WARREN BUFFETT: OK. Round two. Gary, you're up.

GARY RANSOM: Am I up yet?

WARREN BUFFETT: You’re up.

GARY RANSOM: OK. A question on General Re. If I look back at the General Re property-casualty premiums, it's been cut in half, roughly, from 10 years ago, maybe a little more stable recently.

Can you give us some idea of how you've had to adjust the personnel over that time, and then also what opportunities are there for General Re to grow as we go forward?

WARREN BUFFETT: Yeah, Gen Re, I think, got off the track. It may — it was probably off the track when we bought it, and I didn't spot it.

CHARLIE MUNGER: Sure it was.

WARREN BUFFETT: Yeah. OK. (Laughter)

I was in charge of that part. And, they had — I think they'd gotten more concerned about growth and satisfying certain personnel, in terms of their activities, than they had about emphasizing profitability, and it took us awhile to figure that out.

And when Joe Brandon came in, he operated 100 percent, in terms of focusing on underwriting profit instead of premium volume, and Tad Montross has followed through on that, with terrific results.

But it did mean getting rid of a lot of business that didn't make any sense. They did an awful lot of what I would call "accommodation business." So, it's true that the PC volume dropped very significantly during that period, but it's not volume that we miss.

The life business kept growing consistently during that period. Their life business strikes me as very, very good. They've got a little long-term care mixed in there that we wish we didn't have.

But I think Gen Re is — it's right-size, in terms of people. It's got an underwriting discipline to it. And I wouldn't be surprised if it grows at a reasonable rate in the future.

But it, there was a major change that had to be made in the culture at Gen Re. And, you don't make that overnight, and you don't keep a lot of the business — or some of the business — that you got through a wrong culture when you do straighten it out.

It's a terrific asset to us now. And I think that, the life business will continue to grow, and I would bet the PC business grows, too. But it will only grow if we see the chance to do it on a profitable basis.

That's one we feel enormously better about than we did some years back.

Charlie?

CHARLIE MUNGER: Well, it was a major fix-up operation, but we finally got it done.

WARREN BUFFETT: We don't go looking for those, though.

CHARLIE MUNGER: No.

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Hi. Dan Lewis (PH) from Chicago.

I wanted to get your thoughts on two of my concerns about a post-Buffett Berkshire.

Do you worry that some of your key operating and investing managers might leave for more lucrative opportunities once they realize they're working for one of their peers instead of a legend?

And do you think it's possible that a large investor or hedge fund could ever gain enough control of Berkshire to force a change in the unique culture and structure?

WARREN BUFFETT: Yeah. I think that — I would say I virtually know — that the successor we have in mind will not be the kind that will turn off our managers because that — the manager in mind is a — successor in mind — has got the culture as deeply embedded in as I do.

They would not — our managers would not — I don't think it would be a question of leaving for more lucrative jobs.

I think it would be because they love the kind of environment in which they exist. And if that environment didn't exist, it wouldn't be a question whether the alternative was more lucrative.

Many of them, a majority, could retire, wouldn't need to work at all. They're only going to work if it's more fun for them to work than to do anything else, you know, in the world, because they've got the money to leave, in a great many cases.

The conditions — it's the same reason I work. I mean, I'm 81, and I am doing what I find the most enjoyable thing to do in the world, and there are a couple reasons for that. I get to paint my own painting and, you know, I have a lot of fun, working with the people I work.

And our managers work for the same reason. They do get to paint their own paintings. And my successor will understand that just as well as I do. And there would be a lot of people that might very well manage other companies that, I think if stuck in my position, would lose a fair number of managers. They just have a different style. And our managers don't need that style.

In terms of a takeover, I think that really gets unlikely. The size is a huge factor. And, even because of the A and B shares, the A shares get converted to B shares when I give them away.

And even 10 years from now, it would be likely that I would own, or my estate would own, something in the area, you know, perhaps, of 20 percent of the votes, thereabouts.

So the Buffett family will probably have 10 times the voting power, for a long time, of anybody else. So I really — I think it's extraordinarily unlikely for both those reasons, size and the concentration that will exist.

And the longer we go, the larger we'll get. So the — as the voting power aspect goes down, the size aspect goes up. So I don't think there will be a takeover of Berkshire.

And I really — you do not need to worry about my successor. You know, in many ways he'll be better than I am.

He will be totally imbued with the culture. The company is imbued with the culture. It would reject anything. The board of directors reflect that culture. It's everyplace you look around.

Berkshire stands for something different than most companies, and, that's not going to change.

Charlie?

CHARLIE MUNGER: Well, what I said last night was that the first 200 billion was hard, and the second 200 billion, with the momentum in place, is likely to be pretty easy compared to what's been accomplished in the past.

So, I don't think it's going to hell at all. I think the momentums are in place and the right kind of people are in place and the culture is, by and large, pretty well loved, I would say, by the people who've chosen to be in it. Nobody's going to want to change it.

WARREN BUFFETT: Yeah, the businesses are in place to take it to 400 billion.

CHARLIE MUNGER: Hmm?

WARREN BUFFETT: The business — we have the businesses to take it to 400 billion.

CHARLIE MUNGER: Well, but in addition to that, I think people of the type who have sold to us when we were the only acceptable buyer, I think will come to our successors because they will be the only acceptable buyer, at least for some significant part of what's done.

So I don't think it's going to be all that difficult.

WARREN BUFFETT: Don't make it sound too attractive, Charlie. (Laughter)

WARREN BUFFETT: Carol?

CAROL LOOMIS: You're interested in businesses that throw off lots of cash, for instance, See's Candies, as well as those where you expect significant capital reinvestment needs, for example, Burlington Northern.

What is it about a capital-consuming business that persuades you to forego the cash yield you seem to have historically preferred?

How do you balance the expected need for reinvestment in a capital-consuming business against the other possible uses of cash Berkshire may have in the future, such as new investments or stock repurchases?

WARREN BUFFETT: Well, cash-consuming businesses, by their nature, are unattractive unless the cash they consume gets to earn a reasonable return.

And, in the electric utility business, you know, we can expect, cash retained to perhaps earn an average of 12 percent or something like that, which we regard as quite satisfactory.

It's not as exciting as having some business that's going to grow 20 percent a year and not require any capital. I mean, there are a few wonderful businesses like that, but it's perfectly satisfactory.

Same way with the railroad business. You know, we are going to invest a lot of capital over the next 10 years in railroads. Every year we will spend way more than depreciation charges. I think the prospect of earning reasonable returns on that are pretty darn good.

But if I had to put a lot of money, you know, into some capital intensive business where all we were doing was staying alive with that money, you know, we would be in a terrible situation.

And we don't have — in any meaningful way — we do not have any capital-consuming businesses where I see that as the prospect.

It's true, if you go back to a world where we thought we could earn 20 percent on equity or something of the sort, then there's very few capital-consuming businesses where huge amounts of incremental capital can earn at a 20 percent rate.

So that would be disadvantageous, but we don't know how to make 20 percent on equity going forth in the future with the kind of sums we're working with.

And we will be very happy if we can earn 12 percent or something like that on equity, particularly when some of that capital is being consumed is generated by float, which doesn't cost us anything. We've got some small advantage there.

Charlie?

CHARLIE MUNGER: Well, I think it's going to work pretty well. (Laughter)

There's some Mungers here. I hope you won't listen to the siren songs of others and kind of stay with the family heirloom.

WARREN BUFFETT: My family is just hoping for an heirloom. (Laughter)

WARREN BUFFETT: Cliff?

CLIFF GALLANT: Along those lines, in regard to float, in your annual letter this year, you say that you expect the rate of growth in your float to slow going forward.

How slow? What are the drivers? Is it possible that float could shrink going forward?

WARREN BUFFETT: The float could shrink because we have lots of retroactive contracts, that by their nature, the float runs off, although not at a really rapid rate.

And, the float at GEICO is going to grow. I mean, that — the float at our smaller insurance companies will probably net grow over time a little bit, but it's not a lot of money.

In Ajit's operation, where we have a lot of the retroactive stuff, it's very, very tough. You've always got a melting ice cube that you've got to, you know, add a little more water to.

And I have felt — I felt when the float was 40 billion it probably wasn't going to grow very much, and now we're at 70 billion. So, we are looking for ways to intelligently grow the float all the time. That's been true ever since I got in the insurance business in 1967.

So, the desire is always there. We've been reasonably imaginative in figuring out ways to do it and still have the float cost us less than nothing. We've got the smartest guys in the business out there working on it. But the numbers are huge now, and you do have a natural runoff from the retroactive contracts.

So I just thought that it was fair to tell the shareholders that they really should — while they look at that history of float growth, that they really can't extrapolate that.

If we get lucky, you know, we could add a fair amount more, but it's also — it's possible that it will actually dwindle down a little bit and — not at a fast rate — and it certainly is more than possible that it won't grow at very much of a rate from here on.

Ajit told me that when I put that in the annual report that it became a challenge to him. So I'm glad I stuck it in there. He wants to make me look like an idiot, which isn't too hard sometimes, and I may have to stick some other things in the annual report next year to get the attention.

I — if I had to bet on whether float will be higher or lower five years from now, I probably would bet just a slight bit higher, but I also wanted the shareholders to know there's a possibility that it will decline a bit.

We're working on things, though. Every day we're working on things to try to figure out how to increase it.

Charlie?

CHARLIE MUNGER: Yeah. The casualty insurance business, by its nature, is not a terribly good business. You have to be in the top 10 percent, really, to do at all well in it, and I think we're very lucky.

We probably have the best large-scale casualty insurance business in the world. Just because it came out of nothing doesn't mean it's nothing now. But I don't think it will be wildly — it won't grow wildly, will it, Warren?

WARREN BUFFETT: No.

CHARLIE MUNGER: No. But if you have something that is very good and it doesn't grow wildly, that's not the end of the world.

WARREN BUFFETT: It's certainly brought us to where we are today.

CHARLIE MUNGER: Yes.

WARREN BUFFETT: It's done wonders for us, and there's been multiple people that have done — I mean, with the jobs that Tony has done at GEICO, I mean, he's created billions and billions of dollars of value for Berkshire shareholders. That's true certainly with Ajit. You know, it's huge.

CHARLIE MUNGER: We get used to having Ajit work miracles, and he'll probably continue to do so for a long time. But if Matt Rose has to carry some of the future freight, well, that's all right.

WARREN BUFFETT: OK. Station two.

AUDIENCE MEMBER: Greetings to all of you from the Midwest of Europe. I'm Norman Rentrop from Bonn, Germany.

Warren, thank you very much for being so open about your health situation. You are in my thoughts and in my prayers, and I wish you a thorough healing.

WARREN BUFFETT: Thank you. (Applause)

AUDIENCE MEMBER: As I have traveled a long way and can no longer ask questions in Pasadena, I'm hoping for an elaborate answer from you, Charlie, as well. (Laughter)

My question is, how do you value declining businesses? You were talking about the encyclopedia businesses brought down by Encarta or retailing disrupted by Amazon and others by comparison shopping. How do you value declining businesses?

CHARLIE MUNGER: Want me to answer that one? They're not worth nearly as much as growing businesses. (Laughter)

WARREN BUFFETT: Well —

CHARLIE MUNGER: But they can still be quite valuable if a lot of cash is going to come out of them.

WARREN BUFFETT: Yeah. Generally speaking, it pays to stay away from declining businesses.

It's very hard. You'd be amazed at the offerings of businesses we get where they say, you know, it's — I don't want to upset Charlie, but they say, you know, it's only six times EBITDA, and then they project some future that doesn't have any meaning whatsoever.

If you really think a business is declining, most of the time you should avoid it. Now, we are in several declining businesses.

You know, the newspaper business is a declining business. We will pay a price in that business. We do think we understand it pretty well. We will pay a price to be in that, but that is not where we're going to make the real money at Berkshire.

The real money is going to be made by being in growing businesses, and that's where the focus should be.

I would never spend a lot of time trying to value a declining business and think, you know, I'm going to get one free — what I call the cigar butt approach, where you get one free puff out of the cigar butt that you find.

It just isn't — the same amount of energy and intelligence brought to other types of businesses is just going to work out better. And so we — our general reaction, unless there's some special case, is to avoid new ones.

We're playing out certain declining businesses, by their nature, but you know, we started with declining businesses. We started with textiles in New England and we tried U.S.-made shoes and we've —

CHARLIE MUNGER: Department store in Baltimore.

WARREN BUFFETT: Department store in Baltimore. Howard and Lexington Street.

CHARLIE MUNGER: Trading stamp company. We're specialists in — (Laughter)

WARREN BUFFETT: Yeah. We have one business that did 120 million or so of sales in 1967 or '8, and what did we do last year, about 20,000?

CHARLIE MUNGER: Yes.

WARREN BUFFETT: 20,000. Yeah.

CHARLIE MUNGER: I presided over it myself. (Laughter)

WARREN BUFFETT: Yeah. Well, I want to say I helped. I mean, he didn't do it all by himself.

