This was Charlie Munger’s last Berkshire annual meeting. He died that November, aged 99. My five takeaways come first, then the full transcript of both sessions. Every question has a timestamp that opens the video at that moment.
My five takeaways
- At his last Berkshire meeting, Munger went after one of the most common rules in investing. “I think one of the inane things taught in modern university education is that vast diversification is absolutely mandatory in investing in common stocks. That is an insane idea.”
- Buffett drew a clear line through the 2023 banking crisis. “Depositors will not lose money. Stockholders and debt holders of the holding company, they should lose money.”
- Higher rates turned Berkshire’s cash into real income. Not long before, Buffett said, about $125 billion in short-term investments earned four basis points, or $50 million a year. In the afternoon he said “It isn’t killing us to hold $130 billion of bills at 5% plus bond equivalent yields.”
- He sold Taiwan Semiconductor over its location, not its quality. He called it one of the best managed companies in the world, then said “I feel better about the capital that we’ve got deployed in Japan than in Taiwan.”
- On succession, Buffett said he had no second choice to Greg Abel. “I’ve also seen Greg in action, and I feel 100% comfortable.”
The transcript comes from CNBC Television’s recordings of the morning and afternoon sessions, embedded below. I cleaned up YouTube’s auto-captions: filler words and false starts out, everything else as spoken.
Full transcript
Morning session
Opening remarks
Warren Buffett: Excuse me. Good morning. Good morning, and thanks for coming. I love it. Charlie loves it. We’re glad to have you here. We’re going to make this preliminary before the questions very short, because we want to get in at least 60 questions, half divided by the audience outside this arena and a half from you. So I would just like to get right to the directors and the earnings that have been put up on our web page this morning, but we’ll cover those very fast and we’ll get to the questions.
Introducing Charlie Munger, Greg Abel and Ajit Jain (0:49)
Now, when I woke up this morning, I realized that we had a competitive broadcast going out somewhere in the UK, and they were celebrating a King Charles, and we’ve got our own King Charles here today. And next to him we have Greg Abel, who’s in charge of all the operations except for insurance. Next, and actually, great, we have a man I ran into in 1986 and has made us look good ever since. We have the man in charge of insurance, Ajit Jain.
Introducing the directors (2:12)
And now we have our directors here in front, and if they would just stand briefly, and then I’ll go on to the next one. And they’re all here today. First of all, doing alphabetically, there’s Howard Buffett, there’s Susie Buffett, there’s Steve Burke, Ken Chenault, Chris Davis, Sue Decker, Charlotte Guyman, Tom Murphy Jr., Ron Olson, Wally Weitz and Meryl Witmer. That’s as good as you can get.
Thanks to Melissa Shapiro (3:26)
And there’s one other person I would like to mention before we get on to the earnings that were put on in the press release this morning, and that’s, well, let’s see who we have there. We’ve got, this is hard to believe, can you imagine a name, Melissa Shapiro Shapiro. And she was Melissa Shapiro until she married another Shapiro, and she put this whole thing together with no help from me, no help from Charlie, and a lot of help from the people of the other room. Melissa. Yeah, it’s very easy. If you can remember her second name, you can remember her third name. So Melissa Shapiro Shapiro.
First-quarter operating earnings (4:17)
And with that I would like to next move on to the earnings, in a couple small slides that explain what we’re all about, and then we’re going to get to the Q&A. And the slide is up behind me. Yeah, there it is. We reported in the first quarter operating earnings a little over $8 billion. And when we talk about operating earnings, we’re basically referring to the earnings of Berkshire Hathaway as generally, well, as required under GAAP, excluding, however, capital gains, both realized and unrealized. There’s a few other very minor items, but basically we expect to make capital gains over time.
Why would we own the stocks otherwise? It doesn’t always work out, but overall it works out pretty well over time. But in any day, any quarter, any year, even occasionally over a five-year period, the stock prices move around capriciously. Now, we own a lot of other businesses. We consider those stocks businesses. We own a lot of other businesses where they get them consolidated, and they don’t move around in value. Now, if we had a little bit of Burlington stock outstanding, if we had a little bit of the energy stock trading, those stocks would move around a lot, but the businesses are what count. So the operating earnings, as you’ll see, in the first quarter came in at about $8 billion.
A slower year after an extraordinary period (6:02)
And I would say that in the general economy, the feedback we get is that, I would say, perhaps the majority of our businesses will actually report lower earnings this year than last year. In various degrees, in the last six months or so, at various times, the businesses have left the incredible period, which is about as extraordinary as I’ve seen in business since World War II, where the government would pour out a lot of money to people who couldn’t get goods. It was more extreme in World War II, but this was extreme this time. And it was just a question of getting goods to deliver, and people bought and they didn’t wait for sales, and if you couldn’t sell them one thing, they would put another thing in their backlog.
It was an extraordinary period, and that period has ended. It hasn’t ended with, as you know, it isn’t that employment’s fallen off a cliff or anything in the least, but it is a different climate than it was six months ago. And a number of our managers were surprised. Some of them had too much inventory on order, and then all of a sudden it got delivered, and people weren’t in the same frame of mind as earlier, and now we’ll start having sales at places where we didn’t need to have sales before.
Why investment income and insurance should rise (7:44)
But despite the fact that this year, I think, in general will be slower than last year, we actually are situated so that I would expect, and believe me when I say expect, nothing is sure tomorrow, nothing sure next year, and nothing is ever sure either in markets or in business forecasts or anything else. And we don’t pay much attention to markets or forecasts unless the market’s offering something interesting to do. But nevertheless, we are positioned in two respects, as you’ll see from this first report.
Our investment income is going to be a lot larger this year than last year, and that’s built in. I mean, we have, as you’ll see in a minute, we’ve had $125 billion or so in very short-term investments. And believe it or not, not that long ago we were getting four basis points, which is next to nothing, on that $125 billion, which means we were getting $50 million a year.
And now the same money, the other day, just day before yesterday, we actually bought, because of some funny twist in the market, because of doubts about the deficit ceiling or the debt ceiling, we bought $3 billion of bills at the 5.90. That’s 5.9, is it 5.92, bond equivalent yield. So we will have, what produced us not that long ago, on a 12-month basis, was producing $50 million here, producing something in the area of $5 billion here. So we’re in a position where the investment income is essentially, well, it is certain to increase quite a bit.
And insurance underwriting is not, it does not correlate with business activity. It depends on things like hurricanes and earthquakes and other events. So on a prospective basis, on a probability basis, we’re likely to have a better year this year in insurance underwriting than we had last year. It just isn’t affected by what you might call the business cycle, or what applies to generally an industry, retailing, you name it. So I would expect, and one massive earthquake or one hurricane that came into just the wrong place can affect that prediction, but on a probabilistic basis our insurance looks better this year. So if you get two of the elements there, of our main elements of earnings, that look like they will swing in our direction, I would expect, but I can’t promise, that our operating earnings will be greater than last year.
Operating earnings since the pandemic (11:10)
And if we’ll move to the second slide, I give you those operating earnings figures just to give you an overview of what has happened since the pandemic started, and off of the year before as a base. And we retain all our earnings, as you know. So if we’re retaining $30 or $35 billion or whatever it may be a year, you should expect more operating earnings over time. I mean, this number should be significantly higher five or 10 or 15 years from now, because we have the advantage of retaining earnings.
And that’s what got us to these figures, because they were essentially nothing when we started, and they got there by retaining earnings, and we’ll keep retaining earnings. So it’s no great triumph if these numbers move up. And what we hope is that they move up at a reasonable rate. Historically, they moved up at an unreasonable rate sometimes, but we were working with much smaller sums then, and that can’t be repeated with our present capital base, because I note there, I believe it’s on this slide, let’s take a look.
GAAP net worth of $504 billion (12:30)
Now that’ll be, see, it’s on the next, the next slide. We showed that we had on March 31st now 500 and, was it, $504 billion of GAAP net worth. Now, what might surprise you is that there’s no other company in the United States, no other company, that has a number that is that large. Now, that isn’t because we’ve got the most valuable company in the United States. Other companies have used their money to repurchase shares, that they could have accumulated $504 billion in GAAP. But basically we have more under GAAP accounting now than any other company in the US. And of course, if you measure return on equity, that becomes a very big number to increase at a rapid rate, but we hope to do so, not a rapid rate, additional rate.
Insurance float of $165 billion (13:45)
And right below that you see something called float. And float is money that is left in our hands, somewhat akin, but very importantly different, to a bank deposit. But you have to pay interest to get a bank deposit, you have to pay more interest these days, and you have to run a bank and do a lot of things. And basically this is money that represents unpaid losses at this time. You get paid in advance in insurance, so what shows up as a net liability on our balance sheet gives us funds to exercise with an amount of discretion that no other insurance company that I know of in the world enjoys, just because we have so much net worth.
And our float now comes to $165 billion, and the man sitting on the far left is responsible for moving that number up from a pittance in 1986 to this incredible figure, which in most years, practically all years, hasn’t cost us anything. So it’s like having a bank with no employees, no interest and no ability to withdraw the money in a hurry that we have working for us, and it’s a very valuable asset that shows up as a liability. And Ajit is responsible for building up this treasure, which has been done by outcompeting insurance companies all over the world. And then now a number of our insurance companies in turn are run by talented managers who contributed one way or another, start with GEICO, the beginning of my career.
And that float, if you think about it, just think of a balance sheet. You’ve got liabilities here and you’ve got assets over here, and the liability side finances the asset side. It’s very simple. And stockholders’ equity finances it, long-term debt finances, and so on. But stockholders’ equity is very expensive in a real sense. Long-term debt has been cheap for a while, but it can get expensive, and it can also become due eventually, and it may not be available. But float is another item that shows as a liability but hasn’t cost us anything, and it can’t disappear in a hurry, and it finances the asset side in the same way as stockholders’ equity. And nobody else thinks of it much that way, but we’ve always thought of it that way, and it’s built up over time.
Cash and Treasury bills in April (16:59)
So I show at the bottom what’s happened with cash and Treasury bills through March 31st, and I will tell you that in the month of April we probably added about $7 billion to that factor. Now, part of that is because we didn’t buy as much stock, because that reduces cash and Treasury bills. We bought about $400 million worth of stock in the month of April. That’s a minus in terms of cash available. We, however, sold net some stock, which produced maybe $4 billion. And of course we had operating earnings, probably $2.5 billion or something in that area. And my guess is we probably increased our cash and Treasury bills $6 or $7 billion in the month. And I just want to give you a feel for other cash flows at Berkshire.
Falling share count and retained earnings (18:03)
And then if we move to the final, I think it’s the final one, next to the last one. No, I think it is the last. Let’s see, it’s the fourth. Yeah, this is, we should have the one of the class A equivalent shares outstanding. And you’ll notice that every year the number of our shares go down. So if we own more businesses and the businesses make more money, your share as shareholders, as owners of Berkshire, increases every year without you laying out any money. Now, you’re laying out the alternative, which you could receive in dividends, but the reason we’ve gotten to where we are is because we kept the money.
We did pay a dividend in 1967, 10 cents a share. It was a terrible mistake, and I always tell people that I was in the men’s room and the directors voted it while I was gone, but that isn’t true. I was there, I confess. But we reinvested, and it has produced the $500 billion of shareholders’ equity and the $30 billion plus of operating earnings, and we’ll continue to follow that policy because it makes a great deal of sense. And with that, I think we’ve taken care of the preliminaries. You can study that. The 10-Q is on the web page, and if you have a week or two vacation, you could spend it reading the 10-Q. But that is the essence of Berkshire.
Questions and answers
And with that, I will start with Becky Quick, and we will alternate between Becky and the audience. And her questions have come in from all over the country, and I believe you identified the sender, and go to it, Becky.
Silicon Valley Bank and uninsured deposits (20:06)
Becky Quick: Thanks, Warren. The first question comes in from Randy Jeffs in Irvine, California, and his question is, if Silicon Valley Bank’s deposits had not been fully covered, what do you think the economic consequences would have been to the nation?
Warren Buffett: Well, I’d just simply say it would have been catastrophic, and that’s why they were covered. And even though the FDIC limit is $250,000, that’s the way the statute reads, but that is not the way the US is going to behave, any more than they’re going to let the debt ceiling cause the world to go into turmoil. And they, well, they’re just, I can’t imagine anybody in the administration and the Congress and the Federal Reserve, whatever it may have been, FDIC, I can’t imagine anybody saying, I’d like to be the one on television tomorrow and explain the American public why we’re keeping only $250,000 insured, and we’re going to start a run on every bank in the country and disrupt the world financial system. So I think it was inevitable. Charlie, do you have any?
Charlie Munger: No, I have nothing to add.
Warren Buffett: Okay. Well, incidentally, I should mention this now. Ajit and Greg will be here in the morning session, which ends at noon, and so if you’ve got questions to direct to them, the time to do it is in the first half of the show, and then after lunch it’ll just, Charlie and I will be back.
Avoiding emotional investment decisions (21:58)
Okay, area one.
Audience Member (Station 1): Hi, Nirav Patel, Haverhill, Massachusetts. Mr. Buffett, Mr. Munger, it seems like you found the sweet spot between being too conservative and too aggressive as investors. Do you ever make bad investment decisions because of your emotions, and what do you do to try to keep that from happening?
Warren Buffett: Well, we make bad investment decisions plenty of times. I make more than Charlie because, I like to think it’s because I make more decisions, but my batting average is worse. But I can’t recall any time in the history of Berkshire that we made an emotional decision. I know the movie had Jamie Lee in there, but that was for laughs. I mean, Jamie Lee, she’s good, but she’s not good enough to get me or Charlie to make an emotional decision. Charlie, I’m sure you have something to add on that.
Charlie Munger: Well, it’s a different movie than it is shown in the most corporate meetings.
Warren Buffett: But have we ever made an emotional decision?
Charlie Munger: No.
Warren Buffett: No, that’s in business we’re talking about.
Charlie Munger: Yeah, yeah. No, you don’t want to be a no-emotion person in all of your life, but you definitely want to be a no-emotion person of making an investment or business decision.
Warren Buffett: You can argue that, with it, we probably, I would say that we’ve made an emotional decision perhaps when a manager has been with us for some period and we’ve ignored the fact that perhaps they weren’t quite what they were earlier. But our businesses are so good that they’ve run better sometimes. When, you know, I’ve talked about Wesco, for example, the wonderful Louis Vincenti, it ran on automatic pilot for a while, but I don’t think we suffered by it. But you’re going to argue that if Charlie and I hadn’t liked Louie as much as we did, we might have spotted a little bit early, but I don’t think it made any difference in the results. Would you agree with that, Charlie?
Charlie Munger: Yeah, yeah, you’d be totally with it. And I’m glad we behaved the way we did at Wesco. By the way, we bought the thing for a few tens of millions and it became worth $2 or $3 billion.
Warren Buffett: Yeah, that wasn’t common in the savings and loan businesses, you may have noticed.
Charlie Munger: And they really went crazy in that industry, and we had a wonderful guy in Louis, and we didn’t go crazy.
Warren Buffett: Yeah, we didn’t go crazy. Okay, Becky.
GEICO telematics and BNSF scheduled railroading (25:33)
Becky Quick: This question comes from Ben Knoll in Minneapolis. He says he’s a Berkshire shareholder of three decades and he’s attended many Berkshire meetings. He’s here again this year, and this is addressed to Ajit and Greg. He says, last year I asked you about how GEICO and BNSF appeared to lose ground to their leading competitors, GEICO on telematics and BNSF on precision scheduled railroading. Ajit, you responded by saying how you expected GEICO to make progress in a year or two. Greg, you spoke about your pride in BNSF, but you didn’t directly address the threat of precision scheduled railroading. Will each of you please provide perspective on these competitive challenges and our company’s strategies to address them?
Ajit Jain: In terms of GEICO and telematics, let me make the observation that GEICO has certainly taken the ball by the horns and has made rapid strides in terms of trying to bridge the gap in terms of telematics and its competitors.
They have now reached a point where on all new business, close to 90% has a telematics input to the pricing decision. Unfortunately, less than half of that is being taken up by the policyholders. The other point I want to make is, even though we have made improvements in terms of bridging the gap on telematics, we still haven’t started to realize the true benefit, and the real culprit, or the bottleneck, is technology. GEICO’s technology needs a lot more work than I thought it did. It has more than 500, actually more than 600 legacy systems that don’t really talk to each other, and we are trying to compress them to no more than 15, 16 systems that all talk to each other.
That’s a monumental challenge, and because of that, even though we have made improvements in telematics, we still have a long way to go because of technology. Because of that, and because of the whole issue more broadly in terms of matching rate to risk, GEICO is still work in progress. I don’t know if any of you had a chance to look at the first quarter results, but GEICO has had a very good first quarter, coming in at a combined ratio of 93 and change, which means a margin of six and change.
Even though that’s very good, it’s not something we can take to the bank, because there are two unusual items that contributed to it. Firstly, we’ve had what is called prior year reserve releases. We’ve reduced results for the previous years, and that contributed to it. And secondly, every year the first quarter tends to be a seasonally good quarter for auto insurance writers. So if you adjust for those two factors, my guess is the end of the year GEICO will end up with a combined ratio just south of 100, as opposed to the target they’re shooting for, 96.
I hope they reach the target of 96 by the end of next year. But instead of getting too excited about it, I think it’s important to realize that even if we reach 96, it will come at the expense of having lost policyholders. There is a trade-off between profitability and growth, and clearly we’re going to emphasize profitability and not growth, and that will come at the expense of policyholders. So it will not be until two years from now that we’ll be back on track, fighting the battles on both the profitability and the growth front. Okay.
Greg Abel: Yep, moving to BNSF. I’ll start again by expressing great pride in the BNSF team. We have an exceptional group, led by Katie and her managers, that show up every day to do great work on the railroad. At the same time, they would be the first to acknowledge there’s more to be done there. The specific reference to precision scheduled railroading, the other large railroads, Class I, the railroads in the US, follow that, including the two in Canada. We’re well aware of what they’re doing and obviously pay close attention to their operating metrics, and our team strives every day to be more efficient. Obviously, I would say we balance it with the needs of our customers.
If I look back to pre-2022, so we look at the three-year period of 2019, 2020, 2021, the BNSF team made significant progress on their efficiencies and delivering overall value back to the shareholders and to their customers, and at the same time maintaining a very safe railroad for our employees. So we’re making excellent progress. That didn’t stop. Last year they made great progress again.
The reality in 2022 is we did go through a period of time where we had to, call it, reset the railroad. We came out of the pandemic, there were the supply challenges, we had certain other issues, labor issues and other things going on at the port. And the reality is our team prioritized getting the railroad back in place for the long term, not a short-term focus on hitting certain operating metrics in 2022. We’re well aware of where we were relative to those metrics, but the real focus was to get the railroad reset in a safe manner, such that we could deliver long-term value and long-term service to our customers.
And that’s really what we’ll continue to see with that team. There’ll be continual progress. There’ll be years where it’s not as quick, or even we go backwards, but over the long term we’ll see exceptional results from that team, and couldn’t be more proud that we have that asset. Thank you.
Warren Buffett: I would just, well, he deserves, but both of them deserve applause. I would like to add one thing. At GEICO, Todd Combs was Ajit’s choice, my choice, to go to GEICO to work on the problem of matching rate to risk, which is what insurance is all about. And he arrived with exquisite timing, right before the pandemic broke out and all kinds of things changed. But Todd is doing a wonderful job at GEICO, and he works closely with Ajit, because he saw his home and all Mulligan comes back here, and we get together on the weekend sometimes too. So that’s been a remarkable accomplishment under difficult circumstances, and he’s not all the way home, but he’s just made a very, very big change in multiple ways at GEICO.
And then one other thing I would like to mention. There have been a lot of public companies created in the last decade or thereabouts in insurance, and there’s none of them that we would like to own. And they always started out in their prospectus saying this is a tech company, not an insurance company. Of course they’re a tech company. Everybody, whether they’re in insurance or a lot of other places, are using the facility, but you still have to properly match rate to risk. And they invariably have reported huge losses. They’ve eaten up capital.
But there’s been one company that nobody has generally heard of. There’s only been one that I know of, a company started in the last 10 years, that has been an overwhelming success, and that’s a company that Ajit and four people who joined with him set to develop a new business. It’s called Berkshire Hathaway Specialty. It now has, what’s the float, Ajit, coming up to $12 billion? Yeah. We’ve built more float than probably all these companies combined. It’s cost us essentially nothing in terms of an underwriting loss. The four people have turned into, I don’t know, 1,500 around the world.
We took on the whole industry, and we brought some unique talent, and the four people that came now have, like you said, 1,500 or so worldwide. And we brought capital, and we brought capabilities that really only Berkshire could supply. So it was the combination of brains and talent and energy and money. And no one has really successfully entered this space. Plenty of people in the space didn’t like us coming, and we did it without it costing us a dime of entry. And it’s been unmatched by any of the public companies that went public, and people who’ve seen us do it, but they can’t duplicate it. And that’s what Ajit’s created, and Peter Eastwood has led this group, Berkshire Hathaway Specialty, and it’s just remarkable. So anyway, with that, let’s go on. We’ll give him a hand for that.
Charlie Munger on AI and robotics (35:46)
Warren Buffett: Okay, let’s go to station 2.
Audience Member (Station 2): Hi Charlie. I’m Lorenz, I’m Karen here.
Warren Buffett: Your priorities are right.
Audience Member (Station 2): Yes. I have questions on AI and robotics. Here’s my question. As AI and robotics continue to advance, what do you believe will be the positive and negative impact of this technology on both the stock markets and society as a whole? And are there any specific industrials and companies that you believe will be most impacted?
Warren Buffett: Karen, I thank you for asking Charlie that question.
Charlie Munger: Well, if you went into BYD’s factories in China, you would see robotics going in at an unbelievable rate. So we’re going to see a lot more robotics in the world. I am personally skeptical of some of the hype that has gone into artificial intelligence. I think old-fashioned intelligence works pretty well.
Warren Buffett: There won’t be anything in AI that replaces Ajit. I’ll state that unqualifiedly. They can do amazing things. Bill Gates brought me out the latest, maybe not the latest version, but one he thought maybe I could handle. He has to be careful with me in terms of leading me too fast. And it did these remarkable things. But it couldn’t tell jokes. Bill told me that ahead of time, and it prepared me, and it just isn’t there. But things like checking all the legal opinions since the beginning of time and everything, and eliminating all the sided. I mean, it can do all kinds of things, and when something can do all kinds of things, I get a little bit worried, because I know we won’t be able to uninvent it.
And we did invent, for very, very good reason, the atom bomb in World War II, and it was enormously important that we did so. But is it good for the next 200 years of the world that the ability to do so has been unleashed? We didn’t have a choice. But when you start something. Well, Einstein said after, this has changed everything in the world except how men think. And I would say the same thing, maybe not the same thing, I don’t mean that, but with AI, it can change everything in the world except how men think and behave. And that’s a big step to take. It’s a good question, and it’s the best answer we can give. Becky?
Commercial real estate and bank loans (39:40)
Becky Quick: This question comes from Tom Seymour. He says, the first sentence of a recent Financial Times article read, Charlie Munger has warned of a brewing storm in the US commercial property market, with American banks full of what he said were bad loans as property prices fall. Please elaborate on what’s going on in commercial real estate. How bad will the losses be, and what sectors or geographies look particularly bad? I’ll just add an addendum from another viewer who wrote in and wanted to know if Berkshire would be more active in commercial real estate as a result.
Charlie Munger: Okay. Well, Berkshire’s never been very important, very active in commercial real estate. It works better for taxable investors than it does for corporations taxed the way Berkshire is. So I don’t anticipate huge effects on Berkshire. But I do think that the hollowing out of the downtowns in the United States and elsewhere in the world is going to be quite significant and quite unpleasant. I think the country will get through it all right, but as they say, it will often involve a different set of owners.
