1994 Berkshire Hathaway Annual Meeting Warren Buffett Charlie Munger Bill Ackman FULL Q&A

Yeah, right. My live yet? Yeah. Morning. We were a little worried today because we weren't sure from the reservations whether we could handle everybody, but it looks to me like there may be a couple seats left up there. But I think next year we're going to have to find a different spot because it looks to me like we're up about 600 this year from last year. And to be on the safe side, we will seek out a larger spot. Now there are certain implications for that because some of the more experienced of you know a few years ago we were holding this meeting at the Joslyn Museum, which is a temple of culture. And we've now of course moved to an old vaudeville theater, and the only place in town that can hold us next year I think is the Ak-Sar-Ben Coliseum where they have keno and racetracks. We are sliding down the cultural chain just as Charlie predicted years ago.

He is. All this coming. Charlie and I have some rather distressing news to report. There are always a few people that vote against everyone on the slate for directors, and there did maybe a dozen or so people do that. And then there are others that single-shot it and they pick out people to vote against. And this will come as news to Charlie, I haven't told him, you know, but he is the only one among our candidates for directors that received no negative votes this year. No need to applaud. I'd say when you lose out the title of Miss Congeniality to Charlie, you know you're in trouble.

Now I'd like to tell you a little bit. I will run this. We will have the business meeting in a hurry with cooperation of all of you, and then we will introduce our managers who are here, and then we will have a Q&A period. We will run that until twelve o'clock, at which point we'll break. And then at 12:15, if the hardcore want to stick around, we will have another hour until about 1:15 of questions. So you're free to leave, of course, any time. And I've pointed out in the past that it's much better for him if you leave while Charlie is talking rather than when I'm talking. But feel free anytime. If you're panicked and you're worried about being conspicuous by leaving, you will be able to leave at noon. We will have buses out front that will take you to the hotels or the airport or to any place in town in which we have a commercial interest. And we encourage you staying around on that basis. Let's get the business of the meeting out of the way then we get on to more interesting things.

My name is Michael Mullen from Omaha. Would you comment on the use of derivatives? I noticed Dell Computer stock was off two and a half points Friday with the loss in derivatives.

The question is about derivatives. We have in this room the author of the best thing you can read on that. There was an article in Fortune about a month ago or so by Carol Loomis on derivatives, and it is far and away the best article that has been written. We also have some people in the room that do business in derivatives from Salomon. It's a very broad subject. As we said last year, I think someone asked what might be the big financial story of the 90s, and we said we obviously don't know, but that if we had to pick a topic, it could well be derivatives because they lend themselves to the use of unusual amounts of leverage and they're sometimes not completely understood by the people involved. And anytime you combine ignorance and borrowed money, you can get some pretty interesting consequences, particularly when the numbers get big. And you've seen that of course recently with the recent Procter & Gamble announcement. Now I don't know the details of the P&G derivatives, but I understand at least from prep that what started out as interest rate swaps ended up with P&G writing puts in large quantities of US and I think one other country's bonds. And anytime you go from selling soap to writing puts on bonds, you've made a big jump. The ability to borrow enormous amounts of money combined with a chance to get either very rich or very poor very quickly has historically been a recipe for trouble at some point. Derivatives are not going to go away; they serve useful purposes and all of that, but I'm just saying that it has that potential and we've seen a little bit of that. I can't think of anything that we've done that approaches the risk there directly. No.

I may have to cut him off if he talks too much. Is there anything you would like to add to your already extensive remarks? No? Okay. In that case we'll go to Zone 2.

My name is Hugh Stevenson. I'm a shareholder from Atlanta. My question involves the company's investment in the stock of Cap Cities. It's been my understanding in the past that that was regarded as one of the four quote-unquote permanent holdings of the company, and I was a little bit confused by the disposition of one million shares. Could you clarify? Was my previous understanding incorrect, or has there been some change, or is there a third possibility?