CHARLIE MUNGER: No, no, but I sat there on the location and watched the —

WARREN BUFFETT: We thought of bringing the sales chart down here and turning it upside down to impress you, but Charlie is still in charge of this business. He's — (laughter)

I can't get him to sell it, but make me an offer. (Laughs)

CHARLIE MUNGER: If you think what came out of those three declining businesses, all of which failed, it's so many billions you — it's hard to imagine how much came out of it. We're not looking for an opportunity to do it again.

WARREN BUFFETT: No. But it was — in 1966 — maybe we should, because in 1966, Sandy Gottesman — one of our directors and Charlie and I — we put $6 million into a company.

We called it Diversified Retailing, although we only had one operation but, you know — (Laughter)

It was kind of like Angelo Mozilo calling his one location, you know, in New York, Countrywide Mortgage, at the time. (Laughter)

And we bought a department store at Howard and Lexington Street. Now, in our defense, I would have to say there were four department stores at Howard and Lexington Street in Baltimore, and all four of them are gone.

But that $6 million has turned into about $30 billion, starting with that —

CHARLIE MUNGER: — failed business.

WARREN BUFFETT: Failed business. Yeah, yeah.

And of course, Blue Chip Stamps was another example of that because that was another company that — and then, of course, Berkshire was the textile business.

So we were sort of masochistic in the early days. (Laughs)

Becky?

CHARLIE MUNGER: Ignorant, too. (Laughter)

WARREN BUFFETT: Yeah, OK. (Laughter)

That was the word that came to mind, but I didn't really like to use it. (Laughter)

BECKY QUICK: This question is from Bill Nolan who's a shareholder from West Des Moines, Iowa.

He says, "Many of us are interested in what you," meaning Berkshire, "are buying and you won't tell us that.

"Using Charlie's principle of invert, invert, always invert, maybe you can help us by suggesting what to avoid and stay away from, specifically, what in the investment world today strikes you as folly, fad, unsustainable, crazy, or dumb?

CHARLIE MUNGER: A lot. (Laughter)

WARREN BUFFETT: Yeah, well. We — I think I would describe it as we try to stay away from the things, to start with, that we don't understand. And when I say don't understand, it isn't that I don't understand, you know, what a certain business does.

But when I say understand, it means that I think I have a reasonably — a reasonable fix on about what the earning power and competitive position will look like in five or 10 years. So I've got some notion of how the industry will develop and where the company will stand within the industry.

Well, that eliminates a whole bunch of things. And then, beyond that, if the price is crazy, even though I understand it, that eliminates another bunch. So you get down to a very small universe, and you get down to a particularly small universe when we're working with lots of money, as we are now.

But we — well, I would say this: I can't recall any time in the last 30 years, at least, that we've bought a new issue, have we, Charlie?

CHARLIE MUNGER: I can't think of one.

WARREN BUFFETT: No. I mean, the idea, that somebody is bringing something to market today, a seller who has a choice of when to come to market, and that that security, where there's going to be a lot of hoopla connected with it, is going to be the single cheapest thing to buy out of thousands and thousands and thousands of businesses in the world is nonsense, you know.

CHARLIE MUNGER: And then when it carries a 7 percent commission, or higher. It's ridiculous.

WARREN BUFFETT: Yeah, it's ridiculous. So you know it can't be the most attractive thing. But people get excited about what's coming and all that sort of thing.

But I will guarantee you that if you have thousands of opportunities among stocks all over the world and most of them are not being promoted or being sold with special commissions in them or something else, and then some other security is coming to market that day, when the seller picks the time to bring it, as opposed to just this auction market operating otherwise, you know, it just doesn't make any sense to spend five seconds thinking about new issues, so we don't think about them.

And we also — you know, there's industries we know that may have a wonderful future, but we don't have the faintest idea who the winners will be, so we don't think about those, either.

So there's a whole lot of things we don't think about. And we have a — Charlie and I have a number of filters that things have to get through very quickly before we're willing to think about them.

And sometimes we're thought of as rude — probably Charlie is thought of that way a little more often than I am — (laughter) — sometimes we're thought of as rude because people will call us and they start explaining some idea to us, and it just doesn't make it through the first filter or two.

So we just — we think we're saving their time if we just politely say, you know, that we just have no interest, and we don't want to have you finish the sentence. (Laughter)

But we do that, don't we, Charlie?

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: We don't have to do very many things that work. I mean, that's the beauty of this business.

You don't have to be able, you know, to spell 500 words or something to get to the end of the spelling bee and beat everybody else.

You just have to do one or two things every now and then that — where you don't make a big mistake and where every now and then one works out real well. And the solution — you know, you'll get a good result.

You can't have a big disaster. You just — that is what we try to avoid. We do not ever want to lose a significant percentage of Berkshire's net worth, and so far we haven't.

CHARLIE MUNGER: I think there are a couple little rules of thumb. If it's got a really large commission in it —

WARREN BUFFETT: Forget it.

CHARLIE MUNGER: — don't read it. Because the chance of somebody who is paying a very high commission to give you a big advantage is very low.

And the other thing that is, I think, helpful in reverse, is — as a place to look, looking at things that other smart people are buying. That is not a crazy search method as a sorting device for opportunities to consider.

WARREN BUFFETT: Charlie knew me when, I used to look at — I grabbed the Graham-Newman reports as fast as they would come out. (Laughs)

CHARLIE MUNGER: Yeah, sure.

WARREN BUFFETT: You know, if Graham Newman was doing something, it was certainly worth my time to look at it.

CHARLIE MUNGER: Warren has made a lot of people rich he doesn't even know. Just copied him.

WARREN BUFFETT: Don't go into things with big commissions.

WARREN BUFFETT: Jay?

JAY GELB: On the subject of regulation, a question I often get from investors is, what are the implications if Berkshire ends up being subject to the Investment Company Act of 1940 because of insurance becoming a smaller part of Berkshire's overall business?

WARREN BUFFETT: I don't — I may be —

CHARLIE MUNGER: That's too remote. That's not going to happen.

WARREN BUFFETT: Yeah. I used to — I read the Investment Company Act of 1940 probably 20 times because it was quite pertinent when I was setting up my partnership and all that.

I don't remember every detail now, but I see no way that — that Berkshire comes close to that.

We used to worry about both personal holding company status and investment company status, but we steered — we made very clear that we steered clear of both of those. But now — I think we're a million miles away from it now.

CHARLIE MUNGER: Yeah, we really need the financial heft we have to make our basic businesses work. We are not just an investment company.

WARREN BUFFETT: Yeah. We've got 270,000 employees. We own 8 companies that each would qualify for Fortune 500 stand-alone. So it's — people thought of us as investment company long after we were nothing remotely —

CHARLIE MUNGER: Like one.

WARREN BUFFETT: — like one, and where we had no intention of going in that direction.

But the background of both of us caused people to hang on to that notion longer than it was appropriate.

WARREN BUFFETT: Station 3.

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. Good afternoon. My name is Yung (PH). I'm from Toronto, Canada. I appreciate you giving me this opportunity to stand here and ask a question.

And my question is, how long do you think it will take China to appear a great company like Coca-Cola, and in which industry you think it will be? Thank you.

WARREN BUFFETT: How long will it take China to do what?

CHARLIE MUNGER: I didn't quite get that one.

WARREN BUFFETT: Connection to Coca-Cola, yeah.

CHARLIE MUNGER: How long will it take China to do what?

AUDIENCE MEMBER: Oh, just how long do you think it will take China to appear a great company like Coca-Cola, and in which industry you think?

CHARLIE MUNGER: China already has some great companies. It's hard to think of a great branded goods company, but China has some very great companies already.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: (Inaudible). I can't pronounce them, but they've got some very great companies. (Laughter)

WARREN BUFFETT: Yeah. So far it has not been Chinese fast food companies that have been exported to the United States as opposed to — you know, we've got over 500 Dairy Queens now in China.

We tend to export certain products well, some consumer products, entertainment products, that sort of thing.

But China's got some huge companies and they may eclipse in market value, you know, some of the ones such as Coca-Cola that we're talking about.

WARREN BUFFETT: Let's see, that was station 3. Andrew?

ANDREW ROSS SORKIN: OK. This question comes from Larry Pitkowsky from the GoodHaven Fund, also another shareholder, also asked a similar question that I've tried to combine.

Given that you're now in IBM, are there any other entrenched leaders in technology that are, to use one of your terms, inevitable, in the same way that Coke and Gillette were?

For example, is Google inevitable? Is it reminiscent of the advertising agencies you owned in the 1970s, i.e., a toll bridge on all digital spending that's highly likely to keep growing over time?

What are the one or two things about Google, for example, that you think are real risks? And what about Apple?

WARREN BUFFETT: Well, those are extraordinary companies, obviously, and both — they're both huge companies. They make lots of money. They earn fantastic returns on capital. They look very tough to dislodge, where they have their strengths.

You know, I would not be at all surprised to see them be worth a lot more money 10 years from now, but I wouldn't want to buy either one of them.

I do not get to the level of conviction that would cause me to buy them. But I sure as hell wouldn't short them, either.

Charlie?

CHARLIE MUNGER: Well, I think we can fairly say that other people will always understand those two companies better than we do. We have the reverse of an edge. And we're not looking for that. (Laughter)

WARREN BUFFETT: Now he's going to say isn't the same thing true in IBM?

CHARLIE MUNGER: Well, I don't think it is. I think IBM is easier to understand.

WARREN BUFFETT: Yeah. The chances of being way wrong in IBM are probably less, at least for us, than being way wrong with Google or Apple. But that doesn't mean that those — the latter two companies —aren't going to do, say, far better than IBM.

But we wouldn't have predicted what would happen with Apple 10 years ago. And it's very hard for me to predict, you know, what will happen in the next 10 years.

They're certainly — you know, they've come up with these brilliant products. There's other people trying to come up with brilliant products.

I just don't know how to evaluate the people that are out there working, either in big companies or in garages, that are trying to think of something that will change the world the way they have changed it in recent years.

CHARLIE MUNGER: And what do we know about computer science?

WARREN BUFFETT: There's no reply. (Laughter)

WARREN BUFFETT: Gary?

GARY RANSOM: Politics sometimes affects your businesses. Recently we've seen some coal plant closings, turndown of XL pipeline, all of which seemed to have potential effect on BNSF revenues.

Can you talk about how you manage that risk or what the impact might be of some of those political issues?

WARREN BUFFETT: Yeah. Well, BNSF runs their own business very much. I went down to Fort Worth once after we bought it a few years ago, and I haven't been there since. And I probably talk to Matt on the phone, I don't know, once every three months or something of the sort.

But there's no question that railroads, utilities, insurance companies, are all very much affected by the political process.

Fortunately, I think, in the railroad industry, you know, we've got economics on our side. And economics usually win out.

I mean, we can move a ton of product 500 miles on one gallon of diesel, and that may be three times or so as efficient as trucking. And that may be why the railroads currently move, say, 42 percent of all intercity traffic.

I don't think our percentage is going to go down, the railroad industry as a whole, no matter what the politics may be. It's just too compelling to move heavy traffic long distances over steel rail. And in terms of congestion, in terms of emissions, all kinds of reasons.

So we've got a wonderful product, and there will always be struggles in the political arena between competitors and railroads, and customers and railroads. It's just — it's the nature of the game, and there will be some of that in utilities, too. But overall, I like our position in it.

They do have to be involved in politics. I mean, the railroads — all four of the big railroads — are going to be involved in the political process because people have got a — who would like to change some of the rules, either as customers or competitors, are going to be in politics, too, and things will get decided in state capitals ,and more important in Washington, of importance.

So they will — they'll have lobbyists and they'll play a political game and their opponents will.

I like our position. The — it would be very dumb for the country to do anything that discouraged the railroad industry from spending the kind of capital that will need to be spent to take care of the transportation needs of this country in the future.

If you think about the money that will have to be spent on highways, and on the costs involved in there, and the congestion problems, the emissions problems, everything, the country has a strong interest in the railroad industry having every incentive to invest.

And the railroad industry pays its own way, you know. We'll spend $3.9 billion this year, and a lot of it will go to improve our present system an awful lot, and some will go toward expansion of a type. And the country will be better off on that, and the Federal Government will not write a check for it.

Charlie?

CHARLIE MUNGER: Yeah. It's in the nature of things that there are waves of good breaks and bad breaks.

Burlington Northern was enormously helped when you could double the container carriage by making the tunnels a little higher and the bridges a little stronger. And they were enormously helped when they found all this oil in North Dakota and there weren't any pipelines.

And they will get some bad breaks, too, occasionally, where somebody will take away a little break. But averaged out, it's a terrific business with terrific management. I don't think our main problems are political at all.

WARREN BUFFETT: No. The railroad industry —

CHARLIE MUNGER: For one thing, we're headed by a prominent Democrat.

