Warren Buffett & Charlie Munger: 100 Years of Financial Wisdom in 4 Hour - Investing/Market Analysis

Investing is not that is really not complicated. I mean, the the basic framework for it is simple. Now, then you you have to work at it some to find the best pockets of of uh undervaluation, maybe, or something. But you didn't have to have a you didn't have to have a high IQ. You didn't have to have lots of investment smarts to buy junk bonds in 2002, or even to do some of the stuff that was available when LTCM got in trouble. You really just had to have sort of the courage of your convictions. You had to have the willingness to do something when everybody else was petrified. And but that was true in 1974 when, you know, we were buying stocks at very, very, very low multiples of earnings. It wasn't that anybody didn't didn't know that they were cheap. They were just paralyzed for one reason or another. And and, you know, that the lesson a following logic rather than emotion, you know, is something that it's obvious. And some people have great trouble with it, and others have less trouble.

Charlie, can you give him any more help from there?

Well, I think this is different. When we were young, we had way less competition than you people have now. There weren't very many smart people in the investment management field. They really weren't. And you should have seen the people who were in The Bank Trust departments. I mean, so now we've got armies of brilliant young people, and all these private partnerships, and all these proprietary desks, and all the big investment banks. It's a and we've got a vast amount of talent in the investment management business. So and there's a lot of competition. There were suddenly a crisis, now there would be 500 firms that would be studying it intensely, each having capital that they could commit on a hair trigger. In our day, we would frequently be all alone. But in 2000, would be the only we'd be the only buyer. But in 2002, Charlie, there were tons of people that had investment experience and high IQs and lots of money was around. One main question about money, it's just they were terrified of that particular arena.

Well, when you have it huge convulsion, which is like a big fire in this auditorium right now, you know, we get a lot of weird behavior. And if you and if you can, particularly if they had table, and if you can be wise when everybody else is going crazy, sure, there will still be opportunities. But that may give you a long, dull stretch. If that's your strategy, three years ago, two, three years ago, you could find a number of securities in Korea, population 50 million, advanced society, strong balance sheets, strong industry positions, at three or so times earnings. Now, but that took a convulsion to create that, a real a big convulsive. Yeah, but the convulsion happened three or four years earlier, five years earlier. And plenty of smart people in Korea, in the investment business, plenty of smart people here, scouring the information. It was all available. You you you can you can go to the internet and get information about Korean companies as just as good as you get up from the SEC. And there they were dozens of companies at very, very, very cheap prices. Now, we're all these smart people, and with all this money, it did happen. But I asked you to name 20 more like it, you would have great difficulty.

I'm gonna name them. Number eight. My name's Simon Dennison Smith from the UK. My question is this: If you were starting out today with a million dollars, with a vision of building a business with 20 average growth in value over 40 years, what type of investments and investment strategy would you look to make in the first five years?

Interesting. That performed the first partnership 50 years ago. Last two days ago, Thursday on May 4th, 1956, which was 105,000. Um, that's my sister clapping. She would she was in the partnership. They would Charlie and I were starting all over again. And we were in this. Charlie would say we shouldn't be doing this. But but uh, but if we if we were to succumb to Satan and engage in same kind of activity, we would I think be doing something very similarly. If we are investing in securities, we would look around the world. And we would look at a Korean. And Charlie says, you can't find 20 of them. But you don't have to find 20 of them. You only have to find, you only have to find one, really. You do not have to have tons of good ideas in this business. You just have a good idea that's worth a ton, occasionally. And in securities, we would we would be doing the same thing, which would probably mean smaller stocks. It would mean smaller stocks because we would find things that could have an impact on a small portfolio that will have no impact on a portfolio the size of Berkshire. Uh, if we were trying to buy businesses, we'd have a tough time. Um, we would have no reputation, so people would not be coming to us. We'd be too small a player. If you're talking about a million dollars, so we would not have much success, I don't think, with small amounts buying businesses. Charlie started out, you know, in real estate development because it took very, very little capital, and you could magnify brainpower and energy. Uh, uh, or I should say brainpower and energy could magnify some small amounts of capital in a huge way. That was not true in securities. Um, financial inclination was to look at securities and and just kind of do it one foot in front of the other over time. But the basic principles wouldn't be different. You know, I think if I'd been running a partnership a couple of years ago with a small amount of money, I think I'd have probably been 100 in Korea. And, you know, I would be looking around for something that was very mispriced, and which, and and that I understood. And every now and then that's going to happen.

Charlie?

Well, I agree with that. The concept that you're likely to find just one thing where it'll make 20% per annum, and you just sit back for the next 40 years, that tends to be dreamland. And in the real world, you you have to find something that you can understand. That's the best you have available. And, and once you've found the best thing, then you measure everything against that, because it's your opportunity cost. That's the way small sums of money should be invested. And the trick, of course, is is getting enough expertise that your opportunity cost, meaning your default option, which is still pretty good, is very high. And so the game hasn't changed at all in terms of its basic arithmetic. That's why modern portfolio theory is so asinine. It really is, folks. Yeah. When Warren said he would have been all in one country, that's pretty close to close to right. He wouldn't have quite done that when he had the partnership, but he would have been way more concentrated than is conventional. If you listen to modern portfolio theory, most people aren't going to find thousands of things that are equally good. They're going to find a few things where one or two of them are way better than anything else they know. And the right way to think about it in investing is to act thinking about your best opportunity cost.

Number nine. That's in the freshman course in economics everywhere in the basic textbook. It just had it hasn't made its way into modern portfolio theory. We don't get asked to do book reviews. It's it's Andreas Viga from Munich, Germany. Thank you very much for the open discussion that you have with us. Actually, I'd like to ask a question on a book. So I come back to the book review. Jeremy Siegel had some ideas in his second book, and I would like to understand what how this would impact your investment strategies, if there are any changes from his ideas, and how you react to these recommendations that he makes. Thank you.

This is which book? Jeremy Sprinkle? Jeremy Siegel, the second book, by the try and the true triumph over the world and the new. Now that it's had no effect on on us.

Charlie?

No. Is that the fellow who's very optimistic about common stock investment over long periods of time? The University of Pennsylvania? Yeah. Yeah.

Well, I think he's demented.

Well, he's a he's a very nice guy.

Charlie?

Well, he he may well be a very nice guy, but he's comparing apples against elephants and trying to make accurate projections.

Number 10. I'm Bob Klein from Los Angeles. You've so eloquently stated that you can't see who's swimming naked until the tide goes out. Could you discuss the issue of trying to employ a rational decision-making process in investing, or in business generally, as opposed to focusing on outcomes or results of just a few instances or over a short period of time? For example, it may not be a good idea to underwrite some insurance policies if competition has lowered the premiums too far. And likewise, in the stock market, momentum investors may get good results for a while, but buying high and trying to sell higher isn't a good long-term strategy. So I'd just like to hear you guys provide some detail on the importance of using an effective decision-making process, even though it may lead to some bad outcomes and underperformance in the short run.

Yeah. Well, Ben Graham said long ago that you're neither right nor wrong because people agree with you or disagree with you. In other words, being being contrarian has no special virtue over being a trend follower. You're right because your facts and reasoning are right. So all you do is you try to make sure that the facts you have are correct. And that's usually pretty easy to do in this country. I mean, the information is available on all kinds of things. The internet makes it even easier. And then once you have the facts, you got to think through what they mean. And you don't take a public opinion survey. You don't pay attention to things that are unimportant. I mean, what you're looking for is something things that are important and knowable. If something's important but unknowable, forget it. I mean, it may be important in order to know whether somebody's going to drop a nuclear weapon tomorrow, but it's unknowable. It may be all kinds of things. But so you fo and and there are all kinds of things that are knowable but are unimportant. In focusing on business and investment decisions, you try to think you narrow it down to the things that are knowable and important. And then you decide whether you have information of sufficient value that you know compared to price and all that that will cause you to act. What others are doing means nothing. It's what Graham writes in chapter eight of The Intelligent Investor that the market is there to serve you and not to instruct you. That's of enormous importance. When people talk about momentum in stocks, or or charting, or any kind of things like that, they're saying that the market is instructing you. The market doesn't instruct us. The market is there to serve us. If it does something silly, we get a chance to do something because it's doing something silly. We do it. But it doesn't tell us anything. It just tells us prices. And the price is out of line where the facts and reasoning lead you, then you then action is called for. And if it doesn't, you forget it. And you know, go play bridge that day. And the next day, see whether there's something new. And the nice thing about it is there always is something new. I mentioned the LTCM crisis. You know, we on Sunday, for people that had portfolios that were in trouble. Now, I will tell you that if you can make a lot of money on Sunday, you may not get a chance very often. But any calls you get on Sunday, you're probably going to make money on. Things you're things are really screwed up. If you're getting calls on Sunday, and all you have to do is make sure that you're the collie and not the caller on Sunday. But if you get those calls, you get a call on a Sunday, and somebody says that the off-the-run is trading 30 basis points away from the on-the-run, you know, all you have to do is decide whether how you handle that particular piece of information, whether it's correct in the first place, but how you handle that piece of information, whether you can play out your hand. You never get in a position, obviously, where the other fellow can call your tune. You have to be able to play out your hand under all circumstances. But if you can play out your hand, and you've got the right facts, and you reason by yourself, and you let the market serve you and not instruct you, you can't miss.

Charlie?

Well, I would say some of you probably can miss. Okay. I would say Charlie can't miss. I'll put it that way. He'll agree with that. Do you have anything further to do? Okay. At least I've got them off that previous subject.

Number 11. It really doesn't make any difference. I mean, what what we don't pay any attention to what what people say about Coca-Cola stock or Gillette stock or any of those things. I mean, on any given day, two million shares of Coca-Cola may trade. That's a lot of people selling, a lot of people buying it. If you will talk to one person, you'd hear one thing, and talk to another. It really you really should not make decisions in securities based on what other people think. If you're if you're doing that, uh, you should you should think about doing something else because it's a public opinion of poll will just it will not get you rich in Wall Street. Uh, uh, so you really want to stick with businesses that you feel you can somehow evaluate, evaluate yourself. And, uh, I don't think, I mean, Charlie and I, we don't read anything about what business is going the economy is going to do, or the market's going to do, or what anybody. Anytime I see some article, it says, you know, these analysts say this or that about some business, it just it doesn't mean anything to us. You cannot you cannot get uh rich with a weather vane. And I would say this in terms of the of predictions. And I know the spirit in which you ask the question, but there's just there's a market out there all the time. Uh, and and people love to hear predictions. I mean, if I said I was going to offer a bunch of predictions today, I mean, we would we would have a million people here. I mean, that they're dying to have predictions and speeches at Rotary clubs or trade associations or whatever. That's they they just plain love it. And that's what a whole industry is built upon, you know, the people coming out of Washington that talk about political predictions. And the I don't read those in the paper at all because it's just it's space fillers, basically. And, uh, uh, you mentioned Edgar Cayce. Ben Graham knew Edgar Cayce pretty well, but I I just have never seen any utility to any of that at all. There will be some huge surprises in the world. There's no question about that. But I don't I don't think that betting on any specific one is is a very smart policy. In fact, our we usually bet against them. In terms of super catastrophes, we know there will be a 7.0 or greater quake in California in the next 50 years. We don't know where it'll be or when it'll be anything like that. We're willing to pay out a lot of money if it happens tomorrow. And because people do worry about catastrophe, and in this case, it's perfectly proper with with insured values. But it it just isn't any way in in our view to get through economic life.

Charlie?

All of these economists with 160 IQs have spent their life studying it. Can you name me one super wealthy economist that's ever made money out of securities? You know, I may just go down the list. No, no. Keynes. Keynes, actually, in his early years, tried to make money in stocks by predicting what business would do, and he gave it up. And then he went over to a Graham type approach. I mean, it's very interesting to read his history on this because he thought he could, by looking at various economic variables, pick what he called the credit cycle and make a lot of money. And and he what broke a couple of times doing it, had to borrow from people. And then he settled on buying good businesses cheap that he understood and concentrating his investments, and he did very well. It's an interesting history. But if you look at the whole history of them, you know, they don't make a lot of money buying and selling stocks. But people who buy and sell stocks listen to him, which is I have a little trouble with that. You know, I I'm not I've not earned any uh any uh stars for my past economic predictions. And the good thing about my economic predictions, if I even do make them, is that I pay no attention to them myself. So, uh, I I really, uh, and the way we pick our investments is we just don't get into the macro factors. I can't recall a time when Charlie and I have looked at a business, either buying it in its entirety or buying uh pieces of it for the stock market. I just macro the conclusions or just never never enter into the discussion. I mean, you know, I'll pick up the phone. We've had these two in recent months, and I'll tell Charlie about it. And, you know, we we talk about a few things, but we don't talk about anything remotely macro. Uh, and and that's really the way it'll stay. You know, I I've seen a lot of bank mergers recently. And one of the things they do because they want to cut the costs and and justify a merger, which they're dying to do, I mean, that's the reason they they so they they cut costs. They wouldn't have cut if they if they weren't dying to do the merger in the first place and get bigger. But that frequently, I know one in particular that I'm thinking of, that, you know, they'll cut out the economics department. You know, I always wonder why the hell they had it in the first place, you know, because what what do they do? You know, I mean, the guy comes in, I says, I think GDP will be 4.6 this year instead of 4.3. So what? You know, I mean, you're still trying to make every good loan you can make, and you're still trying to take into positives could be trying to cut costs. Worry again. It's got nothing to do with running the business. But but, you know, it it's it's fashionable. And every bank has its economist and economics department. And when a big client will come in, they take them to lunch. And it just it always just struck me as it's just a lot of nonsense. You know, so if we ever get an economics department at Berkshire, sell the stock. Shorten. There was one other item in here, I believe, which I think achieved a little added relevance in the last year. I said we therefore need someone genetically programmed to recognize and avoid serious risks. And then I put in italics, including those never before experienced. And I said, certain perils that lurk and investment strategies cannot be spotted by one of the models by use of the models commonly employed today by financial institutions. Well, I think that proved to be somewhat prophetic of what happened last year. All of these places had models. I mean, the major banks, the major investment banks, and they would meet weekly at a risk committee, probably, and go over their models. And all of the statistics would be printed in nice columns and everything. And they didn't have the faintest idea what risk they were involved. You really need in the investment world, someone very solid, someone you trust, reasonable analytical skills, but you also need someone that actually can contemplate problems that haven't popped up yet, but which are starting to become, uh, possibilities in terms of new financial instruments, or new behaviors and markets, and that sort of thing. And that's the rare quality. I mean, that that inability to envision something that doesn't show up in your past model, you know, can be fatal. And Charlie and I spend a lot of time thinking about things that could hit us out of the blue that other people don't include in their thinking. And the we may miss some opportunities because of that, but we feel it's essential when managing other people's money, or for that matter, managing our own money. So I would say that that you might go back and read the 2006 annual report again. But those are the criteria we're looking for, and we have identified as being met by the four people we're thinking about.

Charlie?

Yeah, you can see how risk-averse Berkshire is. The first place, we try and behave in a way so that no rational person is going to worry about our credit. And after we've done that, and done it for many years, we also behave in a way, and after we've done that, and done it for many years, we also behave in a way that if the world suddenly didn't like our credit, we wouldn't even notice it for months. That if the world suddenly didn't like our credit, we wouldn't even notice it for months, because we have such liquidity and are so unlikely to be unable to be pressured by anybody. That double layering of of protection against risk is is like breathing around Berkshire. It's just part of the culture. And the alternative culture is just the opposite. You call a man the chief risk officer, but often he is functioning as a guy that makes you feel good while you do dumb things. So he's like the Delphic oracle, convinced the Persian king to attack somebody or other. I mean, it's it's just a dumb sister. And and how can a guy be Donald? He's got a PhD, and he can do all this advanced math? Well, you can you can, but you can it's very well. All you've got to do is crave system and computation so much that you torture reality in defending some model, mathematical model, which really doesn't match, particularly under extreme conditions. And then because of this work that you're putting into everything, and these computations about daily trading risk and so forth, you feel confident that you've clobbered the risk. But you haven't. You've just clobbered up your own head. Yeah. We we really want to run Berkshire. You know, I'll even applaud that one. We we really want to run Berkshire so that if the world isn't working tomorrow the way it's working today, or the, and it's working in a way nobody expected, that we don't have a problem. We do not want to be dependent on anybody or anything else. And yet we want to keep doing things. So we found a way to do it. We think we found a way to do that. It may give up some of them. Well, it obviously gives up earning higher returns 99% of the time, and maybe 99.9% of the time. Obviously, we could have run Berkshire with more leverage over the years than we have, but we wouldn't have slept as well. And and we wouldn't feel comfortable. We have a lot of people in this room that have almost all their net worth in Berkshire, including me. And we wouldn't feel comfortable running a business that way. Why do it? I mean, it doesn't it just doesn't make any sense to us to to be exposed to ruin and disgrace and embarrassment and for something that's not that meaningful. If we could earn a decent return on capital, you know, what's an extra percentage point? It just isn't that important. So we will always try to behave in a way that, A, is not dependent on anybody else evaluating the risk except for us. It cannot be farmed out. And you've seen what happened to some institutions where the management thought they were farming it out. And, you know, if that means so a reasonable return instead of a slightly unreasonable region, we just accept it.

Number two. Hello, Mr. Buffett. Hello, Mr. Munger. My name is Brooke Athletic, and I'm from Munich, Germany. I would like to get back to your point that as a professional investor, one should be able to act quickly and decisively. That means being able to know what the intrinsic value is and to act within a day or within an hour if the market offers an opportunity. My question is, how large is the universe of companies which you have in your head whose intrinsic value you know, where you would be able to act within a day or two if the market offered an attractive price to you? And secondly, how come you suddenly invest in Southern Korea or China?

Yeah, we can we can act. Our our immediate decision is whether we can figure the what's being offered out to us or not. I mean, there's a there's a go-no-go signal. And Charlie and I are often thought to be rude when we think we're just being polite and not wasting the other person's time. So as they start mid-sentence in their first conversation with us, we just say, forget it. And Charlie's pretty good at that. And I'm picking it up. The it's we know very, very, very early in the conversation whether somebody's talking about something that there's any chance is actionable by us. And we don't worry about the ones we miss. We we want to make sure that we don't waste any time thinking about things that when we get all through thinking about them, we're not going to know enough to make the decision on. So we just rule those out. And that rules a lot of things out. Then if it gets through a couple of these filters and makes it in to an area where it says, this is something that we know enough about to make a decision on, we're ready to move right then. So we make decisions. We can make a decision in five minutes, very easily. I mean, it just is not that complicated. Now, we know about a number of businesses and industries, and there's a lot of businesses and industries we don't know anything about. We know about a lot of things about certain kinds of bonds, and we know some. There's a variety of things we know about. And it's nice that we can expand that universe of of knowledge. But the most important thing is that that anything that gets through is in an area of knowledge. And the truth is, if we can't make a decision in five minutes, we can't make it in five months. You know, there's we're not going to learn enough in the following five months to make up for the fact that we went in deficient in the first place. So it's it's it's just not a problem around Berkshire. If we get a call and somebody says either they've got a business for sale, or well, that's that's what we're going to get on the calls. Or if I'm reading a paper or a magazine or an annual report or a 10K, and I look at a price, and there's a significant differential between price and value, we move right then. And Charlie and I don't need to talk to each other about it. I mean, we both think the same way. And and we have generally similar spheres of knowledge.