Warren Buffett: Yeah, in the buildings. The buildings don’t go away, but the owners do. Well, but most people like to buy with non-recourse in real estate. And one time I asked Charlie, there was some real estate guy we were talking to, and how do they decide how much a building like this is worth? And the answer is, it’s whatever they can borrow without signing their name. And if you look at real estate generally, you’ll understand the phenomena that’s happening if you remind yourself that that’s the attitude of most people that have become big in the real estate business.
And it does mean that the lenders are the ones that got the property, and of course they don’t want the property usually. So then the real estate operator comes on negotiating with them, and the banks tend to extend and pretend, and there’s all kinds of activities that arise out of commercial real estate development, which occurs on a big, big scale. But it all has consequences, and I think we’re about, well, we are starting to see the consequences of people who could borrow at 2.5% find out it doesn’t work at current rates, and they hand it back to somebody that gave them all the money they needed to build it. Charlie’s had more experience than, really, Charlie got it started in real estate, though. I mean, Charlie?
Charlie Munger: Yes, it’s difficult. I like what we do better.
Warren Buffett: Well, as Charlie once said to me when I was leaving his house a few months ago. I was visiting him, we talked for a couple of hours, and I said to Charlie as I left, it wasn’t anybody else in the house, except one daughter, and I said, Charlie, hello, I’ll just keep doing what we’ve been doing. And Charlie said, without looking up or pausing a second, he said, that’s all you know how to do, Warren. Yeah, he was right too.
The future of value investing (43:14)
Warren Buffett: Station 3, is it?
Audience Member (Station 3): Hi, my name is Salazi. I’m from Santa Clara, California, and my question is to Charlie and Warren. Given the rise of disruptive technologies that can improve productivity significantly, and AI being one of them, how do you envision the future of value investing in this new era? And what adaptations or new principles do you think investors should adopt, and any recommendations for investors to remain successful in this rapidly changing landscape? Thank you.
Warren Buffett: Take that one.
Charlie Munger: I think value investors are going to have a harder time now that there’s so many of them competing for a diminished bunch of opportunities. So my advice to value investors is to get used to making less.
Warren Buffett: Charlie has been telling me the same thing the whole time we’ve known each other. We get along wonderfully because we are making less. Yeah, well, but that mostly, I think, is because it’s larger. We were younger, we never thought we could manage $508 billion, no, one or five. But I would argue that there’s going to be plenty of opportunities, and part of the reason there are going to be plenty of opportunities, the tech doesn’t make any difference or any of that.
I mean, if you look at how the world changed in the years since 1942, when I started, to say, well, how do, the kid that doesn’t know anything about airplanes, doesn’t know anything about androgens and cars, and doesn’t know anything about electricity and all that. But that really isn’t the, that’s not there. The world changing, or new things coming along, don’t take away the opportunities. What gives you opportunities is other people doing dumb things.
And I would say that, well, the 58 years we’ve been running Berkshire, I would say there’s been a great increase in the number of people doing dumb things, and they do big dumb things. And the reason they do it, to some extent, is because they can get money from other people so much easier than when we started. So you could start 10 or 15 dumb insurance companies in the last 10 years, and you could become rich if you were adroit at it, whether the business succeeded or not, and the underwriters got paid and the lawyers got paid. And that creates, if that’s not on a large scale, which it couldn’t be done, what, 58 years ago. You couldn’t get the money to do some of the dumb things that we wanted to do, fortunately.
And so I think that investing has disappeared so much from this huge capitalistic market that anybody can play in, but the big money is in selling other people ideas that isn’t outperforming, in outperforming. And I think if you don’t run too much money, which we do, but if you’re running small amounts of money, I think the opportunities will be greater. But then Charlie and I have always differed on this subject. He likes to tell me how gloomy the world is, and I like to tell him we’ll find something, and so far we’ve both been kind of right on that, or not.
Charlie Munger: There is so much money now in the hands of so many smart people, all trying to outsmart one another and outpromote one another, getting more money out of other people, and it’s a radically different world from the world we started in. I suppose it will have its opportunities, but it’s also going to have some unpleasant episodes.
Warren Buffett: But they’re trying to outsmart each other in arenas you don’t have to play. I mean, if you look at that government bond market, the Treasury bill market, I mean, you’ve got this one bill that’s out of line with the others, when we were over $3 billion of us the other day. But those are people, the world is overwhelmingly short-term focused. And if you go to an investor relations call, they’re all trying to figure out how to fill out their spreadsheet to show the earnings for the year, and the management is interested in feeding them expectations that will slightly be beaten.
I mean, that is the world made to order for anybody that’s trying to think about what you do that should work over five or 10 or 20 years. I just think that I would love to be born today and go out with not too much money and hopefully turn it into a lot of money. And Charlie would too, actually. He would find something to do, I will just guarantee you, and it wouldn’t be exactly the same as before, but he would have a big, big, big pile.
Charlie Munger: I would not like the thrill of losing my big pile into a small pile. But we like, my big pile is the way it is.
Warren Buffett: Well, I like, we agree on that, incidentally.
Charlie Munger: Okay, we do.
Warren Buffett: You’re one of the most extreme lovers of the big pile. Becky?
The AIG retroactive reinsurance deal (49:34)
Becky Quick: This question is for both Warren and Ajit. It comes from Jason Ploner in Livingston, New Jersey. He says, in 2016 you entered into a very unique transaction with AIG, where you assumed up to $20 billion of liabilities in exchange for about $10 billion up front. Can you please provide us with an update on this transaction in light of the increase in interest rates? And then, in Tokyo just a few weeks ago, you talked about the risks of banks with assets that were susceptible to rising interest rates. Any insight as to how Berkshire’s liabilities are susceptible to duration would be appreciated.
Warren Buffett: Is that directed to Ajit or me, or what? Both? Okay. Let me introduce my one thing, and, well, but Ajit is the key to this. He’s the one that put the deal together. But we got handed $10 billion, we’ll say, but we weren’t restricted to putting that into bonds. So the exact interest rate, interest rates affect us to some degree, maybe in terms of the terms of the deal we did with AIG, or anybody we would do a similar deal with like that. But we don’t have to put it in matching bonds or anything of the sort. It goes into a general pool of assets which we manage, and the assets then, well, the liquid assets now are $130 billion plus. But it goes in, so it is not set aside in some little compartment like people like to think.
Now, no other insurance company could do it, but they can’t think that way. They aren’t even used to thinking that way, but they can’t think that way because they don’t have our balance sheet. We account for 26 or something like that of the net worth of all property casualty companies in the United States. So far, the payments that we have had to make have run modestly, and Ajit will correct me on this if I’m wrong, because he paid a lot of attention. The amount we have had to pay has run slightly below the amount we anticipated having to pay in terms of our share of the losses.
But it served AIG’s purposes. It came to us where we are in a unique position. There’s nobody else that was able to write that. Just like when we took on Lloyd’s. I mean, Lloyd’s said there was no choice other than Berkshire Hathaway, when they essentially resuscitated their market by laying off a lot of liabilities on Berkshire Hathaway. So we won’t see those deals very often. If they’re for $500 million or something like that, somebody else will go in there and offer more money, and everybody’s looking for money in Wall Street. But if they start talking with a deal like the AIG deal, there isn’t any other stop now. Correct me on all my numbers there, Ajit.
Ajit Jain: No. One way to look at how the deal is performing since we did the deal is, at the point in time when we did the deal, we had made certain projections of how much we will pay out each year. And what we do is monitor what the actual payments are since the inception of the deal, and how does that compare with what we expected to pay out. As Warren mentioned, these two numbers are very close to each other. More specifically, the actual payouts are 96% of what we had projected to pay out at this point in time, which is good but not great. We are still ahead of the curve.
If we do end up paying out less than what we projected, not only would we have borrowed money at a very attractive rate, meaning less than 4%, significantly less than 4%, in addition to that we would have made a fee, which in 2015 dollars would be a million dollars. So if you would have borrowed money at less than 4%, and we would have made a million dollar fee, which is slightly more than what we were expecting to do. So net net, we’re very happy with the deal. We’re happy we did it, but the game is not over. The tort liabilities are coming down the pike every second day, so I’m cautiously optimistic that the deal will work out better than what we expected it to work out.
Warren Buffett: Well, the really interesting thing is that within Berkshire, the casualty insurance companies have four times as much stockholder capital behind each dollar of premium volume. Four times normal. And of course we see the big deals. Who would you trust if you had a big liability you wanted to dump on somebody? And we have $25 billion or more coming in from things other than insurance, uncorrelated to insurance, every year, with no obligations. We don’t pay dividends. If you paid dividends and you cut your dividend, try going around trying to write insurance the next day. I mean, it’s a business where the people are counting on you to pay.
And when we take that $10 billion, we don’t agree to put it in five-year bonds and 10-year bonds. We don’t even think that way. And the people who do business with us know that they have somebody like nobody else, and it’s going to be able to pay $10 billion no matter what happens to the economy. So it’s not only the presence of enormous strength in the insurance companies, it’s the fact we’ve got all these earnings that essentially come in every month, and we don’t have a lot of debt. I mean, we have debt at the railroad and the energy level, but in terms of the rest of the operation, and we don’t guarantee that, but it’s probably good.
And there just isn’t another Berkshire, and Ajit recognizes that when he’s negotiating. So does the other party, if sums are big enough. There’s all kinds of people that love to get $500 million or $300 million, and they can, they may think in terms of lending it out, because that’s what their insurance companies can do, at a somewhat higher rate. But that is not a game we play in, and we don’t have any interest in playing in them.
Preparing heirs to run a family business (56:22)
Warren Buffett: Okay, station 4.
Audience Member (Station 4): Hello, I’m Marvin Blum, an estate planning lawyer from Fort Worth, Texas, home to many of your companies.
In fact, Warren, I met you at the memorial for our beloved Paul Andrews, who was manager of TTI. I’d like to get your thoughts on a widespread problem in the world of estate planning, and that’s the failure of most parents to prepare the next generation for the inheritance coming their way, in particular if the estate includes a family business. Most parents fail to do business succession planning, to plan for who will run the business on the day when, not if, the founder is no longer there to run it.
The kids aren’t prepared, unlike King Charles, the other King Charles, not King Charlie Munger, who has been preparing for his job as king of England now for more than 70 years. I sometimes describe the situation like this. Picture a football game. At one end of the field is a quarterback. He has great skills. He throws a beautiful pass to the other end of the field, and at the other end of the field are the receivers. They’ve never been to a practice. They don’t know the rules of the game.
They don’t know how to work together as a team. They’re clueless. So the quarterback is the patriarch and the matriarch, the football is the inheritance or the family business, and the receivers are the kids. That they’re going to catch the football and go score a touchdown, probably only around 10%.
Warren Buffett: I’ve got the picture on the question. I probably observed as many, just because of my age and to some extent because of things like the Giving Pledge, I probably observed as many particularly wealthy families, the problems, and they all are, they get very particular to the family. And in my family, I do not sign a will until my three children have read it, understand it and made suggestions. Now, my children are in their 60s, and that would not have been a great success if I’d done the same thing in their 20s.
It depends on the family, it depends on how the kids feel about each other, there’s all kinds of things. It depends on the kind of business you have. So there’s a thousand variables, but I do think that if the children are grown and, when the will is read to them, it’s the first they’ve heard about what the deceased thought about things, the parents have made a terrible mistake. And people, well, I’ve run into all kinds of situations, and some people don’t tell their children anything, and some of them try and get them to bend to their will by using their own personal world. They make a million mistakes, and that’s when you don’t get to correct. And certainly in my, well, Charlie’s had a lot of experience too.
Charlie Munger: Well, at Berkshire we have a simple problem of estate planning. Just hold the goddamn stock.
Warren Buffett: Well, but that doesn’t fit everybody, Charlie. I mean, if it’s 95%, I don’t know necessarily whether we have billions of dollars, you want to leave it to all your children. I mean, that’s another question. But if you’re going to place it somewhere, I’d just as soon it’s Berkshire stock. Oh, you’re solving the investment problem, yeah, but you’ve got the personal problem of the fact that when they were four, one of the kids pulled the other kid’s cat’s tail or something like that.
I mean, you’re dealing with human beings, and the biggest thing you want is you want your children to get along, and you’ll want that all through your life. And the estate isn’t the only place where you can mess that up, but it’s a place where it’s very easy. I mean, I know a number of cases where the people did not know what was in the will, whether we’re using something’s involved, and within about 15 minutes each one of them had a lawyer, and they don’t get along since.
It’s important to handle it right, and it’s important, if you want your kids to have certain values, it’s important that you live those values. It’s important that you talk about it to them, or they’re going, they’re learning from you from the day they’re born what you’re really like. And don’t think that a cleverly drawn will will substitute for your own behavior in teaching your kids the values you hope that they will have. And then your will should be in conjunction with that. It should start expressing, and they grow older, and then they learn to pass along their values in connection with the size of the estate.
If there’s family farms, it’s one thing. If it’s a bunch of marketable securities, it’s something else. But I know in one instance a particularly rich fellow that once a year he’d get those kids together and have a dinner and do all kinds of things to get them to sign their income tax returns in blank, because he didn’t want them to know how much money they had and everything. Well, that isn’t going to work. I mean, I don’t know why necessarily real words with him, but if you want, you know, Charlie and I’ve said it, if you want to figure out how you want to live your life, write your obituary and reverse engineer it.
And Paul Andrews, incidentally, who you mentioned, at TTI, lived as great a life as anybody I’ve known. And he thought about these problems. He came to me, he was 61, I think, had all the money way beyond what he needed, didn’t care about it. He’d like to give it to people, he had all kinds of good things he wanted to do. And he said, for a year I’ve been worried about my business, TTI. And he said, I’ve got all the money I need, the family’s got all the money that I need, but what do I do with the business? These people have helped me throughout my life.
And he says, I could sell it to a competitor, and if I sold it to a competitor, they’d fire my people and keep their people when they put it together. And if I sell it to a private equity firm or somebody, they’ll be figuring their exit strategy as they sign the papers. And he said, so I’ve been thinking about it a year. And he said, it isn’t that you’re such a great guy. He says, it’s just you’re the only one left. And we bought it and we lived happily ever after. And that was a man that knew what life was about. So with that, let’s go on to Becky.
BNSF tribal land breach and derailments (1:04:25)
Becky Quick: This question comes from Don Glickstein in Seattle. He says, Warren has criticized Norfolk Southern’s handling of its train derailment, yet has been silent about BNSF’s conduct. A federal judge ruled in March that BNSF intentionally and illegally violated an easement agreement on tribal land in Washington state by transporting long trains of crude oil. The same month the judge made his ruling, a BNSF train derailed on tribal lands, spilling oil in an environmentally sensitive area.
What is Warren doing to ensure that BNSF and other Berkshire subsidiaries fulfill their ethical responsibilities? He says he’s been a Berkshire owner for more than two decades, and he’s concerned that Berkshire has no systems to identify and address what he calls reprehensible behavior at BNSF and other subsidiaries.
Warren Buffett: Greg?
Greg Abel: Sure. So it is a valid issue that our team obviously has been dealing with at BNSF. We did move crude across that tribal land. We had an agreement that allowed us to move X number of units per day, and we did breach it. We went over it. There were some fundamental breakdowns there, in that our team didn’t understand the number of trains that they could move. We have had significant discussions with the tribe looking to resolve the issue, recognizing we obviously benefited from moving those trains, and those types of discussions will continue.
I would say there’s lessons learned there, that we have to, when we make a commitment, understand what that commitment is and live by it, or don’t assume we can just move our trains as we wish, or the cargo as we wish. We have to respect those agreements. So there’s been a moment learned there, but at the same time we’ve taken it very seriously and attempted to reach a resolution there. And at some point I hope we do come to a true resolution that’s fair both to the tribe and to BNSF.
On the derailment side, we did have an issue around the track. It derailed. We worked very closely with the tribe to mitigate that issue instantly, or at least over a very reasonable period of time. They were very responsive, our team was very responsive, and there were really no long-term environmental impacts to that spill. And as our teams highlighted in other comments, obviously derailments do occur in the industry. We take them incredibly seriously. They’re not all hazardous, but irrespective of that, we’re constantly looking at how do we prevent them, how do we detect them when we potentially have one that’s going to occur, and what do we do with our trains.
And then ultimately it comes down to responding properly, because they will occur. And I think we have an incredibly dedicated team that’s always ready to respond to the communities they’re impacting.
Warren Buffett: There are derailments. How many a year?
Greg Abel: Yeah, well, there’s a thousand plus in the industry.
Warren Buffett: Yeah, yeah. You start hauling, right, and we’re a common carrier, and we take very heavy freight, and we take it at 100 degrees when it’s the weather, and we take it at zero, and we go around curves, and we have grades. And even a 1% grade, if you’re going down a hill with I don’t know how much weight behind you. I mean, railroading is not an easy business. And of course the systems were designed basically in the late 1800s, and we have 22,000, I think it is, miles of track, and that doesn’t count sidings and some other things.
It is not an easy business. We’ll make mistakes. Our job, we’re not making a mistake because we have a derailment. We will have derailments 10 and 20 years or 30 years from now. I mean that. But we have to carry certain products we wish we didn’t have to carry. We’re a common carrier. Do we like carrying chlorine and ammonia and all? No, but they’re going to move from one place to another in this society, and we are a common carrier, and we load them if they select our railroad. But we are better than we used to be, but we’ve got a long way to go. Was that a fair enough statement?
Greg Abel: Absolutely.
Berkshire Hathaway Energy and the energy transition (1:09:12)
Warren Buffett: Yeah. Okay, station 5.
Audience Member (Station 5): Hi, Mr. Warren and Mr. Munger. My name is from China company. And first of all, I’m so excited and very honored to be here today. And my question is, with more and more people focusing on environmental protection and the government supporting the new energy industry as well, what are your thoughts on the continued development of new energy? How may the new energy firm achieve better development in future?
Warren Buffett: Yeah, well, Greg, I think, is the best one to answer that, because he, since we bought a company called MidAmerican, now called Berkshire Hathaway Energy, he’s been talking about it yearly, preparing reports, hoping that we can help solve a number of the problems. And we’ve probably spent more money than any utility, I would guess, in the United States.
Greg Abel: Absolutely.
Warren Buffett: And we’ve just scratched the surface, but it is not easy when you cross state lines. I mean, you’ve got different jurisdictions, and this country should be ahead of where it is in terms of transmission. And we have been the biggest factor in helping that. But why don’t you tell them a little bit about it?
Greg Abel: Sure. So there’s no question there’s an energy transformation going on around the globe. And as Warren touched on, in the US, and in some ways I would hope here in the US we’d at least have a clear plan across the nation as to how to approach that, but the reality is it is state by state, with some exceptions. So as a result, when you think of Berkshire Hathaway Energy, we own three US utilities there, and they’ll participate in multiple states, but they’re developing plans state by state and then trying to integrate them across the various states.
The opportunities are significant, because there is a transformation going on. We’ve outlined our goal on where we’re going relative to carbon at BHE, where they’ll, by 2030, reduce their carbon footprint by 50% relative to 2005. So that’s the Paris Accord and the standard they want to hold the utility industry, or the utility companies, to. And we’re well on that path, but to achieve it is a true journey.
I’ve often talked to Warren. When we bought PacifiCorp back in the mid-2000s, we immediately recognized to build a lot of renewable energy, like we’ve been doing in the Midwest in Iowa, but that was basically in a single state. Now PacifiCorp, we’re in six states. We started that back in the mid-2000s, and we laid out a great transmission plan: here’s how we’re going to build it, here’s how we’re going to effectuate it, and all the benefits for our customers over that period of time.
Here we are in 2023, and we have a little more than a third of that. At the time it was a $6 billion transmission project. Today we have a little more than a third of it built, and we’ve spent probably closer to $7 billion. And it’s the right outcome, it’s still a great outcome for our customers, but that transmission, as part of the transformation, you absolutely have to build it to move all that renewable energy. And that’s sort of the complexity Warren was highlighting. You can’t just wake up one day and solve this problem. You start with transmission and then you build the resources.
But at that same company, and if we look at what we’re doing across BHE and that energy transformation, we have $70 billion of known projects that are really required to properly serve our customers and achieve that type of energy transformation across those utilities, and that’s in the coming 10 years. So we have a team that’s absolutely up to the challenge. They’re delivering on their commitments, and it’s a very good business opportunity for each of our companies and for our shareholders, because as we deploy that capital, we obviously earn a return on equity on it.
But it will be a long journey. It’ll happen over an extended period of time, and the further you get out there, the more dependent upon the evolution of a variety of technologies that are progressing but not there yet.
Warren Buffett: So you’ve raised a question I want to just take an extra minute on, because it’s so important. And I don’t really know whether our form of government is ideal at all in terms of solving the problem you described. We have solved it one time, in World War II. We took a country that was semi-lumping along, and we found ourselves in a world war. And what we did in a world war is we brought a bunch of people to Washington at a dollar a year, whether it was Sidney Weinberg of Goldman Sachs, you just name him, and we gave them enormous power to reorient the resources of the United States to face the problem that they faced, which was to create a war machine.
And what they did was they found Henry Kaiser and told him to build ships, and they went to the Ford Motor Company and said, you build tanks and some airplanes. And they reordered the industrial enterprise of the United States in a way that was unbelievable, because they had the power of the federal government, and they had the ingenuity of American business, and they had the facilities of American business, and it led to a very successful outcome.
But can we do that in peacetime, where you’ve got 50 states and you have to get them to cooperate, and you don’t have anyone that you can, you can issue orders, but you can’t designate where the capital goes as the other end? And we try and do it with tax incentives and all that sort of thing, but we haven’t created the unity of purpose and the machinery that worked in World War II, where essentially everybody felt their one job was to win the war, and we figured out how to use our industrial capacity to, in effect, defeat the Axis powers.
And how do you recreate that with the present democratic system? I’m not sure I know the answer, but I sure know the problem. And I think that if you’ve got an emergency on your hand, I mean, you really need to re-engineer the energy system in the United States, I don’t think you can do it without something resembling the machinery, the urgency. Whatever, the capital is there, the people are there, the objective is obvious, and we just don’t seem to be able to do it in a peacetime where they’re used to following a given set of procedures. And China, you’ve got one country, and we’ve got 50 states, and we’ve got a whole different system of government. We should be up to the test, but so far it hasn’t worked. But thank you for the question. Becky?
Who stands behind Greg Abel and Ajit Jain (1:17:41)
Becky Quick: This question comes from Chris Freed in Philadelphia. He says, we know that Greg Abel and Ajit Jain are the next generation of Berkshire leaders. Who are currently behind Greg and Ajit in their respective roles?
Warren Buffett: Well, that will be the question that they give their, well, Greg will, barring some extraordinary circumstances, he’s going to succeed me, and then he will be sitting in a position where he needs his equivalent, or something close to the corner, because he’s better at many things than I’ve been. He will need a substitute. And when the question comes, we’ll know Ajit’s opinion on that, but Greg will probably be the one that will make the final decision. I mean, it says it was being his responsibility, and Ajit will give him his best advice, and I think the odds are very, very, very high that Greg would follow him.
But those are not easy questions. Everybody talks about the executive bench and all of that sort of thing, which is baloney. I mean, they don’t have that many people that can run the largest GAAP net worth company and all kinds of diverse businesses. But you don’t need five people either. You need a lot of good operating managers, and you need somebody at the top that allocates capital and makes sure that you’ve got the right operating managers.
And we’ve decided to design something where we separate the insurance and the rest of the business, and I think it’s a very good design. But we would not be smart, we wouldn’t wish to name that decision now about the two different areas of the business, because a lot can change between now and then, and the most likely change is that this job changes. Charlie?