WARREN BUFFETT: The railroad industry was — (laughter) — that may not be a help, Charlie. (Laughter)

Right after World War II — now, there was a lot of passenger traffic then — but the railroad industry, I think, had as many as 1,700,000 employees in the United States.

And here we are today, there's less than 200,000. I mean, railroads have become so much more efficient, just by a huge factor, and it's a fundamentally very good way to move heavy stuff a long distance.

I mean, it's hard to conceive of anything — it's be nice maybe to have barge traffic, but you only got a few rivers that are going to lend themselves to real volume along that line.

And so, you know, you have air, pipeline, you know, vehicles, planes, trains. Trains are pretty darn good.

WARREN BUFFETT: OK. Station 4.

AUDIENCE MEMBER: Section 4 does not have any questions at this time. Thank you.

WARREN BUFFETT: Well, that's a first. (Laughter)

WARREN BUFFETT: Carol, have you run out?

CAROL LOOMIS: Unprepared as I am, this is a question about the table on the first page of the annual letter, which shows the relative performance of the S&P 500 index against Berkshire's book value.

"This is an unfair apples-to-oranges presentation. An investor in the S&P 500 index can easily earn the returns shown for the S&P, but an investor in Berkshire will not earn the returns implied by the company's book values figures shown.

"Instead, he or she will earn returns over any given period that depend on the market's assessment thereof, that is, the price-to-book value ratio, and we've seen that go down in the last few years.

"A fairer comparison would be against the annual percentage change in the book value per share of the S&P 500 with dividends included. Wouldn't your shareholders be better served by better information?"

WARREN BUFFETT: Well, actually you can make the calculation two different ways as alternatives to what we do. You could have the market value of the S&P, which is in there with dividends added back, versus the market value of Berkshire.

Berkshire would show up better on that table than it does in the table I present. In other words, our advantage over the S&P would be larger if calculated that way because we started at a discount from book value and we ended up at a premium.

So it would bounce around the years. But overall, our gain would be probably at least — well, it would be about 35 or so percent higher in aggregate over the time than is shown by the book value gain, which is a lot of dollars when you make the calculation.

You could also show the book value of the S&P versus the book value of Berkshire. That figure will be a wash, pretty much, because if you take the S&P's price to book value, if that maintains the ratio at the beginning to the same ratio at the end, it's a wash as to how that calculation comes out.

So I think we could show — we could make a calculation that was more favorable to Berkshire. I don't think what the person suggests there would result in a calculation that's less favorable to Berkshire.

CHARLIE MUNGER: Long-term, the stock value has tracked fairly well with book value.

WARREN BUFFETT: But it's over-performed book value —

CHARLIE MUNGER: Yes.

WARREN BUFFETT: — for the whole time. Which is the point this question seems —

CHARLIE MUNGER: Well, you've been criticized for making yourself look worse.

WARREN BUFFETT: Yeah. (Laughter)

CHARLIE MUNGER: It's all right. You can bear it. (Laughter)

WARREN BUFFETT: I've done the other, too. (Laughs)

WARREN BUFFETT: Cliff.

CLIFF GALLANT: In studying the collapse of AIG, one of the things we learned is there were parts of the company that understood there were certain financial risks in the market and they were lowering their exposure.

While, at the same time, there were other parts of AIG which were actually increasing their exposure to the same risk.

In terms of enterprise risk management at Berkshire, how do you share information across units to make sure that the same mistakes aren't made?

WARREN BUFFETT: I didn't totally get that. Did you get that, Charlie?

CHARLIE MUNGER: Well, he was talking about how do we share information across units.

Well, if there's any sharing, they're doing it; we're not.

WARREN BUFFETT: Yeah. We don't —we don't have any — we're the most uncoordinated pair of individuals, operating both in sports or at the executive level.

There are certainly some people at Berkshire that have some contact with other people at Berkshire, but there's nothing in the way of an organized way of doing that.

I mean, [Gen Re CEO] Tad [Montross] and [GEICO CEO] Tony [Nicely] and [reinsurance chief] Ajit [Jain] are friends, and [National Indemnity President] Don Wurster, and they see each other sometimes so they're — and I'm sure they talk insurance.

But we don't make any attempt — if somebody goes in to get a quote from Gen Re and gets a quote from Ajit, there's no — we have no system that prevents — or that coordinates — our two units to give the same quote or anything of the sort.

We want our businesses to run very autonomously, and we want the managers of those businesses to feel like they're their own business. That's enormously important at Berkshire.

So we don't tell the people at Clayton Homes to buy their carpet from Shaw or to buy their paint from Benjamin Moore. We just don't do that.

And you could say that's kind of silly, but it's — any gains we would get from doing that, by selling incremental units, I think would be far offset by the change in the feeling of the manager as to whether they're really running their own business.

We hand people billions of dollars and they hand us stock certificates and they have been running those businesses for decades in many cases.

And we want them to feel the same way the next day, when they've got the money and we've got the stock certificates, as the day before when they had the stock certificates and we had the money.

And the moment we start telling them how to change the way they operate, or to coordinate with this guy, or get this person's approval, or anything like that, you know, that just erodes that advantage, which we think is very substantial, that they have this proprietary feeling about their business.

Have I answered that, Charlie?

CHARLIE MUNGER: Yeah. We're trying to fail at what you wanted us to succeed at. (Laughter)

WARREN BUFFETT: I'll have to think about that a little. (Laughter)

WARREN BUFFETT: Station 5?

AUDIENCE MEMBER: Hello, Charlie and — Warren.

WARREN BUFFETT: I'm Warren, yeah. (Laughs)

AUDIENCE MEMBER: Yes. Well, my name is Richard Cooper, and I'm from Honor, Michigan. And I'm a professional forester.

Trees are one of America's greatest resources, and it seems that a well-run forest products firm would fit well with Berkshire's holdings.

You've got the transportation system to move the product. You have the construction firms to use the product — furniture companies, home builders — and you've got insurance companies to cover the insurance end of the holdings.

Have you given any thought to getting a forest products firm?

WARREN BUFFETT: Well, your question touches on the answer we just gave. We would not really consider the other activities that Berkshire has in determining whether we would get into forest products.

We've looked at forest products companies, but we don't think about them in terms of how they may divert their products to some other subsidiaries of ours, or how other subsidiaries might benefit from selling them something.

To date, we've looked at several. To date, we've never really found any that met our test for returns against purchase price.

I mean, it's a business that's easy — or reasonably easy — to understand, I mean, in terms of the economics and its permanence and all that sort of thing. But the math has escaped us, in terms of being compelling.

Charlie?

CHARLIE MUNGER: A lot of forest products companies convert themselves into flow-through partnerships of some kind so they don't pay normal full corporate income taxes the way we do.

Berkshire is actually organized so that we'd be a disadvantage — we'd be at a disadvantage — in bidding for forests.

WARREN BUFFETT: Yeah. We're at a disadvantage in terms of any kind of activity that people manage to convert into pass-through organizations.

So particularly — take REITs, Real Estate Investment Trust, you know, they have eliminated one tax in their structure that we would bear.

And like Charlie says, you know, you have firms like Plum Creek Timber and those sort of operations where they have eliminated the federal income tax, and we don't have any structure like that. So just going in, we have a structural disadvantage that is really quite significant.

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Scott Bondurant who is from Chicago, Illinois, and he's a shareholder.

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

WARREN BUFFETT: Yeah. Well, it isn't the magic number, and there is no magic number.

I would get very worried about somebody that walked in every morning and told us precisely how many dollars of cash we needed to be, you know, secured at three sigma or something like that.

Charlie and I have had a lot of — we saw a lot of problems develop in an organization that expressed their risks in sigma, and we even argued sometimes with the appropriateness of how they calculated their risk.

CHARLIE MUNGER: It was truly horrible.

WARREN BUFFETT: And they were a lot smarter than we were. (Laughs) That's what's depressing.

But we both have the same bend of mind whereby we think about worst cases all the time, and then we add on a big margin of safety, and we don't want to go back to go.

I mean, I enjoy tossing those papers in the other room, but I don't want to do it for a living again.

So we undoubtedly build in layers of safety that others might regard as foolish, but we've got 600,000 shareholders and we've got members of my family that have 80 or 90 percent of their net worth in the company.

And I'm just not interested in explaining to them that we went broke because there was a one-hundredth of 1 percent chance that we would go broke and there was a — the remaining probability was filled by the chance of doubling our money, and I decided that that was just a good gamble to take.

We're not going to do that. It doesn't mean that much. We are never going to risk what we have and need for what we don't have and don't need. We'll still find things to do where we can make money, but we don't have to stretch to do it.

And it's my job — and Charlie thinks the same way. We don't have to talk about it much.

But it's our job to figure out what can really go wrong with this place and, you know, we've seen September 11th, and we've seen September of 2008, and we'll see other things of a different nature but similar impact in the future.

And we not only want to sleep well all those nights, we want to be thinking about things to do with some excess money we might have around.

So it is — if you're calibrating it in some mathematical way, I would say it's really dangerous. I could give you a couple examples on that, but unfortunately I've learned about them on a confidential basis.

But some really great organizations have had dozens of people with advanced mathematical training and make — and thinking about it daily, making computations, and they don't really — they don't really get at the problem.

So it's at the top of the mind, always, around Berkshire, and your returns in 99 years out of 100 will probably be penalized by us being excessively conservative, and one year out of a hundred, we'll survive when some other people won't.

Charlie?

CHARLIE MUNGER: Yeah, how do these super-smart people with all these degrees in higher mathematics end up doing these dumb things?

I think it's explainable by the old proverb that, “To a man with a hammer, every problem looks pretty much like a nail.” They've learned these techniques and they just twist the problem so they fit the solution, which is not the way to do it.

WARREN BUFFETT: And they have a lack of understanding of history, I would say.

One of the things — in 1962, when I set up our office in Kiewit Plaza, where we still are, it's a different floor, I put seven items on the wall. Our art budget was $7, and I went down to the library, and for a dollar each I made photo copies of the pages from financial history.

And one of those cases, for example, was in May of 1901 when the Northern Pacific Corner occurred, and it's kind of interesting in terms of being in Omaha because Harriman was trying to get control of the Northern Pacific, and James J. Hill was trying to control the Northern Pacific.

And unbeknownst to each other, they both bought more than 50 percent of the stock. Now, when two people buy more than 50 percent of the stock each, and they both really want it, they're not just going to resell it. You know, interesting things happen.

CHARLIE MUNGER: To the shorts.

WARREN BUFFETT: And in that paper of May 1901, the whole rest of the market was totally collapsing because Northern Pacific went from $170 a share to $1000 a share in one day, trading for cash, because the shorts needed it.

And there was a little item at the top of that paper, which we still have at the office, where a brewer in Troy, New York, committed suicide by diving into a vat of hot beer because he'd gotten a margin call.

And to me, the lesson — that fellow probably understood sigmas and everything and knew how impossible it was that in one day a stock could go from 170 to 1,000 to cause margin calls on everything else.

And he ended up in a vat of hot beer, and I've never wanted to end up in a vat of hot beer. (Laughter)

So those seven days that I put up on the wall — life in financial markets has got no relation to sigmas.

I mean, if everybody that operated in financial markets had never had any concept of standard errors and so on, they would be a lot better off.

Don't you think so, Charlie?

CHARLIE MUNGER: Well, sure. (Laughter)

WARREN BUFFETT: Here, have some fudge. (Laughs)

CHARLIE MUNGER: It's created a lot of false confidence and — now, it has gone away.

Again, as I said earlier, the business schools have improved. So has risk control on Wall Street. They now have taken the Gaussian curve and they've just changed its shape.

WARREN BUFFETT: Threw it away.

CHARLIE MUNGER: They threw it away. Well, they just made a different shape than Gauss did, and it's a better curve now, even though it's less precise.

WARREN BUFFETT: They talk about fat tails, but they still don't know how fat to make them. They have no idea.

CHARLIE MUNGER: Well, but they knew — they've learned through painful experience they weren't fat enough.

WARREN BUFFETT: Yeah. They learned the other was wrong, but they don't know what's right.

CHARLIE MUNGER: We always knew there were fat tails. Warren and I, in the Salomon meetings, would look over at one another and roll our eyes when the risk control people were talking.

WARREN BUFFETT: OK. Jay?

JAY GELB: This question is on Swiss Re.

Berkshire's quota share treaty with Swiss Re, covering 20 percent of Swiss Re's property-casualty risk, ends in 2012. Does Berkshire plan to replace that premium volume through another transaction?

WARREN BUFFETT: Well, we would hope to — we always hope to get more good volume, but what we do has no relationship to the expiration of that contract.

I mean, that contract was a five-year contract. It's a big contract, billions of dollars a year. But the fact that that expires and our premium volume will go down by multiple billions does not cause us to do one thing differently than we would do otherwise.

We've got the capacity to write billions and billions of business, and we would love to do it if we were expanding the Swiss Re contract, and we don't want to write any dumb business when we lose that contract. It's just — it's a nonevent, in terms of future strategy.