Well, we have classified them, Washington Post Company and Cap Cities and GEICO and Coke in the category of permanent holdings. But in the case of three of those four, the Washington Post Company I don't know, maybe seven or eight years ago, GEICO some years back, and now Cap Cities, we have participated in tenders where the company has repurchased shares. Now the first two, the Post and GEICO, we participated proportionally. That was not feasible and incidentally not as attractive tax-wise anymore. The 1968 tax act changed the desirability of proportional redemptions of shares from our standpoint at that point. It had been missed by a lot of journalists commenting on that, but the commentary that has been written has been obsolete in some cases by six or seven years. But we did participate in the Cap Cities tender offer just as we did in the Post and GEICO. We still are by far the largest shareholder of Cap Cities. We think it's a superbly run operation in a business that looks a little tougher than it did 15 years ago but looks a little bit better than it did 15 months ago. Charlie, you have anything to add? No. He's thinking it over now though. Before that, Zone 3.

Good morning. My name is Howard Askin from Kansas City, and I've got a theoretical value question for you. If you were to buy a business and you bought it at its intrinsic value, what's the minimum after-tax free cash flow yield you'd need to get?

The question is if we were buying all of a business and we were buying it at what we thought was its intrinsic value, what was the minimum current after-tax free cash flow yield. Wait, we could conceivably buy a business — I don't think we would be likely to, but we could — we could conceivably buy a business that had no current after-tax cash flow, but we would have to think it had a tremendous future. But we would not find, obviously, the current figures, particularly in the kind of businesses we buy, tend to be representative we think of what's going to happen in the future. But that would not necessarily have to be the case. You can argue, for example, in buying See's Candies at a time when it was losing significant money. We didn't expect it to continue to lose significant money, but if we think the present value of the future earning power is attractive enough compared to the purchase price, we would not be overwhelmed by what the first year's figure would be. Charlie, you want to add to that?

Yeah, well, we don't care what we report in the first year or two after buying anything. Well, I would say that in a world of 7% long-term bond rates, we would certainly want to think we were discounting future after-tax streams of cash at at least a 10% rate. But that will depend on the certainty we feel about the business. The more certain we feel about a business, the closer we're willing to play it. We have to feel pretty certain about any business before we're even interested at all, but there's still degrees of certainty. And if we thought we were getting a stream of cash over the next 30 years that we felt extremely certain about, we would use a discount rate that would be somewhat less than if it was one where we thought we might get some surprises in five or ten years. Possibility existed.

Nothing to add? Okay. So on to four.

Bill Spin from Omaha, Nebraska. You've made comments on several occasions about the intrinsic business value of the insurance operations, and in this year's report you state that the insurance business possesses intrinsic value that exceeds book value by a large amount, larger in fact than is the case of any other Berkshire business. I was wondering if you would explain in greater detail why you believe that to be true.

Well, it's very hard to quantify, as we've said many times in the report. But I think that it's clear that even taking fairly pessimistic assumptions, the excess of intrinsic value over carrying value is higher by some margin for the insurance business. And I think that the table in the report that shows you what our cost of float has been over the years, and also what the trend of float has been over the years, would — unless you thought that table had no validity for the future — I think that table would tend to point you in the direction of saying the insurance business does have a very significant excess of intrinsic value over carrying value. Very hard number to put something on, and you don't want to extrapolate that table out, but I think that table shows that we started with maybe 20 million of float and now we're up to something close to 3 billion of float, and that that float has come to us at a cost that's extremely attractive on average over the years. And just to pick an example, last year when we actually had an underwriting profit, the value of that float was something over 200 million dollars, and that figure was a lot bigger than it was 10 years ago or 20 years ago. So that is a stream — last year was unusually favorable — but that's a very significant stream of earnings and it's one we feel we have reasonably good prospects in. So we feel very good about the insurance business. Okay, it's on to five.

My name is Mark from Omaha. Is there any point at which your stock would rise to the point where you might split the stock?

Surprise, surprise. I think I'll let Charlie answer that this year. He's so popular with the shareholders now, I can afford to let him take the tough questions.

I think the answer is no. I think the idea of carving ownership in an enterprise into little tiny twenty-dollar pieces is almost insane. It's quite inefficient to service a twenty-dollar account, and I don't see why there shouldn't be a minimum as a condition of joining some enterprise. Certainly we don't feel that way being a private enterprise.