Charlie Munger: I’ve got nothing to add.
Warren Buffett: We have a lot of good people that have risen in the Berkshire subsidiaries. And there’s a reason why our operations have, by and large, done better than other big conglomerate companies, and one of them is that we change managers way less frequently than other people do, and that’s helped us. When Paul Andrews died, we know who he thought to take over there, but there wasn’t any reason to announce that. I mean, Paul Andrews, I wish he’d lived to be 100.
We had one of our managers die not long ago. How old was he, Charlie? Yeah, mid-90s, Seymour. Seymour, away from the scene. And Seymour, I wrote him a letter when he was 80, and I said, I’m glad you’re 80, and I’ll write you again when you’re 90. And I wrote him again when he was 90, and he didn’t make it to 100, but he had a terrific following him, and they really managed it jointly to some extent as the years went by. But it’s case by case, and the main thing to do is have the right person running the whole place.
What keeps America strong (1:21:36)
Warren Buffett: Okay, station 6.
Audience Member (Station 6): Good morning.
My name’s Hatch Okamoto. I’m from Miyazaki, Japan. Mr. Buffett, I was one of the 8,000 employees at Salomon Brothers that you saved. I was younger back then. I was working at 7 World Trade Center. I’ve always wanted to thank you in person for saving the company, its employees, including myself and my family. So thank you, Mr. Buffett.
Warren Buffett: Thank you. And thank Deryck Maughan, who actually had been over in Japan before that, and who I met for the first time the day before I put him in. And he turned out to, it wouldn’t have worked if Deryck hadn’t come. So whatever you taught him in Japan, thank you.
Audience Member (Station 6): Thank you, sir. Now, my question. Time to time, you have reminded us to not bet against America. What do you think are the most important things for the US to remain strong? And on the risk side, if the strength of the country is undermined, what could be the reasons?
Warren Buffett: But we’ve had a lot of tests. We’re such a young country. When you think about Japan and you think about the United States, it’s just incredible how new we are to the block. What are we, 234 years old since we started? That’s nothing. Charlie and I combined are two-thirds of, we look two-thirds of the life of the country. And it really has, we’ve been tested at 46 national elections, and we’ve made some bad choices, and we’ve had a Civil War.
So the country has had an enormous advantage, though, in some way, because we started with one half of 1% of the world’s population in 1790, and we now have something close to 25% of the world’s GDP. And it wasn’t because we had some incredible advantage in terms of the land. It was nice to have two oceans, oceans on each side, back when people tried to rule the world by ruling the waves. And we’ve had good neighbors in Canada and Mexico. But it’s a miracle.
And you say, how do we keep the good parts of the system while calling out our obvious defects? And we do it in a very herky-jerky manner, but net, the United States, it’s a better place to live than when I was born, by a huge factor. I just got a root canal a week ago, and I was just thinking, I don’t know who even invented Novocaine, but I’m for him. But in a million ways, you can romanticize about the past, but forget it. It is work.
But now we do have an atom bomb, and we wish, nuclear power, yeah, we wish the atom had never been split. But it has been, and you can’t put it back in the bottle. So the challenges are huge. Our government always looks, my dad was in Congress back in the 1940s, and it looked like a mess then. It was unified by the war to some degree, but it was still very partisan.
Now, the problem we have, I think, is that partisanship, it seems to me, has moved toward tribalism, and tribalism just doesn’t work as well. When it gets to tribalism, you don’t even hear the other side, and tribalism can lead to mobs. It flows. You’ve seen it all over, we’ve seen it to a degree here. So we have to refine in a certain way our democracy as we go along, and we deal with the world we live in. But if I still had a choice of any place to be born in the world, I’d want to be born in the United States, and I’d want to be born today. It is a better world than we’ve ever had.
And with present-day communications, we can also see much more how terrible it is in many ways, and it’s got problems. When I was born in 1930, there were two billion people in the world, and now there’s maybe 7.7 billion and growing. And we went millennia with really no change in population. And of course we’ve introduced energy in an incredible way into something where we now have 7.7 billion people using way more energy than they did when I was born, when there were two billion people. So it’s an exciting world, it’s a challenging world, and I don’t know the solutions on things.
I do think that we do need to think about different solutions in terms of how we get important problems solved, and that we don’t kid ourselves that something magic will happen, or that everybody will get together and we’ll all just cheer and they’ll go away by 2050 or anything. And how well we adapt to them, we will see. I would say so far it doesn’t look very promising, but then I’m sure that when Lincoln looks at it, what was going on in the Civil War didn’t look very promising either. So I think that the US is capable of doing remarkable things, and I think it wouldn’t surprise me if they do it again. Charlie?
Charlie Munger: Well, I’m slightly less optimistic than Warren. I think the best road ahead to human happiness is we expect less. I think it’s going to get tougher. And I think the solution of having a huge proportion of the young and brilliant people all go into wealth management is a crazy development in terms of its natural consequences for American civilization. We don’t need as many wealth managers as we have.
Warren Buffett: Charlie was born on January 1st, 1924, and you’d hate to go back to that, wouldn’t you, Charlie?
Charlie Munger: Yes, I would. And I like more wealth managers who were just merely reflecting the fact there’s more wealth, but I don’t like everybody going into wealth management at MIT or something. I think the world’s a little crazy now.
Warren Buffett: Take your choice.
Corporate raiders and Berkshire after Buffett (1:28:58)
Warren Buffett: Okay, Becky.
Becky Quick: Now, this question comes from Dennis DeGennaro. As Warren stated in the 2022 annual report, Berkshire will always hold a boatload of cash in US Treasury bills. It will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. After Warren passes away, his A shares will be converted into B shares and distributed to various foundations. These foundations will then sell the shares to fund their causes. Warren estimates it will take 12 to 15 years for all his shares to be sold.
I worry that a corporate raider like Carl Icahn or a group will buy up enough of these shares to take control of Berkshire and completely disregard Warren’s philosophy of holding a lot of cash in US Treasury bills, and instead be greedy, reckless and highly speculative and ruin Berkshire’s position as a rock-solid financial fortress. I also worry that changes might be made in how Berkshire subsidiaries are run. Do Warren and Charlie worry that these things could happen?
Warren Buffett: Well, I think it’s fair to say we think about it plenty, but I don’t worry enormously. It is true that Greg and the directors will have a honeymoon period for a long time, simply because of the votes it will still remain. But it’s true that eventually they will get judged based on how well our operation fares versus others. Now, if we don’t pay any dividends, in 12 or 15 years you’re talking $1.5 trillion, and it would take, to take over. And I think, if we can’t, that limits the group. They like to think about how much they can borrow against it. It doesn’t work when you, and some of these, there’s nobody to come close to doing it themselves.
And I think that the important thing is that Berkshire be regarded as a national asset rather than a national liability. We’ve got to be a plus to the country with our form of operation. And we certainly have got a record, which will then be 12 or 15 years longer, done with much more capital, more companies, more things will have happened, where our hundreds of billions can work its way into the economy in terms of lots of jobs, lots of products, lots of behavior, and it can be compared with other things. So I think we’d win out if we deserved to win out, and I think the odds of that happening are very, very, very high. Charlie?
Charlie Munger: Well, I don’t spend much time worrying about what can happen 50 years after I’m dead. I think you sort of take care of each day’s responsibilities pretty well and think ahead as well as you can, and you just take the results as they fall. So I’m philosophical, but I’m not, I’d be spreading unnecessarily.
Warren Buffett: Okay, neither one of us are worried, basically, but we do plan. And I’ve got a model in my mind of what Berkshire has been. That model’s been modified plenty of times over 58 years. And the one thing I knew initially, or very quickly, was it shouldn’t be a textile company. That was an important decision. And we’ve just played the hand as it’s come along, and we made a few really good decisions. And we will never make a decision that kills us. Only things that are a threat to the planet, we don’t have any answer for those. But we keep ourselves in better shape than anybody else, and we just aren’t going to have big maturities of debt that come along. We aren’t going to have insurance policies that can be cashed in en masse.
And we will sit with what looks like a huge amount of capital. And there’s a huge amount of capital, but there’s a huge amount of earning power, there’s a huge amount of diversity, everything. So our business model will be graded, and it’ll be graded against a lot of people that we’d like to be graded against. So I think we’re handing something very secure over to the future. And I think we’ve got the shareholder base like nobody has. There isn’t anybody in the country that I know of, unless they’ve had an employee-owned company prior to going public or something of the sort. But this is the product of 58 years of regarding the shareholder as the owner of the company.
But what does that mean? That means having happy customers. It means being welcomed by your community rather than having them turn you away. It means that the government feels better with you if there’s a financial crisis, because you can provide something that actually the country can’t under some circumstances, and you’ll be there. And at the same time, it’ll be good for the business. And we will have crises of one sort or another, but if they aren’t challenging the planet, which worries you in terms of some of the threats that we have, we will be a plus to the United States. And if we’re close to the United States, we’ll survive.
Stories about Ajit Jain and Ben Rosner (1:35:14)
Warren Buffett: Okay, station 7.
Audience Member (Station 7): Mr. Buffett and Mr. Munger, thank you for having us this weekend. My name is Beau Clayton, and I’m from Durham, North Carolina. One of the reasons that we are all here is that you’re great storytellers, and we carry those stories back home with us. Can you please share a couple stories that maybe we haven’t heard before about Mr. Abel and Mr. Jain that capture their character and their caliber as leaders?
Warren Buffett: Well, I’ll start out with Ajit. He walked into the office in 1986, and I had gotten the bright idea of going into the reinsurance business, I think in maybe 1969. So I’d stumbled along for 17 years, and a wonderful guy that ran it. But he also liked certain brokers, and he was running it the traditional way, top calls, top quality and everything else. But he didn’t try and change the system, he tried to improve the system to some degree. And we just went nowhere, 17 years wandering around in the wilderness. And I thought, I knew we could have something good.
And then Ajit came in on a Saturday, and Mike Goldberg steered him in, I think, and Mike deserves to be enshrined in perpetuity for that act. And I talked with him a while. I think maybe I was opening the mail on Saturday while I talked with him. And he had absolutely zero experience with insurance, but he’d actually seen a good bit of how corporate America operated, because he’d been in management consulting. And after talking with him, I knew I’d struck gold. So I hired him and gave him the backing of some money, and we had a very good period in the market almost right away for him to act.
And Ajit, if I had the top pick of 10 insurance managers in the world, I could take all 10, and they wouldn’t, you can’t replace Ajit. And we still enjoy talking. We don’t talk as frequently as we used to, but we should talk about every day. But he is one of a kind. And you know what, if they’re going to stick around long enough, you only need one of a kind. Paul Andrews stuck around at TTI, had all the money in the world. Every time I talked to him about getting a raise or something of the sort, he said, we’ll talk about that next year.
He was not what you get when you get the top draft picks from the leading business schools. And I will say this, I have never looked at where anybody went to school in terms of hiring. Somebody mailed me a resume or something, I don’t care where they went to school. And it just so happens that Ajit went to some pretty good schools, but he isn’t Ajit because he went to the schools. Charlie, tell a story or two. How’d you find Louis Vincenti?
Charlie Munger: Well, he was there. But you got to recognize him. I asked Louie once how he managed to play first-string football at, I think, Stanford, when he only weighed 165 pounds. And he said, well, I was pretty quick. And he was pretty quick. But we have found a lot of people within our companies who were pretty quick. We had one guy that quit at fourth grade, didn’t we? Ben Rosner. Am I wrong?
Warren Buffett: Oh yeah. Totally self-educated. Ben Rosner knew more about retailing and difficult neighborhoods than anybody, and he watched everything in his business like a hawk, and he was amazing. Now, there was an example. We never found anybody who could do what, when Ben died, that ability left us.
Yeah. And you want a story, it’s kind of interesting, because Ben Rosner had a partner, Leo Simon. And Leo Simon was Moe Annenberg’s son-in-law, and Leo therefore was very, very, very wealthy, and Ben started with nothing, but they liked each other. And one time, well before they got involved in the business we bought, they got the idea of buying a submarine from World War I and taking it to the Century of Progress, the World’s Fair in effect, in Chicago, I think in 1933. So they bought the submarine for probably nothing, and they figured the average guy from Walmart was going to his first World’s Fair, getting a submarine for a quarter or something, that they’d pay it.
So they hauled it from Florida, wherever they got, they hauled it to Chicago. And then they got into Chicago, and they were hauling a submarine down the streets of Chicago, and it was creating traffic problems like nobody could imagine. So a cop came over, and he said to Ben, where do you think you guys are going with a submarine? Ben says, well, he said, you’ll have to talk to my partner, Mr. Capone. And the cop says, oh, I know, just keep going. And that was Ben Rosner.
And then Leo Simon died, and when he died in 1967 or so, Ben Rosner kept delivering half the profits to his widow, who was incredibly rich, of course, being Moe Annenberg’s first-born daughter. I think Moe had nine girls in a row before Walter came along, the tenth. I may be off by one, but anyway. I went to this fancy apartment, and anyway, Ben kept her in for half the deal, and he had her sign the rent checks just so she would look like she was doing something in this business. And she didn’t need the money, obviously, but he just felt he was obligated once his partner Leo died.
And then she started criticizing him. And at that point, Ben went to, his lawyer was her lawyer actually, Will Felsteiner, I don’t know whatever happened to Will. But he gave me a call, because Ben wanted to call me, because he wanted me to buy it, and he wanted, if I bought it, he’d be rid of the ex-partner’s wife. And he had me and Charlie come back, and we went to Will Felsteiner’s office. And Ben says, I’ll work till the end of the year, and that’s all, but I’ll sell you this thing for $6 million. And it had $2 million in cash and a couple million in real estate and a couple million of operating earnings. This is crazy, but he felt he was getting a lousy price, she was taking half of the lousy price for half the money.
He looked at me at some point, Charlie, you described the rest of it again, he said, I hear you’re the fastest draw in the West. He says, draw.
Charlie Munger: We’re in one of the New York lawyers’ offices.
Warren Buffett: Yeah. And this guy, he’s selling his baby, and he told us he’s leaving. I got Charlie on this side. I said, if this guy leaves at the end of the year, he can throw away every psychology book that’s ever been written. It isn’t happening. So we bought it, and we lived happily ever after with Ben. And one time he was taking me over to see a property we had in Brooklyn, and along the way I said, Ben, I promised you I wouldn’t interfere in the business when we started. And he knew a “but” was coming, and he just said, thank you, Warren. And they’re shooting him. He was a lot of fun. We had so many Ben Rosner stories, but now you’ve heard one that hasn’t been published before.
Ajit Jain on property catastrophe reinsurance (1:45:03)
Warren Buffett: Okay, Becky.
Becky Quick: This question comes from Chai Gohil. He writes, this is for Ajit. The reinsurance industry is going through one of the hardest pricing environments in the last 15 years. Berkshire historically has participated during these stress times when economic returns are very attractive. This year, it appears Berkshire has not been interested in deploying its resources towards property cat reinsurance despite such strong returns. Can you elaborate on reasons for not participating despite these returns, and your broader view on how you’re planning to shape your reinsurance business post acquisition of Alleghany?
Ajit Jain: In terms of Alleghany, that’s an easy response. We treat our operating units independent of each other. And as far as Alleghany is concerned, they have a major presence in the reinsurance business under the brand name of Transatlantic Re. That company will operate the way it’s been operating in the past. There’ll be no change in terms of strategy or management, and they will keep doing what they’re doing. They’ve been very successful, and hopefully they’ll keep being successful.
Now, in terms of the property cat business that I have been active in over these last several years, you are right that the last 15 years has been a difficult time. Prices have not been attractive. And even though we have had some presence in the property cat business in the last 15 years, it really has been minimal. This December 31st, which is a big renewal date for cat reinsurance, we were hoping that we would get a few days in the sun, and we’d be able to deploy our capital and be able to write some fairly attractive business.
As it happened, towards the end of December, till about the third week of December, I was very optimistic that we would get a chance to put several billion dollars on the books. But in the last 10 days of December, unfortunately, a lot of capacity came out of the woodwork. Pricing that we were expecting to realize didn’t really come and meet our pricing requirements, as a result of which January 1 was a big disappointment. We did not write as much as we were hoping to write.
Now, fast forward to April 1, which is another big renewal date. We had a lot of powder dry, and we were lucky that we kept the powder dry, because April 1, suddenly prices zoomed up again, a lot higher than what they were on January 1, and started to look attractive to us. So now we have a portfolio that is very heavily exposed to property catastrophe. To put that in perspective, our exposure today is almost 50% more than what it was five, six months ago. So I think we have written as much as our capacity will allow us to write. We are very happy with what we’ve written. The margins have been healthy.
The only thing that I want to mention to you is that while the margins have been healthy, we have a very unbalanced portfolio. What that means is, if there’s a big hurricane in Florida, we will have a very substantial loss. As opposed to that, if we have a very big loss anywhere other than Florida, relative to our competition, we will have a much smaller loss. Net net, I’m very happy with the portfolio. It is a lot better than what it’s been in the past. I don’t know how long it’ll last. And of course, if the hurricane happens in Florida, we could lose, across all the units, we could lose as much as $15 billion. And if there isn’t a loss, we’ll make several billion dollars as profit.
Warren Buffett: And Ajit, tell them how long, when you called me and said you’d like to expose us to whatever was a couple billion more of exposure, how long I took to say yes.
Ajit Jain: Yeah. So the way we think about our exposure is, in the insurance operations collectively across the entire company, given that we have a little less than $300 billion of capital, we think of that as a 5% exposure that we’re willing to take on. So to complete Warren’s story, a few weeks ago we had about $13 billion of exposure all across the globe, and I called up Warren and I said, we have 13, it’ll be nice if we can go up to 15, that’s a good round number. And that was less than a 30-second phone call. I think Warren said yes without even listening to what the numbers were.
Warren Buffett: I hope he calls me again.
Short-term profits versus long-term moats (1:50:13)
Warren Buffett: Okay, station 8.
Audience Member (Station 8): Hello, my name is Adal Flores, and I’ve been a shareholder for about 16 years, and I’m coming from Guadalajara, Mexico.
My question is for Warren and Charlie. Companies have the eternal dilemma between building products that can make profits and increase their company’s competitive position. In the best case, you can build products that have both characteristics at the same time, like Google did, but most of the time companies need to choose between short-term profits and long-term defensibility.
For example, Amazon was focused on building their famous Amazon flywheel with limited profits initially in order to obtain stronger network effects, with the hope of getting more defensible profits in the future. When you invest, you constantly speak about the importance of building competitive moats. What advice would you give to CEOs about how to balance this dilemma, which is essentially short-term profit versus long-term defensibility? Thank you.
Warren Buffett: Well, the answer: to control your destiny, which we’ve been able to do at Berkshire. So we feel no pressure from Wall Street. We don’t have investor calls, we don’t have to make promises. We get a chance to make our own mistakes and occasionally find something that works well. But we recognize that the people in this room, and people like them, are the ones we’re working for, and we’re not working for a bunch of people that care about whether we meet the quarter estimate or anything. So we have a freedom that we get to use.
And we’re interested in owning a wonderful business forever. We’ll learn very many wonderful businesses, but we do learn a lot as we go along. Charlie and I have often mentioned how we learned so much when we bought See’s Candy, which we did. But we learned when we bought Ben Rosner’s chain of women’s dress shops spread all over the eastern part of the country. We learned when we tried getting into the department store business back in 1966, and as the ink was drying on our purchase price, we realized we’d done something dumb. But we’re learning all the time how consumers behave.
I’m not going to be able to learn the technical aspects of businesses. That’d be nice if I knew it, but it isn’t essential. We are obviously, we’ve got a business at Apple which is larger than our energy business, and we may only own 5.6% or 5.7%, but our ownership goes up every year. And I don’t understand the phone at all, but I do understand consumer behavior, and I know how people think about whether to buy a second car. I know how they go out to different, we own auto dealerships. We’re learning all the time from all of our businesses how people react to Garanimals versus selling them something else.
And so See’s was a sort of breakthrough, but we just keep learning more about how people behave, and how a good business can turn into a bad business, and how some good businesses can maintain their competitive advantage over time. And so we don’t have some formula. But we can also tell them in 10 seconds whether it’s something of interest. I mean, when I get these calls and they want to send decks and all that, which is nonsense, it’s a bunch of guys sitting that get paid for drawing up these projections of the future and everything like that, if they knew the future.
We don’t know the future, but we do know certain kinds of businesses. We know what the right price is, and we know what we think we can project out in terms of consumer behavior, and consumer, and threats to a business. And that’s what we’ve been about, and that’s what we’ll continue to be about. We don’t get smarter over time. We get a little wiser, though, following it over time. And you can do it while sitting in the office with a telephone, too, which we like. Charlie?
Charlie Munger: Well, tell them the story of the Japanese investment. That should be told again. That’s a nice story.
Warren Buffett: Well, it was pretty simple. I mean, back when I started, other people were going through Playboy and I was going through Moody’s. So basically, there’s a movie out called Turn Every Page, which I saw again for the second time a couple of days ago, Lizzie Gottlieb. I recommend everybody in this world watch that, because I turned every page in the past, and I did it for thousands and thousands of pages in Moody’s. I did it at the Department of Public Utilities in Boston, I did it in Newton, the insurance department, it just kept turning pages. Well, that goes on for a while, but now we need big ideas in order to find things. And what was your question, Charlie?
Charlie Munger: Tell them about the Japanese.
Warren Buffett: Well, the Japanese thing was simple. I mean, I like looking at companies. I like looking at figures about companies, and here were five very, very substantial companies, understandable companies, most of them, maybe all of them. We’d done business with them in a dozen different ways. If you go a couple miles from where this place is, our last coal generating plant was built by one of the companies.
So here they were, sitting as a group where they were earning, we’ll say, 14% on what we were going to pay to buy them. They were paying decent dividends. They were going to repurchase the shares in some cases. They owned a whole bunch of businesses that we could understand as a group, although we didn’t mean we had deep understanding on anything, but we’ve seen them operate and everything. There wasn’t anything to it. And at the same time, we could take out the currency risk by financing in the yen, and that was going to cost us a half of 1%.
Well, if you get 14% on one side, a half a percent on the other side, and you’ve got money that you know forever, and they’re doing intelligent things and they’re sizable, so we just started buying them. I didn’t even probably tell Greg until maybe six months after we’d gotten going. And then we hit 5% in all of them. We announced on my birthday, my 90th, that we owned over 5%. And recently went over for the first time to visit with them, and were more than pleasantly surprised, delighted with what we find there. And now we own 7.4% of them. We won’t go over 9.9% without their agreeing.
And we sold another 164, or whatever it is, billion of yen again. It would have done for us, if we only had $5 billion or something, and it made $10 billion simply in that way, yeah, we would look like heroes. Now $10 billion just sort of disappears, it’s an old dot in Berkshire’s reports, but it’s fun. And it is fun, and it is $10 billion. And Charlie says it keeps me out of bars.
Right. I probably talked to Charlie about this a year after I started, but who knows. I knew he’d like it, obviously. And we try to do every dollar we would do. We could only do about $10 billion. Yeah, well, not even quite that much. But we are $4 billion or $5 billion ahead plus dividends, and we’ve got a carry that’s terrific. And they welcome us, and they should welcome us, and we love the way they’re operating. We’re not there to tell them what to do in the least.
So we didn’t, but we did say we’d never go over 9.9%, and we mean it, and they know that we’ll be true to our word. And I went over there partly to introduce Greg to those people, because we’re going to be with them 10, 20, 30, 40 years from now, and they may occasionally find something that we can do jointly, and they look forward to doing that. We look forward to it. And in addition, we have some other operating businesses in Japan. So, Greg?