Charlie?

Oh, it's the answer to your question is, we can make a lot of decisions about a lot of things very fast and very easily. And the and and we're unusual in that respect. And the reason we're able to do that is there's such an enormous other lot of things that we won't allow ourselves to think about at all. Just that simple. I mean, I have a little phrase when people make pictures to me, and about halfway through the first sentence, I say, we don't do startups. They don't exist. Oh, look, you blot out startups, there's a whole layer of complexity that goes on in your life. And we've got other little water out systems. And and using those, we finally find out that what remains is still a pretty large territory that we can't handle. I think that's fair.

Warm?

Yeah. And and an awful lot of giveaways that people in the first sentence or two, uh, throw out that, you know, we just know we aren't, you know, it isn't going to work. And, we waste very, I would say we waste a lot of time, but we wasted on things we want to waste our time up. And we we we're very selective about that. And then we're good at it. We waste a lot of time, uh, but we're not going to waste it on things we don't want to waste it up.

Number three. It's just the way it is. Uh, yeah. If you, it's as though God made the world so the only people fluent in math could understand it. Either you can handle ordinary human activity pretty well, but if you want to understand say, science, you can't do it without math. That's just the way it is. And in business, if you're enumerate, you're going to be a klutz.

Keep talking. I'm chewing. And we'll go back. Go ahead. The good thing about business is you don't have to know any high math.

It may be a disadvantage. No, no high math. Yes, I think it is because you you look for opportunities to use this marvelous complicated tool. And, and by and large, that doesn't work nearly as well as just using the simple math. When my mother sang me songs about compound interest, there really wasn't any need to go further.

Let's go back to number one. My name is David Farlow from Minnesota, Minneapolis. Thank you, Warren and Charlie. A few minutes ago, you mentioned the importance of learning from history. What have you learned from the investments you did not make over the last few years that you now regret refraining from?

Well, the mistakes we made, and we made them, some of them big time, are of two kinds. One is one we didn't invest at all in something that we understood that was cheap, maybe because we weren't even working hard enough, but at looking at the whole list, or because for one reason or another, we just didn't we didn't take action. And the second was starting in on something that could have been been a very large investment and and and not maximizing it. Charlie is a huge believer in in the idea that you don't sit around sucking your thumb when you can when something comes along that should be done, that you you pour into it. And and that's generally what we've tried to do. But but there have been times, and it's usually happened when I've started buying something at X, and it went up to X plus an eighth, or some intolerable amount like that, and I I quit or waited for it to come back. And we've missed in some cases billions of dollars of profit because of the fact that I'd gotten anchored, in effect, to some initial price when I could have paid more subsequently, and it really was inconsequential.

Do you have anything worse to confess than Walmart?

A Walmart, I cost us about, it's up to 10 billion now. I cost us about 10 billion. Uh, I set out to buy 100 million shares of Walmart pre-split at about 23, and Charlie said it didn't sound like the worst idea I ever came up with, which is from him, I was just ungodly praise. And and then, you know, we bought a little, and then it moved up a little bit, and I thought, well, you know, maybe it'll come back, or what, who knows what I thought? I mean, you know, only my psychiatrist could tell me. And that thumb-sucking reluctance to pay a little more, the current cost is is in the area of of of 10 of 10 billion. And there have been other examples too. Uh, uh, and there will probably be more examples in the future, unfortunately. But that is that's on the other hand, it doesn't bother us. I mean, you know, it uh, it's it's maybe instructional to talk about it just a little, and I'm glad to respond to the question. But in the end, we're going to make a lot of mistakes at Berkshire. And we've made them in the past, we'll make them in the future. You know, it if every shot you hit in golf was a hole-in-one, it wouldn't be my, you know, the game would soon lose interest. So you have to hit a few in the woods occasionally, just to make it make it a little more interesting. We'll try not to do that too often. But those will be the kind of mistakes we make. We probably won't make the kind of mistakes, although we have, we made one with Dexter shoe. But we we probably won't make the kind that where they cost us a ton of money. That, uh, they'll be much more of omission than commission, I think you'll find in the future.

Charlie?

Won't add any more. At least we are constantly thinking about the past occasions when we blew opportunities. Since those don't hit financial reports, the opportunities you had but didn't accept, most people don't bother thinking about them very much. At least that is a mistake we don't make. We rub our own noses in our mistakes in blowing opportunities, as we just did.

Okay, number two. How many hours per week on average did you spend with reading about companies? Thank you.

Well, when we were younger, we spent, um, probably, Charlie, compared to now, spent a lot more time. I spent a fair amount more time looking at companies. But we would we would, if we were doing it over again, we would do it over again pretty much the same way. We would look at everything in sight that we thought we could understand. And it, the world hasn't changed in that respect. There may be some more people doing it, but there are a lot more companies to look at now. And we would we would read everything in sight about the businesses in the industries we thought we could understand. We would look for things that that jumped out at us as as being very cheap in relation to to value. And we would have one enormous advantage because we would be working with far less capital, which means the universal potential ideas would be would be far greater. But there's no there's nothing different in my view about analyzing securities now than it was 50 years ago.

Charlie?

Yeah, we we read a lot and we thought a lot. I don't know anybody who is wise who doesn't read a lot. And on the other hand, that that alone won't do it. You have to have a a temperament really, which which uh grabs the correct ideas and and does something with those ideas. And I think most people who read a lot don't have the necessary temperament. And they grab the ideas, or they're simply confused by the massive material. And of course, that won't work. There's probably something Phil Cray used to talk about having a money mind, or, and I would call it a business mind. And, you know, there are people that are better with, you know, identical IQs, that are that are better adapted for one than the other. And and the temperament is all important. I mean, if if you can't control yourself, no matter what the intellect you bring to the process, you know, you're going to have you're going to have disasters. And Charlie and I have seen one after another that, uh, uh, it's not a business that requires, uh, extraordinary intellect. It doesn't require an extraordinary discipline. And, uh, uh, that shouldn't be so difficult, but as I look around the world sometimes, it apparently is quite difficult. I mean, the whole world went little mad a few years back in terms of investments. And and, you say to yourself, how could that happen? Don't they learn anything from the earlier ones? But, but, you know, what we learned from history is that people don't learn from history. And you certainly see that in the national markets all the time. Them. Incidentally, you mentioned books. Charlie, did you didn't recommend any books this year? Well, one book I really like, I couldn't buy because it's published only in England, but it'll get here in due course, and that's called Deep Simplicity by John Gribben. It's a perfectly marvelous book. And of course, that's a great title. Deep Simplicity. That's what we're all looking for. I've been reading A Short History of Nearly Everything, and it, it is, it's very impressive to, you know, to read about people pondering how to figure out the weight of the Earth, or something in the 18th century. And you would think minds that could do that would do we work do very well in financial matters. But, you know, if you remember, Isaac Newton spent a significant part of his life trying to turn lead into gold. And he might have made a good stockbroker, but it didn't do much for him financially. He, Charlie knows more about Isaac than I do. So. And he lost an enormous, yeah, the bubble chunk of his net worth in the South Seas bubble. So he invested in an absolute crooked mania. And here was the smartest man in the world. So just IQ points alone won't do it.

Microphone 11, please. Wall Street and financial planning firms charge a lot of money for their asset allocation models, say 50 stocks, 40 bonds, etc. I know you take a more opportunistic approach to building your portfolio and managing risk, as you mentioned by, as you illustrated by your junk bond example. And so I just want you to hammer out how you use price and value as a tool of risk management and US allocation, as opposed to coming at it with a preconceived idea of how much should be allocated to each asset class.

Yeah, we think the best way to minimize risk is to think the, and the idea that you have, you know, you'll say, I've got 60 in stocks and 40 in bonds, and and then have a big announcement, now we're moving it to 65, 35, as some strategist or whatever they call them in Wall Street. I mean, that has to be pure nonsense. I mean, it, uh, 60-40 or 65-35, it just doesn't make any sense. What you ought to do is have your default position is always short-term instruments, and whatever you see anything intelligent to do, you should do it. And you shouldn't be trying to to match up with some, some goal like that. I I found it entertaining. I was just reading yesterday an article, I think it was the about the two fellows at Google, and all of the problems they're going to have because they're each going to get a few billion dollars. And I mean, it was it was I mean, I want to send a sympathy card. I almost went down a Hallmark store because this article went on, they've got this terrible problem, that terrible problem, they're going to need lawyers, and they're going to need financial. They don't need anybody. Those guys are smarter than the people that are coming to them. And they do not have a big problem. And they're very capable of thinking it through themselves. The people that have the problem are the people who want to sell their services to them and are going to have to convince them that they have a problem. But, so much of what you see when you talk about asset allocations, I mean, it's just merchandising. It's a way to make you think that if you don't know how to determine whether it should be 60-40 or 65-35, that you need these people. And you don't need them at all in investing. I mean, most of the professionals that that tell you you're that you're going to get in great trouble unless you listen to them and and adopt and and sign up for their services, you know, they're good at selling. But, um, my brother-in-law, former brother-in-law, that worked at the stockyards, used to say with the people were bringing cattle or something, and I'd say to him, you know, how do you get the farmer to employ you to sell the Swift or Armor or Cudahy instead of the guy right next to you? I mean, you know, it's a cow is a cow, and Armor is going to buy it the same way. And he gave me this disgusted look and he said, Warren, it's not how you sell them, it's how you tell them. Well, there's a lot of that in Wall Street. And Charlie, people have always had this craving to know the future. You know, the king used to hire the magician or the forecast or any looking sheep guts or something for an answer as to how to handle the next war. And so there's always been a market for people who reported to know the future based on their expertise. And there's a lot of that still going on. It's just as crazy as when the king was hiring the the forecaster who looked at the sheep guts. And people have an economic incentive to sell some nostrum that can be sold over and over and over again. The really interesting figures are when you combine the underperformance of the market, say by the mutual fund industry, which is probably a couple of points per annum, that that understates it. Now, if you take all of the investors in the mutual funds who are constantly whipsawing from one fund to another by a bunch of brokers who want commissions, now take a subnormal performance, and it goes down another three or four percentage points due to the shuffling of the mutual fund investments. So the poor guy in the general public is getting a terrible result from from contacting the experts. And these guys are heading the scout troop and the community chest drive and are locally reputable people. I think it's disgusting. It's much better to make a living but by being part of a system that delivers value to the people who are who are buying the product. But nobody nobody uh refrains from creating gambling casinos or something on my theory if it'll work to make money away. We tend to do it in this country.

Microphone four. Can you please elaborate your views on risk? You clearly aren't a fan of relying on statistical probabilities, and you highlight the need for 20 billion dollars in cash to feel comfortable. Why is that the magic number, and has it changed over time?

Yeah, well, it isn't the magic number, and there is no magic number. I would get very worried about somebody that walked in every morning and told us precisely how many dollars of cash we needed to be, you know, secured to three sigma or something like that. But Charlie and I have had a lot of, we saw a lot of problems developing in an organization that that expressed their risks and sigma. And we even argued sometimes with the appropriateness of of how they calculated their risk. And they, it was truly horrible. Yeah. And they were a lot smarter than we were. That's what was depressing. But, um, we we both have the same band of mind whereby we we think about worst cases all the time, and then we add on a big margin of safety. And we don't want to go back to go. I mean, I I enjoy tossing those papers in the other room, but I don't want to do it for a living again. It so we undoubtedly build in layers of of of safety that others might regard as foolish. But we've got 600,000 shareholders, and we've got members of my family that have 80 or 90% of their net worth in the company. And I'm I'm just not interested in explaining to them that we went broke because there was a 100 to one percent chance that we would go broke, and there was a remaining probability was filled by the chance of doubling our money. And I decided that that was just a good gamble to take. We're not going to do that. It it doesn't mean that much. We are never going to risk what we have and need for what we don't have and don't need. We'll still find things to do where we can make money, but we don't have to stretch to do it. And as my job, and and you know, and Charlie thinks the same way. I mean, we're, uh, we don't talk have to talk about it much, but but it's our job to figure out what can really go wrong with this place. And, you know, we've seen September 11th, and we've seen we've seen September of 2008, and we'll see other things of a different nature, but similar impact in the future. And we not only want to sleep well of those nights, we want to be thinking about things to do with some excess money we might have around. So it is, if you're calibrating it in some mathematical way, I would say it's really dangerous. I could give you a couple of examples on that, but that unfortunately, there, I've learned about them on a confidential basis, but but some really great organizations have had dozens of

People with advanced mathematical training make and thinking about it daily, making computations, and they don't really, they don't really get at the problem. Uh, so it, it's at the top of the mind always around Berkshire. And your returns in 99 years out of 100 will probably be penalized by being us being excessively conservative. And one year out of 100 will survive when some other people won't.

Charlie: Yeah, but how do these super smart people with all these degrees and higher mathematics end up doing these dumb things?

I think it's explainable by the old proverb that to a man with a hammer, every problem looks pretty much like a nail. They, they've learned these techniques and they, they just twist the problem to absolutely fit the solution, which is not the way to do it. And they have a lack of understanding of history. I would say that one of the things in 1962, when I set up our office at Key West Plaza, where we still are, at some different floor, I put seven items on the wall. Our art budget was seven dollars. And I went down to the library and for a dollar each, I made photocopies of the pages from financial history. And one of those cases, for example, was in May of 1901, when the Northern Pacific Corner occurred. And it's kind of interesting in terms of being in Omaha, because Herriman was trying to get control of the Northern Pacific, and James J. Hill was trying to control the Northern Pacific. And unbeknownst to each other, they both bought more than 50 percent of the stock. Now, when two people buy more than 50 percent of the stock each, and they both really want it, they're not just going to resell it. You know, interesting things happen to the shorts. And in that paper of May 1901, the whole rest of the market was totally collapsing because Northern Pacific went from $170 a share to $1,000 a share in one day trading for cash because the shorts needed it. And there was a little item at the top of that paper, which we still have at the office, where a brewer in Troy, New York, committed suicide by diving into a vat of hot beer because he'd gotten a margin call. And to me, the lesson that that fellow probably understood sigmas and everything and knew how impossible it was that in one day a stock could go from $170 to a thousand to cause margin calls on everything else, and he ended up in the vat of hot beer. And I've never wanted to end up in a vat. So had those seven days that I put up on the wall, life and financial markets has got no relation to sigmas. I mean, if, if everybody that operated in financial markets had never had any concept of standard errors and so on, they would be a lot better off. Don't you think so, Charlie?

Charlie: Well, sure. There have been some questions. It's created a lot of false confidence, and now it has gone away again. As I said earlier, the business schools have improved, so has risk control on Wall Street. They now have taken the Gaussian curve and they just changed it away. They threw it away. Well, they put, they just made a different shape than Gauss did. And, uh, and it's, it's a better curve now, even though it's less precise. They talk about fat tails, but they still don't know how fat to make them. They have no idea.

Well, but they knew that they've learned through painful. Yeah, they weren't fat enough. Yeah, they learned the other was wrong. Yeah, but they don't know what's right. Um, but we, we always knew that there were, there were fat tails. Warren and I, at the Salomon meetings, would look over at one another and roll our eyes when the risk control people were talking.

Thank you, Bill Ackman from New York, New York, for the handful of AAA-rated companies, AIG, Fannie Mae, Freddie Mac, and MBIA, are under formal investigation for accounting shenanigans and are in the process of restating their financials. Like Charlie said before, I think of a AAA-rated company as an exemplar, a company that should behave in the with the highest accounting and ethical standards. My questions, this leads me to are, how can investors comfortably invest in any financial service company when even when a decent percentage of the AAA-rated companies have false and misleading financials? And I guess the follow-up question is, why don't the rating agencies do some independent due diligence, uh, from an accounting standpoint, so that they can help serve as a watch on this issue?

Well, financial companies are more difficult to analyze than, uh, than many companies. I mean, the, it is more, if you take the insurance business, you know, the biggest single element that is very difficult to evaluate, even if you own the company, uh, uh, is the loss and loss adjustment expense reserve. And that has a huge impact on reported earnings of any given period. And the shorter the period, the more the impact can be from just small changes in assumptions. You know, we carry, we'll say, $45 billion of loss reserves. But, you know, if I had to bet my life on whether $45 billion turned out to be a little over or a little under, I mean, it'd be, it, I think a long time. And, uh, you could just as easily have a figure of $45.5 billion or $44.5 billion. And if you were concerned about reporting given earnings in a given period, that would be an easy game to play. In a bank, you know, it, it basically is what whether the loans are any good. And I've been on the boards of banks, and that's, you know, I've gotten surprises at stuff to tell. Uh, it's financial companies. If you're analyzing something like WD-40, you know, or See's Candy, or, um, our brick business, or whatever, you know, they, they may have good or bad prospects, but you're not likely to be fooling yourself much about what's going on currently. But with financial institutions, it's much tougher. Then you can add, throw in derivatives on top of it. And, you know, it's, it's no one probably knows, you know, perfectly what some of it, or even within a reasonable range, the exact condition of some of the biggest, you know, banks in the world. And, but that brings you back to the due diligence question of the agencies. You had very high grade, very smart, financially smart people on the boards of both Freddy and Fanny, and yet, you know, one was $5 billion and one was apparently $9 billion. Those are big numbers. And I don't think those people were negligent. And it's just, it's very, very tough to know precisely what's going on in a financial institution. Charlie and I were directors of Salomon, and Charlie was on the audit committee. And I forget the size of a few of those things that that you found. But, you know, what that you found. But, you know, what what wasn't found. And that isn't that doesn't mean the people below are crooks or anything like that. It just means that it's, it's very tough with thousands and thousands and thousands of complicated transactions, sometimes involving the computations involving multiple variables. It can be, it can be very hard to figure out where things stand at any given moment. And of course, when the numbers get huge on both sides, and you get small changes in these huge numbers, they have this incredible effect on quarterly or yearly figures because it all comes lumped in. Those adjustments come lumped in a short period of time. So I just think you have to accept the fact that insurance, banking, finance companies, we've seen all kinds of finance company, uh, both frauds and, and just big, big mistakes over time, just one after another over the years. And that, it's just a more dangerous field to analyze. It doesn't mean you can't make money, and we've made a lot of money on it, but, but it's, it's difficult. Now, obviously, at Geico, where you're insuring pretty much the same thing, auto drivers, and you get your statistics are much more valid in something like that than they will be if you're, if you're taking something that like asbestos liability. Uh, you're subject to far greater errors and estimation. Doesn't mean that people aren't operating in good faith. But, you know, I would take, just take the asbestos estimates of the 20 largest insurance companies. I will bet you their way off. But I don't know in which direction. And that's, uh, that's sort of the nature of financial companies. I wouldn't fault the rating agencies in terms of not being able to to dig into the the, uh, financials and find things that that, uh, you know, all of the companies that you've talked about have had big name auditors. And, uh, our auditors, Berkshire, how many hours did they spend last year, man? I don't know whether what it would be, probably 60, 70,000 hours. Uh, and I'm sure another, you know, if you take major banks, they're spending more than that. But, you know, can they be certain of the numbers? I, I doubt it.