It's not a nonevent, in terms of losing some business that we like, but it's a nonevent in terms of any future strategy.

We regard every decision, you know, as independent. We don't do — if money comes in, that doesn't cause us to want to think about doing something today that we weren't thinking about doing the day before. We just don't operate that way.

We'll have things that come along that are terrific, and that doesn't mean the next day we don't want to look for something in addition that's terrific. Every decision is sort of independent.

CHARLIE MUNGER: I don't think there's another large insurance operation in the world that is more cheerful about losing volume than we are. If it doesn't make sense —

WARREN BUFFETT: We don't want it.

CHARLIE MUNGER: — if the business has to shrink, we let it shrink.

WARREN BUFFETT: We don't measure ourselves in any way —

CHARLIE MUNGER: By size.

WARREN BUFFETT: — by size, except by the growth in value over time.

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Wendy Wasserman (PH) from Boston. Warren, best wishes on a speedy and complete recovery.

My question is regarding Fannie Mae and Freddie Mac. You wrote that you expected the housing market to be improved by now but that it hasn't improved.

You spoke about demographics and the housing-dependent parts of the business. You did not, however, speak about Fannie and Freddie. Fannie Mae, the Federal Reserve, and Freddie Mac are the three largest financial institutions.

Then comes J.P. Morgan and Bank of America. Fannie and Freddie have been in conservatorship for 3 1/2 years, the longest. Initially they had combined assets of 1.6 trillion, each a Lehman Brothers.

Now they have 5.5 trillion, adding 4 trillion of off-balance sheet items and government mortgage modification programs.

They are public companies with operating losses, a negative net worth, owned by the government, acting at times with the power of the government, financed with a blank check from Treasury, and taxpayers, who are usually also homeowners.

Most near-bankrupt companies shed assets. These two added assets and liabilities. AIG and General Motors have emerged; these two have not.

Contrary to popular belief, the securities law did not need the biggest rewriting since the Great Depression. The 1933 and 1934 Securities Acts worked. Sarbanes-Oxley works.

Fannie and Freddie, and the 1938 and 1968 governing laws, do not, no matter how much they have contributed to U.S. housing standards.

What is the solution? How many years can they stay in conservatorship? Can the resolution trust authority be used? Are they truly too big to fail? What role will banks like Wells Fargo and U.S. Bancorp, who are leading mortgage players — (applause) — play now that they are well capitalized?

What happens to the MBS market and the (inaudible) system? How can housing improve even with better demographics without an answer to Fannie and Freddie?

WARREN BUFFETT: Well, I got through college answering fewer questions than that. (Laughter and applause)

I would say that the overall tone of your remark, which indicates that you think Fannie and Freddie are a mess, is probably justified.

And of course, the reason they're a mess is we haven't figured out yet, or we can't get agreement, on what the best structure is to have in this country going forward to generally finance mortgages.

There's no question that a government guarantee program brings down the overall cost of financing mortgages over time.

And then we had one, of course — we've had several — but we had one in Fannie and Freddie that went wild when we introduced the profit motive into the mix of two institutions that really were half trying to serve a housing mission and half trying to serve a profit mission, and gradually the profit mission sort of overcame the housing mission.

Congress hadn't sorted that out yet. It's a huge item, obviously. There are roughly 50 million residential mortgages in the United States, you know, and they total 10 trillion or so.

It's important that you have a market that does minimize costs for borrowers who have adequate down payments and adequate income and all of that.

And I think for a while, we were going in that direction with Fannie and Freddie, and then they left the tracks.

But that's going to get — how long they can stay in conservatorship? They can stay there a long time.

They will stay there, in my view, until politically we get some kind of a resolution that — as to a future policy — that both parties can go along with, and it looks to me that's a ways off.

Charlie?

CHARLIE MUNGER: Well, of course, the interesting thing is that Canada, right to the north, kept a more responsible real estate lending system, and they had almost no trouble.

We departed completely from sanity and decency and morality in mortgage lending in the United States, and the government of the United States participated in the folly, and they did it in a big way.

And it was wrong not to step on the boom that was obviously so full of fraud and folly. And I sometimes say that [former Federal Reserve Chairman] Alan Greenspan overdosed on [author] Ayn Rand when he was young. (Laughter)

He thought if an ax murder happened in a free market, it was probably all for the best.

And so we had — there's a lot of disgraceful behavior we have to regret, in terms of what happened, and it caused enormous damage. And a modest little country like Spain, and another one called Ireland, you had something somewhat similar.

People just allowed craziness to go unchecked, and that was a big mistake. And Greenspan was really wrong. It's the duty of the government to step on crazy market booms — (applause) — and prevent them by keeping sound policies, as Canada did.

And so you put your finger on a very disgraceful episode in United States history.

But once we were into it, I think we had no option but to do exactly as the government did, which was to nationalize Fannie Mae and Freddie and try to make them behave better in the future, and that's what's happened.

WARREN BUFFETT: It's going to be a long runoff.

And Congress, it wasn't just the Fed— Congress did their share in that, too. But it was —

CHARLIE MUNGER: Everybody did.

WARREN BUFFETT: Everybody did. I mean, it —

CHARLIE MUNGER: By the way, we didn't. (Laughter)

WARREN BUFFETT: Charlie, we resigned from the Savings and Loan League a good many years ago just because we thought such nutty stuff was going on and —

CHARLIE MUNGER: It was disgraceful.

WARREN BUFFETT: Yeah. And Charlie got lectured for it, too. (Laughs)

CHARLIE MUNGER: Yes, I did.

WARREN BUFFETT: They made him go to school, learn how to loan money, and I think one of the regulators said, “Well, what kind of people do you lend money to?”

And I think Charlie said, “Well, the one thing we do is we don't lend money to people like you.” (Laughter)

And for some reason we had regulatory problems after that. (Laughter)

CHARLIE MUNGER: I was not popular because he said you're using the government's credit in our savings and loan, and therefore, you have to make a lot of dumb loans because we're telling you to.

And I said, “We're not using the government's credit. As a condition of one of our mergers, Berkshire Hathaway agreed you'd never have trouble with our savings and loan. We're paying you insurance premiums, and you're using our credit.” This did not make me popular.

WARREN BUFFETT: No. (Laughter)

CHARLIE MUNGER: And he was a florid-faced alcoholic. (Laughter)

I remember it very well.

WARREN BUFFETT: I do, too, but —

CHARLIE MUNGER: We left the savings and loan business.

WARREN BUFFETT: We have more problems when Charlie wins an argument. (Laughter)

But it's a lot of fun. (Laughter)

CHARLIE MUNGER: Well.

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: OK, here's the question:

"Please tell us more about your experience this past year with Todd Combs and Ted Weschler. What did they do well, and did they make any mistakes? And please discuss how you compensate them a bit more.

In an interview, you said that Todd Combs was well compensated for the performance of his stock picks last year.

Should we be worried about a short-term horizon for compensation? How do you ensure that Todd and Ted don't chase high-flying stocks for the sake of compensation?

WARREN BUFFETT: Well, we've always been more concerned about how our record is achieved than the precise record itself. And with both Todd and Ted, Charlie and I were struck by, not only a good record, but intellectual integrity and qualities of character, a real commitment to Berkshire, a lifelong-type commitment.

And we've seen hundreds and hundreds of good records in our lifetimes; we haven't seen very many people we want to have join Berkshire.

But these two are perfect, and we pay them each a salary of a million dollars a year, and we give them 10 percent of the amount by which their portfolios beat the S&P.

So that if they beat the S&P by 10 points, they get one point, for example, and we get nine points. But we do it on a three-year rolling basis so you don't get the seesaw effect.

And each one gets paid 80 percent based on their own efforts and 20 percent based on the other person's, so that they have every incentive to operate in a collaborative way rather than sit there jealously guarding their own ideas and hoping the other guy doesn't do very well.

So it's a — I don't think we could have a better — it's the same structure on pay, basically, that we had with Lou Simpson for 20-some years, except he did not have a partner.

To the extent that they employ people underneath them, that comes out of their performance record, and it's worked far better than either Charlie and I had hoped, and we had pretty high hopes.

We had 1 3/4 billion with each of them at year end, but we've added another billion each on March 31, so they're running 2 3/4 billion apiece.

I don't look at what they do. I see it eventually when I look at a GEICO portfolio at the end of the month or something of the sort.

But they operate through their own brokers. They don't — I've told them that the only thing I want to know is, if they're getting into a new name, I just want to know the name so I'm certain that it isn't something that I am familiar with some inside information on, or something, so that there's no inadvertent appearance that we would be — or that their purchase would have been influenced by something that I knew about.

That's never come up. They can't — they can't — if there's something we would have to file a 13D on, they would have to check with me. But basically none of that's going to happen. Never happened with Lou, either.

They operate in different stocks. They've got a much bigger universe than I have because they're working with 2 3/4 billion instead of 150 billion, so they can look at a lot more things.

And they've cheerfully pitched in for other duties that they don't really get compensated directly on, but that are helpful to Berkshire. And they will — they'll do a great job for Berkshire when they're running a whole lot more money than they are now.

Ted only joined us this year. Todd did substantially better than the S&P last year, so he racked up a big performance gain, a third of which was paid to him in the first year, but the two years is deferred and he could lose that back if he were to underperform.

So I think we've got a good system and terrific people.

Charlie?

CHARLIE MUNGER: What's interesting about it is that at least 90 percent of the investment management business of the United States would starve to death on our formula. I think — and I think these people will do pretty well with it. So —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And not only that, they'll be terrific for the long pull for Berkshire. They're the kind of people we like having around headquarters.

WARREN BUFFETT: Yeah. I hope they get into that — those 400 taxpayers I mentioned, but if they do, even under the present haul, they'll be paying taxes in the mid-30s.

They are doing what they did before which — they ran hedge funds — but they're going to work every day thinking about the same things, and they get taxed at 35 percent-plus.

And if they were running hedge funds, they'd get taxed at 15 percent. And for all of those in the audience who can reconcile that, there'll be a free Dilly Bar. (Laughter)

CHARLIE MUNGER: I think each of them could earn more money in a different format but with a less desirable lifestyle.

WARREN BUFFETT: Yeah. We have a little free Coke machine at our office. (Laughter)

CHARLIE MUNGER: Well, they get to hang around with a fellow eccentric of the same type as Warren.

WARREN BUFFETT: OK, Gary, before we go too far with this. (Laughs)

GARY RANSOM: My next question is on GEICO, a little bit more detailed question.

In the fourth quarter of last year, the GEICO combined ratio went up over 100 percent for the first time since, I think, in some quarter in 2001.

Now I realize a quarter doesn't make a trend, but something unusual happened in the quarter. Can you tell us more about that?

WARREN BUFFETT: The biggest thing that happened was a decision, or maybe a couple of decisions — Tony Nicely could elaborate more on them — but they involved Florida and some interpretation down there, I think, of the PIP coverage that caused us to set up some extra reserves that — they weren't extra — I mean, they were called for by what was happening in Florida at that time.

But it was a one-time sort of arrangement. And in the first quarter of this year, on a comparable basis, as you've probably seen in our Q, we wrote at about 91.

So, the basic business is good, but the Florida decision cost us significant money because it changed our potential liability for a bunch of claims already outstanding.

And my guess is you're more familiar with the exact terms of that than I am, but that is the bottom line answer on it.

And GEICO — every metric for GEICO that I've seen this year, in terms of retention, combined ratio on seasoned business versus new, all of that sort of thing, is quite consistent with our general record.

GEICO is a terrific asset for Berkshire. I mean, it will be worth — it's worth a lot of money now. It will be worth a lot more money in the future.

WARREN BUFFETT: Station 7.

AUDIENCE MEMBER: Hello, Charlie and Warren. My name is Stuart Kaye from Matarin Capital Management in Stamford, Connecticut.

You mentioned earlier today that one of Burlington Northern Santa Fe's competitive advantages is its environmentally-friendly business relative to transportation alternatives.

When evaluating other investment opportunities, what financial statement or other publicly available data do you use to gauge whether a company is both environmentally responsible and a good investment?

WARREN BUFFETT: Well, in terms of what's a good investment, you know, we try to look at every aspect, everything we can that will tell us how the world is going to develop for both that industry and the company in the future.

And sometimes we feel a lot of confidence about that. If we're looking at Coca-Cola, we think we know a lot about how the world will look with the Coca-Cola Company over the next five or 10 or 20 years.

If we're looking at some retail business or something, we would not have the same degree of conviction at all.

I mentioned the environmentally-friendly aspect of it. It is just — you know, it is just — requires less, in the way, of the world's resources to move goods, you know, on a steel rail in large containers, you know, with only a couple people involved with 120 cars, a train a mile long, than it does if you're working, you know, with trucks that have many, many more people and much more in the way of fuel to deliver the same kind of tonnage.

So there's no — we don't — there's no magazine we go to or books we go to or anything like that. We just look at the dynamics of the specific industry and company.