Greg Abel: No, the only thing I would add is, when Warren went over there, it was to build the trust with these Japanese companies, because we do hope there’s long-term opportunities. But fundamentally, as you highlighted, they’ve been a very good investment. I’d also highlight the five meetings we had were really quite remarkable. I mean, these companies, the culture and the history around it, and how proud they are. There’s just moments of learning from them. So it was just a great experience to spend really two days with the five companies.
Warren Buffett: And an issue that we intended to be 56 billion of yen that we were issuing and selling turned out to be 164.4 or something like that. Everything’s worked so well. And as Charlie says, it doesn’t move $500 billion of net worth that much, but this one will keep adding over the years to Berkshire’s value, with a very wide spread, probably $400 million or $500 million a year. And we’ll just keep looking for more opportunities in Japan.
Berkshire is the largest corporate borrower outside of Japan that exists. We didn’t set out to be that, but it’s turned out that way. And we’re not done, in terms of what may come along there. And we have some direct operations there, as I mentioned, and we’ve got some really wonderful partners working for us, and I don’t have to do anything.
Apple’s weight in Berkshire’s portfolio (2:02:14)
Warren Buffett: Okay. Becky?
Becky Quick: The next question comes from Ellie Amin Tibet, who asks: during an episode of the Investing the Templeton Way podcast, Professor Damodaran, who he respects almost as much as Warren and Charlie, mentioned that he is not comfortable with positions becoming a large part of his portfolio, for example when they reach 25% to 35%. He mentioned that Apple is now 35% of Berkshire’s portfolio and thinks that that is near a danger zone. Wonders if Warren and Charlie can comment.
Warren Buffett: I’d like to make one comment first, but Charlie will come up with – yeah, but Apple is not 35% of Berkshire’s portfolio. Berkshire’s portfolio includes the railroad, the energy business, Garanimals, you name it, See’s Candy. They’re all businesses. And the good thing about Apple is that we can go up. They buy in their stock, and instead of owning 5.6%, they’ve got about 15 billion 700 and some million shares outstanding. They get down to 15 and a quarter billion without us doing anything, we’ve got 6%.
So we can’t own more than 100% of the BNSF, we can’t own more than 100% of Garanimals or See’s Candy, and it’d be nice, we’d love to own 200%, but it just isn’t doable. But they’re all the same. They’re good businesses. And to think that our criterion, a criteria for Apple, is different than the other businesses we own. It just happens to be a better business than any we own, and we put a fair amount of money in it, but we haven’t got more money in it than we’ve got in the railroad.
And Apple is a better business. Our railroad is a very good business. It’s not remotely as good as Apple’s business. But Apple has a position with consumers where they’re paying, maybe they’ll pay 1,500 bucks or whatever it may be for a phone, and these same people pay $35,000 for having a second car, and if they had to give up a second car or give up their iPhone, they’d give up their second car. I mean, it’s an extraordinary product. We don’t have anything like that that we own 100% of, but we’re very, very, very happy to have 5.6% or whatever it may be.
And we’re delighted every tenth of a percent that goes up. It’s like adding $100 million to our earnings, our share of the earnings. And they use their earnings to buy out our partners, which we’re glad to see them sell out too. The index funds have to sell. They bring the number of shares down. We went up slightly last year. And I made a mistake a couple of years ago and I sold some shares, when I had certain reasons why gains were useful to take that year from a tax standpoint, but having heard me say that, it was a dumb decision.
And Charlie, you’ve already given your comment about it, but we do not have 35% of Berkshire’s portfolio. Berkshire’s portfolio is the funds we have to work with, and we want to own good businesses, and we also want to have plenty of liquidity. And beyond that, the sky’s the limit, or our mistakes. Who knows what the bottom is. Charlie, do you want to add anything to your earlier comment?
Charlie Munger: Well, I think one of the inane things taught in modern university education is that vast diversification is absolutely mandatory in investing in common stocks. That is an insane idea. It’s not that easy to have a vast plethora of good opportunities that are easily identified. And if you’ve only got three, I’d rather be in my best ideas instead of my worst. And now some people can’t tell their best ideas from their worst. In the act of deciding, the investment already is good, the thing gets better than it is.
I think we make fewer mistakes like that than other people, and that is a blessing to us. We’re not so smart, but we kind of know where the edge of our smartness is. That is a very important part of practical intelligence. And a lot of people who are geniuses on IQ tests think they’re a lot smarter than they are, and what they are is dangerous. But if you know the edge of your own ability pretty well, you should ignore most of the notions of our experts about what I call diversification of portfolios.
US and China tension and internet valuations (2:07:46)
Warren Buffett: Okay. Yeah. Station 9.
Audience Member (Station 9): Hi Charlie and Warren. Thank you for this superb shareholder meeting celebration. My name is David Chung from Hong Kong and a proud graduate of Chicago Booth. I’m also here with my two sons, Aiden and Ashen, who’s currently studying University of Chicago as a freshman and sophomore. This is my second time attending the conference, last being 2019, four years ago, which I was only a guest shareholder of my friend Andrew. So after the shareholder meeting, I have decided to buy into Berkshire Hathaway, which has given me a great return of 62% since 2019. So I want to thank you for that.
Warren Buffett: Thank you.
Audience Member (Station 9): I have also taken one of your advice to give my children a share for each of their birthdays. Although they won’t own a Berkshire Hathaway A share, they will do just fine with B shares. My question is: how do you see the current US-China internet companies’ valuation and the price disparity, given there has been many uncertainties, such as geopolitical tensions, significant cost optimizations at US tech firms, while China tech has been through all that already? Thank you.
Warren Buffett: Charlie?
Charlie Munger: I want to – well, there’s been some tension in the economic relationship of the United States and China. I think that tension has been wrongly created on both sides. I think we’re equally guilty of being stupid. There’s one thing we should do: let’s get along with China, and we should have a lot of free trade with China in our mutual interest. And I just can’t imagine. It’s just so obvious. There’s so much safety and so much creativity that’s possible.
Think what Apple has done by engaging in a partnership with China as a big supplier. Yeah, it’s been good for Apple and good for China. That’s the kind of business we’ll be doing with China, and more of it. And everything that increases the tension between the two countries is stupid, stupid, stupid, ought to be stopped on each side, and each side ought to respond to the other side’s stupidity with reciprocal kindness. That’s my view.
Warren Buffett: And it creates one enormous problem, of course, which is that you have the two superpowers of the world, and they know they have to get along with each other. Either one can destroy the other, and they’re going to be competitive with each other. But part of it is, always in a game like that, trying to judge how far you can push the other guy without them reacting wrong. And if either side is bullying in some ways, they can get away with it to an extent, because the alternative would drive them both into destruction. But if they push it too far, they increase the probability that something really does go wrong.
So it’s one of those game theory dilemmas. But you really need the leaders of both countries, and you need the populace to understand at least the general situation in which these countries are going to operate over the next century, and know that some leader that promises too much could get you in a hell of a lot of trouble. You’ve got one kind of a system that gets this leader one way, they’ve got another system that gets his leader another way, and keeping either side from trying to play the game too hard and thinking the other side will go along. It’s like playing chicken and driving toward a cliff.
So if you’ve got any diplomacy skills, persuasive skills or anything like that, you really want people that will convince the other country, as well as his own or her own country, that this is what we’re engaged in. We’ve got to do it right. We won’t give away the store, but we won’t try and take the whole store either. And we’re just at the beginning of this, unfortunately. We’ve learned what the situation was. It used to be the Soviet, mutually assured destruction was our policy then, and that kept a lot of things from happening, but it also came with a very, very, very close call with Cuba.
These are different games than existed hundreds of years ago. You could, Britain might rule the seas, or France or Spain, but now you’re playing with a game that you can’t really make a huge mistake in. And I think that the better that’s understood in both countries, the more the leaders feel that their citizenry does understand that, the better off we’ll be. And a lot of demagoguery, or a lot of inflammatory speaking, but a lot of authoritarian action, it all carries its dangers.
And the world has stumbled through the years post 1945 with a lot of close calls in the nuclear arena, and now we’ve got pandemics, and we’ve got cyber and a whole bunch of other things. So we’ve got more tools of destruction the world’s ever had, and it’s imperative that China and the United States both understand what the game is, and understand that you can’t push too hard, but both places are going to be competitive and both can prosper.
That’s what really is the vision that is out there: that China will have a more wonderful country, the United States will have a more wonderful country, and the two are not just compatible, they’re almost imperative in terms of what’s going to happen in the next 100 years or so. And I think that the leaders of both countries have got an important job, and having that understood, and not to do inflammatory things. And we’ll see whether the luck that has taken us from 1945 to present holds out. And I think we can affect to some extent that luck.
Why Berkshire sold Taiwan Semiconductor (2:16:01)
Warren Buffett: And with that cheery message, we will move to Becky.
Becky Quick: This question comes from Rohit Bellany. Berkshire bought a substantial position in Taiwan Semiconductor and, contrary to its normal holding timeline, sold almost the entire position within a few short months. While you cited in a CNBC interview that geopolitical issues were the catalyst, these issues were seemingly no different when you acquired that stock. So what else, if anything, changed in those few months and prompted the firm to offload close to $5 billion worth of Taiwan Semiconductor shares?
Warren Buffett: Taiwan Semiconductor is one of the best managed companies and important companies in the world. And there is not, and I think you’ll be able to say the same thing five or 10 or 20 years from now.
I don’t like its location, and I’ve reevaluated that. I mean, I don’t think it should be any place but Taiwan, although they will be obviously opening up chip capacity in this country, and actually one of our subsidiaries that we got in Alleghany is participating in their Arizona construction activities. But it’s a question of, we would rather have the same kind of company, and there’s nobody in the chip industry that’s in their league, at least in my view.
And the man that was a 91-year-old or so that connected with us, and that I think I played bridge with in Albuquerque, and the marvelous people, marvelous company. But I’d rather find marvelous people, I won’t find it in the chip industry, but marvelous people and marvelous competitive position and everything, I’d rather find it in the United States. I feel better about the capital that we’ve got deployed in Japan than in Taiwan. I wish it weren’t so, but I think that’s the reality, and I’ve reevaluated that in the light of certain things that were going on. Charlie?
Charlie Munger: Well, my view is that Warren ought to feel comfortable if he wants to.
Warren Buffett: Yeah, put that in the minutes.
Ben Graham and a 100-year vision for Berkshire (2:18:37)
Warren Buffett: Okay, station 10.
Audience Member (Station 10): First of all, thank you for making our lives better. My name is Bogumil Baranowski. I’m a founding partner of New York. We manage multi-generational family fortunes, hence my question. Mr. Buffett, in 1976, in your tribute to Benjamin Graham, you wrote, “Walter Lippmann spoke of men who plant trees that other men will sit under. Ben Graham was such a man.” You’re both such people. Could you share with us your 100-year vision for Berkshire? It’s a question to you both.
Warren Buffett: Yeah, I would like to add one thing about Ben Graham. Ben Graham did all kinds of things for me, and he never expected one thing in return. I mean, just you name it and he did it, and there wasn’t any hint, I should say, of anything he expected in return. And I checked, well, he wrote a book in 1949 that in a sense said to me in very persuasive terms that what I’d been spending the previous eight or nine years working at and loving was all wrong.
And that book has been, I check it every now and then on Amazon to where it ranks, and Amazon ranks hundreds and hundreds and hundreds of thousands of books by sales, and Ben Graham’s book has been up there like number 300 or 350 or something like that forever. And there isn’t any book. I wrote HarperCollins a note the other day because they’re bringing out another edition, and I asked them how many copies have been sold, and they said the records didn’t go back far enough, but they had 7.3 million copies of this little book that changed my life, and continues to outsell every investment book.
Investment books will come along, and they’re number 400 or 1,000 or something for a while, and then all of a sudden they’re number 25,000 or 200,000. And this book, in how many areas can you find any book that has had that sustained position? You can’t. You go back and look at number one in 1950 or number two or number three, and you’re looking in ’51 and ’52, they don’t continue. I mean, they just don’t continue. Cookbooks, maybe one or two of them last for a while, but there is nothing.
And this book lives on, and everybody keeps bringing out new books and saying a lot of other things, but they aren’t saying anything as important as what he said in 1949 in this relatively thin little book. So our vision for Berkshire is exactly what we said today. We want it to be a company that is owned by shareholders and behaves in a way society is happy that it exists and not unhappy. And we will have unlimited capital, we’ll get lots of talent, and we’ve got a base that can’t be beat, and there’s no reason why it can’t be perpetuated, just like Ben’s book, and maybe be an example to other people. And if so, we’ll be very happy. Charlie?
Charlie Munger: Yeah, one of the really interesting things about Ben Graham: he was a really gifted teacher, a very honorable profession, and that is what has lasted. However, an interesting fact that he was sheepish about in his old age was that more than half of all the investment return that Ben Graham made in his whole life came from one stock, one growth stock, GEICO, Berkshire’s subsidiary. And at the time he operated, there were a lot of sort of lousy companies that were too cheap, and you can make a little money floating from one to another, but the big money he made was one growth stock. Buying one undervalued great company is a very good thing, as Berkshire has found out again and again and again.
Warren Buffett: And Ben wrote a postscript to the ’49 edition pointing out exactly that fact and acknowledging it, but also took some good lessons from it. He said that’s the way life is, that you prepare and you don’t lose everything along the way, and then something comes along. And GEICO came along because a banker in Fort Worth had financed Leo Davidson, and I think the banker got three-quarters of it. And I don’t mean Leo Davidson, Leo Goodwin, who founded GEICO, then called Government Employees Insurance Company, and you can figure out the acronym.
And the deal almost fell apart. The deal was, as I remember, for maybe $1.5 million or something, like $1.25 million, and it almost fell apart because of a difference of $25,000 in the net worth delivered. This is a business, we’re tens of billions. I mean, but he pointed out the irony in that too. I mean, he was honest about it, he was totally intellectually honest about his failings, but also the strengths of his approach.
And to some extent, Charlie and I have seen that in our lives. I mean, the sort of prepared mind, the willingness to act when you need to act, and the willingness to ignore every salesman in the world and the imperative norm, is one or two things that make the right decision. If you make the right decision on a spouse, I mean, you’ve won the game. And there’s an enormous important decision, and you’ve got all the time in the world. We’ve got more time now than we used to have when I was a kid to make that decision. And I don’t know whether a third or whatever percentage blow that one.
It is really interesting. The thing to do is just keep trying to think things through, not do too many stupid things, and sooner or later you have a lot of Polo. So Charlie would say.
GEICO and carmakers selling their own insurance (2:26:18)
Warren Buffett: Okay, Becky.
Becky Quick: All right. This question comes from Terrafter, a shareholder in Sierra Vista, Arizona, who is asking a question of Ajit. Wants to know about electric vehicles getting insurance from the manufacturer instead of car insurance companies. A recent article in the Wall Street Journal shows that though EVs are a small but growing percentage of sales, Tesla and GM are offering their own electric vehicle insurance. What will GEICO do to combat this?
Ajit Jain: Yeah, so GEICO is talking to a number of original equipment manufacturers as well to try and see how best they can work with the auto manufacturer and offer insurance at the point of sale. There haven’t been very many success stories as yet, so we’ll wait and see. Clearly it is a very convenient way to sell auto insurance at the point of sale, but there’s a fair amount of data that needs to be collected on the driver, not just the car, and that makes it a little more complicated. So we are talking to some auto manufacturers ourselves. We are hopeful that we will strike a deal with some of them before not too long.
Tesla and GM, they both have talked a lot in the press in terms of getting into the insurance business, and in fact GM, I think, has projected they’ll write $3 billion of premium, which, it’s hard to imagine where it’ll come from, but they’re all hot to trot. I think somebody will find the secret sauce before not too long, and we ourselves are in that race.
Warren Buffett: Yeah, I would point out that General Motors, Motors Insurance, for decades, and I mean, this is not a new idea. And Uber wrote a lot of insurance for a while. They laid it off with somebody, and that company got killed by it. But I don’t know the deal between Uber and, I forget the name of the company that took it on. Ajit would probably know.
Ajit Jain: James River.
Warren Buffett: Yeah. And there’s nothing, it’s not a new idea, it’s not magic in the least. I mean, it is hard to come up with something that is better at matching risk to reward, I’m sorry, risk to price, than a bunch of very smart people are doing at Progressive and a bunch of very smart people are doing to a greater extent at GEICO.
I mean, it was fascinating to me when Uber wanted to do it, and they were going to get their head handed to them, but they laid off a good bit of it, a very, very substantial percentage of it, with somebody else who got their head handed to them in this way. But it was a story. Wall Street loves it. We’ve got 80 car dealerships that do a lot of business, and we’ve got the people buying the car in the place, and we form an insurance company around the group for some reason that writes insurance. It’s hard to improve on the present system. And I wouldn’t pay a penny. I’d pay to avoid it, actually. I mean, go ahead.
Ajit Jain: Yeah, the only point I’d like to add is the margins on writing auto insurance are 4%, which is a very small number, and once there are more people that are trying to take a bite of the apple, it just becomes very, very difficult to keep all the mouths fed in a profitable manner.
Warren Buffett: Yeah. You can say there was one big new idea in insurance, in property and car insurance, back in 1920 or so when State Farm started. And State Farm still has it. Next to Berkshire, it’s the leader in having net worth. It’s a mutual company, but some guy just figured that there was a cartel running car insurance, and “The Farmer from Merna” is the name of the book, I think, over in Illinois. And he created a system where he really took 20 points or so out of the cost, and surprise, surprise.
And nobody owns stock in State Farm. It’s an insult to capitalism, actually. Everything you learn at the business school says it shouldn’t work, because nobody owns it, nobody’s going public with it, nothing. But it’s got more net worth, it’s probably double, leaving Berkshire out of the picture, it’s probably double the next guy. And nobody’s really improved on their system that much. So it’s fascinating how people don’t really look at the essence. These are cases that should carry a message.
But the truth is, in Wall Street anything can get, the test is whether you can sell it or not. But if you can sell it, it’ll get sold, and a bunch of insurance companies came along and got sold. And this can be a story about this stock or that stock, and it sounds a good one. They talked about it at Uber for a while, and it is really interesting, the investing public does not learn much.
Index funds, voting control and ESG (2:32:02)
Warren Buffett: Okay, station 11.
Audience Member (Station 11): Hi, my name is Jeff Miriam. I’m from Edina, Minnesota. We’ve been coming for years. To make that professor from the earlier question really nervous, half our family’s wealth is in Berkshire Hathaway.
Warren Buffett: Well, let’s make Charlie nervous.
Audience Member (Station 11): My question has to do with control in the future. There was a question earlier about corporate raiders. I was more wondering about who is actually going to own the voting control. Is it going to be institutions, CalPERS, BlackRock? Are they eventually going to get their way with the ESG check boxes that we’re going to have to check? And what should we be thinking about that?
Warren Buffett: Well, you’re thinking very well. And the interesting thing is, the big aggregations, of course, would be in index funds. But what index funds want is they want a world in which society doesn’t get upset with them about the fact they’ve got all the voting power. And in the last year or two, it’s looked like a better idea for them not quite to get there. What was the phrase that Charlie used? But they backed off a lot.
Charlie Munger: Yeah, they backed off a lot.
Warren Buffett: And it’s in their interest to back off, interestingly enough. And looking at money management, the game is not performance, it’s assets under management. And index funds produce a tiny, tiny, tiny fee on assets under management, because it was pioneered by Vanguard, and when it became successful it was very easy to replicate. Not so easy, but I mean, it was inevitable to be copied, but it came with a management fee of two basis points.
So what people that have offered index funds would really like is for you to buy their other funds or let them manage money in some other way, so that they get a higher fee on assets under management, which of course is exactly why the index fund was invented in the first place. But it’s not a loss leader, but it is a way to pull money in. And then you hope that people ignore what was said by, what’s the name, John Bogle, Jack Bogle. Ignore him.
And essentially they give up the idea, they say, we’ll offer you a fund that does this, and then we’ll offer you another fund that does that, and of course those management fees are higher. So they’re really counter-selling the idea that John Bogle came along with. But in the process they have achieved a lot of votes. And that was fun for a while, but the last thing in the world they want to do is have Washington or the American public decide that they’re throwing around their weight too much. So they’re tending to back off now. If you figure out where their self-interest is, you can judge where their behavior is going to go. Charlie?
Charlie Munger: Yeah.
Warren Buffett: You want to defend them?
Charlie Munger: No, you can square me. What you just said, you’re totally right on everything.
Warren Buffett: Well, in that case, I won’t ask anybody else.
Greg Abel and future share buybacks (2:35:53)
Warren Buffett: Okay, Becky.
Becky Quick: All right. This question comes from Almu Grinnell, and it’s about, this is for Warren and Greg. Since 2019, Berkshire repurchased huge amounts of stock, approximately reducing 10% of the share count and increasing the intrinsic value per share for the continuing shareholders. Greg is expected to be the successor of Warren as CEO, so will he be in charge of the main capital allocation decisions, including future share buybacks? Greg has been key in the development of Berkshire Hathaway Energy, and I think a good capital allocator. Has he been involved in the share repurchases that have been executed over the past years? And do you both, Warren and Greg, work together in the estimation of Berkshire’s intrinsic value and the share buyback decisions?
Warren Buffett: Well, the answer is that Greg, I’m going to turn it over to him, but the answer is Greg understands capital allocation as well as I do, and that’s lucky for us, and he will make those decisions, I think, very much in the same framework as I would make them. And we’ve laid out that framework now for 30 years probably, or something like that. People make it way more complicated. I mean, particularly if you’re working on a doctorate or something, it’s just a great subject to have lots of footnotes and 50 pages or 100 pages.
But it’s no more complicated than if you and I and Charlie had a business and you want to sell your interest in, we could buy it for less than we thought it was worth, and without misleading you in any way about what was going on, and we’d buy it then. But Greg, you’re on, because you’re going to be doing it in the future, right?
Greg Abel: Yeah, well, I think, Warren, you said it really well. I mean, the framework’s been laid out. We know how you approach it, and how you and Charlie have approached it, and really don’t see that framework changing. When the opportunity presents itself, we’ll want to be an active repurchaser of Berkshire shares. We think it’s a great outcome for Berkshire shareholders to own a larger piece of each of our operating businesses and the portfolio of the equity companies when the opportunity presents itself.
Warren Buffett: It can be the dumbest thing you can do, or it can be the smartest thing you can do, and to make it more complicated than that and start getting into all this. But you obviously do what the business needs to do first, then the opportunities are there: grow your present business, buy additional business, whatever it may be. And then you make a decision on dividends, but that decision becomes pretty irrevocable, because you don’t cut dividends without having major effects on your shareholder base and a lot of things.
And then if you’ve got ample capital, and you don’t see that you’re going to use it all, and your stock is attractive and it enhances the intrinsic value for the remaining shareholders, it’s a no-brainer. And if it’s above the price of intrinsic value, it’s a no-brainer that you don’t even listen to anybody, no matter what investment banker comes in and tells you, here’s how to do a repurchase program.
Charlie Munger on his Covid vaccine remarks (2:39:12)
Warren Buffett: Okay, station 1.
Audience Member (Station 1): I’m Tom Nelson, a podcaster from North Oaks, Minnesota. Charlie, in 2022 you used phrases like “really massively stupid,” “massive kind of ignorance” and “crazy” to describe what you said was the 30% of Americans hesitant to submit themselves to untested mRNA COVID gene therapy. Do you stand behind those quotes today?
Charlie Munger: Yeah, sure.
Judging Berkshire’s management after Buffett (2:40:00)
Warren Buffett: Well, we’ve got time for one more before lunch. Becky?