Charlie: Yeah, Warren is obviously correct that where you've got complexity, which by its very nature provides better opportunities to be mistaken and not have it come to notice, or to be fraudulent and have it not be found out, you're going to get more fraud and mistakes than you are if you're selling a business where you shovel sand out of the river and sell it by the truckload. And just as a business that sells natural gas is going to have more explosions than a business that sells sand, a business like these major financial institutions, by its nature, is going to have way more problems. And that will always be true. And it's true when the financial institutions are owned by governments. In fact, some of the worst financial reporting in the world is done by governments and government institutions like government banks in China, etc. So if you don't like the lack of perfect accounting in financial institutions, you're in the wrong world.

Hello, my name is Jeff Colbert, and I'm from Olathe, Kansas. I got started in investing in 1999, right before the big tech bubble. And unfortunately, I learned "buy and hold" and, uh, don't fret about market price fluctuations before I learned the importance of valuing a business and applying a margin of safety. So, as Charlie said, I got my feet wet with huge failure right away. And we're in the club. Thank you. I don't feel so bad now. Um, so that leads to my, my question. It seems like to me, I've read all the Berkshire reports and all the reading I can do about you two, and I thank you for these wonderful meetings. But it seems like it boils down to some simple things: valuing a business and applying a margin of safety. So my question is, what do you recommend for an approach to getting better and better at valuing companies?

It was a very, very good question. And in my own case, you know, I started out without doing anything about value in companies. And then Graham taught me a way to value a certain type of company that would prove successful, except the universe of those companies dried up. But nevertheless, it, it was almost a guarantee against failure, but it wasn't, it was not a guarantee that these things would continue to be available. Charlie taught me a lot, a lot about the value of a durable competitive advantage and, and a really first-class business. But over time, I've learned more about various types of businesses. But you'd be amazed how many businesses I don't feel that I understand well. The biggest thing is not how big your circle of competence is, but knowing where the perimeter is. If you, you don't have to be an expert on 90 percent of the businesses, or 80, or 70, or 50. But you do have to know something about the ones that you actually put your money into. And if that's a very small part of the universe, that still is not a killer. And I, I think if you think about what you would pay for a McDonald's stand, what you think you would pay for, you know, think about the businesses in your own hometown of, uh, you know, which would you like to buy? And do which do you think you could understand their economics? Which do you think will be around 10 or 20 years from now? Which do you think it would be very tough to compete with? Just keep asking yourself questions about businesses. Talk about with other people about them. You will extend your knowledge over time. And always remember that margin of safety. And I think you basically have the right attitude because you do, you recognize your limitations, and that's enormously important in this business. You will find things to do. Six or seven years ago, maybe not that long. Yeah, six or seven years ago, when I was looking at Korean stocks, for example, I never had any idea that Korean stocks would be something that I would be buying. But I looked over there and I could see that there were a number of businesses that met the margin of safety test. And they're right, diversified because I didn't know that much about any specific one, but I knew that a package of 20 was going to work out very well, even if a crook might run one of them, and a couple of might run into competition. I didn't anticipate because they were so cheap. And that was sort of the old Graham approach. You will find opportunities from time to time, and the beauty of it is you don't have to find very many of them.

Currently, well, obviously, if you want to get good at something which is competitive, you have to think about it a lot and learn a lot and practice doing it a lot. And the way the world is constructed in this field, you have to keep learning because the world keeps changing, and your competitors keep learning. So you just have to get up each morning and and try and go to bed that night a little wiser than you were when you got up. And if you keep doing that for a long time and and accumulate some experience, good and bad, as you try and master what you're trying to do, people do that. Almost never fail utterly. They may have a bad period when luck goes against them or something, but very few people have ever failed with that. With that, if you have the right temperament, you may rise slowly, but you, you're sure to rise.

Charlie: Did you take any business courses in school?

No, I took accounting.

And when did you start valuing businesses and how did you go about it?

When I was a little boy, I can remember I would come down to the Omaha Club, and it was an old gentleman who hit the Omaha Club about 10:30 every morning. He obviously did almost no work, and yet was quite prosperous. He became your ideal.

Yeah, so, well, but he made me very curious. As a little boy, I said to my father, "How in the hell does he do that?" And he said, "Charlie, he's in a business where he enjoys practically no competition. He gathers up and renders dead horses." Well, that was an example of avoiding competition by one stratagem. And, and if you keep asking questions like that of reality, starting at a young age, you gradually learn. And where you were doing the same thing?

Well, yeah, thankfully, he extrapolated. He went beyond his original [Laughter] insight there. But I noticed it's rather interesting. You take the rulers of the businesses. When I was a little boy, an awful lot of those businesses in Omaha, a lot of those businesses went broke. A lot of them sold out at modest prices under distress. And some of the people who rose like Kiewit from small beginnings, nobody thought of as the great glories of of that early time. And I think that's kind of the way life is. It's hard to get anywhere near the top, and it's hard to hold any position once you've attained it. And, uh, but I think you could predict Kiewit was likely to win. They cared more about doing it right. They cared more about avoiding trouble. They put more discipline on themselves. If you knew the individual well, it would have, it would have been right. What if you knew the individual? Beat him. I would not have bet on any of the people I knew who were already wealthy, but I would have bet on Pete Kiewit. His sister taught me math. And half Dutch, half German, you know, this is a tough culture. And there's your, there you've just heard it, folks, half Dutch, half German.

Well, but go out looking for him. Well, the man was recommending this is named Munger. And anyway, the, uh, uh, no, I, I don't think it's that. But if you're, I was just automatically doing that. What was working? What was failing? Why was it working? Why was it failing? If you have that temperament, you are gradually going to learn. And, and, uh, if you don't have that temperament, I can't help you.

You followed Pete Kiewit around for 10 years, you never would have seen him do anything dumb, right?

Oh, yeah. And so, it, it's avoiding the dumb thing. You don't, it really don't have to be brilliant, but, yeah, you know, you have to avoid just sort of, put, almost seem the obvious mistakes. But I would say that you're on the right track back there on the, in, in terms of having the basic fundamentals, knowing your limitations, but still seeking to learn more about various kinds of businesses.

Charlie: I think when he practiced law, any client that came in, Charlie was thinking about that business. If he owned the place, and he probably generally felt he knew more about the place than the guy that actually owned it. It was quiet. Who was the client? But, but I remember talking to him, you know, 50 years ago, and he would start talking about Caterpillar dealerships in Bakersfield or something of the sort. It was, it was incapable of looking at a business without thinking about the fundamental economics of it. How'd that guy do with the Caterpillar? Well, he sold it for a perfectly ridiculous price to a dumb oil company. It wasn't worth half what he got for it. Yeah, but they had a concept, they had a concept and strategy, and no doubt they had consultants.

Becky: This question comes from Carson Mitchell in Aberdeen, South Dakota, who asked both of you, what business has had the best return on capital for Berkshire, and what business of any on Earth has had the best return on capital? And he adds, PS, I would have come by rail, but there are no seats in the grain rail cars.

There are two ways of looking at it. If you talk about the capital necessary to run the business, as opposed to what we might have paid for the business. I mean, if we buy a wonderful business, you could run the Coca-Cola Company, assuming you had the bottling systems, ever, you could run it with no capital. Yet, now, if you buy it for $100 billion, I mean, you can look at that as your capital, or you can look at the basic capital. We, when we look at what's a good business, we're defining it in terms of the capital actually needed in the business. Whether it's a good investment for us depends on how much we pay for that in the end. There are a number of businesses that operate on negative capital. Carol's, with Fortune Magazine, you know, any, any of the great magazines, and operate with negative capital. I mean, those subscribers pay in advance. There are no fixed assets to speak of, and, and the receivables are not that much. The inventory is nothing. So a magazine business, my guess is that People Magazine operates, or Sports Illustrated operates, Sports Illustrated operates with negative capital. And particularly, people make a lot of money. So there are certain businesses. Well, we had a company called Blue Chip Stamps, that that where we got the float ahead of time and operated with really substantial negative capital. But there are a lot of great businesses that need very, very little capital. Apple doesn't need that much capital. You know, that, uh, the best ones, of course, are the ones that can get very large while needing no capital. See's is a wonderful business, needs very little capital, but it, we can't get people eating 10 pounds of of boxed chocolates every day. Except here, we want to. Generally, the great consumer businesses need relatively little capital. Um, the, the businesses where people pay you in advance, you know, magazines, Christian being a case, insurance being a case, you know, you're using, you're using your customers' capital. And we like those kinds of businesses. But of course, so does the rest of the world, so they can become very competitive. And, and buying them. We have a business, for example, this won't run wonderfully, like Catherine, Kathy Barron, Tamara, it's called Business Wire. Business Wire does not require a lot of capital. That has receivables and everything, but it is a service type business. And many of the service type businesses and consumer type businesses require a little capital. And when they get to be successful, you know, they can really be something.

Charlie: I've got nothing to add.

At any rate, the, the formula never changes. If you get all, if you could own one business in the world, what would it be?

Charlie: I hope I already own them myself. You and I got in trouble by addressing such a subject many decades ago.

That's right. I don't think I'll come back to it.

Okay, number 13. If you name some business that has incredible pricing power, you're talking about a business that's a monopoly or a near monopoly. Sure. And I don't think it's very smart for us to sit up here naming as our most admired businesses something that other people regard as a monopoly. Okay, we'll move right along.

Brian Zen from China. As a Coke addict myself, I'm excited to report to you, our worldwide promoter in chief, that the Cokes in Beijing taste just as wonderful as in Omaha. As an ex-Zen monk today, I feel like visiting the Buddha of the financial world. We have the investment club with a name that ends in .com, believe it or not, which tells you that the frenzy .com frenzy even seduced Zen monks. When we try to follow you, we find that Mrs. Susan Buffett used to send Zen Buddhism books to her sorority sisters. That's probably why she always has a peaceful smile due to her low expectation of life, which according to Buddha is full of sufferings. But Mr. Munger would tell me that Susan's smile is because you, as the husband, exceeded her low expectations. That's right. Yeah. And her father's even lower expectations. Anyway, um, my question is, did Susan also send those Zen books to your office or your bedroom? And if you have read those books, what are the key ideas that contributed to your investment Tau, which even made sense to secluded, narrow-minded Zen monks like me? Thanks for the financial enlightenments you've given us today.

Thank you. I sent those books on to Charlie, so I'll let him answer. Actually, I tend to be a follower of Confucius. And I think this room is full of Confucian values. You know, if the first law of Confucianism is filial piety, particularly toward the elderly males, you can see why I like that system.

Area four. [Laughter]

Good afternoon, Mr. Buffett, Mr. Munger. My name is Kevin Truitt from Chicago. I have three questions for you. Mr. Munger, at last year's shareholder meeting, you stated that you didn't feel that the concept of the cost of capital made true economic sense. Would you explain why you felt this way and what you would do to replace it with anything? My second question is to Mr. Buffett. You've stated the importance of an occasional big idea. How were you able to, in fact, tell when you had a big idea? And my third question, Mr. Buffett, you have talked about the importance of the franchise and sustainable competitive advantage. Companies like Kellogg and Campbell Soup are companies that most people would have said had those qualities. However, over time, those qualities were lost as a result of a change in consumer taste. What gives you confidence that the same things won't happen to Coke or Gillette?

Cost of capital. First, obviously, considerations of cost are important in business. And obviously, opportunity costs, which is a doctrine of economics, really a doctrine of lifemanship, are also very important. And we've always had that kind of basic thinking. Uh, of course, capital isn't free. And of course, you can figure cost of capital when you're borrowing money, or at least you can figure cost of loans. But the theorists had to develop some theory for what equity cost. And there they just went bonkers. They, they said if you earned 100 percent on capital because you had some marvelous business, your cost of capital was 100 percent, and therefore you shouldn't look at any opportunity that delivered a lousy 80 percent. That is the kind of thinking which came out of the capital asset pricing models and so forth that I've always considered inanity. What is Berkshire's cost of capital? We have this damn capital, it just keeps multiplying and multiplying. What does its cost? You have perfectly good old-fashioned doctrines like opportunity cost. You know, at any given time, when we consider an investment, we have to compare it to the best alternative investment we have at that time. We had perfectly good old-fashioned ideas that are very basic to use, but they weren't good enough for these modern theorists. So they invented all this ridiculous mathematics which concluded that the companies that made the most money had the highest cost of capital. Well, all I can say is this: not for us. Now, the other half of that question, I leave for Mr. Butler.

Yeah, what, what you find, of course, is that the cost of capital is about a quarter percent below the return promised by any deal that the CEO wants to do. Very simple. Uh, you know, we have three questions on capital at the, with capitals around. And leaving aside whether we want to borrow money, which we generally don't want to do. And one is, does it make more sense to pay it out to the shareholders than to keep it within the company? Sub-question on that is, if we pay it out, is it better off to do it by our repurchases or by a dividend? The test for whether we pay it out in dividends is, can we create more than a dollar of value within the company with that dollar than paying it out? And you never know the answer to that, but so far the answer is, judged by results, is yes, we can. And we think that prospectively, we can. But that's, that's a, let's say, uh, you know, that's a hope on our part. And it's justified to some extent by past history, but it's not a certainty. Once we've crossed that threshold, then do we repurchase stock? Well, obviously, if you can buy your stock at a significant discount from conservatively calculated intrinsic value, and you can buy it in reasonable quantity, that's a use for capital. Beyond that, then the question becomes, if you have the capital, you think you can create more than a dollar, how do you create the most with the least risk? And that gets to business risk. It doesn't get to any calculation of the volatility. I don't know, the risk in See's Candy is measured by its stock volatility because the stock hasn't been outstanding since 1972. Does that mean I can't determine how risky a business See's is? Because if we don't have a daily quote on it? No, I can determine it by looking at the business and the competitive environment in which it operates and so on. So once we cross the threshold of deciding that we can deploy capital so as to create more than a dollar of present value for every dollar retained, then it's just a question of doing the most intelligent thing that you can find. And, you know, that is the cost of every deal we do is measured by the second best deal that's around at a given time, including more doing more of some of the things we're, we're already in. And I have listened to cost of capital discussions at all kinds of corporate board meetings and everything else. And, and, you know, I've never found anything that made very much sense in it, except for the fact that that is what they learned in business school, and that's what the consultants talked about. And, and, and most of the board members would nod their head without knowing what the hell was going on. And that's been my history with the cost of capital.

Now, moving on to the big ideas. You know, when you've got a big idea, and I can't tell you, you know, exactly what happens within your nervous system or, uh, brain at that time. But we've had a relatively few big ideas, good ideas over the years. I don't know how many you think we've had in aggregate. Probably in career, maybe 25 each. You took the top 15 out of Berkshire Hathaway, most of you people wouldn't be here. So roughly one every two years. Yeah, one every year or two, man. Sometimes there'll be a bunch of them like in 1973 and '4. But the problem is for us, is that big now really means big. I mean, it has to be billions of dollars to to move the needle very much at Berkshire. But I, I would say that when I would turn those pages 50 years ago in the Moody's manuals, I would know when I hit a big idea. I've got half a dozen of them that I keep the Xeroxes from those reports around from 50 years ago just because it was so obvious that they, they just, they were incredible. And that happens every now and then. When I met, when I met Romer Davidson, you know, at the end of January 1951, and he spent four hours or five hours with me explaining Geico, I knew it was a big idea. Eight months later, or probably 10 months later, I wrote an article to the Commercial Financial Chronicle on the security I like best. It was a big idea. When I found Western Insurance Securities, I knew it was a big idea. They, you know, I couldn't put billions of dollars into it, but I didn't have millions, so it didn't make any difference. And I, we've seen things subsequently, and we'll see, you know, if we have a normal lifespan, we'll see a few more before we get done. But I, I can't tell you that, uh, exactly how I, I can't tell you exactly what transpires in my mind that that says, uh, you know, flashes of neon sign up that says, "This is a big idea."

What happens with you, Charlie?

Actually, one of my, well, I have a real system. My idea of a truly big idea is one I get, and I call Charlie, and he only says "no" rather than "that's the worst idea I've ever heard of." But if he just says "no," it's a hell of an idea.

Mm-hmm. You know, the game in our kind of life is being able to recognize a good idea when you rarely get it, and we're rarely is presented to you. And I think that's something you have to prepare for over a long period. What is the old saying that opportunity comes to the prepared mind? And I don't think you can teach people in two minutes how to have a prepared mind, but that's the game. Things we learned 40 years ago, though, will help in recognizing the next big idea. And on opportunity cost, going back to that, the current freshman economics text, which is sweeping the country, has right in practically the first page, and it says, "All intelligent people should think primarily in terms of opportunity cost." And that's obviously correct, but it's very hard to teach business based on opportunity cost. It's much easier to teach the capital asset pricing model where you can just punch in numbers and outcome numbers. And therefore, people teach what is easy to teach instead of what is correct to teach. It reminds me of Einstein's famous saying. He says, "Everything should be made as simple as possible, but no more simple." Write that down.

Interesting question about franchises, too. I mentioned Campbell's Soup and Kellogg, and, and, you know, I, I am no expert on that, but I would say that that just based on on my general observation over the years is that the problems there came from two different things. I think that the problems with cereal, ready-to-eat cereal, were not so much changes in taste or consumption patterns, but I think they may just push their push their pricing too far to the point that they they lost market share without getting in, without having the moat that they thought they had, as opposed to the General Mills cereals and the General Foods cereals and all of that sort of thing. I mean, if your pricing really gets out of whack, and people regard Wheaties or or Great Grains in the same category that write regard Kellogg's Corn Flakes, you know, you're going to lose share. And once you start losing shares, it, it's hard to get back. Problems with soup, I think, relate more to lifestyle. I think that it's become, it's a, it's a little less, it fits in a little less well with with, uh, current lifestyles maybe than 40 years ago. Soft drinks, the consumption of soft drinks, I don't have the figures here, but I would wager that in 100, 110 years, the per capita soft drinks has gone up virtually every year throughout that history. I mean, it's now 30, close to 30 percent of U.S. consumption of of liquids. So if the average American has about 64 ounces of liquids a day, you're talking about say, 18 ounces of that being soft drinks, and 43 percent of that 18, or almost eight ounces a day, of being Coca-Cola products. In other words, one-eighth of all the liquid man, woman, and child of the United States take in comes from Coca-Cola products. But that has gone up virtually, well, throughout the world, that's gone up on a per capita basis. You know, almost in soft drinks were discovered that people, I would say that that trend is almost impossible to reverse on a worldwide basis. I mean, there's so much potential in countries where per capita consumption, it's like, well, I think it's, I don't know, maybe eight per capita, which is eight ounce servings. They talk in terms of 64 ounces a year. So you have one-fiftieth of the consumption per capita on Coke products in many, in some important countries that you have here. So I don't, I just don't see it as being. Now, it, you can push pricing too far. I mean, there, there comes a point, depends on the country in which you're doing it, but, and it depends even on areas within the country in which you do it. But if you establish too wide a differential between, uh, Coke and and a private label product, you will change consumption patterns somewhat, not huge, but enough so that you don't want to do it. But I don't think, I don't think you'll see. It's interesting, coffee's going down every year. People talk about Starbucks and all that, but if you look at coffee consumption in this country, if you look at milk consumption in the country, you know, per capita, just goes down, down, down, down, year after year after year after year. And I think it's pretty clear what people like to drink once they get used to it. And with the price, when I was born in 1930, a six and a half ounce Coke cost a nickel. And you put a two, two-cent deposit on the bottle, but forget about that, just take the nickel. Now, you buy a 12-ounce can or a larger product, and you're, you're paying as you buy it on the weekends at the supermarket specials. I'm, you're paying maybe a little more than twice per ounce what you were paying in 1930, 70 years ago. And compare that to the price behavior of almost any product, you know, that you can find, except for all commodities, but compared to cars, housing, anything, and it, there's been very, very little price inflation in it. And I think that's contributed, of course, to the the growth in per capita's over time.

