Berkshire now. I went to her house for dinner and she had the price tags from the store hanging on her furniture and she said “it makes me feel at home. Charlie: I'm at least as dubious. but they have a different calculus. The common factor among our managers is they love what they do. It’s the fundamental algorithm of life. “Mrs. Q: What is the central philosophy of Berkshire? What is the unifying theory? A: Charlie: It's pragmatism. BYD. but that doesn't mean there's not a limit. So eventually we will have to return some of that capital. but it is getting extraordinarily hard. don't let anything stop you. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. It will be slower. some dropped out. and we've always bragged about avoiding technology. Charlie: I think we'll do something with a CIO before many people expect. Mrs. We don't have the density of demand. repeat what works. you’re my kind of woman. And when something is working well.” I said. my father was in securities. But it was good for us. And we have found that it works better. that's my guess. competing with auto and air. because after all they were getting into Berkshire. you'll be successful. We love what we do. for us. it doesn't meet the test for private investment. Q: Can you give some advice for a young entrepreneur? A: Warren: There's nothing like following your passion.

They call this the “shake and bake.” the earthquake is the shake and the fire is the bake. but the numbers just blow your mind. And the damage is different from the severity. It’s hard to get above $100 billion. could Berkshire ever be an AIG? A: Warren: If you postulate that there was a total 19 . In San Francisco. Katrina was like $70 billion. As long as the land doesn't get less fertile. we came close to that. The big ones we know about. in the big quake. Berkshire is totally prepared to handle anything that comes along. Joshua Kennedy Liberty Square Asset Management jtk@libertysquare. people get less innovative. When I think worst case in California.Warren: If it’s high speed it can't stop very often. Q: What would be the impact of an earthquake as bad as Chile in California? A: Warren: I don't know. Charlie: A lot of damage is fire and a lot is totally uninsured. And the cost gets staggering. in one case in Missouri there were three eight’s (on the Richter scale) in a few weeks. we can survive anything that corporate America as a whole can deal with. I thought we could. barring something extraordinary like that. It'll happen again at some point. We would still have positive earnings in a year like that. Warren: Huge amounts of debt won’t do us in. but it was clear it wouldn't get screwed up. it’s completely uneconomic. we're built to withstand anything. $100 billion is way up there. It’s more expensive than paying for everybody to take taxicabs. We’re talking about a trolley system in Omaha. It's been done in Buffalo and people like it. Earthquake coverage is not actually that common. the big damage was the fire. Barring a massive nuclear or biological thing where a big part of the population is done in. Charlie: I'm not worried about it. What is our exposure to a financial crisis. Q: We’re seeing an increase in debt everywhere.

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