Becky Quick: Okay. That, I thought I was out, but let’s see. How about, oh, could be. How about lunch pretty soon? But no, no, okay, I’ve just got one for you. This one comes from Drew Estes. This is a question for Warren. In your 1969 letter to partners, you said, “In any company where the founder and chief driving force behind the enterprise is still active, it’s still very difficult to evaluate second men. The only real way to see how someone is going to do when running a company is to let them run it.” This wise statement now applies to Berkshire. Once the second men are running Berkshire, what would you advise owners of Berkshire to watch for? Specifically, what actions, if taken, should give us concern?
Warren Buffett: Well, I would have some comfort in the fact that 99% of my net worth is in that company, so I probably have got a stronger interest in it, and perhaps $100 billion or more of philanthropy will be affected by it. But I would say that I don’t have a second choice. I mean, it is that tough to divine. But I’ve also seen Greg in action, and I feel 100% comfortable. And like I say, if something happened to Greg, I would tell the directors they have a problem, and I don’t have anybody to name.
And if they put somebody in, Berkshire on automatic pilot could work extremely well for a long time. I mean, it isn’t like the businesses go away or any other sort of thing. And it’s hard to judge successor management in a really good business, because if they don’t show up at the office, it’ll keep working for a long time. And maybe that useful input may show itself in five years, it may go a long, long, long time. And how are the shareholders advised by a bunch of people that are concerned about whether you’re meeting earnings projections or something, telling them whether the management’s any good?
It is very, very hard. I’ve been on the board of 20 companies. It’s very hard to ask me to rank the management of each one. It’s very difficult to do, because some are just better businesses than others. Some would be better off not managed hardly at all. Others really need help, but they’ve got a lousy business. And Tom Murphy told me a long, long time ago that the secret of business is to buy a good business, and it’s okay to inherit one too. And Greg is inheriting a good business, and I think he’ll make it better. But I don’t think it’s easy to put any one of the next 10 nominees in and try and judge three years later whether they’ve done a good job or not.
So that’ll be a very interesting job for the board, but it shouldn’t listen to Wall Street on it. They’ve got the job. If they put somebody in, if there’s a surprise and we both go down on a plane, and they put somebody in, they’ve got a real job in assessing that person, because it’ll depend on how good he or she is as a talker. It’ll depend on them courting Wall Street to be supportive of all kinds of things. And we’ve got some very good people on the board, but they would be challenged in that position, as would I. I’ve been in that position at other companies where a very great leader has left, and on the way back from the funeral, nobody knows what to do exactly.
So with that cheery message, we will go to lunch, and we will come back. We’ll see you at one o’clock. Thank you. And we’re still going to try and get 60 questions in. We’ve done 25 so far. Twenty? Yeah, 25. So keep the questions short, and I’ll try and keep the answers short. Thanks.
Afternoon session
Warren Buffett: Sales are terrific out there, so you’re my kind of crowd. I’ve been getting reports we’re breaking all kinds of records.
Bank runs, deposit insurance and the banking outlook (0:08)
Warren Buffett: And we’re going to start off with question number 26, which goes to station 2.
Audience Member (Station 2): Hi, Warren and Charlie. My name is James, from Malaysia. Given the recent challenge faced by the major US banks, what is your overall outlook on the banking industry? How do you assess the risk and the opportunity in this sector?
Warren Buffett: Well, anticipating a few questions on banks, I decided we should start using bank language here to describe Charlie.
The situation in banking is very similar to what it’s always been in banking, that fear is contagious, always. And historically, sometimes the fear was justified and sometimes it wasn’t. My dad lost his job in 1931 because of a bank run. They had a bank run on the state banks, and the head of the Omaha National Bank said, well, we’re a national bank, and they didn’t have a run on the national banks. And of course they both faced the same problem. So it used to be that if you saw people lining up at a bank, the proper response was to get into the line, and you’ll always leave it.
And the story is that Sidney Weinberg of Goldman Sachs, during one of the great bank runs back in 1907 or thereabouts, had a job as a runner at Goldman Sachs and asked his boss if he could take the week off. And his boss said, sure, not much is going on anyway. So he got in line, whether it’s the Knickerbocker Trust or wherever, and as he got toward the front of the line he sold his place in line to somebody. He didn’t have an account at the bank, but that was an asset.
And the banking system has changed so much over the years, and we did something enormously sensible, in my view, when we set up the FDIC. As many as 2,000 banks have failed in one year back after World War I. I mean, bank runs were just part of the picture. And if you have people that are worried about whether their money is safe in the bank, and all signed withdrawals, you can’t run an economy very well. So the FDIC was very logical. It got changed over the years some, but here we are in 2023, and we actually see the FDIC pay off 100 cents on the dollar to everybody, or make it available on all demand deposits, and yet you still have people very worried about theirs, periodically, geographically, all kinds of crazy ways. And that just shouldn’t happen.
So the messaging has been very poor. It’s been poor by the politicians, who sometimes have an interest in having it poor. It’s been poor by the agencies, and I’d say it’s been poor by the press. I mean, you shouldn’t have so many people that misunderstand the fact that, although there may be a debt ceiling, it’s going to get changed. Although there’s a $250,000 limit on FDIC, the FDIC and the US government and the American public have no interest in having a bank fail and have deposits actually lost by people. We had a demonstration project the weekend of Silicon Valley Bank, and the public is still confused.
So it’s really something to have a law that was passed in, or a law that became effective in 1934, although modified in some ways, not understood, about something as important as a banking system. I don’t think the American public is that dumb. And I just, well, I made that offer over in Tokyo, incidentally. I haven’t heard from anybody that wants to take up my million-dollar bet on whether the public will lose money if they have a demand deposit at the bank, no matter what the size. So that’s the world we live in. It means that a lit match can turn into a conflagration or it can be blown out, and who knows what will happen.
And we don’t have any worry. We keep our money in cash and Treasury bills at Berkshire, because we keep $128 billion or whatever it was at the end of the quarter, and we want to be there if the banking system temporarily even gets stalled in some way. It shouldn’t. I don’t think it will, but I think it could. And I think that the incentives in bank regulation are so messed up, and so many people have an interest in having them messed up, that it’s totally crazy.
I mean, it’s the Fannie Mae and Freddie Mac. They were doing 40% or so of the mortgage business in the United States. That is huge. They were regulated, just those two companies were regulated by some group, I forget what they called it, but they had 150 people that were in charge of just figuring out whether Fannie and Freddie were doing the right thing. But I could have done it. It’s probably, I could have done it, and I’m not sure they needed an assistant even to do it. But the incentives were all wrong. And Freddie and Fannie, which were doing fine in August, or apparently doing fine in July and August of 2008, were put into conservatorship early in September, and the things that followed from that were just incredible.
So there are second order and third order and fourth order effects that are somewhat unpredictable as to what they will be, and the sequence and all that. But things change. And if people think that deposits are sticky anymore, they’re just living in a different era. Press a button, you don’t have to get in the line and wait for days and have the teller counting out the money slowly in gold. So I think the line goes away. You can have a run in a few seconds. So the way it hasn’t been addressed properly is a problem, and who knows where it leads.
But you’ll have to have a punishment for the people that do the wrong thing. And if you take First Republic, for example, you could look at their 10-K and you could see that they were offering non-government-guaranteed mortgages in jumbo amounts at fixed rates, sometimes for 10 years before they changed to floating. And I mean, that’s a crazy proposition. If it’s to the advantage of the bank, they get it. They get the guy coming in and says, I’ll refinance it at 1.5% and then 1%. And if it’s advantage the other way, the fellow keeps it out 10 years. You don’t give options like that. But that’s what First Republic was doing. It was in plain sight, and the world ignored it till it blew up.
And some of the stock in some of these banks that were held by insiders was sold, and who knows whether they had a plan, or whether they had some plan that was innocent, or whether they started sensing what was coming. But you do know that the directors are not going to be able to read some book or anything like that, but they do have the ability to hold the CEO accountable. CEO gets the bank in trouble, both the CEO and the directors should suffer. The stockholders of the future shouldn’t suffer. They didn’t do anything.
It doesn’t teach anybody any lessons or anything. The lesson is that if you run a bank and you screw it up, you still live, you’re still a rich guy, and the clubs don’t drop you, and the charity groups don’t quit asking you to their benefits, and the world goes on. That is not a good lesson to teach people who are holding the behavior of the economy in their hands. So I think there’s some work to be done, but I don’t think it’s a difficult problem. It’s just we’ve screwed up the answer and we’ve screwed up the communication of it. Charlie?
Charlie Munger: Well, I’m so old-fashioned that I kind of liked it better when banks didn’t do investment banking. That makes me very outmoded in the modern world. And the country decided it was contrary to public interest for a while, and then the banks wanted to get back into it.
Warren Buffett: Did they ever, yeah.
Charlie Munger: No, I mean, I don’t think having a bunch of bankers, all of them trying to get rich, leads to good things. I think a banker should be more like an engineer. He’s more into avoiding trouble than he is getting rich.
Warren Buffett: Yeah, and they could do fine. They can do fine that way.
Charlie Munger: And I think we had a big mistake when we got to the bank where everybody who joins the firm wants to get rich.
Warren Buffett: Yeah, it’s a contradiction in values. And we came to that conclusion, I don’t know when Glass-Steagall passed or anything, but then they wanted to get back in.
How many of you know, and maybe I’m wrong on this, I haven’t looked lately, but the Federal Reserve actually was given the responsibility for setting margin requirements. And they changed margin requirements a lot of times, because it was known that people that borrow a lot of money cause a danger to the bank system if you get too many in the picture, and all of that sort of thing. And what’s happened? The banks figured out a thousand different ways so you could borrow on 100% margin, through derivatives and everything. They just totally distorted all the lessons that were learned in the ’29 crash.
Charlie Munger: Imagine taking banking into derivative trading. Who in his right mind would have allowed that?
Warren Buffett: Yeah, well, there’s more money in it.
Charlie Munger: Well, that’s why they’re in it.
Warren Buffett: Yeah. But it isn’t necessarily a great social outcome for the rest of us. That’s what those Senate committees decided back in 1931 and ’32. And then in the late 1990s particularly, very decent people, Bob Rubin and some of the people, they said, this is the modern world. And here’s what the modern world has turned out to hand us. Banking can have all kinds of new inventions, but it needs to have old values.
Well, if we don’t, we don’t know what’s going to happen, because there are a lot of things that could happen out of the present situation. Depositors will not lose money. Stockholders and debt holders of the holding company, they should lose money. And the people who borrowed on commercial real estate, and now the loans aren’t getting extended, they should lose. It’s too bad. I mean, that’s part of borrowing on 100% margin, which is what people were doing in commercial real estate. You’ve got to have the penalties hit the people that cause the problems. And if they took risks that they shouldn’t have, it needs to fall on them if you’re going to change how people are going to behave in the future.
Big banks versus regional banks (13:44)
Warren Buffett: Okay, Becky.
Becky Quick: This question comes from Davis Hance in Houston, Texas. He writes: What do you think about the business models of the big banks as compared to the regional banks in the wake of the events at Silicon Valley Bank? And how does the perceived implicit guarantee of all deposits at all banks affect big banks and those regional banks?
Warren Buffett: Yeah, well, I can say this. If you follow sound banking methods, which means not doing some things that other people do, a bank could be a perfectly decent investment. In fact, Charlie and I, it was me originally, in 1969 we bought a bank at Berkshire, and we had $19 million invested in that bank, and we had $17 million, I think, invested in our insurance companies. And if the Bank Holding Company Act of 1970 hadn’t been passed, we might have ended up owning a lot of banks instead of a lot of insurance companies.
We were looking at more banks, and Harry Kip was taking us around Chicago, and there were other things we could do. And then, bingo, they passed the 1970 Bank Holding Company Act, and we had to divest ourselves of that bank in 10 years, which, by the way, had never had a bad debt. It never had an unnecessary cost. It made nothing but money, with no risk, and never presented any deposit insurance risk to the government. Zero. It was a lovely, sound, constructive institution in this community, and any person who really deserved credit could get credit.
And we were going to buy more. We were forced out of it. And we were going to buy more banks, and if we bought more banks we probably wouldn’t have expanded the insurance business. But the law changed, and so we divested, and we’ve done all kinds of insurance. But banking was more attractive to us. It was bigger, there were more targets to buy, and you could run a perfectly sound bank then, with no negotiable certificates and all these things, all the inventions that came later. And you could still run them today, and you could earn good money, very good money. And we would have found more banks, but we were precluded from doing that.
And we sold bank stocks in the last, well, we sold them first when the pandemic broke out, and then we sold some more in the last six months. And we don’t know where the shareholders of the big banks necessarily, or the regional banks or anybody, are heading. I’ve got my own personal money, and I’m probably above the FDIC limit. I’ve got it with a local bank, and I don’t worry about it in the least. But in terms of owning banks, events will determine their future. And you’ve got politicians involved, you’ve got a whole lot of people that don’t really understand how the system works. And I would say that the events, something less than a perfect communication between various people and the American public.
So the American public is probably as confused about banking as ever, and that has consequences, and nobody knows what the consequences are, because every event starts recreating a different dynamic. I mean, in physics you know that pi is going to be 3.14, an infinite number of numbers after that, no matter what happens. But you don’t know what has happened to the stickiness of deposits. It got changed by 2008. It’s gotten changed by this. And that changes everything. And so we’re very cautious in a situation like that about ownership of banks.
And we do remain with one bank holding, a deal, but we originated that deal, with the Bank of America. I like Bank of America. I like the management, and I proposed the deal to them, so I stick with it. But do I know how to project out what’s going to happen from here? The answer is I don’t, because I’ve seen so many things in the last few months, which really weren’t that unexpected to me to see, but which reconfirmed my beliefs that the American public doesn’t understand their banking system. And some people in Congress perhaps don’t understand it any more than I understand, I don’t understand how the spaceships go. I mean, there’s all kinds of things I don’t know about. If you’re in Congress, you’ve taken a position on everything, and sometimes it’s to your advantage, if you really understand it, not to say exactly what you feel. And here we are. Charlie?
Charlie Munger: Yeah, well, a lot has happened in banking in my lifetime. I welcomed all that early banking of the disturbing immigrants by the early Bank of America, and I think all the credit cards, when they came in as original bank cards, were a great contribution to civilization. But the gamier it gets, and the more it looks like investment banking, the less I like it as a citizen. I am deeply distrustful of situations in which everybody wants to get rich and envies everybody else. I regard that atmosphere as utterly toxic.
Warren Buffett: And the people who like, one story, which is again a true story, and I’m not naming the name, and it wasn’t Pete Jeffrey, because he might fit this name, but it wasn’t Pete. But our hero, Gene Abegg, was going to have to retire at some point, and so we hired a future replacement. It’s got a little problem. I talked before about having the perfect business, and now we’re going to bring in somebody. We actually bring in some money, but what does Central High with Charlie all over my class. Yeah, and Charlie didn’t know I was picking up this guy, and he didn’t ask me.
Charlie Munger: We wouldn’t have hired him.
Warren Buffett: Well, if I asked you, I probably wouldn’t hire anybody, but that’s another question. But this guy comes over, a perfectly decent guy, presentable, looks like a banker and everything. And of course the first thing he wants to do, we’ve got this wonderful bank, but we’ve got the crummiest-looking building in Rockford. And we don’t need a great building, we just need a great banker. And naturally this guy wants to build a new building, because we were the most profitable bank, but we didn’t look like we were the most prosperous.
So I told him he could have any building he wanted as long as it was not higher than, it had to be shorter than our nearest competitor. And he lost interest totally. He wanted to be on the top floor of the biggest building in town. And I told him he could go horizontally, do anything he wanted, but he couldn’t do it vertically. It taught me a lot about the guy’s motivations in life. And he didn’t end up running the bank anyway. Anyway, that’s all I know about banking, probably more.
The national debt and the dollar’s reserve status (21:35)
Warren Buffett: Station 3.
Audience Member (Station 3): Mr. Buffett and Mr. Munger, hi, my name is Daphne. I’m 13 years old and this is my sixth annual Berkshire Hathaway shareholders meeting, and I’ve had the privilege to ask you both questions in years past. My question for you today is the following. As you know, the US national debt is currently at an estimated $31 trillion, making up about 125% of the US GDP. In the meantime, over the past few years, the Federal Reserve has telegraphed that they intend to monetize the debt by printing trillions of dollars, even as they insist that they’re fighting inflation.
Already other major economies in the world, such as China, Saudi Arabia and Brazil, are moving away from the dollar in anticipation of this. My question is, are we likely to face a time in the future when the US dollar is no longer the global reserve currency? How is Berkshire prepared for this possibility, and what can we do as American citizens to attempt to shelter ourselves from what’s beginning to look like the beginnings of de-dollarization?
Warren Buffett: Well, hey. I should ask you to come up here and answer some questions. Hey, it’s very interesting. We are the reserve currency, and I see no option for any other currency to be the reserve currency. And I think that nobody understands the situation better than Jay Powell, but he’s not in control of fiscal policy, and every now and then he drops a few hints. And there was no question that when the pandemic broke out, it was a semi-war-like situation. But nobody knows how far you can go with the paper currency before it gets out of control, and particularly if you’re the world’s reserve currency. Nobody knows the answer to that. And you don’t want to try and pick out the point at where it does become a problem, because then it’s all over.
And I think we should be very careful. We all learned Keynesianism and we applied it in World War II to the advantage of the country, and we did everything we could to prevent inflation during the war. And then the war ended in August of ’45, and I think in January ’46, and I’m not giving you exact figures at all now, but in January ’46 I think the rate of inflation was something like 1% or thereabouts, and by the end of the year I think it was like 15. And again, I’m doing this from long memories.
But it’s easy for America to do a lot, but if we do too much, it’s very hard to see how you recover once you let the genie out of the bottle and people lose faith in the currency. And they behave in an entirely different manner than they do when they feel that if they put some money in the bank or have a pension plan or whatever it may be, that they’re going to get to have something with roughly equal purchasing power. And it just changes legal economy, and all kinds of things can happen then. And I can’t predict them and nobody else can predict them, but I do know they aren’t good. And we will see.
And I voted for both parties, and it’s not limited to politicians of either party or anything of the sort. People take positions. Some of them understand what they’re doing, some don’t understand what they’re doing. And if they put me on some medical board, I don’t understand what I’m doing. There’s nothing wrong with the fact that you can’t master everything. Can’t all be Isaac Newton. But you can’t go around pretending you do, or making decisions on it.
And we are not as well off in relationship to curbing inflation expectations, which become self-fulfilling. We are not as well off as we were earlier. And Berkshire is better prepared than most investments for that kind of a period. But I said this in the annual report, but we aren’t perfectly prepared, because there’s no way to perfectly prepare. You don’t know what course of action will occur. And it’s a very political decision. Now it’s a tribal decision to some degree. And you’ll hope for leadership that actually will do something, recognizes the problem.
And America’s an incredible society. Rich, we got everything going for us, but that doesn’t mean we can just print money indefinitely. And it’ll be interesting to see how it turns out. Charlie?
Charlie Munger: Well, at some point printing money to buy votes will be counterproductive.
Warren Buffett: Yep.
Charlie Munger: And we don’t know exactly where that comes, and if something is going to be dangerous and unproductive, you ought to keep it a fair distance away. Now if you have a culture that is exceptionally strong, like Japan, they have done some strange things there.
Warren Buffett: But they couldn’t have been the reserve currency.
Charlie Munger: No, of course not. But Japan bought back most of the national debt and a lot of the common stocks, and the Federal Reserve’s practically everything in Japan, and the country’s working. It’s in 30 years of economic stasis, but it’s not going to hell. I really admire Japan, but I don’t think we should try and imitate it. I don’t think we’re as good as Japan.
Warren Buffett: They have a cohesive culture and we don’t.
Charlie Munger: That’s exactly right. In Japan everybody’s supposed to suck it up and cope, and in America we’ve been playing.
Warren Buffett: So I hope you come next year with a tougher question. But, and thank you. And I predict, I would love to be being born again today in the United States. We can do a lot of dumb things and get away with it. We can’t do an unlimited number. There are people who care about that.
And you have to be willing to be extraordinarily unpopular. Paul Volcker, there are other Federal Reserve chair people that would not have done what they did. It’s just too uncomfortable. And there used to be a politician in Nebraska, and if you asked him some really tough question, like how do you stand on abortion, he would look you right in the eye and say, “I’m all right on that one,” and then he moved next door. Well, that’s what people have done basically on inflation. One way or another they say, “I’m all right on that,” and then they don’t really think about what the consequences of their actions could be. And it’s so much fun if there’s 435 of you. It’ll just be one of 435, instead of being the person actually responsible. Anyway.
Charlie Munger: I am still next to the question of two superpowers, and when you get into really destroying a planet, destroying the reserve currency of the world when there’s really no substance, and forgettable all the toys, it’s a joke to think of any tokens or of that sort of that. That’s madness.
Warren Buffett: But it’s also madness to just keep printing money.
Charlie Munger: Yeah.
Warren Buffett: And we know how to do it, and we actually came from a pretty money-printing economy in World War II, which was required, and we suffered significant inflation. The price level, there’s a million ways to judge it, but maybe 10 times what it was then, or something like that. Well, that’s getting close to the edge of where you don’t want to hold dollars anymore. You want to hold something else. You want to hold real estate, you want to hold an interest in a business. There’s a lot of good ones.
Your best defense is your own earning power. If you’re the best doctor in town, if you’re the best lawyer in town, if you’re the best teacher in town, or even if it’s the 10th best, you’re going to make a good living. The economy is productive and you will succeed with your talents, but you won’t succeed by hoarding dollars. You’ll just succeed by the fact that your value to the community, which is a rich community overall, is sustained. And so the best investment is always in yourself. That’s the answer I would give you.
Charlie Munger: Well, we have a situation where we’ve learned to print money in gobs, and a big chunk of our young people go right into wealth management.
Warren Buffett: This is like we did.
Charlie Munger: Yeah, like we did. Yes, we’ve been bad examples. And I want to say that I didn’t realize wealth management was going to get so big when I went into it, and I also apologize for what’s happened.
Warren Buffett: Yeah, well, anyway, you did well.
Was Berkshire’s price for Pilot too high (32:34)
Warren Buffett: Becky.
Becky Quick: This question comes from Gary Gambino in Parma, Ohio, who says he’s been a Berkshire shareholder since 2004. He says the amount paid this year for the 41.4% stake in Pilot values the entire company at around $19 billion. That’s about six times what BP is paying for TravelCenters of America, but Pilot’s market share is just three times TravelCenters of America’s. Was it a big mistake to base the final price on 2022 earnings, which has unusually high fuel margins?
Warren Buffett: Well, that’s a very good question. And the answer is that we arranged to buy it in three stages, with the third stage being at the option of the owner of 20%. The first stage, we bought it at what turned out to be a very attractive price. The second stage turned out to be a very good year for the diesel business, which means that the seller got a very good price. And I would say that overall we feel very good about the fact we own 80% at the price that we do, but we would have been better off if we just bought the 80% to start with.
And the last 20%, the seller has the option, and that’s always an unintelligent way of structuring something. We’ve had that arrangement with others. Well, we’ve had it with the Furniture Mart. We bought 80% of the Furniture Mart on August 30th, 1983, almost 40 years ago, and it’s worked out perfectly. But when you give the other person the option, they’ve got some advantage. We have 80% of a business we like very much.
And the comparison to Travel America is really superior, because Travel America is not only much smaller, but they run all their properties. We have hundreds and hundreds of locations on the interstate that are zoned for commercial, and maybe 15 acres, or there’s nothing like it. And they’re not going to move the interstate two miles to the right or something. So we’ve got a position that, BP may or may not have made a fine deal. I’d read the prospectus, and I can understand. It’s a big, big source of output for BP.