Yeah, we would not carve it up in twenty-dollar units. We find it very interesting because every company finds a way to fill up its common shareholder list. You can start with the A's and work through the Z's, and you know every company on the New York Stock Exchange one way or another has attracted some constituency of shareholders. And frankly, we can't imagine a better constituency than is in this room. We don't think we can improve on this group. And we've followed certain policies that we think attracted certain types of shareholders and actually pushed away others, and that is part of our eugenics program here at Berkshire during that time. Yeah, just look around this room, and as you mingle with one another, this is a very outstanding group of people. And why would anybody want a different kind of a group? If we followed some policies that caused a whole bunch of people to buy Berkshire for the wrong reason, the only way they buy it is to replace somebody in this room or in this larger metaphorical room of shareholders that we have. So someone at one of these seats gets up and somebody else walks in, the question is: do we have a better audience? I don't think so. So I think Charlie said it very well. It's Zone Six.

Mr. Buffett, my name is Rob, I'm from Omaha, Nebraska. My question is: given the recent announcement of Midwest Express and their nonstop jet service between east and west coasts, will this cut down on your use of the Indefensible, and will you use more commercial air travel?

This is a question planted by Charlie. I think you should know I take it to the drugstore at the moment, and I know just as well that when I start sleeping in it at the hangar, nothing will cut back on the Indefensible. It's being painted right now, but I told them to make it last a long time. Charlie though was pointing out the merits of other kinds of transportation last night at the meeting of our managers. He might want to repeat those here.

Well, I just pointed out that the back of the plane arrives at the same time as the front of the plane, invariably.

He's even more of an authority on buses, incidentally. If anybody has his own 747...

Mr. Buffett, my name is Alan Maxwell from Omaha. I've got two questions. What is your next goal in life now that you're the richest man in the country?

That's easy. It's to be the oldest man in the country. Secondly, you talk about good management with corporations and that you try and buy companies with good management. I feel that I have about as much chance of meeting good managers other than yourself as I do bringing Richard Nixon back to life. How does an average investor find out what good management is? Well, I think you judge management by two yardsticks. One is how well they run the business, and I think you can learn a lot about that by reading about both what they've accomplished and what their competitors have accomplished, and seeing how they have allocated capital over time. You have to have some understanding of the hand they were dealt when they themselves got a chance to play the hand. But if you understand something about the business they're in — and you can't understand it in every business, but you can find industries or companies where you can't understand it — then you simply want to look at how well they have been doing in playing the hand essentially that's been dealt to them. And then the second thing you want to figure out is how well they treat their owners, and I think you can get a handle on that. Oftentimes, a lot of times you can't. I mean, there are many companies that obviously fall somewhere in that 20th to 80th percentile and it's a little hard to pick out where they do fall. But I think you can usually figure out — I mean, it is not hard to figure out that say Bill Gates or Tom Murphy or Don Keough or people like that are really outstanding managers. Hard to figure out who they're working for. And I could give you some cases on the other end of the spectrum too. It's interesting how often the ones that in my view are the poorer managers also turn out to be the ones that really don't think that much about the shareholders. Too often they go hand in hand. But I think reading of reports, competitor reports, I think you'll get a fix on that. In some cases you don't have to — you don't have to make a hundred correct judgments in this business or 50 correct judgments. You only have to make a few, and that's all we try to do. Generally speaking, the conclusions I've come to about managers have really come about the same way you could make yours. I mean, they've come about by reading reports rather than any intimate personal knowledge or knowing them personally at all. So read the proxy statements, see what they think of themselves versus how they treat the shareholders, and look at what they have accomplished considering what the hand was that they were dealt when they took over compared to what is going on in the industry. I think you can figure it out. Sometimes you don't have to figure it out very often. Charlie? Nothing to add? Okay, we're back to Zone 1.

Hi there. My name is Liam from Palo Alto, California. I've met Ajit and I've been very impressed over the years. I think I even met his parents once; they came from India. Please comment on your deepest impressions of his personality and managerial skills, and also how you go about exactly keeping somebody with such fine skills within the fold. You might go to Walt Disney someday and pull down 200 million.