Charlie: How about cereals and soup?

Well, I think those are examples where the moats got less, uh, hostile for the competitors. Part of the trouble was the, the buying power got more concentrated and tougher. I mean, the big grocery chains now have a lot of clout. And then you add the Walmarts and the Costcos and the Sam's Clubs, and it, it's just, it's a different world faced by the Kelloggs than the one they had 30 or 40 years ago. Yeah, there will be a battle always between brands and retailers because the retailer would like his name to be the brand. And to the extent that people trust Costco or Walmart more than they, or as much as they trust the brand, then the value of having the brand moves over to the retailer from the product itself. And that's gone on for a long, long time. I, you know, the first I would cases I know about in any real quantity back with A&P in the '30s. And A&P, I believe, was was the largest food retailer in this country. And they were also a big promoter of private labels. And "America's Choice" I think was a big private label with them, for example. And they felt they could convince the consumer in the '30s that their brand meant more than having Del Monte on it or or or Campbell's or whatever it might be in the different categories. And, and people thought they were going to win that war for a while. But it, and who knows, I mean, I don't know all the variables that went into A&P's decline, but it was dramatic. I mean, it was one of, it was a great American success story for a while, and then it was a great American failure.

Charlie: The muscle power of the Sam's Clubs and the Costcos has gotten very extreme. A little earlier this morning, when I was autographing books, a very good-looking woman came up to me and said she wanted to thank me. And I said, "For what?" And she said, "You told me to buy these pantyhose I'm wearing from Costco." And evidently made some previous comment about how amazing it was that Costco could be at Hanes, of all people, to allow a co-branded pantyhose, Hanes-Kirkland, in the Costco stores. That wouldn't have happened 20 years ago. She must have been pretty desperate as she was consoling with you on where to buy pantyhose.

Okay, and we'll start, just one second. Everybody has a chance to get to their seats. Charlie has promised to stop tapping the Coke can during this session. Number two, okay.

I used to have a friend that was a stock salesman many years ago. And when you'd have lunch with him, he would just keep going like this. And finally, I would get to him and say, "What's that?" And he said, "That's opportunity." [Laughter] He was pretty good. Okay, let's, uh, Kelly tells me we should start with, uh, with number two, zone two. So we're going to start with zone two. Yes.

I'm, uh, Fred Cooker from Boulder, Colorado. And this is a question about intrinsic value. And it's a question for both of you because you have written that perhaps you would come up with different answers. You, uh, write and speak a great deal about intrinsic value, and you indicate that you try to give shareholders the tools in the annual report so they can come to their own determination. What I'd like you to do is expand upon that a little bit. First of all, what, what do you believe to be the important tools, either in the Berkshire annual report or other annual reports that you review, in determining intrinsic value? And secondly, what rules or principles or standards do you use in applying those tools? And lastly, how does that process, that is, the use of the tools, the application of the standards, relate to what you have previously described as the filters you use in determining your valuation of a company?

If we could see in it, looking at any business, what its future cash inflows or outflows from the business to the owners or from the owners would be over the next, we'll call it, 100 years, or until the business is extinct, and then could discount that back at the appropriate interest rate, well, which I'll get to in a second, uh, that would give us a number for intrinsic value. In other words, it would be like looking at a bond that had a whole bunch of coupons on it that was doing 100 years. And if you could see what those coupons are, you can figure the value of that bond compared to government bonds, if you want to stick an appropriate risk rate in, or you can compare one government bond with 5 percent coupons to another government bond with 7 percent coupons. Each one of those bonds has a different value because they have different coupons printed on them. Businesses have coupons that are going to develop in the future, too. The only problem is they aren't printed on the instrument, and it's up to the investor to try to estimate what those coupons are going to be over time. As we have said, in high-tech businesses or something like that, we don't know the faintest idea what the coupons are going to be. When we get into businesses where we think we can understand them reasonably well, we are trying to print the coupons out. We were trying to figure out what businesses are going to be worth in 10 or 20 years. When we bought See's Candy in 1972, we had to come to the judgment as to whether we could figure out the competitive forces that would operate, the strengths and weaknesses of the company, and, and how that would look over a 10 or 20 or 30-year period. And if you attempt to assess intrinsic value, it all relates to cash flows. The only reason for putting cash into any kind of an investment now is because you expect to take cash out, not by selling it to somebody else, because that's just a game of who beats who, but by, in a sense, by what the asset itself produces. That's true if you're buying a farm, it's true if you're buying, if you're buying a business. And the filters you described were there are a number of filters which say to us, we don't know what that business is going to be worth in, in 10 or 20 years, and we can't even make an educated guess. Obviously, we don't think we know the three decimal places or two decimal places or anything like that, what precisely is going to be produced, but we have a high degree of confidence that we're in the ballpark with certain kinds of businesses. The filters are designed to make sure we're in those kinds of businesses. We basically use long-term risk-free, that's government bond type interest rates, to think back in terms of what we should discount at. And, you know, that's, that's what the game of investment is all about. Investment is putting out money to get more money back later, later on, from the asset, and not by selling it to somebody else, but by what the asset itself will produce. If you're an investor, you're looking at what the asset, you're looking at what the asset is going to do. In our case, businesses. If you're a speculator, you're primarily focusing on what the price of the object is going to do, independent of the business. And that's not our game. So we figure if we're right about the business, we're going to make, we're going to make a lot of money. And if we're wrong about the business, we don't have any hopes. We, we don't expect to make money. And, and in looking at Berkshire, we try to tell you as much as possible as we can about our business, of the key factors. Those are the things that Charlie and I, what the things we put in our report about those businesses are the things that we look at ourselves. So if Charlie had nothing to do with Berkshire, but he looked at our report, he would probably, in my view, he would come to pretty much the same idea of intrinsic value that he would come to for being around it. And, you know, for X number of years, the information should be there. We give you the information that if the positions were reversed, we would want to get from you. And in companies like Coca-Cola or Gillette or Disney or those kind of businesses, you will see the information in the reports. You have to have some understanding of what they're doing, but you have that in your everyday activities. You'll get that, you'll get that kind of knowledge. Yeah, you won't get it, you know, in terms of some high-tech company, but you'll get it with those kind of companies. And then you sit down and you, you try to print out the future.

Charlie: I would argue that one filter that's useful in investing is the simple idea of opportunity cost. If you have one opportunity that you already have available in large quantity, and you like it better than 98 percent of the other things you see where you can

Just screen out the other 98 percent because you already know something better. So that people who have a lot of opportunities tend to make better investments than people that don't have a lot of opportunities. And people who have very good opportunities, and using a concept of opportunity costs, they can make better decisions about what to buy.

With this attitude, you get a concentrated portfolio, which we don't mind. That practice of ours, which is so simple, is not widely copied. I do not know why. Now, it's copied among the Berkshire shareholders. I mean, all you people have learned it, but it's not the standard in investment management, even at great universities and other intellectual institutions.

Very interesting question: if we're right, why are so many eminent places so wrong? There are several possible answers to that question.

Yeah, the [Laughter] the attitude, though, I mean, if somebody shows us a business, you know, the first thing that goes through our head is, would we rather own this business than more Coca-Cola? Would we rather own it than more Gillette? Now, it's crazy not to compare it to things that you're very certain of. There are very few businesses that we'll find that we're certain of the future about as companies such as that. And therefore, we will want companies where the certainty gets close to that, and then we'll want to figure that we're better off than just buying more of those.

If every management, before they bought a business in some unrelated field that they might not have even heard of, you know, more than a short time before that's being promoted to them, if they said, "Is this better than buying in our own stock? Is this better than even buying, you know, buying Coca-Cola stock or something?" there'd be a lot fewer deals done. But they don't. They tend not to measure against what we regard as close to perfection as we can get.

Charlie, anyone?

Well, I will say this: that the concept of intrinsic value used to be a lot easier because there were all kinds of stocks that were selling for 50 percent or less of the amount at which you could have easily liquidated the whole corporation if you owned the whole corporation. Indeed, in the history of Berkshire Hathaway, we bought things at 20 percent of then liquidating value.

And in the old days, the Ben Graham followers could run their Geiger counters over Corporate America, and they could spill out a few things, and you could easily see, if you were at all familiar with the market prices of whole corporations, that you were buying at a huge discount. Well, no matter how bad the management, if you're buying at 50 percent of asset value, or 30 percent, or so on down, you have a lot going for you.

And as the world has wised up, and as stocks have behaved so well for people, that stocks generally have gone to higher and higher prices, that game gets much harder. Now, to find something at a discount from intrinsic value, those simple systems ordinarily don't work. You've got to get into Warren's kind of thinking, and that is a lot harder.

I think you can predict the future in a few places best if you understand a few basic ideas that come from a good general education, and that's what I was talking about in that talk I gave at the USC Business School. In other words, Coca-Cola is a simple company if it's stripped down and analyzed in terms of some elemental forces.

Munger: It's hard to understand Costco either, you know. I mean, there are certain fundamental models out there that do not take—you don't have the kind of ability that quantum mechanics requires. You just have to know a few simple things and really know them.

Charlie talks about liquid email—you're not talking about closing up the enterprise, but he's talking about what somebody else would pay for that stream of cash, too. I mean, if you could have looked at a collection of television stations owned by Cap Cities, for example, in the early, well, 1974, and it would have been worth, we'll say, four times what the company was selling for, not because you'd close the stations, but just their stream of income was worth that to somebody else. It's just that the marketplace was very depressed, although, like I say, on a negotiated basis, you could have gone and sold the properties for four times what the company was selling for, and you got wonderful management. And I mean, those things happen in markets. They will happen again.

But part of investing and calculating intrinsic values is if you get the wrong answer when you get through. In other words, if it says, "Don't buy," you can't buy just because somebody else thinks it's going to go up, or because your friends have made a lot of easy money lately, or anything of the sort. You just have to be able to walk away from anything that doesn't work. And very few things work these days. You also have to walk away from anything you don't understand, which in my case is a big handicap.

But you'd agree with Joanne that it's much harder now?

Yeah, but I would also agree that almost at any time over the last 40 years that we've been up on a podium, we would have said it was much harder in the past. But it is harder now. It's way harder.

Part of it being harder now, too, is the amount of capital we run. I mean, if we were running a hundred thousand dollars, our prospects for returns would be—and we really needed the money—our prospects for return would be considerably better than they are running Berkshire. It's just very simple. Our universe of possible ideas would expand by a huge factor.

We are looking at things today that, by their nature, a lot of people are looking at. And there were times in the past when we were looking at things that very few people were looking at. But there were other times in the past when we were looking at things where the whole world was just looking at them kind of crazy. And that's a decided help.

Michael Zanga from Danvers, Massachusetts. That's a town whose Mr. Buffett so generously sent to the Rose Bowl Parade last year. So, you're a very popular guy in my town.

Good morning, Mr. Buffett, Mr. Munger.

Mr. Buffett, I want to ask you this question. Last week, when I ran into—after Gillette's annual meeting—but I choked. So now there's no pressure. Here goes.

In the years, from my reading, in the years from 1956 through '69, you achieved the best results of your career quantitatively: 29% annually against only seven percent for the Dow. Your approach then was different than now. You looked for lots of undervalued stocks with less attention to competitive advantage or favorable economics, and sold them rather quickly. As your capital base grew, you switched your approach to buying undervalued, excellent companies with favorable long-term economics. My question is, if you're investing a small sum today, which approach would you use?

Well, I would use the approach that I think I'm using now, of trying to search out businesses that were—I think they're selling at the lowest price relative to the discounted cash they would produce in the future. But if I were working with a small amount of money, the universe would be huge compared to the universe of possible ideas I work with now.

You mentioned that '56 to '69 was the best period. Actually, my best period was before that. It was from right after I met Ben Graham in early 1951. But from the end of 1950 through the next 10 years, actually, returns averaged about 50 percent a year, and I think they were 37 points better than the Dow. Period, or something like that.

But I was working with a tiny, tiny, tiny amount of money. And so I would pore through volumes of businesses, and I would find one or two that I could put ten thousand dollars into, or fifteen thousand dollars into, that which is ridiculous. They were ridiculously cheap. And obviously, as the money increased, then the universe of possible ideas started shrinking dramatically. The times were also better for doing it in that time.

But I think that—I think if you're working with a small amount of money, with exactly the same background that Charlie and I have, and same ideas, same, same whatever ability we have, you know, I think you can make very significant sums. But as soon as you start getting the money up into the millions, many millions, the curve on expectable results falls off just dramatically. But that's the nature of it.

You've got to, you know, when you get up to things you could put millions of dollars into, you've got a lot of competition looking at that. And they're not looking as I did when I started. When I started, I went through the pages of the manuals page by page. I mean, I probably went through 20,000 pages in the Moody's Industrial, Transportation, Banks, and Finance manuals, and I did it twice. And I actually, you know, looked at every business. I didn't look very hard at some. Well, that's not a practical way to invest tens or hundreds of millions of dollars.

So I would say if you're working with a small sum of money, that and you're really interested in the business and willing to do the work, you can—you will find something. If you were—there's no question about it in my mind—you will find some things that promise very large returns compared to what we will be able to deliver with large sums of money.

Charlie?

Well, yeah, I think that's right. A brilliant man who can't get any money from other people is working with a very small sum, and probably should work in very obscure stocks, searching out unusual, mispriced opportunities. But, you know, that's such a small world. It may be a way for one person to come up, but it's a long slog.

Yeah, most smart people, unfortunately, in Wall Street, figured that they can make a lot more money a lot easier just by one way or another, and getting an override on other people's money, or delivering services in some way that people—and the monetization of hope and greed, you know, as a way to make a huge amount of money.

And right now, it's very—just take hedge funds. I mean, I've had calls from a couple of friends in the last month that don't know anything about investing money. They've been unsuccessful in everything else, and, you know, one of them called me, the name said, "Well, I'm forming a small hedge fund, $125 million." He was talking about it like the thought that since it was only $125 million, maybe we ought to put in $10 million or something. I mean, if you looked at this fellow's Schedule D on his 1040 for the last 20 years, you know, you'd think he ought to be mowing lawns.

But he may get his $125 million. I mean, you know, it's just astounding to me how willing people are during a bull market just to toss money around because they, you know, they think it's easy. And of course, that's what they felt about internet stocks a few years ago. They're thinking about something else next year, too. But the biggest money made, you know, in Wall Street in recent years has not been made by great performance, but it's been made by great promotion, basically.

Charlie, do you have anything?

Well, I would have stated it even more strongly. I think the current scene is obscene. I think there's too much mania. There's too much chasing after easy money. There's too much misleading sales material about investments. There's too much on the television emphasizing speculation in stocks.

Matthew Monahan from Palo Alto, California.

Mr. Buffett, Mr. Munger, first of all, I want to thank both of you for so freely sharing your wisdom and knowledge over the years. Even though we've never met in person, I consider both of you to be close personal mentors and attribute your teachings and philosophies to any success I've had in business so far. So, thank you.

Here's my question: For a 23-year-old with high ambitions, some initial working capital, and a genetic wiring, as you call it, for disciplines like investments, mathematics, and technology, what do you foresee as the significant areas of opportunity over the next 50, even 100 years? And if you were in my shoes, what would be your approach and methodology for really learning, tackling, and mastering these areas of opportunity for the purpose of massive value creation?

Well, I—I remain very—and frankly, when you get the chance to talk to somebody like Lorimer Davidson, as I did when I was 20 years old, I probably learned more from Lorimer Davidson in those four or five hours than I learned in college, with the, you know, exception of learning some accounting or one or two subjects like that. So you just want to soak it up.

If you have those qualities you talked about, you'll see the areas as you go along. I mean, Charlie and I probably, you know, we've made money in a lot of different ways, some of which we didn't anticipate, you know, when we were 30 or 40 years ago. But we did have the ability to recognize some. We didn't have the ability to recognize others, but we did know when we knew what we were doing and when we didn't. And we just kept looking. We had a curiosity about things.

You would know at a time like the Long-Term Capital Management crisis, for example, that there were going to be ways to make money. I mean, it just was—they were going to be out there, and all you had to do was just read and think eight or ten hours a day, and you were going to cover a lot of possibilities, probably a very high percentage of them good, and some of them sensational.

So you can't really lay it out ahead of time. You can't have a defined roadmap, but you can have a reservoir of thinking, looking at different kinds of businesses, looking at different kinds of securities, looking at markets in different places, and you will then spot a reasonable number of things that come along. You won't spot every one of them. We've missed all kinds of things.

But the biggest thing, too, is to have something in the way you're programmed so that you don't ever do anything where you can lose a lot. I mean, our best ideas have not been better than other people's best ideas, but we've never had a lot of things that pulled us way back. So we never went two steps forward and one step back. We probably went two steps forward and a fraction of a step back. But avoiding the catastrophes is a very important thing, and it will be important in the future. I mean, you will have your chance to participate in catastrophes.

Charlie?

Yeah, and of course, the place to look when you're young is in the inefficient markets. You shouldn't be trying to guess whether, you know, one drug company has a better drug pipeline than another. You want to go, when you're young, someplace that's very inefficient. Me trying to guess whether the stock market is going to go up or whether long-term bonds are going to change in yield, I mean, you don't have anything going in that kind of a game. But you can have a lot going in games that very few people are playing, and maybe where they've even got their heads screwed on wrong in terms of how they're thinking about the subject.

The RTC was a great example of a chance to make a lot of money. I mean, here was a seller of hundreds of billions of dollars worth of real estate where the people that were selling it had no economic interest in it, were eager to wind up the thing, you know, and they were selling at a terrible time when the people who had been venturesome in lending were no longer lending. The people who had been venturesome in the equity end of real estate had gotten cleaned out. So you had a great background of environment, and then you had an imbalance of intensity in terms of analyzing situations between the seller, which was the government with a bunch of people who had no economic interest in it, were probably eager to wind up the job, and buyers on the other side who were of the generally cautious type because the more venturesome type had taken themselves out of action. So, and there were huge amounts of property. So you get these opportunities, and you'll get more. I mean, there won't be any scarcity of opportunities in your life, although it will be days when you feel that way.