But I like the management we have had at Pilot. I like very much the fellow who’s coming in. That’s the new CEO. I just have to tell you a little bit about Adam Wright, who’s taking that job on. He came from Omaha. He wasn’t selected because he came from Omaha. He came from North High, a public school that my wife graduated from. I’ve got grandchildren that graduated from there. He went to the University of Nebraska, almost set the rushing record in football, which will never be beaten because they’ve given up football. But I think he rushed for maybe 3,600.
He held three jobs while he went through there. He interned at MidAmerican 20 years ago. His mother worked to put him through school. It’s just Horatio Alger squared. And we have him to manage Pilot. And the Haslams have given us a wonderful business. Big Jim, he, my advantage, I mean, great people. And here we are. And I’m very glad we own Pilot. I just wish we bought 100% of it when I first made the deal, but that was not the deal. It wasn’t for sale.
Yeah, and similarly the last 20% of the Furniture Mart wasn’t for sale when we bought, so we bought 80% of it, and that’s worked out well. And we’ve done various deals various ways. The best way to do it is just write people a check and get the stock, as we did with TTI. But you can’t always make the same deal. We find if we like the business well enough and the people well enough, we will tailor it differently. But our preference is to write a check and own the whole place and keep the management in place.
It’s really wonderful to watch something like Adam Wright work. Basically, I don’t know what his mother was earning, but he went to North High, which is probably four or five miles from here. Public school graduate, and worked his way up, went for a short period to Pacific Gas and Electric, and we brought him home to run Pilot. And Pilot, well, the prices on diesel were way different last year. Pilot’s close to $80 billion of sales last year, but at more normal prices it’s significant, and it’s half that or thereabouts, and maybe a little more.
But he is, I don’t know how old Adam would be, but he’s in his 40s. And he came up through the organization that Greg Abel was involved with, and now here he is running a very major business. It’s good for sure to be able to do that. And somebody else may have gone to more prestigious business schools or anything. So we’ve seen what Adam can do.
Major mistakes to avoid in investing and life (38:34)
Warren Buffett: Okay, station 4.
Audience Member (Station 4): Good afternoon, Mr. Buffett, Mr. Munger. My name is JC. I’m 15 years old and I’m from Ohio. This is my fourth in-person Berkshire meeting. I have a lot of passion learning from your speeches, interviews and articles. Thank you for sharing your wisdom all the time. Mr. Buffett, in your annual shareholder letter this year, you said that Berkshire’s journey consisted of continuous savings, the power of compounding, the American tailwind and avoidance of major mistakes. You have humbly admitted in the past that you have made many mistakes, but this is the first time that major mistakes stood out to me. Could you please advise us on what major mistakes we should avoid in both investing and in life? I would also like to have Mr. Munger’s thoughts too, please. Thank you very much.
Warren Buffett: Charlie? Charlie said the major mistake you can make. Then you’re lucky if you’re in the United States. People around the world, they don’t have a lot of choices in some places. But you should write your obituary and try and figure out how to live up to it. And that’s something you get wiser on as you go along.
The business mistakes, you just want to make sure you don’t make any mistakes that take you out of the game, or come close to taking you out of the game. You should never have a night when you’re worried about investing, assuming you have any money to invest at all. And you should get to spend a little bit less than you earn. And you can spend a little bit more than you earn, and then you’ve got debt, and the chances are you’ll never get out of debt. I’ll make an exception in terms of a mortgage on your house.
But credit card debt, and we’re in the credit card business big time, and the board will stay in the credit card business. But why get behind the game? If you’re effectively paying 12% or 14% or whatever percent you’re paying on a credit card, you’re saying, “I’m going to earn more than 12% or 14% on money.” And if you can do that, come to Berkshire Hathaway. I hate to say this with Charlie around me, but it’s straight out of Ben Franklin. It’s not that complicated.
But I’ll give you a couple lessons. Tom Murphy, the first time I met him, said two things to me. He said, “You can always tell someone to go to hell tomorrow.” Well, that was great advice then, and think about what great advice it is when you sit down at the computer and screw your life up forever by telling somebody to go to hell or something else in 30 seconds, and you can’t erase it. And you haven’t lost the option.
And he said, “Praise by name, criticize by category.” Well, what makes more sense than that? Who do you like that criticizes you all the time? You don’t need to vilify anybody to make your point on subjects of discussion. And then he gave me another general piece of advice. I’ve never known anybody that was basically kind that died without friends, and I’ve known plenty of people with money who died without friends, including their family. But I’ve never known anybody.
And I’ve seen a few people, including Tom Murphy Senior, and maybe Junior, who’s here. Certainly his dad. I watched him for 50 years. I never saw him do an unkind act. He didn’t seem to do very many stupid acts either. It was not discriminating. He just decided that there was no reason to do it. And wow, what a difference that makes in life. Charlie?
Charlie Munger: Well, it’s so simple to spend less than you earn, and invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life, et cetera, et cetera, and do a lot of deferred gratification, because you prefer life that way. And if you do all those things, you are almost certain to succeed, and if you don’t, you’re going to need a lot of luck. And you don’t want to need a lot of luck. You want to go into a game where you’re very likely to win without having any unusual luck.
Warren Buffett: I’d add one more thought too. You need to know how people can manipulate other people, then you need to resist the temptation to do it yourself.
Charlie Munger: Oh yes. The toxic people who are trying to fool you or lie to you, who aren’t reliable meeting their commitments, a great lesson of life is get the hell out of your life, and do it fast.
Warren Buffett: Do it fast. And I would add, Charlie wouldn’t totally agree with me, do it tactfully if possible too. But do get them out of your life.
Charlie Munger: Yes. Yeah, I don’t mind a little tact, or even a little financial cost, but the question is getting the hell out of the lot.
When the negative people are family (44:43)
Warren Buffett: Okay, Becky.
Becky Quick: All right, this comes from Roger Lee Town. He says, “My name is Roger, from Hong Kong, a long-term shareholder of Berkshire, admirer and follower of Mr. Buffett’s and Munger’s wisdom and principles. Both of you have said before that the most difficult problems in life are always people problems, and one of the key lessons you have learned to be able to live a happy life and a successful life is to stay away from negative people. My question is, what to do if those negative people are your families, the people whom you can’t simply stay away from?”
Warren Buffett: Yeah, you minimize it, but you can’t. There’s no question about it. But Charlie gave an answer I thought was a master of tact the other day, where he says you always, how would I interact with people who behave well. He says, “Of course you have to make some exceptions for your family.” But it’s true. And I don’t know what it’s like to have a drunken, bullish, probably father, but parents just generally. How do you handle it?
And it’s very interesting that the MacArthur family, the very famous John MacArthur, the battle, set up the MacArthur Foundation. He had five kids, and four of them turned out to be superstars of one sort or another, and they had this crazy, generous, drunken father, but they all decided the thing to do was get the hell out of the house. And so, yeah, the father of the MacArthur Foundation did that, along with three of the siblings out of five.
So I was lucky. Charlie was lucky at it. If you have a, I mean, our fathers saw plenty of shortcomings in both of us, but it would still be there for us. And if you have one that won’t be there for you, it’s a very tough problem. And I think one way or another I probably would have gotten through that if I had that situation, but I think my life would have been a lot different. Charlie?
Charlie Munger: I have nothing to add.
Exclusive brands at Walmart and other retailers (47:25)
Warren Buffett: Okay, station 5.
Audience Member (Station 5): Hey Warren, Charlie, good afternoon. My name is – from Arkansas, home of Walmart. I’m a shareholder since 2019 and my daughters are shareholders since 2020. This is my first time coming to the shareholders meeting, and my question is the relationship with BNSF, McLane and consumer goods like Fruit of the Loom and Garanimals, etc. My question is, Garanimals is exclusively sold at Walmart and Fruit of the Loom is sold at many other retailers. How does Berkshire Hathaway decide some items are sold at some retailers exclusively versus others are sold at many retailers?
Warren Buffett: Well, that’s a good question. But obviously, if you have a product, you’d love to control the distribution, and you’re probably going to get better gross margins if they ask for you by name. I mean, they just had an article about Bernard Arnault of LVMH, and he’s got a blue box of Tiffany, and the blue box itself means something. And Coca-Cola, the bottle meant something. In the 1920s, I think there was a study of that kind of hobble skirt bottle, and blindfolded, a very high percentage of the population could recognize it was Coca-Cola. When they can recognize not only the product but the container, you’re going to have good gross margins.
And if you’re just another cola, and there have been hundreds of them, and even if you have distribution through something like Walmart, who has Sam’s Cola, it just doesn’t, it’s not the same. I mean, here I am, in 1886 or so, John Pemberton in Atlanta created it, and they spent very significant amounts of money advertising. On the other hand, Hershey’s didn’t spend any money on advertising. So we have observed, Charlie and I both have observed, so many products, so many methods of retail, and we really think we know quite a bit, a lot of it, and we also know how much we don’t know about it at the same time. And it doesn’t mean that we want to go into retailing ourselves, but it does mean we’ve learned to some extent what to avoid, and we’ve learned when somebody really has something.
Garanimals has something. It’s just that there’s only so many. Walmart does a great job of distribution for us, and it’s a good product for Walmart, it’s a good product for us. And on Fruit of the Loom, they can sell lots of types of underwear and they can do a big volume, but we’re not going to make as much money relative to capital employed or anything with a product that has a whole bunch of competitors. And if the kid wants Garanimals pajamas or something, it’s not the sort of product that causes people to drive 20 miles out of their way to buy it or anything of the sort.
But if you’re in the Walmart and you’re picking out pajamas or something for the kid, and he or she wants a particular product, and it’s reasonably priced and everything and wears well, we’re happy to have it distributed through somebody with the distribution power of Walmart, and they’re very happy to have the product. On balance, it’s obviously better if you own See’s Candy than if you own the no-name candy company.
Particularly women, people buy it as gifts a couple times a year. I mean, they know that if they give it to their girlfriend, if they give it to someone in the hospital, if they give a gift at Christmas or going to a dinner, they know if they hand the box of candy to somebody, they don’t say at the same time, “Here, I got a wonderful deal on this candy.” I mean, that sort of kills the moment, right? What they really want to see is a smile on the other person’s face that they’re receiving it, and they get it.
So, knowing what customers, and See’s box chocolates are not remotely the market that soft drinks are, and the product does not travel particularly. Hershey’s chocolate is in trouble. I mean, if you look at candy bars, what’s popular in the UK isn’t that popular in the US, and all kinds of things. Coca-Cola travels. There’s 200 countries, and roughly, in probably 180 of them, it’s the number one product. And how do you do it? Well, it helps if you started in 1886, from that point forward.
So we’ve learned a lot, we’ve got a lot to learn, but we did learn that something like Garanimals, we understood. When it came around, nobody ever heard of it. We bought it for a very low price, as it turned out, 20 years ago, and still nobody knows, hardly, that we own it, and that’s fine. But they know what Garanimals are, and it has legs. It just keeps going year after year. And some things are like pet rocks, and we’re learning all the time. Charlie?
Charlie Munger: I have nothing to add.
Warren Buffett: Okay. You probably have never bought any Garanimals also.
Charlie Munger: No, I never. I don’t even wear them.
Paramount Global and the streaming wars (53:52)
Warren Buffett: Okay, Becky.
Becky Quick: This question comes from Barry Laffer in New York City. Berkshire owns about 94 million shares of Paramount Global as of the last published data. This asset-rich company has disappointed on recent quarterly earnings reports and just this week slashed its dividend by 80%. How do you see the streaming wars evolving, and do you still have conviction in your investment thesis? Is your investment thesis based on the company being an acquisition target or based on its fundamentals?
Warren Buffett: Yeah, and how would you like to manage my money for nothing? We are not in the business of giving stock advice to people, and people who don’t know anything about stocks can make a lot of money doing that, and we don’t think it’s something we should give away. But I will say this: it’s not good news when any company passes a dividend or cuts its dividend dramatically.
And the streaming business is extremely interesting to watch, because there’s people, people love to use their eyeballs watching, being entertained on a screen in front of them or a phone or whatever it may be. But there’s a lot of companies doing it, and you need fewer companies or you need higher prices, and well, you need higher prices or it doesn’t work. And you don’t lock in people when you get them to join up for the streaming period when your serial runs. I mean, you keep them on for a while, but you can’t lock them up. And we’ll see what happens.
I mean, I had a gasoline station when I was 21 or 22, and it’s about four or five miles from here, and we had one competitor, and he determined our profit, because we looked at his price every day, and if we cut the price he’d match it, and we couldn’t raise the price, and he did twice the gallonage. So he won. And there’s just basic business problems that you see with certain industries, because you don’t see what the other – Disney was unique, and its animated, what it offered in the ’30s and ’40s, and they wrote the stuff off on the first showing, and then they rejuvenated Snow White and all these other people every seven years, and that was fine.
But this is a different world, and the eyeballs aren’t going to increase dramatically in the time they can spend, or it’s not going to increase dramatically, and you’ve got a lot of companies that don’t want to quit. And who knows what pricing does under that. But anybody that tells you they know what pricing will do in the future is kidding themselves. Charlie’s had a lot of experience, incidentally, with Hollywood. I mean, he used to, before I even met him.
Charlie Munger: I think the movie business is one tough business.
Warren Buffett: Yeah, that’s my view. The talent will make the money, the agents will make the money, and if you’ve got a theater, the theaters are now doing 70% of the business that they did before the pandemic. And big hits, you have enormous grosses, but you can’t reduce the supply. People have only got so many hours in the day, they’ve only got two eyeballs, and they’ve got more choice than ever before, and they’ve got something cheaper that offers them the same experience. And some of them like to experience, particularly the big hits, of going. But it isn’t like you can double the number of people or double the eyeballs or anything like that.
And you’ve got a lot of people, the talent will always get paid, when you essentially are packaging that talent one way or another, and you need to get higher prices, and you’ve got a lot of strong companies that don’t want to quit. That’s an interesting equation.
Charlie Munger: Hey, if you think the movies are tough, try to invest in a New York show. I don’t know if a conventional stage, there they think it’s a breach of faith in that business to let the person who put up the money ever get any money back.
Warren Buffett: Yeah, well, Charlie saw a lot of that, actually.
Charlie Munger: Yeah, I like those businesses.
Warren Buffett: Don’t tell them what happened on Cleopatra, Charlie.
Charlie Munger: No. It’s a business that everybody’s tempted. They love the idea of going in it, and they get a certain amount of psychic income. But I never owned any racehorses either.
Warren Buffett: Well, my father and I used to talk about claiming a horse at Ak-Sar-Ben. We never quite got around to it, and we had a lot of fun at the track together.
Coal plant retirement and renewables in Iowa (58:54)
Warren Buffett: Okay, station 6.
Audience Member (Station 6): Good afternoon. My name is Hannah Hayes, and I’m a high schooler from Iowa. You said earlier today that transitioning to renewable energy has the people and capital to support it. So with enough investment in renewables, the development of energy storage technology to soon meet Iowa’s energy needs, and support from the government system through Inflation Reduction Act funding, why hasn’t Berkshire Hathaway Energy truly invested in the future by accelerating retirement plans for the coal plants, which have high operating costs and are currently Iowa’s biggest carbon polluter, and will continue to be until they’re finally retired in 2049, which is too late to be curbing emissions according to the IPCC?
Warren Buffett: And it’s very interesting. In Iowa, we have actually produced more wind energy than is used, the total amount of energy used by our customers. But it’s not producible 24 hours a day, necessarily. So there’s problems. And incidentally, in Iowa, a significant majority of counties welcome us when we come around and want to put in wind, and some don’t want it. I mean, there’s a not-in-my-backyard someplace. There’s other places where they love the money they get from a small plot of ground, and people like the taxes that are paid. But I would say that if there’s one state in the Union that stands out in the development, it’s Iowa.
But what’s also interesting in Iowa is that we have one other major company. There’s always loads of little co-ops and all kinds of things that sell electricity, but we have one major competitor, and our prices are significantly lower. And as a matter of fact, we are now in the Omaha Public Power District, and three miles or four miles away we’re selling electricity in Iowa, and we are selling it cheaper, even though public power was invented in Nebraska. I think it’s George Norris did it, back in the 1930s. And Nebraska’s resisted, to some extent, wind power more than Iowa. But like I said, our competitor or alternate source hasn’t really pursued it the way we have.
But I would say that our record in wind and solar has not been topped by any utility in the United States. And of course it’s been aided by the fact that most utilities pay out 70% or 80% of earnings in dividends, and we haven’t taken a common dividend out of, we had a little tiny preferred, we haven’t taken a common dividend for 20 years. We reinvested, I don’t know how many billions. That’s the reason why their earnings have gone from $200 million to $4 billion. But we’re not earning a higher rate of return on capital than we were when we started. We just put way more capital into the businesses. We went along, kept reinvesting the capital.
So I wish Greg were here to tell you more details about it, but I would say that we’d really put Berkshire Hathaway Energy’s record against any utility in the United States. Charlie, you’ve watched it.
Charlie Munger: Well, I have. And I’m not personally at all sure how bad the global warming is going to be. I don’t think anybody knows for sure whether seas are going to rise two inches or 20 feet. And so I think there’s a lot of false claims here, in a world where much is not known.
Warren Buffett: Yeah. Wyoming, there is a lot of wind in Wyoming, and we are building transmission line to extend out through the West. But if it was World War II and they told us to do it, and we had a czar in Washington who could say, just get it done, like I said, the Henry Kaiser, building ships, you can’t believe how far ahead we would be from where we are. But we’ve got some money, we’ve got the know-how.
And we do spend, this year, our depreciation in our utility companies is on the order of $4 billion, and we spend maybe $3 billion additional. So maybe we spend $7 billion. And there are very few companies in the utility industry that are spending that percentage of their depreciation. But we’d love to be spending more. But there are people all over that don’t want, they don’t want the pipeline to go through there, they don’t want the tower, whatever it may be. And that is the problem of a democracy.
And even, as I mentioned, within Iowa, you’ve got a great many counties, the great majority of the counties, I think, that welcome the wind power, and you’ve got some counties that don’t like it. And we’re obviously going to work with the ones that do want to work with us. We do not have the ability to go in and tell anybody what to do on that. And there’s a public utility commission in every state that basically governs what we earn on it, what we do, and that’s the way the industry is developing. That’s not bad, unless you get into things that in effect extend, where they’re part of a countrywide system rather than a statewide system.
Charlie Munger: I think also that even if we weren’t worried about global warming, it would make sense to shift to renewables to conserve our hydrocarbons. There are certain things hydrocarbons can do that nothing else can do, and there’s only so much of them. Why not be cautious in conserving them?
Warren Buffett: And because they’ve got so much more efficient too. I mean, the wind, I mean, if you look at what we’re doing now, those towers are way more efficient. But there’s a lot of people that are talking, that did all my things that can’t be done, and then there’s a lot of nonsense in this field.
Charlie Munger: Yeah. If you like nonsense, this is the field for you.
Warren Buffett: Well, but we’re in the field, so I know, I know.
Oil, the Permian Basin and Occidental (1:06:42)
Warren Buffett: Okay, Becky.
Becky Quick: This is a question from Monroe Richardson. The Wall Street Journal reported in March that oil producers are producing less oil and may have reached their peak in the Permian Basin.
Given the major positions of both Occidental Petroleum and Chevron in the Permian, would you please explain the rationale for Berkshire’s significant holdings of both those companies, considering that future outlook for oil there?
Warren Buffett: Well, there’s no question it’s really interesting about oil, and Charlie knows way more about all of them. When did you buy that royalty in your Bakersfield or whatever it is? But that was before I met you, right?
Charlie Munger: Yes. No, it wasn’t before. It was, but it was, yes, it was, it’s just before. You’re right. Yeah, and that got him early, still paying me $70,000 a year.
Warren Buffett: What’d you pay for that?
Charlie Munger: $1,000.
Warren Buffett: Yeah, yeah. Now that’s the opposite of the Permian. My dad bought $1,000 or $1,500 worth of royalties before he died in 1964. He left it to my mother, my mother left them to her two daughters, and my older sister died, and my younger sister’s here today, and she gets these checks every month, and she knows about all these different fields and what they’re producing. And that’s the reality of half of the oil production, or something around that, in the United States.
And then the other half, the shale, and, you know, if you’ve gone to the movies, I never watched oil, you’ve never watched the things that are pumping Charlie’s royalties in California, you see these gushers of oil. Well, in the Permian, and I’m like, this should sink in on you, the first day when you bring in a well, you know, it may be 12,000 barrels or maybe 15,000 barrels, and it’s even, it’s dangerous. Occidental had one come in at, I think, 19,000 barrels or something like that one day, and in a year, year and a half, it becomes probably nothing. It’s just a different business, in effect.
And the United States, it’s interesting, we use whatever we use, maybe 11 or a fraction, what we produce, at 11 and a fraction million barrels of oil equivalent a day, but if shale stopped, I mean, it would drop to 6 million very fast. Well, just imagine taking 5 million barrels a day out of the production in the world. And then we’re also taking down our Strategic Petroleum Reserve. The Strategic Petroleum Reserve’s the ultimate oil field. You don’t have to drill, it’s just, we’ve got it. It was supposed to be strategic, but it gets involved in politics.
So, different kinds of businesses, and basically, we like them. Occidental’s position in the Permian, and we wouldn’t like that position that well, I got the minus, one day it got to minus $30 a barrel. Well, that was crazy, of course, but if oil sells at X, you know, you do very well, and it was also the half of action. You know, your costs are the same and it doesn’t change the production, and it doesn’t work as well, but it also brings down the oil production of the United States very fast. So we don’t know what oil prices will be, but we do very much like the Occidental position they have.
That’s why we financed them a few years ago, and it looked like it was a terrible mistake when the oil market just totally collapsed, and then it changed around and we bought a lot of the common stock in the last few months. They’ve reduced our preferred, which we don’t like, obviously. We’d be disappointed in them if they didn’t reduce it. It’s intelligent from their standpoint. So we’ve taken, of the $10 billion preferred, we’ve gotten maybe $400 or $500 million of it retired at 110% of par.
But Vicki Hollub is, she’s an extraordinary manager of Occidental. Her first job was with Cities Service. That was the first stock I bought, in 1942. She knows what happens beneath the surface. I know the math of it, but I wouldn’t know, I would never find this idea, what to do if I was in an oil field. I mean, I can dig two feet down in my backyard, and that’s my understanding of subsoil in the world. I can’t picture the field that Charlie has been collecting that monthly check from for 50 plus years, 60, well, 60 years roughly, or my sister’s getting, various fields where they just keep pumping and pumping and pumping.
And we in the United States are lucky to have the ability to produce the kind of oil we’ve got from shale, but it is not a long-term source, like you might think by watching movies about oil or something of the sort. Charlie?
Charlie Munger: Yeah, it really dies fast, those shale wells. If you like quick death of the oil wells, that we have them for you.
Warren Buffett: No, but Occidental, they’re doing a lot of good things.
Charlie Munger: Yeah, they do a lot of new wells, and yeah, they’re doing it at a profit, but it’s a different kind of oil. It’s just different.
Warren Buffett: Yeah, yeah. And that’s true of almost half the oil produced in the United States. And there’s times more oil down there that nobody knows how to produce, and they’ve been working at it for like 50 years. But they worked at the existing shale production for about 50 years before they figured it out, and it was weirdly complicated when they finally were able to do it. There’s only one type of sand that works. Can you imagine a horizontal pipe, you know, that’s maybe a mile and a half or something? It’s just so different than what you think about.
Charlie Munger: You can drill laterally for three miles, two miles down.
Warren Buffett: Yeah. How the hell do you drill two or three miles laterally when you’re already two or three miles under the Earth? They’ve mastered a lot of very tricky technology to be able to get any oil out of these wells at all. And we love the position with Occidental, and yeah, we love having Vicki run it. And there’s a lot more oil down there if anybody can figure out another magic trick.
Charlie Munger: That’s all we need, is another magic trick. But Occidental have some other things too.