Charlie?

CHARLIE MUNGER: Warren, even though he's an unseasoned young man, was able to figure out that if you used a lot less fuel per ton of freight, you were causing fewer undesired particles to go into the air.

WARREN BUFFETT: That's about the limit of my capabilities, folks. (Laughter)

WARREN BUFFETT: OK. Station 8.

We've gotten into the — we've covered 36 questions from the two panels, so we're now going to keep going around the audience as long as the questions last, we're going to give you more than your share at this point.

AUDIENCE MEMBER: Good afternoon, Warren and Charlie. Up here.

WARREN BUFFETT: Yeah, I see ya.

AUDIENCE MEMBER: All right. Very good.

John Norwood from West Des Moines, Iowa. We spent a lot of time today talking about two out of the three things you fellows said you spend a lot of time thinking about. One is allocating capital; one is managing risk.

We've had just one question related to motivating your people and tied into executive compensation. So that's what I'm interested in learning more about: executive compensation, how you motivate Berkshire managers, financial versus nonfinancial incentives. Can you speak more about that?

WARREN BUFFETT: Yeah. Well, obviously, Charlie and I have thought a few times about why do we do what we do when we don't need the money at all. And we jump out of bed excited about what we're going to do every day, and why is that the case?

Well, we get the opportunity to paint our own painting every day, and we love painting that painting, and it's a painting that will never be finished.

And you know, if we had somebody over us that was saying why don't you use more red paint than blue paint, and we had all the money in the world, we might tell them what they could do with the paint brush. (Laughter)

But we get to paint our own painting, and ours overlap. We have more fun doing it together than we would have doing it singly, because it is more fun to do with people around you that are pleasant and interesting to be around, and we also like applause.

So if that works with us, we say to ourselves — (applause) — that was not a brazen — (Laughs)

If that works for us, why shouldn't it work for a bunch of other people who have long been doing what they like to do and now, in many cases, have all the money they possibly need? But still, they may have to sell us their business for one reason or another connected with family or taxes, who knows what else?

But they really like what they've been doing. That's the reason — probably — the reason they've been so good at it — part of the reason they've been so good at it.

So we give them the paint brush, let them keep the paint brush, and we don't go around and tell them to use more red paint than blue paint or something of the sort. And we applaud and we try to compensate them fairly, because though they aren't primarily doing it for the money in many cases, nobody likes to be taken advantage of.

But that has not been a big problem at Berkshire. We have not had compensation problems over time. If you think about it, over 40-odd years, the times when compensation has been of importance are practically nil.

And it — we don't — we'll just take that we've talked about the investment — the compensation of two investment people. Those people are making below hedge fund standards, below private equity standards, and having a less favorable tax treatment.

They'll still make a lot of money, I mean, huge amounts of money. And I hope that they are having a good time doing what they're doing. I think that's why they're here.

And I think they'll enjoy it a lot more over the years than going around to a bunch of people explaining why they're worth two and twenty even in the years that aren't so good and trying to attract new money when other people are making bigger promises someplace else. It's just a different way to live your life.

So we want to have our managers enjoying their lives and enjoying their business lives. And we get rid of some of the things they don't like, a lot of them.

I was with a fellow the other day that had come from England. And he's got plenty of business problems to work on, and he's spending a significant part of his time talking to investors, which does him no good.

I mean, he ought to be talking to customers or, you know, employees or something, but he — I think a number of managers may have to spend time talking to lawyers or talking to bankers or talking to investors and what they really like to do is run their businesses, and we give them the best opportunity to do that.

So I can't put passion into somebody about their jobs, but I can certainly create a structure that will take that passion away from them.

And Berkshire is a negative art in that way. We focus on not messing up something that's already good, and that's my job. And I think the person that follows me will have a very similar job.

But we have a unique — we have a bunch of managers nobody else can hire and, you know, how many companies of size can you say that about around the country these days?

And I think we will retain that advantage for many, many decades to come. It works, and people know that it works within the company.

So it's self-reinforcing, and there's nothing like getting proof that what you've designed works, to cause you desire to perpetuate it and to build upon it.

Charlie?

CHARLIE MUNGER: Well, and we don't have any standard formulas like they have in some big companies where X percent is on diversity and Y percent is on something else and Z percent is on something else and everybody is putting all this stuff through a big human resources department.

And every incentive arrangement with a key executive is different from every other, so we can't help you with a standard formula. We don't have one.

WARREN BUFFETT: Our businesses are all so different. It would be crazy to try and have some master arrangement, you know, that involved return on capital — there are some businesses that don't use any capital in our companies — or operating margins. They're just — you know, we could hire consultants in compensation to come in and they —

CHARLIE MUNGER: We never have.

WARREN BUFFETT: No, we never will.

But, you know, they would want to please the people they were working for and get referred elsewhere.

I mean, I will guarantee that you can go to many corporations, if you've got a comp committee, it meets periodically, and the human relations VP comes in and probably suggests a compensation consultant to take. And, you know, who does a human relations VP want to — whose approval do they want? The CEO's.

Whose approval does the compensation consultant want? Well, they want to get recommended elsewhere by the CEO and the human relations VP. So what kind of a system do you get? You get what I call ratchet, ratchet, and bingo, you know.

We're not going to have any of that at Berkshire, and like I say it's worked very well.

Now, we've had people make lots of money at Berkshire. I mean, we've got numbers in eight figures, you know, a page-and-a-half or so, I saw it the other day, that would be at a million dollars and over, and we'll have more.

But it does relate to logical measures of performance in practically all cases. And the amount of time we spend on it is just — I am the compensation committee for 60 or 70 people, and I'm not overworked. (Laughs)

Anything further on that, Charlie?

CHARLIE MUNGER: Well, in past years, I've made the remark about compensation consultants that prostitution would be a step up for them. (Laughter)

WARREN BUFFETT: Charlie is also in charge of diplomacy at Berkshire. (Laughter)

We told you we'd get to everybody in terms of offending them before the day was over. (Laughter)

It didn't even take until 3:30.

WARREN BUFFETT: Station 9.

AUDIENCE MEMBER: Good afternoon gentleman. (Inaudible), Arlington, Virginia. I have a question for you.

What will it take to get America growing by 4 percent again?

WARREN BUFFETT: Well, Charlie, that's too easy for me. You take it. (Laughter)

CHARLIE MUNGER: A lot. A lot. It's not going to be easy.

WARREN BUFFETT: No. But if population grows 1 percent a year and GDP, in real terms, grows 2 1/2 percent a year, by the standards of 2,000 or 5,000 years, that would be remarkable.

I mean, it would result in, you know, a quadrupling of real GDP per capita every century.

We don't — it's nice to have 4 percent in real terms, but 2 1/2 percent, it may be slow in getting us out from the slump that we entered into a few years ago, but it's a really — it's a remarkable rate of growth for a country that already enjoys a very high standard of living.

It's a remarkable rate of growth for a country that has 1 percent a year gain in population. It is huge over one person's lifetime. I've used this a lot of times, but in my lifetime, the real GDP per capita has increased six-for-one.

CHARLIE MUNGER: But it's nowhere near 4 percent per annum.

WARREN BUFFETT: No. It's staggering. It's staggering. And we have $48,000 or thereabouts of GDP per capita in the United States. We are unbelievably rich.

But an awful lot of people are not feeling that way, and in many cases for good reason. But we've got a tremendous country to work for — to work with.

It's got all kinds of strengths. And it has this huge abundance that — if my parents back in 1930, if you'd told my mother and father that when I was 81, that I would be living in a country that had six times the per capita output of their day, they would have thought, you know, that this would be a utopia. And it hasn't been bad, I might add.

But our country is not a mess. Our politics may be a mess, but the output is — (applause) — you know, it's terrific.

Charlie, if you had to guess the real growth rate per capita over the next 20 years in the United States, what do you think it would be?

CHARLIE MUNGER: That's after inflation?

WARREN BUFFETT: No. This is just real.

CHARLIE MUNGER: Real, that's what I mean. After taking inflation out of it?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Well, if God were making the guarantee, I would settle for a very low figure. I think we're a very mature economy, with a lot of social safety net, and a lot of competition from new nations rising, I think 1 percent per capita in real growth would be a sensational result.

WARREN BUFFETT: Yeah, which in 20 years means people would be living close to 25 percent better on average. That's not bad. That's the next generation — in one generation.

CHARLIE MUNGER: You get your expectations too high. When you think that 4 percent is what the world ought to provide, you're asking for trouble.

WARREN BUFFETT: It won't do it.

CHARLIE MUNGER: That's what happened in the housing boom. People got these foolish dreams, and they just started doing foolish things to try and reach unattainable objectives.

WARREN BUFFETT: But if you had the 1 percent, you would be talking about each generation living something over 20 percent better than their parents did.

CHARLIE MUNGER: For this base, it would be a sensational result.

WARREN BUFFETT: And we'll probably get it, in my view.

It won't come in even increments, but the system still works.

And incidentally, you've actually seen — even after the incredible crash, in effect, that we had in the fall of 2008, you've seen an enormous amount of resilience here and, of course, you compare it with Europe and it looks particularly strong, but —

CHARLIE MUNGER: Yes, but the resilience has been better for the businesses than it has been for the employment situation —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — which is too bad.

WARREN BUFFETT: Yeah. Business has done extraordinarily well.

Business profits as a percent of GDP were right at the height, you know, last year — and of course our own worth.

I mean, that produces a lot of strains on the political system.

Well, we've mused enough on that.

WARREN BUFFETT: So let's go to station 10.

AUDIENCE MEMBER: Hi, Warren. Arthur Lewis (PH) from Denver, Colorado, new home of Peyton Manning. But my question is —

WARREN BUFFETT: It's also the home of Johns Manville. (Laughter)

AUDIENCE MEMBER: My question is with the election coming up, have you thought about making a donation to a super PAC to try to protect a competitive advantage?

WARREN BUFFETT: No, I won't. You know, I wish it never — (applause) — [U.S. Supreme Court case] Citizens United never happened.

It's very tempting, and I will hear this argument put forth to me. People will say, well, you know, we don't believe in it either, but they're doing it on the other side, and, you know, you've got hundreds of millions pouring in on the other side and you're going to tie your hands behind your back, you know, just over principle.

But, you know, I think the whole idea of super PACs is wrong, and I think the idea of huge money by relatively few people influencing politics, I think we've got enough of a push toward a plutocracy from a lot of other factors that we don't need to throw it into the voting process.

And I might say that — I'll say this for [Las Vegas Sands CEO and GOP contributor] Sheldon Adelson who was — you know, he and his wife I think have probably put 12 million in or something. He says this, and I believe him entirely. He says the same thing. He thinks the system is wrong, but he says that's the way the system is. So he has to — you know, he has to play or other people will play and he won't be.

I can understand that, but I don't want to do it. I just think that, you know, you've got to take a stand someplace.

And the idea that I should toss $10 million into some super PAC which is going to spend its whole time kind of misleading people about the opponent's behavior or record, I don't want to see democracy go in that direction.

Charlie? (Applause)

CHARLIE MUNGER: Well, I'm ordinarily so negative and I am extremely negative about our — the nature of our politics with both parties doing the gerrymandering and requiring this unified thought so that the crazies on each side get all this power.

And I remember when we did the Marshall Plan with bipartisan support. That's more my kind of a world. So I don't like it.

That said — (applause) - I think we're lucky to have two candidates as good as we have. Considering the system, I think we've done pretty well this year.

WARREN BUFFETT: How would you feel about contributing to a super PAC if the other side had way more going to their super PACs?

CHARLIE MUNGER: Well, there are certain subjects where I would give money to a super PAC if I thought it would work. If I thought I could really reduce legalized gambling in the United States by a major amount, I would be willing to spend some money to get it done. (Applause)

I think it does us no good. And to the extent we have allowed our securities markets to be more like gambling casinos, I think that's a dumb outcome, too. (Applause)

WARREN BUFFETT: Yeah. If you've got a super PAC out there, call on Charlie, not me.

WARREN BUFFETT: 11.

AUDIENCE MEMBER: Glenn Tongue, T2 Partners, shareholder from New York.

In an interview with Becky yesterday, Mr. Munger commented that in the old days, the vast majority of Berkshire's value was embedded in the investment portfolio, which is presumably worth around book value.

Today the majority is in the controlled businesses, which we believe are worth a substantial premium to book. In light of this, Berkshire Hathaway's intrinsic value, as a multiple of book value, should be increasing over time, yet Berkshire's price-to-book value has been declining. I'm trying to understand this.

Since the beginning of the year, Berkshire's investment portfolio — I'm sorry — since the beginning of last year, Berkshire's investment portfolio has increased in value by $20 billion and you've acquired Lubrizol. The controlled businesses are going gangbusters, yet the stock price hasn't budged. Is "Mr. Market" simply in one of his manic moods?

WARREN BUFFETT: Charlie?