Yes, uh, hi Mr. Buffett, Mr. Munger. This is Whitney Tilson, a shareholder from New York. For many years, both of you have been warning about the dangers of derivatives, at one point calling them "financial weapons of mass destruction." Yet every year, tens of trillions of dollars of derivatives are bought and sold. It just seems to be getting bigger and bigger, and almost certainly improperly accounted for. And so I was wondering if you could comment, specifically if you have any thoughts on how much longer this might go on? Do you see anything imminent that could derail this ever-inflating bubble? What might trigger it, and who should be doing what to try and mitigate this looming danger?

Well, we've tried to do a little to mitigate it ourselves by talking about it. But you're right that, and it isn't the derivative itself. And there's nothing evil about a derivative instrument. As I mentioned, we have 60 some of them at Berkshire. And on Monday, I will go over the directors with the directors—I'll go over all 60 some, and believe me, we'll make money out of those particular instruments.

But the usage of them on an expanding basis, more and more imaginative ways of using them, introduces essentially more and more leverage into the system. And it's an invisible or largely invisible sort of leverage.

If you go back to the 1920s, after the crash, the United States government held hearings. They decided that leverage—margin in those days, that they called leverage—contributed to perhaps the crash itself, and certainly to the extent of the crash. And it was like pouring gasoline on a fire. It was when people's holdings got tripped, you know, when stocks went down 10 percent, people had to sell. Another 10 percent, more people had to sell, and so on.

Leverage was regarded as dangerous, and the United States government empowered the Federal Reserve to regulate margin requirements, regulate leverage. And that was taken very seriously, and for decades, it was a source of real attention. If you went to a bank and tried to borrow money on a stock, they made you sign certain papers as to you weren't in violation of the margin requirements, and they policed it, and it was taken quite seriously. When the Fed increased or decreased margin requirements, it was a signal of how they felt about the level of speculation.

Well, the introduction of derivatives and index futures, all that sort of thing, it's just totally made any regulation of margin requirements a joke. They still exist, and, you know, it's an anachronism.

So I believe—I think Charlie probably agrees with me—that we may not know where exactly the danger begins and where and at what point it becomes a super danger, and so on. We certainly don't know what will end it precisely. We don't know when it will end precisely. But we probably, at least I believe, that it will go on and increase to the point where at some point, there'll be some very unpleasant things happen in markets because of it.

You saw one example of what can happen under forced sales back in October 19, 1987, when you had so-called portfolio insurance. Well, now, portfolio insurance—and you ought to go back and read the literature for the couple years preceding that—I mean, this was something that came out of academia, and it was regarded as a great advance in financial theories and everything. It was a joke. It was a bunch of stop-loss orders, which, you know, go back 150 years or something, except that they were done automatically and in large scale by institutions. And they were merchandised. People paid a lot of money to people to teach them how to put in a stop-loss order.

And what happened, of course, was that if you have a whole series of stop-loss orders by very big institutions, you are pouring gasoline on fire. And when October 19th came along, you had a 22 percent shrink in the value of American business caused essentially by a Doomsday Machine. A dead hand was selling as each level got hit. And three weeks earlier, you know, people were proclaiming the beauty of this.

Well, that is nothing compared—it was a formal arrangement to have these, this dynamic hedging or portfolio insurance, sell things. But you have the same thing existing when you have fund operators operating with billions in aggregate, trillions of dollars leveraged, who will respond to the same stimulus. They have what is—they have what we would call a crowded trade, but they don't know it. It's not a formal crowded trade. It's just that they're all ready to sell if a certain given signal or certain given activity occurs. And when you get that coupled with extreme leverage, which derivatives allow, you will someday get a very, very chaotic situation.

I have no idea when. I have no idea what the exogenous factor—I didn't know that shooting some Archduke, you know, would start World War I. And I have no idea what will cause this kind of a thing, but it'll happen.

Charlie?

Yeah, and of course, the accounting being deficient enormously contributes to the risks. If you get paid enormous bonuses based on reporting profits that don't exist, you're going to keep doing whatever causes those phony profits to keep appearing on the books. And what makes that so difficult is that most of the accounting profession doesn't even recognize how stupidly it is behaving.

And one of the people in charge of accounting standards said to me, "Well, this is better, this derivative accounting, because it's mark-to-market, and don't we want current information?" And I said, "Yes, but if you mark-to-model, and you create the models, and your accountants trust your models, and you can just report whatever profit you want as long as you keep expanding the positions bigger and bigger and bigger, the way human nature is, that will cause terrible results and terrible behavior." And this person said to me, "Well, you just don't understand accounting."

If four years ago, or whenever it was, when we started to liquidate Henry's portfolio, we had reserves set up for in the hundreds of millions, with and all sorts of things. And our auditor—and I emphasize any other of the big four auditors—absolutely would have attested to the fact that our stop was marked-to-market. You know, I just wish I'd sold the portfolio to the auditors that day. Maybe $400 million better off. So it's a real problem.

Now, there's one thing that's really quite interesting to me. You know, if I owe you on my dry cleaning bill or something, $15, and they're auditing the dry cleaners, they check with me, and they find out that I owe you $15, and it's all fine. If they're auditing me, they find out that I owe the dry cleaner $15 bucks. There are only four big auditing firms, you know, basically in this country.

And so in many cases, if they're auditing my side of the derivative transaction, you know, what I'm valuing it at, the same firm may often be valuing or attesting to the value of the mark by the person on the other side of the contract. I will guarantee you that if you add up the marks on both sides, they don't—they don't equate out to zero.

We have 60 some contracts, you know, and I will bet that people are valuing them differently on the other side than we value them ourselves. And it won't be to the disadvantage of the trader on the other side. I don't get paid based on how ours are valued, so I've got no reason to want to game the system. But there are people out on the other side that do have reasons to game the system.

So if I'm valuing some contract at plus a million dollars for Berkshire, that contract on the other side is just one piece of paper, should be valued at a minus one million by somebody else. But I think you probably have cases—and this is I'm going to talk about our auditors, I'm talking about all four of the firms—but they have many cases where they are attesting the values that of the exact same piece of paper where the numbers are widely different on both sides.

You have any thoughts on that, Charlie?

Sure, as God made little green apples, this is going to cause a lot of trouble in due course. As long as it keeps expanding and ballooning and so on, and the convulsions are minor, it can just go on and on. But eventually, there will be a big denouement.

My name is Ethan Berg. I'm from Cambridge, Massachusetts, and I'd like to thank you for the education you've provided, particularly with the annual reports. I've got three brief questions.

Years ago, you wrote to your friend Jory Orange that you were applying to Columbia's Business School because they had a pretty good finance department and a couple of hot shots in Graham and Dodd. If you're considering graduate or business school today, with which individuals or professors would you want to study?

Second question is, a friend who wants to know your thoughts on the concrete, cement, and aggregates business.

And the third question is from my wife. You mentioned earlier, if someone were buying a parachute, they wouldn't buy based on lowest bid. We saw you touring around in a car this week that, were it to be bought today, could probably be bought at a relatively low bid. As someone interested in your health, she's wondering whether you've considered a newer automobile, possibly one with lots of airbags?

Actually, I picked out the car I have based on the fact that it had airbags on both sides. So that was a factor, and maybe the first car of that type ever made with airbags. But I think—I think my car actually, it's both heavy and has airbags, and those are two primary factors in safety. I don't think a safer car is necessarily being made. It might be safer to drive around in a big, heavy-duty truck or something, but I'm not ready for that.

Incidentally, on a car, I look at that like anything else. It would take me probably a half a day to go through the, you know, the exercise of buying a car and reading the owner's manual and all that. And that's just a half a day I don't want to give up in my life for no benefit. You know, if I could write a check in 30 seconds and be in the same position I'm in now with a newer car, I'd be glad to do it this afternoon. But I don't like to trade away when there's really no benefit to me at all. I'm totally happy with the car. I just don't want to trade away the amount of time I'd have to spend fooling around to get familiar with and get title to and do all the rest of the things, pick one out, saw a new car. But if there's a safer car made, you know, I'll be driving in it.

The aggregates business, concrete, all of that—those are businesses, and Charlie probably knows more about them than I do. We've looked at businesses like that. In fact, we've even owned a few shares at one time or another because it's an understandable business. And it's a business that, well, particularly if you get into concrete, cement, I mean, you know, there have been periods of substantial overcapacity, particularly on a regional basis. But those are fundamental businesses, and at a price, you know, for low-cost capacity and advantageously located raw materials, and so on, you know, we would do. In fact, Charlie and I talked about one probably 10 or 15 years ago quite a bit, and he's had a fair amount of familiarity with it.

And what was the other one? I jotted it down here. Let's see. He wanted to know what business school. All business schools. Yeah, well, I would say this, that I think Bruce Greenwald's class at Columbia is very good. He gets in a lot of people that are practitioners, so there's a lot of practicality to the course. And I think Bruce is good. He's got a new book coming out that, probably within the next six months or so, will deal with that. And then there's also been an endowed at the University of Florida certain courses relating to value investing. And I think there's been one at the University of Missouri. So I would suggest you at least check out the curriculum at the University of Missouri in Columbia and Florida, and do a little comparison and maybe check with a few graduates, recent graduates, as to what kind of experience they had. I think you can, if you can find them, I think that's the best system for evaluating a place. But those three at least have courses that, based on the catalog, sound like they might be of interest to you.

Charlie?

Yeah, a huge majority of the business school teaching on the field of investment of passive portfolios of securities is not what we believe and not what Warren was taught years ago by Ben Graham. And there are just little pockets of our attitude left. There's one at Stanford, Jack McDonald. Yeah, sure. And, uh, yeah, that's graduate school. He's a graduate school.

And what's interesting about that is I think it's the most popular course in the whole Stanford Business School. They've got some kind of a bidding system. And yet, I asked Jack how he felt, and he said he felt lonely. He's got the most popular course, but in the whole professoriat dealing with investment matters, the Jack McDonalds are a little clan of their own, in a side pocket, so to speak. Now, they're right, and they can take whatever consolation they get from that. But mostly, if you go to a business school, you will learn a lot of things we don't believe.

Yeah, Jack—Bob Kirby comes in and works with Jack sometimes, too. And Bob has got a terrific mind in terms of investment. So that, I mean, there's no question about that. If it, you know, it's not the easiest school in the world to get into, and it is at the graduate level. But there are these occasional, uh, little anomalies, as they would say, in the teaching world.

I mean, what you really want a course on investing to be is how to value a business. That's—that's what the game is about. I mean, if you don't know how to value a business, you don't know how to value a stock. And if you look at what is being taught, I think you see very little of how to value a business. And the rest of it is playing around, maybe with numbers or, you know, Greek symbols or something of the sort. But it doesn't do you any good.

I mean, then you have to decide, you know, whether you're going—whether you're going to value a business at $400 million or $600 million or $800 million, and then you compare that with the price. And that's—that's what investing is. And I don't know any other kind of investing, you know, basically to do. And that just isn't taught. And the reason it isn't taught is because there aren't teachers around, you know, who know how to teach it. I mean, they don't know themselves. And since they don't know themselves, they teach something that says nobody knows anything, and which is the efficient market theory. And if I didn't know how to do it, if I ever teach physics, I'm going to come up with a theory that nobody knows anything because it's the only way I can get through the day, you know.

But it's fascinating to me how the, you know, the really great universities operate in this respect. They, uh, if you get a sacred writ, I mean, you get in the finance department because you sign on, you know, to whatever the present group thinks. And if they think the world is flat, you better think the world is flat, too, you know, and your students better answer the world's flat when they got on exams. Listen, I—I would say investment finance teaching in this country is, in general, is kind of pathetic.

Well, I think the business schools do a pretty good job when it comes to accounting or personnel management or a whole lot of subjects. I think they do quite well with. But they miss one enormous opportunity. If you learn to think intelligently about how to invest successfully in businesses, you'll become a much better business manager than you will if you aren't good at understanding what's required for successful investment. So they're missing a huge opportunity to improve the management profession by doing such a lousy job in teaching investment.

You see, Charlie and I see CEOs all the time who, in a sense, don't know how to think about the value of businesses they're acquiring. And then, you know, so they go out and hire investment bankers, and guess what the investment banker tells them what to do? It tells them to do it because they get 20x if they do it and X if they don't do it. And guess how the advice comes out?

So it's—when a manager of a business feels helpless, which you won't say out loud, but inwardly feels helpless in the question of asset allocation, you know, you've got a real problem. And they have not gone to business schools that have given them any real help, I think, in terms of learning how to think about valuation in businesses. And that's one of the reasons that we write and talk about it some, because there's a gap there.

When you try and you've got a wonderful business, and you use your shares in it to buy another business, I say at least two times out of three, it's a terrible idea. Well, Geico is a great example. Geico is a wonderful business, absolutely wonderful. It's more wonderful by the day. Has the world's best manager, Tony Nicely, running it.

Geico in the last 20 years went into three, at least three, other insurance businesses I can think of. They went into Resolute Insurance, which was a reinsurance operation started in the mid-'80s. It was a disaster. They went into two others, Southern Something or Other and another one that started with an M. You know, I don't know why in the hell they would go into them. I mean, they had a great, great insurance business, and there aren't that many great insurance businesses. And neither one of those amounted to anything. I think, you know, they sold them off at some point.

But why would you have an absolutely wonderful business and start one and buy two others that are obviously mediocre, where you bring nothing to the party but management's? It's very human to want to do that. It's no great sin that the Geico management did it because we see it happen time after time after time.

I can tell you this: Charlie and I have no urges like that. I mean, we want to buy easy things. We do not have to prove our manhood by doing something terribly difficult. And I think a lot of managements feel that necessity. They've got a wonderful business. The cigarette companies did that. Cigarette companies had these great businesses, and, you know, it irritated them that they—they like to think they were business geniuses. So they would go out and buy other things, and those other businesses generally did not do that well. I'm not saying they should have been in the cigarette business in the first place, but they were not business geniuses because they got to make a lot of money selling an addictive, you know, product. That did not make them business geniuses. And so they wanted to prove it other ways, and they bought businesses and fell on their face in many cases.

Charlie, do you have any more to add on cigarette coming?

No, but I think a lot of people rise to the top in publicly held corporations who come up in sales or organize, you know, engineering or drug development or what have you. And it's natural to assume once you're sitting in the top chair that now you know pretty much everything, or at least how to get wisdom out of this wonderful staff and all these outside advisors that are now available to you. And so I think it's very natural that perfectly terrible acquisition decisions get made. I'd say more often than not.

Area six. Yeah, we had a break in about five minutes. Well, in fact, we'll do this question, then we'll break. Okay.

My name's Paul Thomasic from Illinois. I'd like to talk about your thinking, if you don't mind. In the Fortune magazine article that you sent to all the shareholders, you referenced a practice by Darwin that when he found something that was contrary to his established conclusions, he quickly wrote it down because the mind would have pushed it out. And if you read the Origin of Species, Darwin's very careful to avoid fooling himself. He very carefully asks and answers the hard questions. It's a feedback mechanism. And you've picked up on one of his feedback mechanisms to avoid fooling yourself.

So the two questions are this: Do you see it that way, that you're thinking just like mathematicians, physicists, and some of the other exceptional businessmen by being logical and being careful to have feedback mechanisms? And the second question is about other feedback mechanisms. Your partnership sitting next to you is a great feedback mechanism. It's hard to fool yourself when you partner with Charlie Munger, right? These meetings are hard to fool him, too. But that's not an accident. The meeting on one level is a feedback mechanism. The way you attack the annual report letter is a feedback mechanism. So could you comment, both of you, on other feedback mechanisms you develop? Thank you.

Well, you've come up with two very good ones. I mean, there's no question that Charlie will not accept anything I say because I say it, whereas a lot of other people will. You know, I mean, it's just the way the world works. And it's terrific to have a partner who will say, "You know, you're not thinking straight." It doesn't happen very often.

There's no question the human mind—what the human being is best at doing is interpreting all new information so that their prior conclusions remain intact. I mean, that is a talent everyone seems to have mastered. And how do we guard ourselves against it? Well, we don't—we don't achieve it perfectly. I mean, Charlie and I have made big mistakes because, in effect, we have been unwilling to look afresh at something. You know, that happens.

But we do have, I think, the annual report is a good feedback mechanism. I think that reporting on yourself, and particularly being reported honestly, whether you do it through an annual report or do it through some other mechanism, is very useful. But I would say a partner who is not subservient and who himself is extremely logical, you know, it's probably the best mechanism you can have.

And I would say that I, on the contrary, to get back to looking things, you have to be sure you don't fall into—I would say the typical corporate organization is designed so that the CEO's opinions and biases and previous beliefs are reinforced in every possible way. I mean, having staffs around you that know what you want to do, you are not going to get a lot of contrary thinking. I mean, most staffs, if they know you want to buy a company, you're going to get a recommendation, whatever your hurdle rate there, but it's 15% internal rate of return, which very few deals ever work out at, you know, or 12, or they're going to come back and they're going to come back with whatever they feel that you want.

And if you arrange your organization so that you basically have a bunch of, you know, sycophants who are cloaked in other, you know, titles, you're not going to get—you're going to leave your prior conclusions intact, and you're going to get whatever you go in with your biases wanting. And the board is not going to be much of a check on that. I've seen very, very few boards that can stand up to the CEO on something that's important to the CEO and just say, "You know, you're not going to get it."

So you've hit on a terribly important point that, you know, all of us in this room want to read new information and have it confirm our cherished beliefs. I mean, it is just built into the human system, and that can be very expensive in the investment and business world. And like I say, I think we've got a pretty good system, and I think that most of the systems aren't very good that exist in Corporate America, to avoid falling in the trap you're talking about.

Charlie?

Yeah, I think it also helps to be willing to reverse course even when it's quite painful. As we sit here, I think Berkshire is the only big corporation in America that is running off a derivative book. And we originally made the decision to allow the general General re derivative book to continue. It's a very unpleasant thing to do to reverse that decision. Yet we're perfectly willing to do it. Nobody else is doing it. And yet it's perfectly obvious, at least to me, to say that derivative accounting in America is a sewer is an insult to sewage.

Yeah, yeah, I would—I would—I would second that. I might not have chosen those exact words, and we may not even use those words in describing why we got out of it. But, um, yeah, and in the first—in the first quarter of this year, we'll show quite a bit of income. And anything we say here, we ought to put on the internet, Mark. But I think we'll show about $160 million or something like that of financial, or maybe it's $140. I'll take a look here. Uh, yeah, about $160 odd million of income in that funny little line we have from financials, uh, income. But that will be after an $88 million dollar loss in terms of getting the first steps of getting out of the general General re—what used to be called General refinancial products derivative book.

You know, those losses were there. I mean, some of that is the shutdown loss. $30 odd—$30 million or thereabouts is severance pay and that sort of thing. But the truth is that derivative accounting is absolutely terrible in this country, and there are a lot of companies that will not want to face up to what would be involved if they actually got out.