Warren Buffett: Yes, yes. But the price of oil still is incredibly important in terms of the economics of short-lived oil. I mean, no question about that.
Well, and we will, incidentally, you know, there’s speculation about us buying control. We’re not going to buy control. We don’t want to. We’ve got the right management, and we wouldn’t know what to do with it. Charlie wouldn’t know what to do in an oil field, sitting here.
Charlie Munger: Buying coal would be like going out and seeking to acquire a cancer or something. You can’t even borrow to expand a coal mine now. It’s really, it got very unfashionable.
Warren Buffett: Yeah, and we think, frankly, some of the things are ridiculous on both sides, in both extremes. I mean, you’re dealing with physics, you’re dealing with, you know, it’s the politicization of positions on something that’s enormously important in terms of energy. It just lends itself to demagogues and fundraisers and advisory organizations and everybody inside. But we will make rational decisions, and we do not think it’s un-American to be producing oil. And there is no oil basin in the United States that compares to the Permian in terms of promise.
Charlie Munger: Yeah, we were lucky.
Warren Buffett: Well, we didn’t know it was there until, yes, not that many years ago. It has ever been used up, and they always knew that shale was there, but they thought it was going to stay unrecoverable forever.
The second or third stock I bought was Texas Pacific Land Trust, and they owned 3 million acres down there, in fee, and there were grazing revenues of $10,000 a year or something like that. They were sitting on this incredible amount of oil, and basically that company is now actually part of Chevron. It went through Texaco and did all kinds of things, and they’re still a Texas Pacific Land Trust, but a lot of that property is fee owned by, their minerals are owned by Chevron, which is some advantage.
But it’s, well, it’s an interesting subject, I’ll put it that way. And we will not be making any offer for control of Oxy, none of it. But we love the shares we have, and we may or may not own more in the future. But we certainly have warrants, which we got as part of the original deal, on a very substantial amount of stock at around $59 a share, and that warrant lasts a long time, and I’m glad we have them.
Charlie Munger on Elon Musk overestimating himself (1:17:26)
Warren Buffett: Okay, station 7.
Audience Member (Station 7): My name is Max Joe, and I’m from Toronto, Canada. I have a question for Charlie regarding a statement you made in the past. You once mentioned that you would prefer to hire someone with an IQ of 130 who believes it’s 120 over someone with an IQ of 150 who thinks it’s 170. I understand that you were referring to Elon Musk. Given the recent success of his ventures, such as Tesla, SpaceX and Starlink, I’m curious to know if you still hold the view that Elon Musk overestimates himself. Thank you so much.
Charlie Munger: Well, yes, I think Elon Musk overestimates himself, but he has a, he is very talented. So he’s an overestimating somebody who doesn’t need to overestimate to be very talented.
Warren Buffett: There’s a Bill Maher program, about a week old, maybe two weeks old, but he interviews Elon, and Elon does a terrific job going toe to toe with Bill Maher, who, I mean, it’s worth watching. And Elon is, he’s a brilliant, brilliant guy, and I would say that, you know, he might score over 170. But he, you know, he dreams about things, and his dreams have got a foundation.
Charlie Munger: He would not have achieved what he has in life if he hadn’t tried for unreasonably extreme objectives. He likes taking on the impossible job and doing it. Warren and I are looking for the easy job that we can identify.
Warren Buffett: Yeah, if we can do it playing tic-tac-toe, we’ll do it. You know, I mean, we have a totally different way of going in the hallway. Yeah, but we don’t want to compete with Elon in a lot of things. I mean, you know, we don’t want that much failure.
Yeah, and it takes over your life, and I mean, in a way that it just doesn’t fit us. But, you know, they’re going to be, well, there have been important things done by Elon already. And it requires, fanaticism isn’t the word.
Charlie Munger: Yeah, it is the word.
Warren Buffett: Okay, well, it isn’t quite the word, but yeah, but it’s a dedication to solving the impossible, and every now and then they’ll do it. But it would be torturous to me or Charlie, and I like the way I’m living, and I wouldn’t enjoy being in his, but he wouldn’t enjoy being in my shoes either.
Charlie Munger: No, no.
Warren Buffett: Watch the Bill Maher interview. Okay, Becky.
The cash pile and distributing cash to shareholders (1:21:06)
Becky Quick: This question comes from Foster Taylor. At the 2010 Berkshire annual meeting, you said the one question that you would ask of the Berkshire CEO would be about the distribution of cash to shareholders. As the Berkshire cash pile grows larger and larger, so let me ask that question. Do you still feel confident of the future prospects for our over $100 billion in cash on hand, or are we getting closer to cash distributions?
Warren Buffett: Well, our, you know, the one thing, if Berkshire shares are selling for less than we think they’re worth, that’s a pretty, that could be a pretty big, whether to distribute cash. But what we really like to do is buy great businesses. If we could buy a company for $50 billion or $75 billion, $100 billion, we could do it, and we can do it, and our word’s good.
It’s difficult with a public company because, in effect, if you bid on a company, you make the bid, and their shareholders vote months later, and you’re giving an option. If we’re good for it, and the other guy has a way to top it, or all kinds of things, they can get out of it, and you get paid 2% for that, or 1% for that. That is not an appropriate price. And on the other hand, Delaware will decide whether they should do it or not, and that’s the way the world is. I mean, that’s the law. So it’d be easier to do with a private company, and there aren’t very many that are big.
On the other hand, there’s nobody else that can quite make a deal like we can under the right circumstances. And there could be a situation where a number of very decent companies have got a very uncomfortable borrowing structure, and money comes due to them at the exact wrong time, and that’s when they pick up the phone. It was Tiffany and Harley-Davidson and, you name it, I mean, a whole bunch of companies in 2008. That sort of thing will happen again. Whether it results in us getting the calls, or what the world is exactly at that time, but the one thing we know is that the number of phone calls that you can make at a time like that is very, very limited.
And there can be good companies. They don’t want to sell the company, necessarily, but they just may need $5 or $10 or $20 billion, depending on what company you’re talking about, and that can happen. And our own shareholders can be selling the stock too cheap, and we’ll never do anything to make them sell it cheap, and we’ll tell them the truth about what the business is. But if market circumstances result in us being able to buy $50 billion of our own stock, we’ll buy it. So we’ll see what the world holds.
But I don’t, we don’t have the opportunities we used to have, but we’ve got enough, and we’re making money with the things we have. It isn’t killing us to hold $130 billion of bills at 5% plus bond equivalent yields. And everybody says, well, yields are going to get out of the future. I don’t have the faintest idea what else we’re going to do in the future. And, you know, the prime rate was 21.5% in 1981 or ’82, and people were worried that it was going to go totally out of control, and Volcker kept it from happening. But if Volcker hadn’t been in there, who the hell knows what would happen? But we’re running Berkshire so that we’ll do okay, and maybe we’ll do a little bit better than okay. Charlie?
Charlie Munger: Okay.
Warren Buffett: Maybe fine. Okay.
Charlie Munger’s advice for a young lawyer (1:25:10)
Warren Buffett: Station 8.
Audience Member (Station 8): Hello, Mr. Buffett and Mr. Munger. My name is Carlos Sanchez, and I’m honored to be here from Guadalajara, Mexico. Mr. Munger, as a fellow lawyer, I have a question regarding corporate law. Considering your experience and success, if you were to offer guidance to someone, like when he was at the beginning of his career, and before becoming Berkshire Hathaway company’s lawyer, what key principles or lessons would you suggest to help him excel in his profession?
Charlie Munger: Well, I’m not sure I quite caught all of that, but I don’t think I have a lot of advice about how to succeed as a lawyer. I have a son-in-law who describes modern law practice in a big firm. He says it’s like a pie-eating contest where you win, you get to eat more pie. And I advise you to avoid that kind of a life. Life is too short to just do nothing but eat pie.
Warren Buffett: Yeah, yeah. Charlie has not practiced law since what, 1964, maybe? Or whatever it was.
Charlie Munger: 1962.
Warren Buffett: ’62. And Charlie has given me four or five pieces of advice that don’t really come from his legal background, but because he knows the system so well, and, you know, really did do quite well at Harvard Law School despite his taunting of teachers and a few things. He has given me four or five solutions on things that nobody else in the world would have given me, law firm or otherwise. And it’s been within almost a nanosecond of when I described a problem to him, and he just gave me the answer that nobody else would have come up with. I told you one of them last year, so I won’t repeat it at this meeting, but we’ve got the best lawyer in the world, and Charlie, it was something that really matters, and there have been times when I’ve taken advantage of that.
And he totally didn’t want to be a lawyer. He didn’t want to sell his time at maybe 20 bucks an hour or something to people he thought were making the wrong decisions, and he knew more about it than they did, and that just did not strike him as a good way to go through a life. And I think he’s probably right on that. I think it’d have really gotten to be miserable if he had to keep doing that. It’s just no fun. It’d be like me giving investment advice to somebody, or taking it from somebody. I just wouldn’t want to do it in life. And Charlie figured that out, and so we decided to work for ourselves, and it’s worked. We’ve been happy ever after.
Charlie Munger: We have no complaints.
Warren Buffett: Yeah, none.
The new 15% corporate minimum tax (1:28:55)
Warren Buffett: Okay, where is Becky?
Becky Quick: This question comes from Ryan Harding, and it’s about the new 15% corporate minimum tax rate. As he sees it, its implementation is currently understood, he thinks it, as he understands it, to apply over rolling three-year periods and to be based on reported earnings. First, is the inclusion of unrealized gains and losses in reported earnings under the current financial reporting standards contribute to the calculation for corporate minimum tax rate purposes, and could it potentially convert some of those notional deferred taxes into cash taxes, even if a rise in the market price of a major holding is only temporary but rather extreme? And then second, could it reduce the effect of some of the renewable energy tax incentives and others?
Warren Buffett: Yeah, I think the answer on the second part probably is no, but I don’t want to say it is for sure, because he’s asking the same questions I ask of Marc Hamburg, who’s the smartest guy on combining understanding a business, understanding the tax code, understanding SEC rules and everything else, that you’ll find in corporate America. And these questions, that particular question on marketable securities, I don’t think has been answered yet. And I think that there are a number of things about the new tax act that were not an accent.
But I would say this. You know, we have said ourselves what we think the proper approach to operating income. We didn’t design that because this tax law came along, it was some years back. So we would think that you wouldn’t include unrealized capital gains in. But we’ve got enough, I think, no matter how things turn out, you know, the 15% tax doesn’t bother me in the least. And we can figure ways, once we know the rules, where we will pay the 15% tax.
And, you know, we were paying 52% taxes, federal income taxes, when I bought control in the partnership of Berkshire Hathaway. I mean, the tax rate has come down dramatically. And the deferred tax that was embodied, for example, at Sanborn Map, when I was involved, in a system that was allowed under the tax law to avoid that tax, but that was a huge tax, 52%. So we will live with this tax code, and we do not think corporations are overtaxed in the United States. And, you know, I think that the conversation about how we lose out to the world and all that sort of thing, it’s really nonsense.
But we’ve got a new law that hasn’t yet, the regulations haven’t been written on it, and when we know what the game is, we will absolutely figure out a way to pay 15% every year, which generally we’ve been paying anyway. And as I pointed out, if there were 1,000 corporations in the United States that paid what Berkshire has been paying, nobody else in the United States, no individual, no corporation, would ever pay any income tax, Social Security tax, gift tax, estate tax, anything else. A thousand like Berkshire Hathaway would produce the revenue that’s being produced by the federal government, that’s being derived under the present tax code from everybody in the United States.
And I don’t feel badly about that, and I’d love to get up to where it’s 1 in 500 or something of the sort. But I’d like to do it, endorsed us, right? I’m happy to do it. I think we are privileged to live in the United States, but we also have to control spending, and that’s something that Congress doesn’t quite, widely like to give, like to do, and they didn’t like to do it, but my dad went to Congress, but they’ve dug in more as the years have gone by. Charlie?
Charlie Munger: Well, we covered this subject earlier.
Warren Buffett: Yeah. Okay.
Funniest untold stories and the hardest part (1:33:51)
Warren Buffett: Station 9. Am I right on this?
Audience Member (Station 9): Yeah. My name is Avalon Gross, and I am from Los Angeles, California.
I am a shareholder, and it’s my fourth year coming to the Woodstock of capitalism.
Warren Buffett: Yeah, yeah, we’re glad you came.
Audience Member (Station 9): Thank you so much for everything, Warren Buffett and Charlie Munger. What is the funniest story that you have never told about each other? And also, what is the hardest part of your business?
Warren Buffett: I’ll answer the second part of your question. The second part of your question is that we don’t have a hard business. We love our business. Every morning when I get up, I feel good. I don’t know what’s going to happen that day. Maybe nothing will happen, but maybe something will happen. And if nothing else, I’ll roll some T-bills or something. But I work with the greatest group of people you can imagine. We like each other, and nobody is after anybody else’s job or anything of the sort.
It’s ideal working conditions, and it’s five minutes from my home or thereabouts. So I haven’t spent my life commuting. I just can’t imagine having anything better. And Charlie’s got a lot of funny stories you haven’t heard, but we’ll see which one he comes up with.
Charlie Munger: Well, I think Warren and I are naturally so ridiculous that we don’t need very many funny stories. We each do things that are peculiar enough so that we can keep one another amused.
Warren Buffett: Tell them what you told the lawyer when we were buying Hochschild Kohn.
Charlie Munger: I don’t remember. You tell them.
Warren Buffett: Well, well, remember, it was nice. We were down in Baltimore buying a department store, and we needed a lawyer, and we needed a lawyer who was nearby and would do exactly as told. And Charlie came up with a very good lawyer from Wilmer Cutler, I believe. And I don’t know whether Charlie remembers the instructions he gave the lawyer or not.
Charlie Munger: Yeah, no, I don’t.
Warren Buffett: Oh, well. Charlie told the lawyer, who we’d never met before, and he said, well, he says, treat Warren – I was 36 at the time, or 35 – treat Warren like any other 90-year-old. This guy knew exactly what he meant, and we made the deal in a hurry.
And then we went to the bank, the First National Bank, and I believe it was a Maryland National Bank actually, and there was a fellow named Cami Slack there, wasn’t it, Charlie? And we wanted to borrow $6 million against a $12 million purchase, and Cami looked at us with bewilderment. He says, you want to borrow $6 million in this little old Hochschild? And Charlie and I said something to the effect, well, the Maryland National was our first call, and if they didn’t want to do it, we had another bank we’d go to. And anyway, they allowed us the money.
But when he said a little old Hochschild Kohn, we immediately started thinking, maybe this isn’t the best deal we’ve ever seen in our lives. And from that point on, we were trying to figure out how to sell it. So we had as much fun, Sandy Gottesman was involved with us then too, and we had as much fun out of deals that didn’t work, in a certain sense, as the ones that did work.
I mean, if you knew you were going to play golf and you’re going to hit a hole in one on every hole, you just hit the ball and it went in the hole 300 yards away or 400 yards away, nobody’d play golf. Part of the fun of the game is the fact that you hit them into the woods, and sometimes you had to get them out, and sometimes you don’t. So we are in the perfect sort of game, and we both enjoy it, and we have a lot of fun together.
And we don’t have to do anything we don’t really believe in doing. I mean, we are not dictated to by any group. And so we get to forge our own destiny and, in a sense, set our own principles by which we can run the company. And that’s a huge luxury in life. And we don’t want to be president of any other company in the world, or CEO or anything else, where we have to conform to certain things that we really don’t want to conform to. Kind of fair description, Charlie?
Charlie Munger: Yeah, it is.
Warren Buffett: Okay, Becky.
Activision Blizzard after the UK block (1:39:11)
Becky Quick: This question comes from David Kass, who is a professor at the business school at University of Maryland. He says, at last year’s annual meeting, Warren mentioned that Berkshire had taken a large stake in Activision Blizzard as a merger arbitrage play. Since the UK regulator has blocked its acquisition by Microsoft, has Berkshire reduced or sold its stake?
Warren Buffett: Well, I think in terms of what we do with stocks, we don’t give information except when required to, which is in the 13F or whatever we file. And there’s certain things you can actually figure out by looking at our 10-K or 10-Q, which we filed this morning, but you have to look pretty hard.
But I would say this. I think Microsoft has been remarkably, what’s the word, willing to cooperate with governing bodies. I mean, they want to do the deal, and they met the opposition, it seems to me, more than halfway. But that doesn’t mean that it gets done. If a given country, in this case the UK, wants to park it there, they’re in a better position to block it than the United States, just the way the world works. And that doesn’t get solved by offering more money or so. I don’t know how it turns out. But if it doesn’t go through, I don’t think it’s through any shortcoming by either Microsoft or Activision. But not everything that should happen does happen.
Well, we ran into it when we made the deal with Dominion Energy 18 months ago, and they let us buy a good bit of what we wanted to buy. And then the government in effect said you can’t buy something else, which I think we would have done a better job with than anybody else did, and which the states involved didn’t object to, which the customers didn’t object to. But you don’t take on the United States government, you know. And you try and figure out things that you won’t have a problem with. And I think in that case the US government made a mistake. I think the British government’s making a mistake in this case. But that’s life in the big city, sure. I would say, and what we do will depend on a lot of things. Charlie?
Charlie Munger: Well, I think what we do, yeah. You kissed that one off beautifully.
Incentives for owners who sell to Berkshire (1:42:28)
Warren Buffett: Okay, station 10.
Audience Member (Station 10): Hi Warren, hi Charlie. My name is Anderson Fuller, and I’m from Avonport, Nova Scotia, in Canada. And before I ask my question, I just want to thank you for all you’ve done to give us insight into your minds as investors.
So for me, the most compelling takeaway from Berkshire is your guys’ emphasis on, and successful use of, properly aligned incentives. In my view, owning and leading a business has two central benefits. First, you directly benefit as the company goes, through your equity in it. And second, you have autonomy. Incentives for employees are a bit easier to understand, such as offering benefits, fair pay and creating a strong culture, but I’ve always struggled to understand them at the highest level.
Even though you say Berkshire gives its managers significant flexibility, it must be less than what they had when they were independent. Additionally, you would think passion and a willingness to sell would be inversely correlated. So how exactly does Berkshire bridge this gap and incentivize owners of its subsidiaries to give up these benefits to Berkshire? Thank you.
Warren Buffett: Well, what we really hope to find is managers who love their business but don’t like a lot of what comes with it as a public company. I mean, if they have to spend a lot of time listening to people tell them what to do about this or that, and they can’t afford to irritate them, or they have to go along with their trade association, or whatever they may call it, because you don’t want to look like a free rider. And then there’s all kinds of things, compromises that people have to make in most jobs. And Charlie and I solved that problem.
I had five bosses in my life, and I liked all five of them, and two of them were just huge factors in making my life better. But I liked all five of them. A couple of them are, you know, some people here: JCPenney, Cooper Smith. You know, I worked for 75 cents an hour, and I loved them. I loved working at Penney’s. Well, I didn’t love working at Penney’s, but I loved working for Cooper Smith. And, you know, it was 75 cents an hour, but I had to do what they told me to do, which was to sell men’s shirts first, then men’s clothing, then children’s clothing and so on. And I loved working for the newspaper, and I had a great manager when I was at University of Nebraska. Got to work for Ben Graham. Everything worked out.
But there’s nothing like working for yourself. And if you can’t own a big company, working at Berkshire Hathaway, running a company, is the closest thing you will get. You don’t have to spend time courting analysts who you’ll probably have contempt for in many cases. You don’t have to spend time with banks, you know, getting money, and particularly in terrible times. There’s all kinds of, you get a lot in the way of freedom, that I would think would be meaningful to me.
And it might be better if you own the whole place yourself, but maybe you’ve got siblings that want out. Maybe there’s a million reasons why you may not be able to achieve that, unless you sell to Berkshire. And that’s easier, probably, if you have a family business where people want to go in different directions than it is with a public company, but there’s still possibilities there.
So that’s why I think, if I owned a public company and it was worth a great many billions of dollars, and Berkshire Hathaway wanted to buy it and the shareholders were willing to vote it, I would consider the way I would feel about life. But one thing, I wouldn’t want to retire at 65. I’d want to keep working. There are reasons to sell to Berkshire, which Charlie and I, in certain positions, if we were on the other side, would take the deal. But it isn’t for everybody. Charlie?
Charlie Munger: I think we have a pretty good one. We’ve been very lucky in it. And I don’t know, it seems to me that most of the people are going to end up the way we did. They almost already know how to do it.
Warren Buffett: Well, the most important purchase in retrospect that we may have made was National Indemnity, not because of specifically what it did, but what it led to. And Jack Ringwalt controlled the company, and I knew him, I liked him, and he knew me. And once a year he’d get irritated when the Nebraska Department of Insurance or somebody would come around. And he said they always came around when the Ak-Sar-Ben racetrack was open, you know. He had all these theories about why it was a pain in the neck to be regulated.
And I told Charlie Heider, next time Jack is in that mood where he’s ready to sell just because he’s tired of fooling around with all these guys, be sure and find me. And so Charlie called me one day, and he says, Jack is in heat. And I said, bring him over, and we made a deal. Well, that’s why Jack sold, and he was happy after he made the deal, and I was happy after we made the deal. So there’s a man that controlled the business but just decided these people didn’t seem to bother him as much once they were my problem and not his.
And you just can’t tell when lightning will strike. And that didn’t do magnificent things for us initially, but just look at what it led to, you know. So again, if you knew how you were going to shoot all 18 holes, it wouldn’t be any fun playing. You wouldn’t get on the first tee. I mean, it’s the uncertainty, the fun of playing the game, the opponents, all kinds of things that make a game interesting. And I think Charlie and I are in the most interesting game in the world. Okay, Becky.
Updates on See’s Candies and NetJets (1:49:41)
Becky Quick: Here’s a question from Simon Withers in Perth, in Western Australia. It’s been a long time since we’ve heard about See’s Candies and NetJets. Could you please give us an update on See’s performance, and when you project it will run out of places to open stores in the United States? And could you also give us an overview of how NetJets has performed since its acquisition, and whether it’s achieved the potential you saw at the time of that acquisition?
Warren Buffett: Well, with See’s, it hasn’t been a question of opening stores. We found out that we’ve had this wonderful brand that doesn’t travel, you know. The mystique, the actual product, the feelings people have about some things, as we said before. I mean, sometimes it’s limited to given markets. Dr Pepper sells at a huge rate in Dallas-Fort Worth, maybe 10 times the percentage per capita, maybe, that it has in Detroit or Boston. And you say, well, how can that be, when the product’s been around for a century and people travel and you have national advertising? And I’m not sure, but I kept learning more as I watched different brands.
And Charlie and I, our economics were so good in California that we tried, in many cases, the same experiment over and over again. It doesn’t cost much to experiment. We’ve tried everything in the world to get the brand to travel, and we always think we were right for the first week, and then we find out that the magic, we can beat any other candy store pretty much, but there aren’t any candy stores anymore to speak of, as the world has changed.
So See’s is 101 years now. It has magic, and it has limited magic, in the adjacent West. You can almost, it’s gravitational almost. And then you get to the East. And incidentally, in the East people prefer dark chocolate to milk chocolate. In the West people prefer milk chocolate to dark. I mean, there’s all kinds of crazy things in the world that consumers do, but you want to keep observing it, because you do learn a little.
And with Charlie and I, I’m sorry, the temptation to keep trying things, because the economics were so good if we succeeded. So we tried various things, and of course every manager wants to try as it comes along, because they’ve learned, you know, it should work, but it doesn’t work. But that’s what makes it very interesting.