CHARLIE MUNGER: Well, I'd say no, but I'd say it's in the nature of things that the market is not going to do exactly what you want when you want it.

I think over time, "Mr. Market" will treat the Berkshire shareholders fine, and I wouldn't worry too much about what happens over this six months or this 12 months.

I don't think you’re really all that welcome in this room if the short-term orientation is what turns you on. (Applause)

WARREN BUFFETT: I think you'd agree, though, probably, that Berkshire is somewhat cheaper relative to its price than it was a year ago.

CHARLIE MUNGER: Yes, absolutely, if that's your test. Should you feel better about the margin of safety in Berkshire? Yes, it's fine.

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Good afternoon. Based on your earlier — oh, this is Roberta Cole (PH) from the Twin Cities of Minnesota.

Based on your earlier comments you made this morning, we understand you will buy back shares to help increase share value.

Our confusion, and appreciate clarification, arises as to why you are unwilling to distribute a dividend on a sporadic basis when the stock is too expensive to buy back, and you have the excess cash so that you could do that, particularly in a low interest rate environment. We look forward to clarification. Thank you.

WARREN BUFFETT: Yeah. By and large, we feel, perhaps unjustifiably, but so far justified, that we can create more than a dollar of present value by investing.

Sometimes, if the stock is cheap, we can create more than a dollar of present value by simply repurchasing shares. But even if that option isn't available, we feel that by every dollar we retain, we can — overall — we can turn that into a greater than a dollar of present value.

And for 47 years, that's worked. I mean, we have — every dollar retained is turned into more than a dollar of value.

So, if somebody wanted to create their own income stream out of it, they were much better off selling a little bit of stock every year than they were by getting a dividend out of it.

They would have more money working per share in Berkshire if they sold off 2 percent of their holdings than if we actually paid them out in 2 percent dividends.

So the math has been compelling to this point. Now, the question is whether we can keep doing that in the future.

But so far, at any point in our history, if we had paid out dividends — and I paid out 10 cents a share back in the 1960s which was a big mistake, but — we won't repeat that.

If we paid out dividends, our shareholders, net, would be worth less money than they are by having left it in, and I think that will continue to be the case, but who knows?

Charlie?

CHARLIE MUNGER: Well, I think the dividends will come in due course because eventually we'll find it difficult to multiply the rabbits, but we hope that that evil day is delayed.

WARREN BUFFETT: And even events of the last few years are encouraging in that respect.

CHARLIE MUNGER: Yeah, absolutely, particularly encouraging.

WARREN BUFFETT: Yeah. I would feel better about — well, the last few years have been better than we anticipated, in terms of being able to put money to work in ways that we think are creating more than a dollar of present value at the time we did it.

CHARLIE MUNGER: You know, MidAmerica may have very unusual opportunities in the next ten or fifteen years to employ an enormous amount of capital at a very reasonable return.

WARREN BUFFETT: Perhaps 100 billion.

CHARLIE MUNGER: What?

WARREN BUFFETT: Perhaps 100 billion.

CHARLIE MUNGER: Perhaps $100 billion. And you can see why that doesn't make us too excited about dividends.

WARREN BUFFETT: We'll think about it when we're older. (Laughter)

CHARLIE MUNGER: A lot older. (Laughs)

WARREN BUFFETT: Number 2.

AUDIENCE MEMBER: Hi, Warren and Charlie. This is Thomas Schulz (PH) from Germany.

You once said that if you had just $1 million to invest now, you could achieve returns of 50 percent per year.

Given what you know now, how would you be able to improve on the already spectacular performance of when you started out with your partnership?

CHARLIE MUNGER: We can't do with our present resources what we did once. There are a lot of things I can't do that I used to do better. (Laughter)

WARREN BUFFETT: Well, you can confess to those, Charlie. (Laughter)

CHARLIE MUNGER: And so —

WARREN BUFFETT: Well, but I think he may be driving it to the point that have we learned things in managing since we were at that level where we can do even better with $1 million now than we could have done with $1 million then, and I would say the answer to that is yes. Wouldn't you?

CHARLIE MUNGER: Yeah, I think that's true.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: There's enough craziness out there. If you have endless time and only a very small amount of money, I think you could find ways to do pretty well.

WARREN BUFFETT: And in the course of 50 or so years, we have probably learned more, or been exposed to more, that if we were back at the million-dollar level we would know more places to look, I think.

CHARLIE MUNGER: Well, I say what's interesting about Berkshire, and many of you have been around for so long you've actually seen it happen, Berkshire's record would have been terrible compared to the way it turned out if Warren hadn't kept learning and learning and learning all the way.

I mean, each decade, to make the record decent, he had to learn to do some things he didn't know how to do at the start of the decade. And I think that's pretty much the human condition, and of course, he's getting old. I worry about him a lot. (Laughter)

WARREN BUFFETT: I'll resist commenting. (Laughter)

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Hi. My name is Jeff Chen (PH). I'm from San Francisco. I'm 26, and I run a software start-up out there.

My question is about mistake minimization. I found that I've made a lot of mistakes in my business, looking back, and I want to know besides thinking harder and learning from your own mistakes, what are the most effective techniques you've used to minimize the mistakes?

WARREN BUFFETT: Yeah. Well, I — we made mistakes; we'll make more mistakes.

We do — we think not so much — we think in terms of not exposing ourselves to any mistakes that could really hurt our ability to play tomorrow.

And so we are always thinking about, you know, worst-case situations and there are — on the other hand, we have a natural instinct to do things big, both of us.

So we have to think about whether we're doing anything really big that could have really terrible consequences.

And, I would say this, that A) I don't worry much about mistakes, I mean, the idea of learning from mistakes. The next mistake is something different. So I do not sit around and think about my mistakes and things I'm going to do differently in the future or anything of the sort.

I would say that the — you may get some advantage — I think I've learned something over the years. I haven't learned more about a basic investment philosophy. I got that when I was 19 and I still —

I think I've learned more about people over the years. And I'll make mistakes with people. You know, that's inevitable. But, I think I'll make more good judgments about people. I'll recognize the extraordinary ones better than I would have 40 or 50 years ago.

So I think that improves, but I don't think it improves by certainly any conscious sitting around and focusing on what mistake did I make with that person or this person. I just don't operate that way.

Charlie?

CHARLIE MUNGER: Warren, I would argue that what you've done, and what I've done to a lesser extent, is to learn a lot from other people's mistakes. That is really a much more pleasant way to learn hard lessons. (Laughter)

And we have really worked at that over the years, partly because we find it so interesting, the great variety of human mistakes and their causes. And I think this constant study of other people's disasters and other people's errors has helped us enormously, don't you, Warren?

WARREN BUFFETT: Oh yeah, well that's true. In terms of reading of financial history and all that sort of thing, I've always been absolutely absorbed with reading about disasters. (Laughs)

And there's no question. I mean, when you look at the folly of humans — you know, I've focused on the folly in the financial area — there's all kinds of folly elsewhere — but just the financial area will give you plenty of material if you like to be a follower of folly.

And I do think that understanding — and that's what gave us some advantage over these people that have IQs of 180, you know, and can do things with math that we couldn't do.

They just — they really just didn't have an understanding of how human beings behave and what happens. 2008 was a good example of that, too.

So we've — we have been a student of other people's folly, and its served us well.

WARREN BUFFETT: Station 4, have we got a question yet?

AUDIENCE MEMBER: John Boxters (PH), Dartmouth, Massachusetts, which as you know is next door to New Bedford, a former home of Berkshire.

My question is how do you build barriers to entry, especially in industries which have few?

WARREN BUFFETT: Industries which have?

CHARLIE MUNGER: Few barriers to entry.

WARREN BUFFETT: Oh.

CHARLIE MUNGER: How do we build barriers?

WARREN BUFFETT: Pretty tough. (Laughs)

CHARLIE MUNGER: Yeah. We sort of buy barriers; we don't build them. (Laughter)

WARREN BUFFETT: Yeah. Well, think about that because it's true. It's very — there are some industries that are just never going to have barriers to entry.

And in those industries, you better be running very fast because there are a lot of other people that are going to be running and looking at what you're doing and trying to figure out, you know, what your weakness is or what they can do a little bit better.

You really — you know, a great barrier to entry, you know, is something like this. If you gave me 10, 20, $30 billion and told me to go in and try and knock off the Coca-Cola Company with some new cola drink, I wouldn't have the faintest idea how to do it.

I mean, there are billions of people around the world that have something in their mind about Coca-Cola, and you're not going to change that with 10 or $20 billion.

CHARLIE MUNGER: Yeah, but our great brands we bought, we didn't create.

WARREN BUFFETT: We didn't create them, no.

We eat them but we don't create them. (Laughter)

But you know, not so many years ago, you remember Richard Branson, he came to this country and he came up with something called Virgin Cola. And, you know, they say a brand is a promise. Well, I'm not sure what promise he was trying to convey by that particular branding — (laughter) — but you know, you haven't heard anything about that since.

I don't know how many cola drinks there have been in the history. Don Keough would probably know but there's been hundreds, I'm sure.

And those are real barriers, but it's hard to do.

I mean, the people — as Pfizer finds out with Lipitor, you know, the time runs out and what was an absolute gold mine still is a pretty good mine, it's not what it was by a long shot.

But we've got a number of businesses that have — well, nobody's going to build another railroad, you know. We have a competitor and we will have competitors in alternative methods of transportation and all of that.

But if you're buying something at a huge discount from replacement cost and it's an essential sort of activity, you've certainly got a barrier to new competition.

But the UP is out there fighting for every bit of business every day, of course.

Charlie?

CHARLIE MUNGER: Yeah. We have found in a long life that one competitor is frequently enough to ruin a business.

WARREN BUFFETT: Well, I did find that out. I started with a gas station out at 30th and Redick here in Omaha, and we had a Phillips station next to it. I had a Sinclair station. And you know, whatever he charged for gas was my price. (Laughs)

I didn't have much choice. You don't like to be in a business like that.

WARREN BUFFETT Number 5.

AUDIENCE MEMBER: Hi. I'm Kyle Miller (PH) from Kansas City, Missouri, and I was wondering about the BYD electric car company and if — with the new cars going on sale in the U.S., if that will hopefully increase the value of the company.

WARREN BUFFETT: Charlie is our expert on BYD, and he will now carry forth. (Laughter)

CHARLIE MUNGER: Well, the car market in China is a huge market, and they happen to be located in China. So that's the main focus of BYD.

I think the first cars they will try and bring here will be for fleets in California where we have environmental troubles and so on, and there may be a market for electric cars with that.

And of course, there are various subsidies that come to people who use electric cars.

I have some relatives who commute into Washington, D.C., and they can only use the fast lane on the freeway if they buy a Prius, and that's been very helpful to Toyota. And we'll see a lot more of that sort of thing.

Generally speaking, I think BYD is an interesting company, if you stop to think about it.

Here's one of eight children of a peasant that becomes a famous engineering school professor, and before he's reached 50, he's won the equivalent of China's Nobel Prize.

And he has created a company which has 180-some thousand employees, a land holding about the size of Macau, and 100-and-some million square feet of buildings.

It's a very interesting start-up company.

WARREN BUFFETT: What percent of the cars do you think in 2030 will be electrics?

CHARLIE MUNGER: Not many. (Laughter)

WARREN BUFFETT: I shouldn't have asked.

CHARLIE MUNGER: I think society — it's like the wind power that's being subsidized in Iowa.

We should subsidize electric cars in various ways, as they do in Washington, D.C. by letting them use the fast lane on the freeway, in order to get the technology going so that we can wean ourselves from oil more quickly.

So I think there will be more subsidies, and there will be more electric cars, but I'm not expecting a sudden revolution.

I drove the latest version of BYD's electric car. I was driven around the block Tuesday, and I was flabbergasted at how much improved that car was.

It's simply amazing how fast people in China are learning to do what took us a long time to learn. The world is getting very much more competitive.

WARREN BUFFETT: OK. Area 6.

AUDIENCE MEMBER: Good afternoon, Warren and Charlie. Jay (inaudible) from Mumbai, India, residing in Austin, Texas.

I want to thank you for a great show again, and over the few years that I've been here, I've truly enjoyed hearing both of you speak and especially ability to synthesize and clarify so many issues on important things like, you know, valuation, the philosophy of life, or sometimes even the trivial things, Warren, like you clarifying two years ago about, you know, your joke on Charlie Rose about Sophia Loren.

They've all been extremely beneficial.

My question is regarding some clarification around the insurance business, and especially how you value it. Now, typically we've had, you know, a lot of float information and the underwriting profit or loss info.

So, in one way we've been geared to think about it is the value of the investments that you get — the present value of the investments that you get — from the future expected float.

However, I think last year, you also talked about the economic goodwill, especially in GEICO, and I think you were using some ratio, 90 percent of that year's insurance premiums.

So I was wondering if you could just talk to us a little bit about the different ways you could look at valuing the different insurance businesses. That would be of huge help. Thank you.