Now, you're seeing derivative accounting unwound at Enron in a very major way. And believe me, it's not being unwound to profit, except to the extent of the bankruptcy court lets them disaffirm certain contracts. And I mean, it is that there was no place where there was as much potential for phony numbers at a place like Enron than in the derivative kind of—they were marking to model. They were doing all these things. You give a whole bunch of traders the ability to create income by putting little numbers down on a piece of paper that nobody can really check, and it, you know, it just—it's—it can get out of control. It will get out of control. And so we—we decided finally to.

bite the bullet on it and we get out of it and it would incidentally, we would not have reported 88 million dollars of loss if we'd stayed in. It might have reported a tiny profit or something. But, but, uh, in the end, you know, the loss was there and there, there will be, there could well be some more to come in that because once you get into derivatives, I think our longest contract may run 40 years or something like that. And then the guy who put the 40-year contract on the book probably got paid, you know, that week for putting it on virtually. And, uh, you know, we've got a bunch of assumptions as to how it's all going to work out over 40 years. It, it, you couldn't devise a worse system. And, uh, in the end, you know, we didn't want to be in the business when we got in it and we, we're now in the process of getting out. But you don't get out of fast, out fast of something like this. I mean, it, the, uh, uh, you know, it's a little, it's a little like hell. It's easy to get into and it's hard to get, very hard to get out of them.

Well, with that, we'll go off to lunch and I'll see you here in another half hour or so. Thanks.

[Applause]

Hello, Mr. Buffett, Mr. Munger. My name is James Claus from New York City. And I just wanted to ask you a question. Both you and Mr. Munger have repeatedly said that you don't believe that business valuation is being taught correctly at our universities. And as a PhD student at Columbia Business School, that troubles me understandably because in a couple of years, I'll be joining the ranks with those teaching business valuation. My question isn't what sources such as Graham or Fisher or Mr. Munger's talks you would point people that are teaching business valuation to, but do you have any counsel about the techniques of teaching business valuation?

Well, I, I was lucky. I had a sensational teacher in Ben Graham. And we had a course there. There's at least one fellow up in the audience here that attended with me. And, and Ben made it terribly interesting because what we did was we walked into that class and we valued companies. And he had various little games he would play with us. Sometimes he would have us evaluate company A and company B with a whole bunch of figures. And then we would find out that A and B were the same company at different points in its history, for example. And then there were a lot of little, uh, games he, he played to get us to think about what were the key variables and, you know, how could we go off the track. I remember one time Ben met with, uh, with Charlie and me and about nine or so other people down in San Diego and in 1968 or so. And he gave, gave all of us a little true-false test. And we all thought we were pretty smart and we all flunked. But that was his way of teaching us that, teaching us that a, a smart man playing his own game and, and working at fooling you could do a pretty good job at it. But I would, you know, if I were teaching your course on investments, there would be simply one valuation study after another with, with the students trying to identify the key variables in that particular business and, uh, evaluating how predictable they were. First, because that is the first step. If something is not very predictable, forget it. You know, you don't have to be right about every company. You have to make a few good decisions in your lifetime. But then when you find the important thing is to know when you find one where you really do know the key variables, which ones are important, and you, and you do think you've got a fix on them, where we've been, where we've done well, Charlie and I made a dozen or so very big decisions relative to net worth, but not as big as they should have been. And we've known we were right based on those going in. I mean, they, they just weren't that complicated. And we knew we were focusing on the right variables and they were dominant. And we know that even though we couldn't take it out to five decimal places or anything like that, we, we knew that in the general way we were right about them. And that's what we look for, the fat pitch. And that's what I would be teaching, trying to teach students to do. And I would not try to teach them to think they could do the impossible.

Charlie, yes, if you're planning to teach business valuation and what you hope to do is, uh, teach the way people teach real estate appraising so you can take any company and your students after studying your course will be able to give you an appraisal of, of that company which will indicate, oh, really, its future prospects compared to its, uh, market price. I think you're attempting the impossible. You're probably on the final exam. I would, I would take an internet company and I would say, the final exam, the question is, how much is this worth? And anybody that gave me an answer, I would flunk. Right.

[Applause]

Make grading papers easy too.

My name is Phil Young from LA, California. Mr. Warren Buffett, Mr. [Munger], I am one of the poor persons who highly admire you both. I have two questions. Question one, your view on World Financial business involvement in the next decade? Question two, U.S. position for economic competition in the next decade? Thank you.

Well, you've asked two big questions, but, but you're going to get very small answers, I'm afraid. And that's no disrespect, but we, we just, we don't have that, we don't think about those things very much. We, we just, we just are looking for decent businesses. And incidentally, our views in the past wouldn't have been any good on those subjects. And we try to, we try to think about two things. We try to think about things that are important and things that are knowable. Now, there are things that are important that are not knowable, in our view. Those two questions that you raised fall on that. There are things that are knowable but not important. We don't want to cut our minds up with those. So we're, we say, what is important and what is knowable? And what, among the things that fall within those two categories, can we translate into some kind of an action that is, is useful for Berkshire? And, and we really, there are all kinds of important subjects that Charlie and I, we don't know anything about. And, and therefore, we don't think about them. So we have our view about what the world will look like over the next 10 years in, in business or competitive situations. We're just no good. We do think we know something about what Coca-Cola is going to look like in 10 years, or what your, what's going to look like in 10 years, or what Disney's going to look like in 10 years, or what some of our operating subsidiaries are going to look like in 10 years. We care a lot about that. We think a lot about that. We want to be right about that. We're right about that. The other things get to be, uh, you know, they're, they're just, they're, they're less important. And, and if we started focusing on those, we would miss a lot of big things. I've used this example before, but Coca-Cola went public and I think it was 1919. And the first year, one share cost $40. The first year, it went down a little over 50. At the end of the year, it was down to $19. There were some problems with bottler contracts, there's problems with sugar, various kinds of problems. If you'd had perfect foresight, you would have seen the world's greatest depression staring you in the face when, when the social order even got questioned. You would have seen World War II. You would have seen atomic bombs and, and hydrogen bombs. You would have seen all kinds of things. And you could always find a reason to postpone, uh, why you should buy that share of Coca-Cola. But the important thing wasn't to see that. The important thing was to see if they were going to be selling a billion eight-ounce servings of beverages a day this year, or some large number. And that the person who could make people happy a billion times a day around the globe ought to make a few bucks off doing it. And so that $40, which went down to $19, I think with dividends reinvested, has to be well over five million dollars now. And if you developed a view on these other subjects that in any way forestalled you acting on this more important, specific, narrow view about the future of the company, uh, you would have missed, either missed a great ride. So that's, that's the kind of thing we focus on.

Charlie, yeah, we're not predicting the currents that will come, just how some things will swim in the currents, whatever they are.

Good morning. My name is Ronald Towell. I'm from Brooklyn, New York. I'm very, uh, appreciative of your graciousness as a host for this wonderful weekend. My question has to do with the [Applause] my question has to do with the retailing industry, particularly the department stores and mass merchants. My question has two parts. Without resorting to comments about specific companies, may I ask your opinion as to the long-term prospects for growth and profitability of this industry group? The second part of my question is, given the fact that it is difficult to pick up a newspaper or to be an investor without being bombarded by what is purported to be the potential for exponential growth in the internet e-business, particularly directly to consumers, which could possibly eat into the revenues of these retailers? And if even if we assume a relatively low impact of say, five to ten percent revenue reductions, and given the fact that top-line growth is critical to any business, especially the bricks and mortar retailers with their high proportions of fixed overhead, what advice could you give to a CEO of such a company? And in turn, based on the preceding scenario, what would be your opinion of the medium and long-term prospects for this industry?

Well, that's a good question too. And obviously, the internet is going to have an important impact on retailing. It will have a huge impact on some forms of retailing, change them, maybe revolutionize them. I think there's some other areas where the impact will be less. But anytime we buy into a business, and anytime we bought in for some time, we have tried to think of what that business is going to look like in five or 10 or 15 years. And we recognize that the internet, in many forms of retailing, is likely to pose such a threat that we simply wouldn't want to get into the business. I mean, it's not that we can measure it perfectly, but, but there are a number of retailing operations that we think are threatened. And we do not think that's the case in furniture retailing. And we have three very important operations there. We could be wrong, but, uh, so far, that, you know, that would be my judgment that furniture retailing will not be hurt. You've seen other forms of retailing where you're already starting to see some inroads being made, but, but it's just started. The internet is going to be a huge force in many arenas, but it'll certainly be a huge force in retailing. Now, it may benefit us in certain areas. I would expect the internet to benefit Borsheims in a very big way. And you noticed in the, in the movie, we talked about Borsheims.com coming online in, in May. There's something up there now, but you'll see a new format, uh, within a month or so. Now, you might say, in, in jewelry retailing, you know, with millions of things that you can click onto, 10 years from now, you know, who is going to be important in terms of online, uh, retailing of jewelry? I would argue that that two firms have an enormous advantage going in. I would argue that Tiffany has such an advantage. We don't own any Tiffany, but I would say that because of their name, brand names are going to mean very, very much. When you have literally, you know, thousands and thousands of choices, people can't, they have to trust somebody. And I think that Tiffany has a name that, that people would trust. And I think Borsheim's has a name that people would trust. And Borsheim sells jewelry a whole lot cheaper than Tiffany. So I would say that, that people who are price conscious but also want to deal, deal with a jeweler that they trust implicitly will find their way to, to, uh, Borsheim's in increasing numbers, uh, over the internet. And I would say that people that like the blue box, you know, are going to find their way to Tiffany's, uh, over time. And they'll pay more money, but I don't see them going for Brand X in buying fine jewelry over the internet. So I think that with the brand that Borsheim's has, and with, with the careful nurturing of that brand, I, I would say that the internet offers Borsheim's a chance to have the advantage in cost that comes from a huge one-store location and yet also go into the homes of people in, in every part of the world. And, uh, that kind of a company should prosper. Um, there are other of our companies I worry about. You know, I can worry about them being hurt in various ways. Geico is going to be a big beneficiary of the internet. We already are developing substantial business through it. But I, I, if I were to buy, buy into any retailing business, whether I was buying the stock of it or buying the whole business, I would think very hard about what people are going to be trying to do to that business through the internet. And, and, you know, it affects, it affects real estate that is dedicated to retailing. And if you, uh, substitute five percent of the retail volume, uh, uh, via the internet, where real estate is essentially free, they're, you know, you can have a store in, in every, in every town in the world through the internet without having any rental expense. So I would be think, I would, I would give a lot of thought to that if I were, if I were owning a lot of retail, a rental space.

Charlie, well, I think it is, uh, tricky predicting that technological change either will or won't destroy some business. When I was young, the department stores had a bunch of sort of monopolistic advantages. A, they were downtown where the streetcar lines met. B, they had sort of a monopoly on extending revolving credit. And D, they had one-stop shopping and all kinds of weather and nobody else did. And they lost all three of those advantages. And yet, they've done well, a lot of them, for many decades since. At other times, you get a change and you just get destroyed. Our trading stamp business was destroyed by changes in the economic world. And our World Book business has been seriously hurt by the personal computer and the CD-ROM and so forth. Yeah, I agree it's a big risk, but it's, it's not easy to, uh, to make predictions in which you have great confidence. If you go down to 16th and Farnam area where the streetcar tracks used to cross, that was the, that was the best real estate in town. And, and people signed 100-year, 50-year leases on it. And it, it looked like there was nothing more safe because they weren't going to move the streetcar lines. The only thing was that they moved the streetcars. They just took and converted them into junk. And it seemed very permanent. The advantage of the big department store, the Marshall Field in Chicago or the Macy's in New York, was this incredible breadth of merchandise. You could go and you could find 300 different types of spools of thread, or 500 different, you could see 500 different wedding dresses or whatever. And you had these million square foot, and even 2 million square foot downtown stores. And they were these huge emporiums. And then the shopping center came along. And of course, the shopping center created, in effect, a store of many stores. So you had millions of square feet now. And, and but you still had this incredible variety being offered. The internet becomes a store in your, you know, in your computer. And it has an incredible variety of, of offerings too. Some of them don't lend themselves very well, it seems to me, to the retailing. And, and, you know, and others do. Uh, uh, but Charlie's right, it, it, it's hard to predict exactly how it will turn out. I would expect, I would expect, you know, automobile retailing to change. And in some important ways. And in part, in, very significant part, influenced by the internet. But I wouldn't, you know, I can't predict exactly how that will happen. But, uh, I don't think it'll look the same 10 or 15 years from now.

Zones. Good morning. My name is Jad Corey. I'm from Gaithersburg, Maryland. I just want to thank you for sharing your wisdom. And my question is, um, what criteria do you use to sell stock? I kind of understand how you buy it, but I'm not sure how you sell. Yeah.

Well, the best thing to do is buy a stock that you don't ever want to sell. I mean, that, and that's what we're trying to do. Uh, and that's true when we buy an entire business. I mean, we've bought all of Geico, we bought all of See's Candy, or the Buffalo News. We're not buying those to resell. I mean, what we're trying to do is buy a business that we will be happy with if we own it the rest of our lives. And we expect to with those. It's the same principle applies to marketable securities. You get extra options with marketable securities. You can, you, you can add to the holdings, obviously, easier. We can never own more than 100% of a business, but if we own two percent of a business and we like it at a given price, we can add and have four or five percent. So that's, that's an advantage. Sometimes, if we, if we need money to move to another sector, like we did last year, we will trim from some holdings. But that doesn't mean we're negative on those businesses at all. I mean, we think they're wonderful businesses, or we wouldn't own them. And we would sell, uh, if we needed money for other things. The Geico stock that I bought in 1951, I sold in 1952. It was, you know, went on to be worth 100 or more times before the 1976 problems, 100 or more times what I'd paid. But I didn't have the money to do something else. So you sell if you need money for something else. You may sell if you believe that valuations between different kinds of markets are, are somewhat out of whack. And, you know, we, we have done a little trimming last year, uh, uh, in that matter. But that will be a mistake. I mean, the real thing to do with a great business is just hang on for dear life.

Charlie, yes, but the sales that do happen, the ideal is when you found something you like immensely better, isn't that obvious? That's the, that's the ideal way to sell. And incidentally, the ideal purchase is defined as, is to have something that you already like be selling at a price where you feel like buying more of it. I mean, that, we probably should have done more of that in the past and in some situations. But that's the beauty of marketable securities. You really do, if you're in a wonderful business, you do get a chance periodically, maybe to double up in it or something to sort of, if, if the market, the stock market would sell a lot cheaper than it is now, we would probably be buying more of the businesses that were, all we, that we already own. That they would certainly be the first ones that we would think about. They're, they're the businesses we like the best, really. Nothing more.

Okay. Charlie and I, I've thought about options all our life. I mean, my guess is Charlie was thinking about that in grade school. And, um, you know, and I, I mean, you have to understand, you don't have to understand Black-Scholes at all, but you have to understand, uh, uh, the utility, uh, and in a general sense, the value of options. And you have to understand the cost of issuing options, which is a very unpopular subject in certain quarters. Any option has value. I mean, I bought a house in 1958 for $31,500. And let's assume the seller of that house has said to me, I'd like an option on it, good in perpetuity, at $200,000. Well, that wouldn't have seemed like it cost me much if I'd given it to him. But an option has value. Any option has value. And that's why some people who are, you know, kind of slick in business matters, sometimes get options for very little or for nothing. I'm talking about stock options. I'm just talking about an option to purchase anything. They got options for far less than really a market value would be. Black-Scholes is an attempt to measure the market value of options. And it cranks in certain variables. But the most important variable that cranks in that, that might be subject, well, might be a case where if you had differing views, you could make some money. But it, it, it's based upon the past volatility, uh, uh, of the asset involved. And past volatilities are not the best judge of value. I mean, if you looked at a, at a five-year option at Birch on Berkshire stock at various times, Berkshire stock had a fairly low beta, as they call it. The beta is a measure that people in academia always like to give Greek names to things that are fairly simple. And so that they have sort of a priesthood, you know. So it's, you know, it's like a priest talking in Latin or something. I mean, it, it kind of cows the, the laity. But they, beta is a measure of past volatility. Berkshire's had a low volatility, but that didn't mean that the option value of it to anybody that really understood the business was low than than a stock with a higher beta. And I think Charlie, what Charlie said is that last year is that over that, for longer-term options in particular, Black-Scholes can give some silly results. I mean, it misprices things. But it's a mechanical system. And any mechanical system in securities markets is going to misprice things from time to time. And that's, we, we made one, as I mentioned last year, we made one large commitment that basically was, uh, uh, had somebody on the other side of it using Black-Scholes and using market prices, took the other side of it. And we made $120 million last year. And we love the idea of other people using mechanistic formulas to price things because they may be right 99 times out of 100, but we don't have to play those 99 times. We just play the one time when we have a differing view.

Charlie, you want to comment on? Yeah, Black-Scholes is a, what I would call an a no-nothing value system. If you don't know anything at all about value compared with price. In other words, if, if price is teaching you all that can be known, then Black-Scholes on a very short-term basis is a pretty good guess, you know, for what a 90-day option may be worth in some stock or another. The minute you get into longer-term options where you don't have the no-nothing factor so extreme, it's crazy to use Black-Scholes. People use it just because they want some kind of a mechanical system. But at Costco, for instance, with a fairly short period, we issued stock options at $30, and we also issued stock options at $60. And Black-Scholes valued the options we issued at $60, was a strike price way higher than the options we issued at $30. Well, this is insane. But we like a certain amount of insanity. Yeah.

Well, it's good for Warren, who picked up this extra $120 million dollars. But, and so he, he's, he's founder of this kind of insanity than I am. No, we will pay you real money if you will deliver to our officers at Key West Plaza somebody who wants to use the Black-Scholes model and is willing to price, uh, a hundred options for three years, willing to using the Black-Scholes model and letting us pick and choose among those. Because, as Charlie says, it's a know-nothing, uh, affair. And, and we are know-nothing guys in respect to an awful lot of things. But every now and then, we find something where we think we know something. And, and, uh, and anybody that's using a mechanistic formula is going to get in trouble in, in that situation. But options have value. I mean, we, we issued options in a sense last year when we, when we sold those, the $400 million of of bonds, and we know what we're giving up when we, when we, when we sell those bonds. I mean, we may have gotten what, uh, a negative coupon of sorts, but, but that's because we gave up option value. And then, it wasn't, it isn't truly a negative cost instrument at all, because options have value.

Let's go to number four. Hello, my name is Martin Wiegand from Bethesda, Maryland. And first, I'd like to thank you and all the folks working here at the microphones and staffing the booths for hosting this wonderful shareholders weekend. We enjoy your efforts. Thanks, Martin.

[Applause]

My question is about a, a company getting its employee compensation aligned with shareholder interests. Charlie Munger, in one of his outstanding investor digest interviews, cites the case of FedEx getting it right. In the newspapers, we've all just read about American Airlines, Bethlehem Steel, and a lot of other companies getting it wrong. I find precious little written about compensation systems. Would you share with us how you get it right at Berkshire companies? Also, your old golf coach and racetrack friend, Bob Dwyer, asked me if you would like to share with us your pick for the Kentucky Derby. Is Bob back there with you, Martin?