We may not want to compete too vigorously at that level. We basically try to run a business so that's what we're going to have to do. We have to identify and keep good managers interested after we've figured out who they are, and that often is a little different here because I would say a majority of our managers are financially independent. So they don't go to work because they are worried about putting kids through school or putting food on the table. So they have to have some reason to go to work aside from that. They have to be treated fairly in terms of compensation, but they also have to figure it is better than playing golf every day or whatever it may be. And so that's one of the jobs we have, and we basically attack that the same way — we look at what they do the same way we look at what we do. We've got a wonderful group of shareholders. Before I ran this, I had a partnership. I had a great group of partners, and essentially I like to be left alone to do what I did. I like to be judged on the scorecard at the end of the year rather than on every stroke, and not second-guessed in a way that was inappropriate. I like to have people who understood the environment in which I was operating. And so the important thing we do with managers generally is to find the 400 hitters and then not tell them how to swing, as I put in the report. Second thing we do is allocate capital, and aside from that, we play bridge — pretty much what happens at Berkshire. So with any of the managers you might name here, we try to make it interesting and fun for them to run their business. We try to have a compensation arrangement that's appropriate for the kind of business they're in. We have no company-wide compensation plan. We wouldn't dream of having some compensation expert or consultant come in and screw it up. Some businesses require a lot of capital that we're in; some require no capital. Some are easy businesses where good profit margins are a cinch to come by, but we're really paying for the extra beyond that. Some are very tough businesses to make money in, and it would be crazy to have some huge framework that we tried to place everybody in where one size would fit all. People generally are compensated in some manner that relates to how their business does. As opposed to — there's no reason to pay anybody based on how Berkshire does, because no one has responsibility for Berkshire except for Charlie. We try to make them responsible for their own units, compensated based on how those units do. We try to understand the businesses they're in so we know what the difference between a good performance and a bad performance is. And that's about how we work with people. We've had terrific luck over the years in retaining the managers that we wanted to retain, and it's I think largely because particularly sellers of businesses, to a great extent the next day they're running it just as they were the day before, and they're having as much fun running their business as I have running Berkshire. Charlie?

Well, I've got nothing to add. I think it's that concept of treating the other fellow the way you'd like to be treated if the roles were reversed. It's so simple when you stop to think about it, but it's a rare evening when he isn't even more on our talking once on the phone.

It's more than a business relationship, at least it seems that way to me. Yeah, well, it is that way. And by the way, we like our businesses, our relationships, to be more than a business relationship. Charlie and I are very — we basically — it's a luxury, but it's a luxury that we should try to nurture as we get to work with people we like, and it makes life a lot simpler.

It probably helps on that goal of being the oldest living American, I tell you that.

Yeah, and we tend to like people we admire. Yeah, who do we like that we don't admire? Charlie, start naming names. These people have names. Zone 2.

My name is Peter Babbling from Sweden. How do you perceive Guinness long-term economic growth-wise?

This is — would you repeat that? What firm? Growth-wise. Guinness. I'm not as much of an expert on Guinness's products as Charlie. As we proved, he didn't hear me. He said he made a decision to buy Guinness and Guinness is down somewhat from — actually the price in pounds is about the same, but the pound is at about a dollar forty-six or seven against an average of dollar eighty-something, so we've had a significant exchange loss on that. Guinness, despite the name, the main product of course is scotch, and that's where most of the money is made. Oh, they make good money in brewing, but distilling is the main business. And you know, the usage of scotch particularly in this country, the trends have not been strong at all. But that was true when we bought it too. There are some countries around the world where it's grown, and there are certain countries where it's a huge prestige item. I mean, in certain parts of the Far East, the more you pay for scotch the better people think of you, which I don't understand completely but I hope it continues. But worldwide scotch consumption has not been anything to write home about. Guinness makes a lot of money in the business, but I wouldn't — I don't see anything in published history that would lead you to believe that the prospects in terms of physical volume are high for scotch. The Guinness beer actually has shown pretty good growth rates in some countries, actually from a very tiny base in the US as well. But they will have to do well in distilling; that will govern the outcome of Guinness. I think Guinness is well run and it's a very important company in that business, but I wouldn't count on a lot of physical growth. Charlie, what — any consumer insights? No. Zone Three.

Mr. Buffett, my name is Arthur Colley from Canton, Massachusetts, and I'd like to know how you respond to the question that my associates ask me when they say that Berkshire Hathaway has been a good investment up to now — if God forbid something happens to Mr. Warren Buffett.