WARREN BUFFETT: Well, the economic value comes from the ability to utilize float if obtained at a bargain rate.

Now, if interest rates were 7 or 8 percent and float even cost you 2 percent to obtain, it still would be very valuable.

But the economic — at GEICO, for example, I think it's quite reasonable to expect a fairly substantial underwriting profit, on average, for as far as the eye can see, and growth for as far as the eye can see.

And then coupled with that is a growing float, because float grows with the premium volume. Well, that's the most — you know, that is a very attractive combination of factors that comes about because GEICO is a low-cost producer.

And it has some real advantages, in terms of scale, in terms of the whole method of operation, that makes it very hard for other companies to duplicate their cost structure. It's always good, though, to own a low-cost producer in any business, but it's very, very nice in the insurance business.

Now, Ajit's business did not come the same way at all. I mean, at GEICO we have, you know, almost — we have well over 10 million policies, and that's a statistical-type business.

And so we have, you know, hundreds of thousands of drivers in New York, and we have them by age and profession and all kinds of things. So it's a very statistical-type business, and that coupled with a low cost, is very, very likely to produce a good result over time.

In Ajit's business, he has to be smart on each deal, because something comes along and somebody wants to buy coverage for events causing the loss of more than $10 billion in Japan in the next year.

That is not — you can't look it up in any book, and you can't do enough transactions just like that one to even know whether your calculation was right on that specific deal.

Now, if you make 100 calculations on 100 of these type of deals, you'll soon find out whether you have the right person making those calculations or not.

But the economic goodwill with Ajit's operation is based much more on the skill to price individual transactions and the ability to find the people even that want those transactions. Whereas at GEICO, it's based basically on a machine.

But it's enormously important how that machine is run, and Tony Nicely has absolutely knocked the ball out of the park, in terms of managing it.

In the years prior to when he took over, it was — you know, it had gone along at 2 percent of the market and really hardly gone anyplace.

And Tony is — quintupled, virtually, our share of the market, while at the same time producing great underwriting results.

So he took a machine that had a current — had a lot of potential — and then he exceeded even the potential that I thought it had. So you get the value in different ways.

It does relate in the end to a combination of growing a large float, and extremely low-cost float, and in our case, the cost of float has been negative, so people are actually paying us to hold $70 billion of their money, and that's a lot of fun. (Laughter)

And I think that the chances of that continuing are really quite high, although I don't think the chances of the 70 billion growing at a fast clip are high at all. I think we'll be lucky to hold onto the 70 billion.

But I think the chances of the fact of us being able to get that at a less-than-zero cost is good, and I think that will even be true if interest rates go up to 4 or 5 or 6 or 7 percent. I think we may very well be able to do it, and that's a huge asset under circumstances like that.

Charlie?

CHARLIE MUNGER: Yeah. And we're currently in a low-return environment from conventional investment float, but that won't last forever.

And there were times in the past when Ajit would generate a lot of one-of-a-kind float, and Warren would make 20 or 30 percent with it before we had to give it back. That was a lot of fun, and we did it over and over and over again.

Whether that will ever come again on that scale, I don't know, but it doesn't have to.

WARREN BUFFETT: You know, when we have 30 — presently our cash position — well, really if you counted all the companies, it's probably 36 or 7 billion — you know, we're essentially getting nothing on that.

So if you — our earning power today is being affected by current Fed policies.

And I — you know, that is not going to be a normal rate for many, many — for over the longer term. So we — in that sense, our normal earning power is being depressed by Mr. Bernanke but probably for very good reason.

WARREN BUFFETT: Seven?

AUDIENCE MEMBER: Ola Larson (PH), Salt Lake City.

Five, six years ago, you wrote in your annual shareholders report that the current account deficit, the trade deficit, couldn't go on indefinitely. Of course, a very large part of that is crude oil import.

Now some people in the energy markets are sort of talking about United States becoming independent in the energy market.

Could you shed some light on how this might affect the trade deficit? Thank you.

WARREN BUFFETT: Yeah. It will be a huge plus, obviously, if our total energy production increases substantially and what we have to import costs us less. I mean, it is a big factor in the current account deficit.

We're doing a lot in oil. I don't see us getting self-sufficient in oil, but gas is huge. We — our picture has changed a lot in the last three years, in terms of energy.

Charlie and I might argue that, over time, we'd still be better off using somebody else's up and keeping our own for a long time.

CHARLIE MUNGER: That's my view.

WARREN BUFFETT: Yeah. For a long time — we were an oil exporter in my lifetime, a substantial oil exporter. And it might have been better if we would have been using Saudi —

CHARLIE MUNGER: It would have been better.

WARREN BUFFETT: Yeah. (Laughs)

You can't get by with much with Charlie here.

It would have been better. OK. It would have been better if we had been using Saudi Arabia's oil then and just, in effect, treated all of those huge reserves we had in places like East Texas and such as a strategic petroleum reserve which we just kept around for another century, but —

CHARLIE MUNGER: It would have been much better.

WARREN BUFFETT: Yeah, it would have.

But our picture has changed for the better, and that means our current account deficit picture has changed for the better.

We still got a ways to go, but it does look better than three or four years ago. Don't you think so, Charlie?

CHARLIE MUNGER: Well, I think the — those — that's a very complex interaction.

My view is that the single-most precious resource in the United States are its hydrocarbon reserves, the ones that are right here and, of course, I want to use up —

I'm a puritan. I always want to suffer now to make the future better, because I think that's the way grown-ups should behave. So I'm all for — (applause) — using up the other fellow's oil and conserving our own.

You know, I think the idea of energy independence is one of the stupidest ideas I've ever heard grown people talk about.

Think of what terrible shape we'd been in if we'd achieved total energy independence way earlier.

We wouldn't have any oil and gas left at all. Wouldn't that be a wonderful condition? We don't want energy independence. We want to conserve this stuff.

And thank God other people have some of this precious stuff they're willing to sell.

I have the exact opposite idea on this subject than most people and, of course, I think I'm right. (Laughter)

WARREN BUFFETT: This is Charlie's version of saving up sex for your old age. (Laughter)

CHARLIE MUNGER: No, we're going to use the oil. (Laughter)

WARREN BUFFETT: OK. Number 7. Was that 7?

AUDIENCE MEMBER: Jim Powers (PH), Newton, Massachusetts.

A few minutes ago you were talking about per capita GDP, and if it went up 1 percent a year, each generation would be 20, 25 percent better off than the previous one.

In Boston right now, we have a big controversy where the executive officer of Liberty Mutual Insurance Company has been making over 50 million a year in compensation plus other perks.

And that amount of money, in an hour or two, is more than 95 percent of the employees of that company make in the course of a year.

The newspapers have been commenting on the concentration of the profits of that mutual insurance company not going to the insurance policyholders who own the company because it's a mutual insurance company, and the lack of compensation going to the average employee.

What good does it do the average American for the economy to improve 1 percent of GDP per year if they don't — if they don't enjoy some of that themselves?

WARREN BUFFETT: We certainly agree — (applause) — without commenting on any specific individuals, but obviously, if we start out with $48,000 per capita GDP and we do increase by 20 percent or so each generation, you would certainly hope that that would not keep bubbling to the people at the top as it has during the past generation.

I mean, the past 20 years we have not seen the progress that the country overall has made distributed in any kind of way except very, very much at the top.

And the tax code has encouraged that. The tax code is — you know, the tax code, which was taking those people making the $45 million incomes in 1992, was taking 27 or 28 percent from them. When they got up to 270 million now, it's taking a figure that's more like 18 percent.

So, we've got a tax code that has become more and more pro the ultra-rich, and coupled with what you see, and you've seen in compensation, and what the CEO makes in relation to the average worker and all that, you know, we've gone a long direction — a long way — in making sure that what we were promised in the way of trickle-down benefits has not been achieved.

CHARLIE MUNGER: It's also true that most of the great mutual insurance companies — and there are a lot of them in the United States — do not have that kind of compensation abuse in them.

WARREN BUFFETT: That's true, for example —

CHARLIE MUNGER: That's quite fair.

WARREN BUFFETT: — State Farm, or something like that, does not have that.

CHARLIE MUNGER: No, no. Most of them don't. That's a very egregious example, but Boston has always led in egregious examples. (Laughter)

WARREN BUFFETT: No — it's — the corporate world —

CHARLIE MUNGER: It got there early, you know. It mastered the art. (Laughter)

WARREN BUFFETT: The corporate world has been — there's been a lot more egregious behavior in the corporate world than the mutual world.

CHARLIE MUNGER: Well, that's why it's so anomalous, really.

WARREN BUFFETT: Yeah, yeah.

CHARLIE MUNGER: No wonder it's drawing some attention.

WARREN BUFFETT: The rich like it that way. You have to understand that. (Laughs)

But the tax code is basically — you know, that is an important place where people decide, you know, who actually bears the cost of this government, and we have moved away from the rich on that as they have gotten further and further away from the middle class, in terms of earnings.

And, you know, there's a — there may be a natural tendency in a democracy to work toward a plutocracy. If you think about the effect of money in politics, if you think of the nature of how market systems work, you know, there may be some underlying trends that push a democracy toward plutocracy, and you need countervailing factors to prevent it.

CHARLIE MUNGER: I don't think you ought to be too discouraged about Boston, either, because when I first went to Boston, the mayor was running the city from the federal penitentiary. (Laughter)

WARREN BUFFETT: Was that Curley or —

CHARLIE MUNGER: Yes, Mayor Curley.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And nobody in Boston saw anything peculiar about it. (Laughter)

WARREN BUFFETT: If you live long enough, you'll see everything. (Laughter)

CHARLIE MUNGER: Yeah, right.

WARREN BUFFETT: Area 8.

VOICES FROM AUDIENCE: Nine, nine.

CHARLIE MUNGER: Nine, he says.

WARREN BUFFETT: Oh, 9? OK. Nine.

AUDIENCE MEMBER: My name is Brian Chilton (PH), also from the Boston, Massachusetts, area.

WARREN BUFFETT: I'm surprised you admit it. (Laughter)

AUDIENCE MEMBER: I was tempted.

Warren, a lot of today's questions referenced risk. It seems to me one of the biggest risks facing us is the (inaudible) sovereign debt levels both here in the U.S. and in many countries in Europe.

The liquidity injections by the Fed, and more recently the ECB, have given us some breathing room, but how do these large debts get balanced and do they concern you? (Applause)

WARREN BUFFETT: Well, the nice thing about sovereign debt is they can not pay you in the end and you can't grab anything from them, unlike other kinds of debts.

And, you know, the truth is that the world has seen many, many failures of sovereign debt. I remember when Walt Wriston, back in the early 1980s, said sovereigns don't default.

Well, the truth is they've defaulted many, many times over history. And what happens then is you get a big reallocation of wealth.

Now, the wealth doesn't go away. I mean, you don't lose the farms, you don't — you lose the (inaudible), you don't lose the people with their skills and all of that sort of thing. I mean, there may be some marginal losses.

But I don't know how it plays out in Europe. We have seen the ECB here recently give the trillion dollars to banks which are loaded with sovereign debt, which really is questionable in many cases.

And I wouldn't be surprised, in some cases, if they haven't used some of those — some of the borrowing to even buy more of it.

So it's like giving a guy with a margin account with some perhaps bad assets in it even more money to play with to further leverage themselves up and make an even bigger bet.

But when they did that at MF, or whatever it was, Global, you know, then it had a bad ending, and it might have a bad ending over there.

I would much prefer, you know, a world that was getting its fiscal house in order, including in the United States.

The counterargument, of course, is that when you're in a recession, or close to it, as some or all of Europe might be, that that will feed on itself and be destructive in the same way that it was in the early '30s in the United States.

But we have been having in the United States — it's very interesting. We talk about the fact that there was a stimulus bill a few years ago, even though they didn't call it that, and whether it was adequate and inadequate and all that.

When the government is operating at a deficit that's 8 to 9 percent of GDP, that is stimulus on a huge, huge level. They don't call it — they may not call it, but that is, by definition, huge fiscal stimulus.

So we have been having consistent, huge fiscal stimulus in this country, and we will have to wean ourselves off of that fairly soon.

And the interesting, I think, almost — leaders of both parties realize that you probably have to get revenues up to something around 19 percent of GDP and you have to get expenses down to 21 percent of GDP.

And that that will work fine over time, but you have a situation where both sides feel they will show weakness by going first.

And you also have a situation where the leader, probably, of at least one party can't speak for their party, so that you can't have negotiations in private, which are probably the way to get something like this solved.

I would avoid — I would — certainly at these rates, I would totally avoid buying medium-term or long-term government bonds. I think that's the obvious answer. I wish I had answers that would solve the problem further beyond than that.

But in terms of your own situation, I would stay away from medium- or long-term government bonds, our own, or those of other countries.

Charlie?

CHARLIE MUNGER: Well, of course, he's asking the really intelligent question of the day, and of course we're having difficulty answering it. (Laughter)

It is very hard to know how much of this Keynesian stuff will work after you've lost all your fiscal virtue.