No, in the middle. Oh, Bob. Yeah, Bob. Bob and I did spend a lot of time at the racetrack in high school. He was a, he was not on the basketball coach at Woodrow Wilson High, but he was also the golf coach. And whenever I wanted to go to the races, he would, he would write an excuse to my other teachers saying that we had to go out for the golf team. And then we would head off to Charleston or Robert Aguara, Pimlico, or someplace. And, and he, he cleaned up his act subsequently. It's good to have Bob with us. He was known for his famous three-iron shots. He was known as Trolley Wire Dwyer in, in those days.

Charlie, do you want to talk about comp a little?

Well, as the shareholders know, our system is different from that of most big corporations. We think it's less capricious. The stock option system will give extraordinarily liberal awards, sort of by accident, to some people. And it will deny other people any reward at all at some different time, in spite of great contributions made by the people who are getting nothing. So, except where we inherited, we just don't use it. But we must be in a minority. Far less than one percent, right? It's where we like to be right. Oh, they, it's interesting. We inherited some stock options at Berkshire, primarily in the General Re transaction, and not through any failing of anybody or, or, there's no dispersion to be cast. But at all. But those options turned out to be quite valuable. They would not have been valuable if General Re had been left alone as a standalone company. Uh, they were, they profited from the fact that other parts of Berkshire did well. And the money went to the people that had these options who delivered nothing to the performance of Berkshire for a while. Now, that's, that's, that is not an indictment of anybody in the least, a genre. It's an indictment of an option system, which represents a lottery ticket. And also a royalty on the passage of time, because as you know, an option holder has benefits from retained earnings and benefits not at all from dividends. And that puts his interest, well, maybe quite contrary to that of the shareholders. So we believe in paying for performance. But we believe in tying performance to what is actually under the reasonable control of the person that's being measured. And, and we, to give a lottery ticket on, on the overall results of Berkshire Hathaway to someone who is running a business that's one percent of the whole is really crazy. And, and I would say that you have seen probably more misdirected compensation throughout the corporate system, corporate America, in the last five years, you know, then in the hundred years before that. It's been extraordinary. And, uh, there was, there was wealth creation in the 90s, just like in the 80s and the 70s and the 60s and the 50s. But there was a wealth transfer like I've never been experienced before. And, you know, you can't blame people for wanting to cash in on it. You know, if anybody wants to walk up and hand me a half a dozen lottery tickets for the Nebraska Lottery, you know, I'll accept them. But it will have nothing to do with how I do in terms of running Berkshire. Uh, actually, Charlie and I think a properly designed option system, which includes cost of capital and some other factors, and, and ties it to the performance of the people involved, we think that can make sense. When we've used various incentive programs that are similar to that. But the idea of just passing them out and telling people that for 10 years they get a free ride, and then repricing, you know, if your stock goes down, their stock doesn't go down, their option price goes down, you know, that is not our idea of a great compensation system. Yeah, if we're, if we're right with our general approach, uh, it has considerably important implications because the natural implication is that more than 99% of corporate compensation systems are more than a little crazy in America. And, and I want to emphasize that Berkshire is not illiberal. I mean, we've got various incentive systems out where people make tens of millions and they make hundreds of millions. So we're not against rewards for people who make vast contributions. But a system that's basically capricious and which doesn't tailor the results per person and per activity very well, we just think it's crazy. We love to see people that are associated with Berkshire making money, as long as they're making money for you at the same time. It's very simple. And, but we don't want them to get a free ride off your money. Compensation is an interesting subject. And I'm going to write about it next year or something. But, you know, it, it's not a market system. You can read all you want. I mean, you know, the, the PR people will tell you, you know, that ex Joe Smith's compensation was determined by a market system, and he's just like a baseball player or anything of the sort. But he's not just like a baseball player. And the baseball player negotiates with somebody who's spending his money to hire the baseball player, making a calculation whether he's better off laying out the money out of his own pocket, the owner of the team, to get that player. But when you get a comp committee at a large American corporation, you have somebody with an enormous interest in the amount of comp on one side of the table. And you've got somebody on the other side of the table who was not picked because they were the Doberman of the board, believe me. Uh, and who is dealing with what many times is what my friend Tom Murphy used to call play money. I mean, it, you know, it's, it's almost meaningless to the person on one side of the table whether somebody gets a hundred thousand shares of restricted stock or a million shares of restricted stock. And it's not meaningless to the guy on the other side of the table. Almost every other negotiation in American business, you have some parity of concern. But you do not have a parity of concern, you know, in terms of the, uh, in terms of comp at the top levels. You have a parity of concern when you get down to labor unions. I mean, the management wants to keep down the prices, and the union wants to get more money. And, you know, and, and that's a real negotiation. And you have, you know, I mean, you have lots of other real negotiations in American business. But the compensation in many companies, not all, obviously, but, but in many, many companies has not been a real negotiation at all. And the management is hired comp consultants to come in. And I have never seen a comp consultant come in and say, we ought to reduce this guy's salary. I've also never seen a comp consultant come in and say, why don't you get rid of this bozo? You know, I mean, you know, they can't all be wonderful. But, you know, can you imagine a comp consultant doing that? Never getting another assignment. It wouldn't happen. So it's, it's a bad system and it needs improvement. And it may be getting a little improvement. And as I wrote in the annual report this year, what happens with comp is the acid test of corporate reform. Because frankly, the CEOs of America, they don't care whether their boards are diverse or not diverse or anything of the sort. They care about how much money they make. And in the great many cases, and, and you, the owners, and big owners in particular, you know, have to provide some countervailing force, or you'll have what you've had in the last 20 years, which is an enormous disparity in the rates of compensation of people at the top compared to people at the bottom. And also a disconnect between the comp of people running businesses and the results of the owners who gave them the money. So, arise, you know, shareholder.

[Applause]

Let's go to number five. The, um, well, the answer is, I do believe in dividends. And in a great many situations, including many of the ones that companies in which we own stock, the test about whether to pay dividends is whether you can continue to create more than one dollar of value for every dollar you retain. And there are many businesses. We take See's Candy, which we own. See's Candy has paid virtually everything out to us that they've earned because they do not have the ability within See's Candy to use large sums which they earn, uh, intelligently in their business. So it'd be an enormous mistake for See's Candy to retain money. So they distribute to Berkshire. And we hope that we move that around in some other area where that dollar becomes worth a dollar ten cents or a dollar twenty cents in terms of present value terms. If we do that, the shareholder, whether they're taxable or whether they're not taxable, whether they're a foundation or whether they're living on income, even, they are better off if, if we retain the money. Because if they were going to get a dollar in dividends and it became worth a dollar ten or a dollar twenty in market value immediately on a present value basis, uh, they're better off selling a small percentage of their stock and, and realizing, uh, the required amount that way. And they will have more money when they get all through doing that than if we paid it in dividends. But if the time comes, uh, and it will come someday, when the, if the time comes when we don't think we can use the money effectively to create more than a dollar of market value per dollar retained, then it should be paid out. And like I say, we do that individually within Berkshire. But because we have this ability to redistribute money, uh, in a tax-efficient way within the company, we probably had more, we had more reason to retain all of our earnings. If See's Candy were a standalone company, we would simply pay out a lot of the, the earnings, practically all of the earnings, in dividends, just like we do now, except it goes to Berkshire. That we like our, we like the companies in which we have investments to pay to us the money they can't use efficiently in their own business. In some cases, that's 100% of what they earn. In some cases, it's zero percent of the year. And we own some stocks that don't pay any dividends. Big opportunities in life have to be seized. We don't do very many things, but when we get the chance to do something that's right and big, we've got to do it. And even to do it in a small scale is just as big a mistake, almost, as not doing it at all. I mean, you've really gotta, you gotta grab them when they come. And because they, you're not going to get 500 great opportunities. You would be better off if when you got out of school here, you got a punch card with 20 punches on it. And every big financial, every financial decision you made, you used up a punch. You'd get very rich because you'd think through very hard each one. I mean, you went to a cocktail party and somebody talked about a company, you didn't even understand what they did or couldn't pronounce the name, but they made some money last week. And another one like it, you wouldn't buy it if you only had 20 punches on that card. There's a temptation to dabble, if, particularly during bull markets, uh, uh, in stocks. It's so easy. You know, it's easier now than ever because you can do it online. You know, just, you click it in and maybe it goes up a point and get excited about that. And you buy another one the next day and so on. You can't make any money over time doing that. But if you had a punch card with only 20 punches, you weren't going to get another one the rest of your life, you would think a long time before every investment decision. And you would make good ones, and you'd make big ones. And you probably wouldn't even use all 20 punches at the, in your lifetime, but you wouldn't need to.

Hi, I'm, uh, Steve Casbell from Atlanta. Um, my question involves interest rates. When you calculate the intrinsic value of a business, and in a period of low interest rates like we have currently, do you use a higher discount rate to factor in higher rates in the future? And also, um, when do you ever look at a company's free cash flow yield relative to current rates? And if I could also get your thoughts on the dividend tax cut, if by some miracle the politicians think logically and get rid of the dividend taxes, would Berkshire ever pay a dividend?

The question on discount rates, we, we use the same discount. I mean, in theory, we would use the same discount rate across all securities because if you really knew the cash they were going to produce, you know, that would that would take care of it. We may be more conservative in estimating the returns of cash from some. But the, the discount rate we would use as a constant. Now, in terms of where we commit, you know, we don't want to use the fact that short-term rates are one and a quarter percent to think that something that yields us three percent or four percent is a good deal. So we sort of have a minimum threshold in our mind about which we're below which we're unwilling to commit money. And we're unwilling to commit it whether interest rates are six or seven percent, or whether they're three or four percent, or whether they're on a short-term basis one percent. We just, we don't want to get hooked into long-term investments at low rates just because they're a little bit better than than short rates would be or, or low government rates would be. So we, we have minimum thresholds in our mind. I can't tell you precisely what they are, but they're, uh, they're a whole lot higher than present government rates would be. And at other times, we'd be very happy owning governments just because we feel that they offer attractive enough rates. Uh, uh, I would, when we're looking at a business, we're looking at holding it forever. And, and we want to be sure we're getting an adequate return on capital. We don't regard what we can get on short-term rates now as adequate. But we'll still sit, then, you know, a little bit and start settling for lower rates for 30 years because rates for 30 days or so low. We would rather just sit it out and wait a while. Um, the tax on dividends, you know, I've used this illustration before, but I'm paying about the same percentage of my income to the federal government as my secretary does. Now, I pay more in income tax rates than she does. I pay a higher marginal tax rate by some margin than she does. But she pays way more in Social Security taxes than I do because I only pay out the first, whatever it is, $70 or $80,000 of income. And so she's paying between what we pay at the company for, and what she pays, we're paying 12 or 13 percent or whatever it is of that. So we both end up paying fairly similar percentages of our income to the federal government every year. If Berkshire were to declare a billion dollar dividend, and my share of it was $330 million, and it were tax-free, as the Bush people originally suggested, and it would be tax-free, I mean, we have lots of taxable earnings at Berkshire. You know, I might be paying one-tenth of the rate to the federal government of my income that she would be. Now, I can make the argument about the fact that structure shouldn't govern tax rates, that that Subchapter S and Subchapters and Chapter C and partnerships and all of these things, that the tax code should be neutral between them. And I've made those kinds of arguments in the past. But I can make no argument in my mind that says that I, with everything that, you know, all the luck I've had in life, you know, I was wired a certain way at birth that enabled me to make a lot of money. And frankly, it was better to be born a boy than a, a girl in terms of money-making possibilities in 1930. And probably still is, but not to the same degree. I mean, the fact that, that I would send one-tenth portion of my income in the year to the federal government that my secretary would, I, it just, it screams at injustice to me in terms of what the society gives back to me. So I'm not, I am not for the, I'm not for the Bush plan at them.

Charlie, well, I agree with you. Even if you assume that the whole economy would work better if we'd never gotten into this double taxation system on corporate earnings, which I don't think is a clear thing anyway. But even if you, even if you assume that, I think even you live in a democracy where there's lots of envy and resentment and what have you. To have the absolute most fortunate people paying practically no income taxes, I, I just think it's unacceptable. I think there has to be some fairness in, in, uh, in some of these arrangements, even if there's some theoretical argument that the economy might work a little better some other way. Yeah, there are IRAs now, obviously, that work very well for people with modest amounts of dividends that they, they're getting tax deferred for a very long period of time, which has huge benefits. The big benefits of exempting dividends would go to fellows like me and Charlie, you know. And that's not going to stimulate the economy. It's going to stimulate us. But, and it's going to result in us sending a very small percentage of the income of our income to Washington compared to what the people, you know, working in our shoe factories send. And, that, you know, when somebody says, you know, what did you do during the war, Grandpa? I'm not sure that's what I want to explain to them.

Number three. Hi, my name is Charlie Rice and I'm a stockholder from St. Louis, Missouri. Appreciate hearing your comments on publicly held companies using their cash for, uh, dividends versus stock buybacks.

Well, the equation is pretty simple, but the practice doesn't necessarily follow logic. The, it's obviously, as long as you're telling the truth your shareholders about what's going on so that you aren't manipulating the stock downward or something when a stock can be bought well below its business value, that probably is the best use of cash. It's something the Washington Post did on a huge scale back in the 1970s. Teledyne may have bought 90 or something or close to it of their stock back. And that was the reason, a very significant percentage of companies bought stock back in the past because they actually thought it was selling for less than it was worth. Uh, like I say, that, that can be abused if you do various things.

To bury your stock in one way or another. But, but that wasn't the usual case. It stock repurchases were relatively unpopular in those days. They've become quite popular now. And, and, and to the extent that I've been around a good number of them and, and been able to pick up on what I thought was the underlying rationale, if not the professed rationale, you know, I think it's often done for people that that are hoping that it causes their their stock price not to go down. And, uh, and they're, you know, and often done at prices that don't really make a lot of sense for continuing shareholders.

Um, if we wanted to return a bunch of cash to shareholders, we would. If our stock was undervalued, we would, we would, we would go to the shareholders and say, "We think it's cheap, and, and we think that this cash can be better used by you than by us." And we will therefore be repurchasing at what we think is a discount intrinsic value, and the people that remain will be better off, and the people to get out will get out at a little bit better price than they would otherwise.

Um, in terms of dividends, you get into an expectational situation. And for most companies that follow a that pay a cash dividend, it doesn't make sense to be to bounce around the dividend from year to year. Although private companies frequently do that, and we do it ourselves with our subsidiaries. They have some, some subsidiary can pay us a lot of money one year and not so much money the next year. But with public companies, people do, a lot of people do buy stocks to obtain dividends, and they hope for regularity. And if there's a signaling aspect to it and everything. So I would, I would say that once you establish a dividend policy with a public company, you should think a long time before you change that policy in a material way. But I think the best use of cash, if you don't have a good use for it in the business, if the stock is underpriced, is to repurchase it. And if it's overpriced, you've got no business buying a single share. But a lot of companies do it.

Charlie, yeah, the dividends are a very interesting subject. If you count the unnecessary stock trading, and the cost of investment advice, and the cost of making a lot of errors in the trading costs in and out, I don't think it would be too extreme to say that now the total amount that's paid out in dividends is roughly equal to the amount that is wasted in illustrating and investment advice. So that the net dividends that come to the shareholders are approximately zero. This is a very peculiar way to run a republic, and very few people comment about it. Yeah, actually, I did in an article some time ago in Fortune. The frictional costs to American shareholders in sort of changing chairs for all American businesses to hold those frictional costs are probably not much different than the entire amount paid out by American corporations.

So, but getting to the individual corporation level, a company that expects to regularly earn more than it than it can profitably employ in its business should be paying out dividends. Take a subsidiary of ours like See's Candy. We would love to expand See's Candy to double or triple its present size, but it doesn't work. We've tried it a lot of different ways. So it should be paying out attorneys. If it was a public company, and it was at one time, you know, you could argue that something approaching a 100% payout would would make sense there. But most managements worrying about earnings falling off at some time in the future would rather establish a lower level and, and, and, and, and therefore ensure regularity of dividends, uh, by by going with it with a conservative level. Uh, I, you know, we, it's obviously something we think about at Berkshire. When we have 30 odd billion dollars around, if we can't figure out a way to employ that over time, you know, it's, it's a mistake to keep it in corporate form. But we have this expectation, and I think it's a reasonable expectation, that we get the put it to work. If we ever came to the different conclusion, if our stock, we thought our stock was significantly undervalued, we'd probably figure in terms of dispersing it through repurchases, particularly where now dividends and capital gains are are neutral for for individuals. Uh, and if our stock was not underpriced, and we felt we would, we would probably do something by a dividend. It's not going to happen soon, however.

Good afternoon, Mr. Buffett, Mr. Munger. My name is Mark Stender from San Francisco. Um, my question involves, if you live in California, which I understand you do sometime of the year, it's almost mandatory that you shop at Whole Foods Markets. They sell a lot of organic food there. And I was wondering if anyone ever tried to feed you organic food or organic food stock. I've never been near the place. But, um, Charlie, well, I've never thought it was a health nut, but he may have some comment to make on this being a Californian. No, my idea of a good place to shop is Costco. Has these heavily marbled filet steaks in the finest grade. And the idea of eating a little whole grain, whatever I'm washing it down with some carrot juice, is just never appealed to me. We don't have a lot of arguments between the two of us about where to eat.

Number nine. Hello. Thank you. I'm Sherman Silber from St. Louis. I'm a fertility doctor in St. Louis. We kind of view ourselves as the Berkshire Hathaway of infertility treatment. We don't know anything really about business. We're doctors and scientists. And so, first, I'd just like to say, I really appreciate you, the people that you have on your board, and would like to keep it that way because we do know a lot about character. And I'm happy to have our savings safe with you and the people of character that represent the company. I just had an opportunity a couple of weeks ago. I was talking to one of the former managers of the Fidelity Magellan fund, managed huge amounts of money. And he, he never really met you. And I was saying, "I may have a chance to ask Warren Buffett and Charlie Munger a question. What would that question be?" I wanted to have some idea of something intelligent I could ask business-wise. And he thought if he had the opportunity to talk to you, the best thing is to give you what would sound like a softball question because, because you could maybe bring more profoundness to this than we hear usually. What, in view of the Iraq War, consumer debt that's increasing, declining job growth, declining pay in the jobs that are growing, prospects of increased interest rates, he has this view that the next five to ten years are going to be very difficult. What would your view be about this the investment future for the next five to ten years in view of all these negative factors going on?