In NetJets, we have really learned how to distinguish, and justifiably distinguish, a service to the people. So you have to be very well-to-do to use it, but if you’re very well-to-do, you’re in effect spending your heirs’ money. I mean, it’s what I told my Aunt Alice after she went from teaching to being worth millions of dollars. She came to see me, she’d never been married, and she said, can I afford to buy this fur coat? In 1968 or ’69. And I said, Alice, you aren’t buying it. Your nieces and nephews are buying it, because that’s who you’re leaving your money to. And speaking on behalf of your nieces and nephews, I said, we want you to buy it.
And it’s the same way, you know. Do your heirs want you to fly around in a NetJet, or do you want to leave a little more money to your foundation or your kids? And the way to solve that one is to offer your kids a few hours themselves, and then their attitude can change. So it’s in a class by itself. It’s done what Ferrari has done, in a different sort of way, in cars. Ferrari sells 11,000 cars a year, I mean maybe 12,000, and you know, they’re known throughout the world, and we’ll have a Chevy dealership in Austin or something that will sell as many cars. But we’re not Ferrari.
And NetJets has 600, well, counting Europe, I mean, it’s maybe 651. We’re going to buy 100 planes this year, and we won’t sell any, because we’ve got a backlog. And we took a NetJets flight over to Tokyo, and we arrived in good shape, and we spent a couple days there, and we flew back, and there’s just nothing to it. Now, you can say, well, you’re getting sort of decadent and all that in your old age. But the money will go to philanthropy. The money will probably be $100 billion or more. And the philanthropies want me to spend a few bucks on myself, and all it has to do is be better than the last dollars that are spent by various philanthropies, which have plenty of problems finding things to do that make lots of sense.
So there isn’t a competitor. I mean, we looked the other day at Wheels Up. The stock came out at $10 a couple years ago. It was selling at 48 cents the other day, and they’ve got 12,600 people, they’ve given a billion dollars, a little over a billion dollars, on prepaid cards, where they’ve given them money and they get a certain number of hours later on. And I think there’s a good chance that some people are going to be very disappointed later on when they have money there.
At NetJets, they know they’ll get on the same planes with the same pilots as I and my family have flown on since before we bought the company. So the decision wasn’t shaped by some commercial objective. A couple years before, I’d never heard of NetJets. Frank Rooney mentioned it to me, and I bought a share immediately, and we bought the company. And my kids have to fly commercial sometimes, but sometimes they get to use ours too. But I’ve never flown anything else, and why would I? I mean, it’s the gold standard.
Nobody will match our fleet. I mean, if you’ve got, you know, 600 planes, you’ve got them a lot more places in the United States than anybody else will have theirs. I think we’re the second-largest fleet, counting the commercial airliners. And our fleet’s growing, like I said, at the rate of 100 planes a year or something. It’s a marvelous company, and Adam Johnson has performed, you just can’t believe what he’s done with the business. And it was a tough model for a long time, but he’s brought it where it is, and we should have a wonderful company forever. Charlie?
Charlie Munger: Well, NetJets has been remarkable. You can argue that it’s worth as much as any airline now.
Warren Buffett: Oh, it’s so different. And Charlie, we had a hard time selling Charlie a NetJets membership, and then we figured the way to get him to buy a membership was to put a coach seat in the fuselage, and that really knocked him off. I mean, I think he’s the only one we sold on that basis.
Charlie Munger: I used to come to the Berkshire annual meetings on coach from Los Angeles, and it was full of rich stockholders, and they would clap when I came into the coach section. I really liked that.
Warren Buffett: But I got to tell you, we semi-corrupted him. He feels he kind of has to explain it, but he still flies, and he’d be crazy not to, you know. And your heirs are paying for it. I mean, if you find me anybody whose estate came in at less than zero because what they spent on NetJets threw them into that position, let me know. But I’ve never seen a case yet. It won’t be the case for the Buffett family. And it’s the residual beneficiary that’s paying for your membership. And it’s a little hard to get used to paying that much money, though, when you lived like Charlie and I have most of our lives.
Opportunities in electric vehicles (1:59:20)
Warren Buffett: Okay, we will go to station 11.
Audience Member (Station 11): Hello, my name is Humphrey Liu. I’m from Charlottesville, Virginia. First, I wanted to add my thanks to you and Mr. Munger and Mr. Buffett and all of Berkshire for throwing this grand event each year. Looking at the global trends, it increasingly does seem that zero-emission vehicles may have finally reached the cusp of mass adoption. Do you see any opportunities in this space, either in specific vehicle manufacturers or in related technologies?
Warren Buffett: Well, I would say that Charlie and I have long felt that the auto industry is just too tough. You know, the Ford Motor Company. I mean, Henry Ford looked like he owned the world with the Model T. And he brought down the price dramatically, he took up wages dramatically. He might have been, with a different personality or some different views, he might have been elected president of the United States. I mean, there’s a good book that came out on that recently that told about the story, one of them, tells a little about Nebraska in terms of it, but Henry Ford and Thomas Edison joining up, but maybe a year or two, was it. If you’re interested in autos, you ought to read that book.
But Henry Ford did that, and you know, 20 years later they were losing money, and they had a guy with a gun in his pocket, I think Harry Bennett, you know, running the Ford Motor Company. It was on its way to the junk heap when the Whiz Kids came in, and Henry Ford II, Hank the Deuce as they called him, brought in Tex Thornton and my friend Arjay Miller and a few people. But it’s just, it’s not.
I was reading the other day, actually, the 1932 annual report of General Motors, and it’s one of the best annual reports I’ve read. It’s a totally honest, you know, assessment of exactly where they were. They had 19,000 dealers then, and the population, as I mentioned earlier, was about 120 million or so. And now, with 330 million people, all brands in the United States have like 18,000 dealers or something. It’s just a business where you’ve got a lot of worldwide competitors. They’re not going to go away. And it looks like there are winners at any given time, but it doesn’t get you a permanent place.
Although, as I mentioned, I would say Ferrari is in a special place, but they only sell 11,000 or 12,000 cars a year, and the US last year, I think there were 14 million something. It’s not a business where we find it fascinating to be in. We like our dealership operation, but I don’t think I can tell you what the auto industry will look like five or 10 years from now. I do think that you’re right that, you know, you will see a change in the vehicles, but you won’t see anybody that owns the market because they changed the vehicle. Charlie?
Charlie Munger: Well, the electric vehicle’s coming big time, and that’s a very interesting development. At the moment it’s imposing huge capital costs and huge risks, and I don’t like huge capital costs and huge risks. And we’re subsidizing it in the United States, and we’re actually doing it, try putting in a pro-labor time.
Warren Buffett: I mean, it is subject to politics like you can’t believe, too. But it’s going to be with us. We’re not going to quit driving cars, and the American public has a love affair with them. But I think I know where Apple’s going to be in five or 10 years, and I don’t know where the car companies are going to be in five or 10 years. And I may be wrong, but that’s – Charlie and I follow the auto business with intense interest. Charlie’s firm was the specialist in General Motors on the Pacific Coast Stock Exchange, and that was a franchise, wasn’t it, Charlie?
Charlie Munger: Yeah. By working very hard, we can make a minor amount of money.
Warren Buffett: Yeah, yeah. It wasn’t minor at the time.
Charlie Munger: It wasn’t minor at the time, even.
Warren Buffett: Yeah, well, that was pretty minor. Okay, Becky.
The Federal Reserve balance sheet and currency (2:04:40)
Becky Quick: This question comes from Lindsay Peter Schumacher in Cedar Rapids, Iowa. Does the current size of the Federal Reserve balance sheet concern you? In particular, the result of quantitative easing, the Federal Reserve expanded its balance sheet out of nothing. The net effect in essence is a form of single-entry accounting, creating something of value out of nothing other than a series of book entries Andre entries. And wondering what Mr. Munger thinks about this as well.
Warren Buffett: Well, I don’t think the Federal Reserve is the problem, and I think they can’t solve the fiscal problem. I do not worry about the Federal Reserve, and I think it’s fulfilling the functions for which it was established. I probably would not have been, if they only, they have two objectives, and I would not have been one, probably, that would have changed the inflation objective to 2% a year from zero. I think that if you tell people that you’re shooting to depreciate your currency at 2% a year, that is a lot of implications, although it feels good to a lot of people. A lot of people want a little inflation, but nobody wants a lot of inflation except somebody’s got a lot of debts.
I do not worry about the Federal Reserve balance sheet. I enjoy looking at it, and the numbers are big. I always like big numbers. But it is not, it’s interesting, one of the most interesting figures to me is currency in circulation. I mean, it is gone. They were saying cash is trash back in 2007 and ‘8 and all that, cash is going to disappear. Well, if you look at the Federal Reserve balance sheet, it’s gone from $800 billion to $2.2 trillion, and most of it in $100 bills, overwhelmingly. And I figured out, I think there’s about 50 $100 bills per person, babies, everybody in the United States.
And I would really like to know where all of that is. I mean, nobody’s hoarding euro dollars, you know, in South America, Africa or whatever. And the demand for currency now, you know, it’s somewhat, maybe usually subtle, drug dealers’ activities and all of that. But anybody thinks cash is trash ought to look at the Federal Reserve balance sheet. And actually you can look at how many $5 bills and $2 bills and ones and all that, and the action has been in $100 bills. I mean, it is just astounding, the way $100 bills spreading.
And of course we don’t know, I don’t know where they are, and I don’t think the Fed can know exactly, but they probably make a lot better guess than they could. But I do know what’s happened, and you can watch it every week, and you’ll watch currency in circulation probably grow a little bit. And believe me, cash is not trash. Charlie?
Charlie Munger: Well, I don’t know where we’re headed with all of this. It’s been very extreme. I think that you could be pretty extreme in fighting depressions and so forth if you reverted afterwards to a period of some discipline. But if you’re going to just keep borrowing, you’re printing money and spending it, I think eventually it causes bad trouble. And you can see it in Latin America. Latin America let its currency get out of control all the time, and of course it lagged the United States in economic achievement greatly. So I think we pay a price if we ever give up our old ways entirely and go into a new world where we just try and print money to make it easier to get through the air.
Warren Buffett: We paid a price in World War II. I mean, everybody, school kids and everybody else, myself included. We bought what were originally called war bonds and defense bonds and savings bonds and all that. But from 1940 to 1944 or ‘5, you paid out $18.75 and you got $25 back, and every kid saved savings stamps and all that. But when you got all through, you know, you had 120% of GDP in the national debt instead of 30% or 40%, and we had a lot of inflation subsequently, a lot. So the people that really bought those bonds and supported the war had a portion of their purchasing power taken away from them.
Well, there wasn’t anything wrong with that particularly, but once the country gets in the habit of doing that, I think it’s tough to figure out where the breaking point is with society, but I don’t think we want to come anywhere close to it.
Charlie Munger: It’s also tough to have massive people unemployed. That’s the tension.
Warren Buffett: Yep. Well, that’s why the Fed has two objectives, in terms of employment and inflation. But they are not the ones that create the deficits. And so far the system has worked pretty well, although, like I say, it’s been so far, the man who’s jumped off a tall building.
Charlie Munger: Yeah, it’s all right until he hits the ground.
Warren Buffett: Yeah. Well, but there could be ways we can stop now at the third floor or the sixth floor. We don’t know what floor it is, but we know it hasn’t happened at the ground. But the question, you know, politically it’s very, very, very tempting to vote appropriations, and it’s not fun to vote taxes. Russell Long had the Senate Finance Committee, they’ve got a building named after him now. He said, you know, “Don’t tax you, don’t tax me, tax that fellow behind the tree.”
And basically that is the attitude of, I mean, it’s the reality of what is useful in politics. And so far this country’s managed to work very well with a lot of things that could theoretically cause a lot of problems, but it doesn’t guarantee us the future on it. And being the reserve currency lets us do a lot of things, but it also creates a lot of consequences if we screw it up. Charlie?
Charlie Munger: Well, we’re beating this subject to death, but it is a problem. I wish we had a solution.
Supply chains and moving production away from Asia (2:12:23)
Warren Buffett: Okay, well, we’ll go to station 1.
Audience Member (Station 1): Hello, Mr. Buffett and Mr. Munger. My name is Connor. I’m an economics student at the University of Nottingham. My question for you today is, during the pandemic we witnessed supply chain shortages, especially from Asia. As a result, companies have chosen, with political tensions, to move production away. Should companies make these decisions, and should the government support them?
Warren Buffett: Okay, well, that’s a good question.
Charlie Munger: Yeah, obviously. Yeah, it’s logical. If you’re in business and you can make the thing in Mexico way cheaper, it’s natural to open a factory in Mexico and get your parts cheaper, and a lot of the auto manufacturers have done exactly that. On the other hand, nobody wants to hollow out the whole country so all the manufacturing jobs are elsewhere and we’re all living a bunch of farmers, you know, like English colonies in 1820 or something. And these ideas are of course in big tension. We don’t have that much foreign production. All right, Warren?
Warren Buffett: Yeah, well, but we’ve lost, well, originally Berkshire Hathaway was the textile manufacturer. It lost because the South became feasible versus the North, and of course then eventually the South got expensive compared to China. Sure, and society benefits, and some people get killed in that sort of a situation, and a rich society should take care, one way or another, of people who worked in our shoe factories, people who worked in our textile companies. I mean, if you worked in our textile operation in 1960, or when we took it over, half our workers only spoke Portuguese, and, you know, they weren’t getting great wages at all.
But now you could do it in the South, and we were doomed to go out of business, and it wasn’t the fault of the worker in any way, shape or form. It wasn’t the hard fault. We kept trying to compete.
Charlie Munger: Well, it was TVA had cheap power down there, and textiles really congealed power. And air conditioning changed everything, but the heat and those damn places were impossible.
Warren Buffett: That’s a lot of things. But then it moves offshore in many ways, and now the country is better off because of it, but it displaces a lot of people who really can’t do something else in life. You can’t talk about retraining somebody that’s 55 or 60, speaks only Portuguese, and really tell them they’re going to have a great future in New Bedford, Mass. And, you know, so you don’t want to be glib about it. And we can afford to take care of those people, and we’ve got some systems that work reasonably well. But there’s a tension between, you know, what about the person that doesn’t do anything and all that kind of stuff. So these are not easy problems to solve.
But I would say that by and large we want the whole world to prosper. We don’t want the United States to be a country of extraordinary prosperity and have the rest of the world starving. No, it isn’t going to work, and particularly it’s not going to work in a nuclear world. So, and you can have your own feelings about it as a humane person, but it does not, it can be done better, and we’ve got the resources to do it. I mean, the output of this country can be done with a lot fewer people and doing more specialized things. And of course the work week in the United States, you know, in my lifetime has dropped dramatically, and people still feel busy.
And it will be the human lot to say, you know, how can I get all these things done? But my mother didn’t drive three kids any place. So if you wanted to go to a place, if you were lucky and got old enough, you had a bicycle. The world just keeps looking at everything moving up as becoming sort of a base that leaves them somewhat dissatisfied. And with our prosperity we can do a lot of things we couldn’t do in 1930, including taking care of people that got displaced by the fact that somebody else can do that work and improve their lot in life. And we’ve got to make sure that we have the best system that takes care of the people who get displaced by that. But doing that, and building a system we have and everything, we’ll make a lot of mistakes along the way, but we’ve got to keep moving in that direction.
Charlie Munger: And the really interesting thing about it is that Adam Smith was right, that the free market capitalism, automatically, with a lot of property in private hands and free trade and all that, automatically creates GDP per capita that grows and helps everybody, including the people at the bottom. It helps everybody a lot. But inherent in the process, there’s a lot of pain in that free market capitalism, for instance for the Portuguese workers in the textile company in New Bedford, and nobody’s ever figured out how to take all the pain out of it.
We do have government safety nets to take some of the pain out. We make those safety nets a little bigger as time goes by. But apart from that, if you try and take all the pain out, you’ll also take all the gains out of it. You won’t get growing GDP per capita. You’ll have an economy like Russia’s, which has been characterized as, “They pretend to pay us and we pretend to work.”
Warren Buffett: Yeah, the other systems haven’t worked better.
Charlie Munger: But yeah, it also produces more and more disparities in wealth, and people that do nothing but got assets under management without actually performing anything extra make fortunes. And I mean, it’s the job of government to keep the best aspects of capitalism while not causing people that only speak Portuguese to suffer in the process. I mean, the two aren’t compatible politically over time, and we stumble along making progress on things like Social Security and all that. And we are a lot better off than we were when I was born. Net, the United States has done a very good job of this tension between capitalistic growth and growing social safety net. We can be pretty proud of our country, looking backward.
Warren Buffett: That may be why we have 25% of the world’s GDP, starting with a half a percent of the population, and in a few centuries. I mean, it’s just, it’s a miracle. It wasn’t because we were smarter. Oh, you’ve got to say that there must be something to the system that’s worked pretty well, even though it’s produced a Civil War and all kinds of things, you know, and women, you know, not getting a shot at anything, you know, even after they passed the 19th Amendment. It’s a work in progress.
Charlie Munger: I think actually there’s been progress, but it’s mankind’s nature to see the things wrong with it. If you’ve a few words expansion Asia to take the progress as a right, not something to be earned or strived for, but something that should automatically just flow in over the transom. And that attitude is what is poison. It doesn’t do anybody any good.
Mark-to-market accounting for banks and Berkshire (2:21:24)
Warren Buffett: Okay, now ask us an easy question, Becky.
Becky Quick: This question comes from Doug Deshield. Since the accounting rules changed, requiring Berkshire to report the change in fair value of its equity investments through the income statement, Mr. Buffett has repeatedly told shareholders to ignore those changes, as they’re not reflective of the long-term returns that those investments will produce. Recently Mr. Buffett has argued that hold-to-maturity accounting, used by the banks to avoid reflecting the changes in fair value of bank investment portfolios in the income statement and the shareholder equity account, do a disservice to its various stakeholders. Can Mr. Buffett elaborate on why he views mark-to-market accounting differently for banks in comparison to Berkshire?
Warren Buffett: Oh, I believe in both cases in doing it on the balance sheet and not in the income statement. And it’s a very tough problem the auditors face, as is that obviously the income statement feeds into the balance sheet, but the balance sheet tells you whether deposits can be paid. It tells you a lot of things, and we show it on our balance sheet. We believe in showing market values on our balance sheet. We just don’t believe in running it through the income account. And in getting there, we would put it in other comprehensive income, like it was for a long time.
So I sympathize to some extent, oh, a far extent, with the audit group, but they have to really decide whether they want the balance sheet to represent values, except it doesn’t reflect them on the upside. If we buy a See’s Candies, it’s worth way more money, so it’s conservative in that sense. Or whether they want to have an income account that becomes meaningless to people because it really changes every five seconds, you know. I mean, while we’re, all the market’s closed today, but, you know, we have days, well, I guess Apple was up what, seven or eight points on Friday. I mean, that’s $7 billion. I mean, that’s a crazy income account. It is a reflection of where we stand at that point.
And of course, if you’re a bank where you’re putting out money in things that people sort of, mortgages, I mean primarily, they’re a terrible instrument for a bank to own but a great instrument for a consumer to buy, and built into the whole society now in a way that was entirely different than the past. You’ve got to pay attention to whether they’ve gotten out of whack in terms of what the value of what they own and what can be demanded of them tomorrow morning. And if we had all of our money that could be demanded from us tomorrow morning, we’d have to behave a lot differently than Berkshire does.
So I really think the way to do it is the way we recommend doing, which is exactly what was being done until a few years ago. I recommend the shareholders look at it that way, but we’re going to follow the rules, obviously, the SEC, you know, state authorities and everybody require of us. But I’ll still explain to the shareholders exactly what I would explain to my sister about what really counts at Berkshire. And I think every management actually has an obligation to do that, and instead of it, they go in the other direction and give them a lot of figures that are total nonsense, you know.
I can’t imagine some of the, you know, EBITDA I thought was about as bad as you could get, but they kept going, you know, earnings before everything, EBE. And so that doesn’t change. But I would tell my sister, who’s here in the audience, I hope, and I should tell all the shareholders. And we’ll consistently do what is legal, and we’ll consistently say what we think is right. Sorry.
We want owners who understand what they own. Now, that doesn’t mean they have to understand the detail of it, but that’s why we have people that have been around 50 or 60 years. That doesn’t mean that they read the 10-Qs or anything like that, but they feel we’re telling it to them like, you know, hello next door to us.
Charlie Munger: Yeah, I don’t know what the accountants were thinking when they made that change. It strikes me as bonkers, absolutely bonkers. I don’t see how anybody who understands how businesses really operated, and should be operated by owning managers, would have made that accounting change. The accountants did it just because they had a wild moment.
Warren Buffett: 20, 25 years ago I suggested to the audit profession that they just, that the audit committee asked auditors four questions, and the shareholders would know a lot more about the company if those questions were asked. But it wasn’t good for the auditors to be asked those questions, because it might increase their liability if they answered them, and the client didn’t want them to answer them because the management didn’t want them to.
Charlie Munger: No, they were, they want a system where if they follow certain rules they’re safe, and that’s understandable. But I don’t think the past year, this rule requiring changes in marketable securities to go through the income account quarterly, they didn’t do that to protect themselves from liability. They just did that for some crazy reason of their own. You get a bunch of people who are all drawing a lot of pay out of a big, complicated system and rising in, like so many officers in the army, God knows what they’ll do if you put them in a little room by themselves and tell them to invent new accounting standards.
Warren Buffett: Well, to our order to remember, that’s Charlie talking. And that’s right, but I agree with him 100%. Like, he’s 99, he can get away with more than I can get away with.
Passing wisdom on to grandchildren (2:28:18)
Warren Buffett: Okay, station 2. But what he said is enormously important. I mean, you’ve got to have some insights into what the hell really goes on, even if you’re an accountant. Yeah, okay, station 2.
Audience Member (Station 2): Dear Warren, dear Charlie, my name is Victoria Runtrop. I am 22 years old and I study in Munich at the CDTM, the Center for Digital Technology and Management. As your grandchildren are more in my age group, let me ask you, how do you transfer your wisdom to your grandchildren and heirs? How do you lead them to investing? Do you see value in investing as a family or individually? Thank you.
Warren Buffett: I’m going to let Charlie do the answering. He’s got more.
Charlie Munger: Well, I have my grandchildren, but I am quite philosophical about my grandchildren not thinking exactly the way I do. It seems to me that’s almost a natural course of life. And I just live my life my own way, and they can observe it as an example if they want to, and if they don’t, they can try some other way. I don’t like it when they try some other way, to pretend that I like some of the boyfriends and girlfriends I don’t like, but I just struggle through like everybody else. And usually I just bite my tongue and keep silence. That’s my way of handling it.
Warren Buffett: Well, I would say that I think that in my case my three children have grown a lot smarter in the last 30 years, and I think I’ve grown smarter.
Charlie Munger: And I know, but you needed a lot of help.
Warren Buffett: That is for sure. No, I would totally acknowledge that. That’s why I had the room to grow. I mean, I had plenty of room for improvement.
Charlie Munger: But I also had a lot to grow. I went to, I worked a year for US Steel, which was in their fabrication department in Los Angeles, a big operation. The thing was utterly doomed, and three years later it went back to greenfield. The whole thing was razed to the ground. I did not see it coming. Now, I would like to be that ignorant of that as I was at that age. It was a sin. And my professors, by and large, were even more ignorant than I was. We just know what he had observed the basic economics of business in a scientific way at all when I was young.
Warren Buffett: Well, if we’re getting into confession time, I have to tell you it’s 3:30, so we don’t want to keep going on. Who knows what we’ll be saying in another half hour. So I thank you all very much for coming. At 4:30 we will have the shareholders meeting here, and we’re continuing to sell goods for another 20 or 25 minutes. We’ve already broken all kinds of records, but let’s really make it tougher comparisons next year. And I think, again, I thank you for coming. Come next year, and maybe we’ll figure out the answer to a few more of these questions. Thank you.