You know you come to a time, if you’re a government which has pretty much lost all its fiscal virtue, that the Keynesian stuff won't work, and the money printing won't work, and it's all counterproductive, and you're heading for calamity.

We don't know the precise point at which it stops working. And somebody like Paul Krugman — who I think is a genius — but I also think he's more optimistic about doing well with various economic tricks after you've lost a lot of fiscal virtue than I think is justified by the facts.

I think it's very dangerous to go low on fiscal virtue and, of course, here in the United States, we've used up some of our store.

And it's very important that we not go too far in that direction because we want to be able to do what we did in the Great Recession, where we avoided a huge calamity because we had enough fiscal virtue left so the economic tricks would work.

So it's a terrible problem, and I ask you the question, Warren. Is it inconceivable that we could get a very mediocre result in the United States as a result of all this trouble?

WARREN BUFFETT: I think we'll get a good result over time.

CHARLIE MUNGER: I know you do, but — (Buffett laughs) — is it inconceivable? I'm trying —

WARREN BUFFETT: Well, we can have problems, but —

CHARLIE MUNGER: I'm a little less optimistic than he is. I'm roughly in his position. I think there's some slight chance that we can get a pretty mediocre result.

WARREN BUFFETT: Let's say I came to you right now with a budget that made sense in general — in what it achieved — it had a 19 percent revenue built into it and 21 percent of expenditures. Would you want to adopt that now?

CHARLIE MUNGER: I think the reason intelligent people disagree on this subject is because it's so difficult.

Everybody wants fiscal virtue but not quite yet. They're like that guy who felt that way about sex. He was willing to give it up but not quite yet. (Laughter)

WARREN BUFFETT: Saint Augustine.

CHARLIE MUNGER: Saint Augustine, yes.

WARREN BUFFETT: He's a hero to many of us. (Laughter)

CHARLIE MUNGER: I think these are very, very hard questions. And I have one thing I'm sure of: that it is safer, if you're going to these deficit financing things, to use the money intelligently to build something you're sure to need than it is to just throw it off the end of trains or give it to crooked lawyers. (Applause)

And so I think we all have an interest in making sure that whatever tricks we play are intelligently used because it will protect our reputation and reality in having this fiscal virtue.

WARREN BUFFETT: I'll let you design the 21 percent that gets expended.

CHARLIE MUNGER: Oh, if I were doing it, I would expend it sensibly on infrastructure that I knew we were going to need, and I would have a massive program — (applause) — and I would have the whole damn country pay more cheerfully, like we were so many Romans in the Punic Wars.

The Punic Wars, the Romans paid off two-thirds of the war debt before the war was over. That's my kind of —

WARREN BUFFETT: That's our campaign slogan, folks. Punic Wars again. (Laughs)

CHARLIE MUNGER: But the answer is, I think we do need more sacrifice. I think we need more patriotism, we need more sensible ways of spending money, and we need more civilized politics. (Applause)

But it's still a hard question. I think we should go on to an easier one. (Laughter)

Warren is not strained, but I'm at my limit. (Laughter)

WARREN BUFFETT: OK. We'll do one more question, from area 10.

AUDIENCE MEMBER: This will be an easier question.

WARREN BUFFETT: Good.

AUDIENCE MEMBER: Thank you so much both for being here today, and I hope when you're both in your 90s and your 100s, you'll still be here doing these meetings. (Applause)

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: And I'm Candy Lewis (PH) from Denver, Colorado.

And my question has to do with taxes and what do you feel is the ideal corporate tax rate to get this economy started and excited?

WARREN BUFFETT: Yeah. Last year the actual taxes paid were about 13 percent of profits, as I remember.

So the corporate rate is 35 percent, and last year you were allowed to write off 100 percent of most kinds of fixed-asset purchases.

I don't think the — corporate profits are not the problem, or corporate balance sheets, or corporate liquidity, is not the problem in the economy moving.

I mean, there is money available, huge amounts of money available in the corporate world, including at Berkshire, to push forward on opportunities.

You know, we will — we're spending money where we see opportunity. And we spent lots of money in the railroad business, we spent lots of money in the energy business, and we built plants elsewhere and did other things.

But — so it is not a lack of capital at all that's holding back, nor is it tax rates, in my view, that are holding back, at all, investment.

You know, this country prospered in the '50s and the '60s when the corporate rate was 52 percent and people actually paid it.

When it was cut to 48 percent, we all rejoiced. And our GDP per capita grew. So it is not a factor holding back.

I will tell you, I mean, corporate tax rates last year were 1.2 percent of GDP. Medical costs were 17-and-a-fraction percent of GDP. And there we have at least a 7 percentage point disadvantage against the rest of the world, which is a big multiple of all the corporate taxes paid.

So if you ask me about the tapeworm of American industry, you know, it's basically our medical costs. We've got a huge cost disadvantage against the rest of the world. (Applause)

Now, that's unbelievably tough to address, but that is where — as Willie Sutton would say — that's where the money is.

And you can fiddle around with corporate tax rates. I don't think that will have any big effect on the economy.

You may achieve greater fairness within the corporate tax code, I wouldn't argue about that at all.

And incidentally, the Treasury — I mean, I think both parties agree that they would like to see a lower overall corporate tax rate but one that applies more equally across corporations so that the —

But getting from here to there is going to be very, very difficult, because it's fine when you talk about it in the terms I just used. But once you put specific proposals out, everyone whose tax rate is going to go up — and some have to go up if others are going to go down — everyone whose tax rate is going to go up will fight with an intensity against that bill that far outstrips the intensity with which those on the other side fight.

It's a real complex problem that way. But corporate tax rates are not our country's problem, in my view.

Charlie?

CHARLIE MUNGER: Well, I used to say when I was younger that I expected to live to see a value-added tax, and now I'm not so sure. But I think it's going to come eventually and probably should.

It equalizes the import-export effect of the taxes, and I think it's quite logical to tax consumption.

I think we get in a lot of trouble when we give people the money and then come around later and try and take it back.

Human nature really resists that. And I think it's much better, if you're going to rely on taxes, to have taxes that are sort of taken out right off the top, and they don't vary so much from year to year.

I come from a state where the state income tax is based on capital gains — go way up and then they collapse. And of course, the politicians spend like crazy when they go up, and there's agony when — it's a crazy way to have a tax system.

We have a lot of problems.

And I don't think a 52 percent tax rate — we may have gotten by with it when we sort of led the world, but I'm not so sure it would be such a good right now to have our tax at 52 percent and the rest of the world taxing corporate profits at 15 percent or something.

That might have a lot of perverse consequences. And since so little money is involved, it's not where the game should be played.

And if Warren could save a lot of money on medical expense for everybody, why, he probably would have done it already. It's really hard.

WARREN BUFFETT: It's hard. So we'll end with a hard one. And I thank you all for coming. We're going to reconvene in about ten minutes to conduct the business of the meeting, and thank you. (Applause)

WARREN BUFFETT: We'll now go to the business meeting. We follow a script here, at least to quite a degree. And the meeting will now come to order.

I'm Warren Buffett, Chairman of the Board of Directors of the company. I welcome you to this 2012 annual meeting of shareholders.

This morning, I introduced the Berkshire Hathaway directors that are present.

Also with us today are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire.

Forrest Krutter is secretary of Berkshire. He will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting and she will certify to the count of votes cast in the election for directors and the motions to be voted upon at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

FORREST KRUTTER: As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 7, 2012, being the record date for this meeting, there were 934,158 shares of Class A common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,075,302,988 shares of Class B common stock outstanding, with each share entitled to 1/10,000th of one vote on motions considered at the meeting.

Of that number, 640,153 Class A shares, and 664,293,280 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 3rd.

WARREN BUFFETT: Thank you. That number represents a quorum and we will therefore directly proceed with the meeting.

The first order of business will be a reading of the minutes of the last meeting of shareholders, and I recognize Mr. Walter Scott, who will place a motion before the meeting.

WALTER SCOTT: I move that the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes be approved.

WARREN BUFFETT: Do I hear a second?

The motion has been moved and seconded. Are there any comments or questions?

We will vote on this motion by voice vote. All those in favor, say aye. Opposed? The motion's carried.

WARREN BUFFETT: The next item of business is to elect directors.

If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, you may do so.

Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so.

If you wish to do this, please identify yourself to one of the meeting officials in the aisles, who will furnish a ballot to you.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WALTER SCOTT: I move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ron Olson, and Walter Scott be elected as directors.

WARREN BUFFETT: Is there a second?

It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors.

Are there any other nominations? Is there any discussion?

The motions are ready to be acted upon. If there are any shareholders voting in person they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections.

Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast not less than 697,021 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick.

Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott have been elected as directors.

WARREN BUFFETT: The next item of business is a motion put forth by the AFL-CIO Reserve Fund. The motion is set forth in the proxy statement.

The motion requests Berkshire Hathaway to amend its corporate governance guidelines to establish a written succession planning policy, including certain specified features.

The directors have recommended that shareholders vote against this proposal.

I will now recognize Ken Mass to present the motion. To allow all interested shareholders to present their views, I ask Mr. Mass to limit his remarks to five minutes.

KEN MASS: Mr. Buffett — Mr. Buffett, members of the board of directors. My name is Ken Mass. I represent the AFL-CIO, a federation of 56 unions, representing more than 12 million members.

I'm here today to introduce the AFL-CIO shareholders proposal for succession planning.

Our proposal urges the board of directors to adopt and disclose a policy on CEO succession planning.

Planning for the succession of CEO is one of the most important responsibilities of the board of directors. Having a succession plan in place is particularly important at a company like Berkshire Hathaway where the CEO has created tremendous value.

Shareholders are thankful for Warren Buffett's leadership as CEO.

Last year, shareholders became concerned when David Sokol resigned from the company after allegations of improper trading.

Mr. Sokol has been rumored to be a possible successor to Mr. Buffett.

We filed our proposal last fall because we feel that an internal CEO candidate is needed to carry out Mr. Buffett's legacy.

Internal candidate may be maintain — can help maintain — Berkshire Hathaway's strong culture.

In Mr. Buffett's letter to shareholders earlier this year, he disclosed that the board of directors had identified his successor, as well as two superb backup candidates.

We were relieved to hear this news.

We are not asking the company to disclose the name of Mr. Buffett's successor. All we're asking for is the board of directors update shareholders annually on the status of its succession planning.

We are pleased that Berkshire Hathaway has adopted all of these practices we recommended in our shareholders proposal, except for an annual reporting.

We hope the company will continue to keep shareholders informed about the status of its succession plan.

Thank you again — AFL-CIO — for considering this proposal. Thank you.

WARREN BUFFETT: Thank you Mr. Mass.

Is there anyone else that wishes to speak?

OK, if there's no one — no one else, I would say, Mr. Mass, you know, we are on the same page.

We regard it — and I speak for all the directors — we regard it as the number one obligation of the board to have a successor, and one that we're very happy with, as to both ability and integrity, and that we know well, to step in tomorrow morning if I should die tonight.

And we spend more time on that subject than any other subject that might come before the board.

So we do not disagree with you on the importance of it. We have taken it very seriously, and I note that you do not ask us to name the candidates, and I think there are obvious disadvantages to doing that. So again, we're on the same page on that.

And so as I understand it, you basically want to be sure that we report annually to you that the subject continues to be at the top of the list, and I can assure you that it will. And in terms of affirming that fact, I would say that certainly more often than once a year, I get — in some public forum — I get asked questions where I get to answer precisely the question that you want me to address, and I think that will continue in the future.

We have not built it into any formal item in the proxy statement, which your organization has suggested we do, but we have covered it in the annual report. We cover it at these meetings. We cover it when I'm interviewed, frequently.

And I don’t think that anything would be gained by putting it in some other form, but I do want to say that we — I'm glad you take it seriously. We take it seriously. And I think we're going to get a result that you'll be very happy with, although I hope it doesn't happen too soon. (Laughter)

So, with that I would say that the motion is now ready to be acted upon. If there are any shareholders voting in person they should now mark their ballots on the motion and allow the ballots to be delivered to the inspector of elections.

Miss Amick, when you're ready, may you give your report.

BECKI AMICK: My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast 32,179 votes for the motion and 672,285 votes against the motion.

As the number of votes against the motion exceed a majority of the number of votes of all Class A and Class B shares outstanding, the motion has failed.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: The vote was about 95 percent — 5 percent, and thank you, Miss Amick. The proposal fails.

WARREN BUFFETT: Does anyone else have any further business to come before this meeting before we adjourn?

If not, I recognize Mr. Scott to place a motion before the meeting.

WALTER SCOTT: I move that this meeting be adjourned.

WARREN BUFFETT: Is there a second?

A motion to adjourn has been made and seconded. We will vote by voice.

Is there any discussion? If not, all in favor say yes. Aye. Yes.

All opposed say no.