[Laughter] Well, I would say that at any given point in history, including when stocks were their cheapest, you could find, um, an equally impressive number of negative factors. I mean, you can, you could have sat down in 1974 when stocks were screaming bargains, and you could have written down all kinds of things that would have caused you to say, "You know, the future is just going to be terrible." And similarly, it at the top, you know, or anytime, you can write down a large list of of things that would be quite on the bullish side. We don't panic. We really don't pay any attention to that sort of thing. I mean, we, we have, uh, you might say that our underlying premise, and I think it's a pretty sound underlying premise, is that this country will do very well. Um, and, and in particular, it will do well for business. Businesses have done very well. You know, the Dow went from 66 to ten thousand plus in the hundred years of the 20th century, and we had two world wars, and nuclear bombs, and flu epidemics, and we, you know, you name it, Cold War. There's always, there's always problems in the future. There are always opportunities in the future. And in this country, the opportunities have won out over the problems over time, and I think they will continue to do so, absent the weapons of mass destruction, which is another question, and business won't make much difference if anything really drastic happens along that line. So we don't, I don't, I can't remember any discussions, Charlie, that I have had, ever going back to 1959, that where we would have come to the conclusion at the end of them that we would have passed on a great business opportunity, a business to buy, because of external conditions. Nor did we ever buy anything we thought was, uh, mediocre simply because we thought the world was going to be wonderful. At the, it won't be the American economy, in my view. The dozen investors over a five or ten or twenty year period, it will be the investors themselves. Uh, if you look at the record of the 20th century, you'd say, "How could anybody have missed, you know, and owning equities during that time?" And yet, you know, we had, we had all kinds of people wiped out, you know, in the '29-'32 period. We had, we had all kinds of things that were bad. But if, if you would just own stocks right straight through, didn't leverage them, you know, you would, you have gotten a perfectly decent return. So we're, we're unaffected in essence by the by the variables you mentioned. Just show us a good business tomorrow, and we'll jump at the hook.

Charlie, yeah, I think, but it's also true that both of us have sat at various times over the last three years that we wouldn't be at all surprised if professionally invested money in America had a pretty modest result over a fairly extended period of the future compared to the very dramatically high returns that it had achieved up to about three years ago. And so far, that's been proved out to be pretty much right. Certain stretches are easier than other stretches. Yeah, our expectations were were more modest than most people's a few years ago. We didn't say the world was coming to an end or anything. We just said that people have gone crazy in certain sectors. And that, and that anybody that thought that that you could, you know, sit at home and day trade and make double-digit returns over time, or do anything that you were entitled to that, you know, by just sticking a little money in your 401k or something, was really living in a fool's paradise. But that was never accompanied by any predictions of disaster for the American economy as a whole, or for American business as a whole. Uh, it's people get crazy notions from time to time in financial markets, you know, with coming on this earlier. But they just believe things that there's, it's hard to understand how they can believe. Now, since some extent, they get sold up by other people. But, uh, uh, American business really is has never let investors down. Under the group, but investors have done themselves and quite frequently, Lauren.

And Charlie, my name is Peter Brochie from Beverly, Massachusetts. And I would like to thank you both for helping me become a better businessman and a better investor. Perhaps more importantly, you have created by example a kind of true north on the moral compass for me to steer by. While the education has been fantastic, I have found that the demands of owning a successful business and having a large family do not leave time to apply the research stance I have become so wonderfully accustomed to by being a member of this cult. Please imagine for a moment that you are 30 years younger and have only a few holes left in your investment punch card. If you were in my situation, to the extent that you would diversify your holdings beyond Berkshire Hathaway, given this environment, how would you choose the investment managers? Or, as Charlie has just discussed when addressing foundations, would you hunt for two more great companies to invest in via common stocks?

Charlie, why don't you take a swing at that? Well, of course, you're hunting. That's part of the fun of life. And, uh, but I would say the chief lesson would be that you're unlikely to find very many in a whole lifetime. And when you find one in which you really have thought it out and have confidence, for God's sakes, don't do it in a niggardly fashion. The idea that very smart people with investment skills should have hugely diversified portfolios is madness. It's a very conventional madness, and it's taught in all the business schools, but they're wrong. The question of finding other advisors is a tough one. I mean, when I wound up my partnership in 19, the end of 1969, and I had all these partners that had counted on me, and I was going to mail them back a lot of money, um, you know, I felt an obligation to at least suggest some alternatives for them. And I, I recommended two people who I knew were exceptionally good and exceptionally honest. Uh, we put one of them on the board not long ago and reaffirmed it today, Sandy Gottisman. The other one was Bill Ruane. Now, I've been around the investment world for a long time at that point, and those were the two I knew. But they were more or less contemporaries of mine, and I'd gotten to know over the years, and I'd seen them for a long time. So I not only knew their results, but I knew how they'd accomplish their results, which is terribly important. I don't know that generation of managers now. But the fact that with the number of people I knew that I could only come up with two at a time when I was very active, says something about the difficulties of of finding managers. The one thing I can almost guarantee to you is that the promotional types going around to solicit the institutional investors are very unlikely to meet any long-term tests of of ability and sometimes integrity. It's not an easy job spotting an investor.

I think it's probably easier, depending on the amount of time, you know, you mentioned having children in the business and the amount of time you can spend on. Every now and then, you do, if you, if you're, if you're conscious of the investment world and you have some kind of sort of grounding knowledge about what's going on, you can see something. You know, as we did in junk bonds a couple of years ago, or as we did with all kinds of things some years back when stocks were cheaper. You, you will occasionally see something that that you should load up on. And, and Charlie says that's what you really have to do. I mean, some of the people in this room loaded up on Berkshire many years ago, and the truth was, they didn't need diversification. You know, I loaded up on it, that, uh, Charlie did. And you'll see opportunities occasionally, but you're not going to see them every day or every week. If you, if you think you're going to see an opportunity every week, you're going to lose a lot of money because people will come around and tell you that they've got them. And they may not be quite as flagrant as that fellow we had in the movie, but they're a version of that.

Charlie, yeah, the business of selecting investment managers was recently shown to be even harder than than I had previously thought. It was a significant fraction of the institutional investment managers who run the nation's mutual funds actually accepted propositions to take bribes for betraying their own shareholders. It was as if a man came to you and said, "I have a wonderful proposition. Why don't I kill your mother and we'll split the insurance money?" And it was that ridiculous. And yet a significant number of the people said, "Gee, I would like some insurance money," and they just went right ahead. And they were already rich beforehand. Yes, the, the absolute, and they've destroyed themselves, many of them, by making this insane decision. And, and I think many of them are probably think the outcome is unjust. And I mean, the, the downfall they've had. And the interesting thing about it, of course, is that here is a huge industry that where the people who weren't doing it have a great interest in having that reputation of the industry not get stained. And a number of them had to know what was going on. I mean, this would, I, I, it's hard for me to imagine that people at most large mutual funds, even the ones that didn't, their mutual fund management companies, even the ones that weren't engaging in the activities mentioned, weren't aware of it. I mean, you just, if you're in an industry like that, you're going to hear what's going on. And the Investment Company Institute was busy patting itself on the back, you know, one meeting and after another, and becoming very cozy with legislators. And there wasn't one thing done until a whistleblower went to Elliot Spitzer. And, uh, uh, and he got active in the very strong way with a very limited staff, and he uncovered and put on the front pages what was taking place. But the industry itself, with hundreds and hundreds and hundreds of people that must have known what was going on, uh, and it went on for a long time, never said a word. It's, it's a, you know, it makes you wonder a little bit.

Number three. Number three. Dear Mr. Buffett, Dear Mr. Munger. My name is Oliver Crouchite from Frankfurt in Germany. The subprime crisis has led to inconsistent pricing in capital markets. Credits are trading at large discounts, and at the same time, the equities do not respect, do not reflect this. My question is, when will this be over? And how do you take advantage of market dislocations?

Well, when there are market dislocations, there are always ways to take advantage of it. But we'll, we'll leave you the joy of searching for those. But there have been some really important dislocations. And I brought along just for your amusement, uh, a few figures on something that that we've done recently. But it doesn't have any big significance for Berkshire. I mean, Berkshire will make some extra money out of this. It doesn't take any time to think about. But it does illustrate just how dramatic the changes were. And the ones I brought along relate to the the tax-exempt money market funds. Uh, there were 330 billion of these. That's a lot of money. 330 billion. And they relied on repricing, a really almost all cases, first-grade municipal bonds every seven days. They had these auctions. And it was all set up very elaborately so that people could have their money more or less in their minds instantly available and something that was tax-exempt. And they were marketed extensively. And I brought along, for example, here's one that related to the, they were backed by various municipal issues. This happens to be one by the L.A. County Museum of Art. Just pull that out. And on January 24th, uh, it was marketed at 3.15%. January 31st, 4.0%. February 7th, 3.5%. February 14th, 8%. Now, how can a tax-exempt bond of short-term nature be selling at a three and a half percent rate one week, and one week later on Valentine's Day be at eight percent, and one week after that be at 10 percent? It's now back to 4.2 percent. Now, those are in huge dislocations in markets. That's crazy. It'd be one thing to be some little obscure item, but this happened with billions and billions and billions of dollars of securities. It even happened. We get these bid sheets every day. And this happens to be a bid sheet, I think from Citigroup. And they were repricing these every seven days. And what you would find on these are, you'll see there's lots of issues involved. The same issue would appear on several different pages because it would represent some different auction, although handled by the same broker at the same time. On one page, you would find an issue. We would bid all these. We have to bid these at 11.3 percent. On one page, we bought them at eleven three percent. On another page, the same issue, we bid the 11.3 percent, and somebody else bid six percent. So you had the same issue with the same broker at the same time being sold at 11.3 percent and six percent. Those remarks of extreme dislocation. And you find those occasionally. You found that after the Long-Term Capital Management crisis in 1998. You found the equivalent of it in the stock market in 1974, and so on. And those are great times to make unusual amounts of money. And if you, there's certain things we can't figure out. I see in the Wall Street Journal, I see advertisements these days of auctions taking place in some esoteric mortgage securities. If you had enough time, you could probably figure out some of those who were very mispriced. We don't fool around with that. That we just don't have the time. We were able to do four. We have about four billion in this right now. When we got all through, we'll have made some extra money for a couple of months. It won't be significant in relation to Berkshire's size. But but it's something that's very easy to do. You may be able to find by working very, very hard on some smaller issues, you might be able to find in this mess in mortgages, and it's gone beyond subprime, it's gone into all days, and it's gone into option arms and that sort of thing. You may, there very well could be some great opportunities out there that Charlie and I will no longer spot because we just can't be looking at that many things.

Charlie, yeah, what is interesting is that how brief these opportunities to take advantage of dislocations frequently are. Some idiot hedge fund bought unlimited municipal bonds that, you know, incredible margins. I think they bought 20 times more Minnesota bonds than they could afford with their own money, borrowing all the rest of them. Those things were dumped on margin calls. Municipal bonds suddenly got mispriced in America. But the dislocation was very brief. So you, but very extreme. You've been very extreme. And so if you can't think fast and act resolutely, it does you no good. So you're like a man standing by a stream trying to spear a fish, and the fish just comes by once a week or once a month or once every 10 years. And you've got to be there to throw that spear fast before the fish swims on. It's a pretty demanding business if you do it right. But there have been times. I mean, the in the junk market, the market, there was a three or four month period in 19, in 2002, with some really incredible things happen, and they happened on a large scale. So that, um, uh, yeah, it happens about twice a century, which means that he and I have only had four or five times when we could do it.

My question is, is, you know, how do you, what are the mental tricks you have, or how do you overcome these behavioral and emotional traps like anchoring? And what advice do you have for us?

Well, that's a good question. And of course, it first in recognition of the fact that they can be traps, and that you, and that you will be affected by them, and you will make some mistakes because of them. But, uh, Charlie and his, in poor Charlie's Almanac, which I probably do take credit for the name of, and, uh, the, uh, he talks about the various psychological traps that people fall into. And, and simply reading that section, you will come away wiser than than before you started on it. We will, our personalities are such that Charlie and I probably are a little less prone to some of those mistakes than other people are. But as our record clearly indicates, we still are prone to them, and we, we make them, and we'll make them again. We're probably a little less inclined to make some of them than we were 30 or 40 years ago. But, you know, the nice thing about it is, though, is that if you make fewer of those mistakes than others, you know, they will continue making their share, and you'll get very rich.

Charlie, yeah, you don't have to have perfect wisdom to get very rich. All you've got to do is have slightly more than other people on average over a long time. It's the old story about the guy outrunning the bear. I mean, they don't have to outrun the bear. I just have to outrun that other fellow.

And number five. I think what has happened that at Berkshire is just wonderfully for the good. And I do think we have a perfectly marvelous board. What makes me sad, as I said earlier, is I don't see more of the same practice followed elsewhere. A director getting a hundred and fifty thousand dollars a year from a company who needs it is not an independent director. That director automatically becomes an inside director. And so it's a typical government intervention. Ah, it's just, it says it's doing one thing and it does another. Yeah, I have never, I've been on 19 boards. I've never seen a director where the director's fees were important to them object to an acquisition proposal, object to a compensation arrangement of the CEO. It's just never happened. You know, and, uh, in my, in my experience. And, uh, you know, they do not, they frequently do not behave as they would if they owned the place. And, and basically, we want people that the behaviors if they owned the place. The correct system is the Lu Root system. Ellie, who wrote, who had three different cabinet appointments, if I remember right, said no man was fit to hold public office it wasn't perfectly willing to leave it at any time. And the fellow who wrote, didn't approve of something the government asked him to do, he could always go back and be the most sought-after lawyer in the world. He had an identity to go back to, and he didn't need the government's salary. And I think that ought to be more the test in corporate directorships. Is a man really fit to make tough calls, who isn't perfectly willing to leave the office at any time? My answer is no. Yeah, we have one of our directors who was, who's been removed twice from compensation committees of other corporations because he had the temerity to actually question whether the compensation arrangement being suggested was the appropriate one. I mean, it, uh, it's not, it's, it's being put on the comp committee of American corporations. As I've said, they're not, they're looking for Chihuahuas and, and, and not Great Danes. And governments. And, yeah, and I hope I'm not insulting any of my friends that are on comp committees. You're insulting the dogs. [Laughter] [Applause] Okay.

Number one. Number seven. Well, it's more, uh, it's more nerve-wracking than I thought it would be. Um, hello, Warren, Charlie. Um, my name is Aki Progakis. I'm from Montreal, Canada. A Warren, I wrote a letter back in January. Um, I wrote a letter to you recommending a beautiful Canadian retail company in which I described the my analysis to you. I'd like to thank you for taking the time to respond to me. Uh, you said some nice, kind words. It meant a lot to me, and I think you're an amazing individual. Um, my question, people, what is the single most difficult decision you've had to make in your lifetime, whether it be business or personal? I think I want to let Charlie answer that one first.

Yeah, I would argue that that may be one that you shouldn't ask. [Applause] Ed, or let's put it this way, I think you should answer it with several interesting examples before you ask us to answer. [Music] That's a little dirty joke. It's interesting, but as Charlie was talking, I was, I haven't, I, I can't think of a lot of difficult. I think of a lot of wrong decisions I've made. Uh, but I, I certainly can't think of, I can't think of anything I agonized over making for any long period of time. Uh, like I say, that isn't, you know, I mean, it's calling balls and strikes. I mean, you gotta, you got a second there, and if you don't do it, that you're, you're no longer an umpire. Uh, so I, uh, I made, I made plenty of wrong decisions. I'm going to make plenty more. That, that's just part of the living. But I don't, I don't think in terms of being difficult as measured by the time it took me to do it or the, not a lot of them pop to mind. And if they do, I'll probably, I'll probably give you the same answer. Surely.

Charlie, Charlie, have you thought of any more there while we were talking? Oh, let's go on to another. Okay. That was not a bad decision.

Number eight. Would you say that the USS, quote-unquote, a castle with a moat? And if so, how can we make the moat any bigger? Thank you.

Yeah, well, the US has been pretty remarkable, as I indicated in my earlier comment. I mean, you know, essentially the the same population pool, pretty much. And, and they've garnered over this 215-year period, a remarkable share of the world's wealth. Uh, and it's an interesting question as to just why this group of people here have been able to do so much better than the rest of the world, considering we're not any smarter or anything of the smart. And, uh, um, it's not an economic hassle anymore. I wouldn't, I wouldn't call it that. What we do is no secret. And I think that the relative importance of America, I mean, when you know, we've, we have been a dominant factor in the world and post-World War II. And I think it will decline somewhat, although I'm not an alarmist on that. But I think to some extent, the rest of the world, or much of the rest, or some of the rest of the world is catching on and adopting some, you know, sort of best practices, as they say in industry. And our, our castle will grow in size, but there will be more castles around it. And I basically think that's a very good thing for the world. I think the more prosperous, generally, the rest of the world is, uh, you know, the better, generally, it will be for us. And, you know, I've talked about our trade problems. The more trade we have, the better. We had 1.1 trillion of real trade last year in the country. We would have with the world. And then we had another 600 billion, six tenths of a trillion that unilaterally we bought. Well, I, I would love to see the 1.1 trillion grow and grow and grow. It'd be good for us and good for the rest of the world. But I don't think that our prosperity will come in the future will come at the expense of the rest of the world at all. And I, I do think that there were parts of the world that will grow economically from a lower base, but much faster than the US. And basically, I think that's, that's a good thing. I mean, there's six billion people in this world, and a lot of them don't live very well. And, and I would hope that 20 or 50 years from now, that it's a higher percentage of them would live well. And that, but I don't think it comes out of our height at all.

Charlie, well, I don't think it comes out of our height in that sense. But if we're well, I don't think it comes out of our height in that sense. But if we are now the richest and most powerful nation in the world, and 50 or 100 years from now, now the richest and most powerful nation in the world, and 50 or 100 years from now, we're a poor third some country in Asia. Sure, we're richer, but it's a peculiar type of richness where you've lost your relative position in the world. It's not all. I think if I had to bet, I would bet that the part of the world that does best is Asia in terms of percentage gains per annum. And, and I think it might do amazingly well if it doesn't blow up in some way. And if it does amazingly well, it will eventually be a much richer place than than ours. My understanding is that the University of Florida has instituted a couple of courses that actually Mason Hawkins gave them a significant amount of money to finance. And I believe they're, they're teaching something other than efficient markets there. There's, there's a very good course at Columbia, I know that. It gets a lot of visiting, uh, teachers to come in. I, I go in there and teach occasionally, and, and, and, but a number of practitioners do so. They're, I think the efficient market, uh, theory is less wholly written now than it was 15 or 20 years ago. And in, uh, in universities. But it's, it, there's a lot of a talk. But I think you can find more diversity in what is being offered now than than 10 or 20 years ago. And I'd recommend, you know, looking into those to schools, you know, it's really quite useful. If you had a merchant shipping business, if all of your competitors believe the world is flat, you know, that it is a huge edge because they will not take any, uh, they will not take on any cargo to, uh, to go to places that are beyond where they think they will fall off. And so we should be encouraging the teaching of efficient market theories in, in universities. And it amazes, it amazes me. But what it, you know, I think one time that, was it Keynes that said that, uh, most economists are most economical about ideas that they make the ones they learned in graduate school last a lifetime. And what happens is that you spend years getting your PhD in finance, and you, you learn theories with a lot of mathematics, and then the average layman can't, uh, can't do. And, and you become sort of a high priest, and you get an enormous come out of yourself, an ego. And even professional security invested in those ideas. And it gets very hard to back off after, after a given point. And I think that to some extent has contaminated that, uh, the teaching of investing in the universities.

Charlie, well, I would argue that the contamination was massive, but it's waning. It, yeah, it is waning. It's waning. The good ideas eventually triumph.