Well, I'm glad you didn't say Charlie Munger. Berkshire will do just fine. We've got a wonderful group of businesses. I've told you the two things I do in terms of them, the managers we have — you'd have to come in and really want to mess it up, I would think, and we don't have anybody like that in terms of succession plans at Berkshire. And then there's the question of allocation of capital, and you could do worse than just adding it to some of the positions that we already had. The ownership is — if I die tonight, the ownership structure does not change. So you've got the same large block of stock that has every interest in having good successor management as I would having — there's no one else would have any greater interest. And it's not a complicated business. I mean, you ought to worry more about if you own Microsoft about Bill Gates, I think, or something. But this place is — we've got a group down here that are running these — you didn't see me out at Porsche selling any jewelry the other day. I mean, that's somebody else's job. And it is not very complicated. Incidentally, I think I'm in pretty good health. I mean, this stuff will do wonders for you if you'll just try it.

Charlie, do you want to add anything? That's the — yeah. I think the prospects of Berkshire would be diminished, obviously diminished, if Warren were to drop off tomorrow morning. It would still be one hell of a company, and I think it would still do quite well. I used to do legal work when I was young for Charlie's cousin. I heard he once say my business, which was movie theaters like this one, was off 25% last year, and last year was off 25% from the year before, and that was off 25% from the year before. And then he'd pound the table and he'd say, 'But it's still one hell of a business.' It's not a formula we want to test. No, it is one hell of a business that we've got here. I mean, and if you saw what happened at Berkshire headquarters, you would not worry as much. There's very little going on there that contributes to things. We're right now at our peak of activity — this is it. It's on to four.

My name is Al Martin and my wife Terri is here with me, and I appreciate the invitation to attend this meeting. I was a little bit dubious and quite excited at that game Saturday night. I didn't know which side was going to throw the game to the other one, but I did find out at the end. The first question actually was somewhat answered but not fully. Has the board considered a reverse split? My experience has been that — would you like to make that a motion? There was a motion for reverse, but I would say a two-for-one because if it were three or four for one I might end up with no shares or fractional shares. But anyway, my experience has been that all the stocks that have split have gone down in the next two or three months for the next two or three years, including one which you are drinking, which is a flat Coke. Also, I have observed Merck over the last several years to be hitting a low which is — it split three-for-one. So I think that the reasons for splitting stocks are to make it affordable. I found that every stock, every board was never affordable. I found the reason I bought it was because I couldn't afford not to buy it. So that's a different philosophy, I guess, that's somewhat shared indirectly with the board's running the stock.

The second question, which has to do with — compasses easier than the first question. Well, I didn't want to wait for an answer of the first question for that reason, because it could be complicated and confusing and so forth. The second question has to do with: could the board consider looking into a commodity broker or a lawyer or both that could take action similar to Hillary Clinton's? I think you know — to making your net worth go up by a factor of five overnight is more than enticing. Some of us might even want to wait for ten months to get a hundred-to-one return on the money. I want to sell — make 530% in one day. Charlie has never done that for us. I mean, it really caused me to reassess succession plans at Berkshire. And Hillary may be free in a few years.

I hope you're applauding hoping to come to Berkshire, not that he's been fired, but how lovely. Got a bit — okay, that was his second question.

That was my second question. Of course, in my experience it's been that most of us have thought through this situation, and I guess it's pretty speculative. But I found out that the rules and laws that are made for trading are interpreted rather than enforced, and I think that applied to this particular case. So let's go on to the third question. All right, they're getting easier. This one is real easy. My wife was a collector of Blue Chip Stamps for many, many years, and she bought some stamps with her. What should she do with them?

Well, I thought we could give you a definitive answer. Charlie and I entered this trading stamp business to apply our wizardry to it. What, 1969 or so? Surely? When we were doing what, then about a hundred and ten million? No, it went up to a hundred and twenty. Okay, and then we arrived on the scene and we're going to do what, about four hundred thousand this year? Yes, yeah, that shows you what can be done when your management gets active. Presided over a decline of ninety-nine and a half percent. Yeah, but we're waiting for a bounce. I would say this: the trading stamp business, those of you who followed all know it only works because of the float. I mean, a very, very high percentage of the stamps in the 60s were cashed in. We have some years that we've gone up to 99% I believe. We sampled the returns because they were given out in such quantity. But our advice to anyone who has stamps is to save them because they're going to be collectors' items. And besides, if you bring them to us, we have to give you merchandise for them. So I tell her to keep them. They'll do nothing but gain in value over years. Going back against another year to point on the split, I think most people think that the stock would sell for more money split. We wouldn't necessarily think that was advisable in the first place, but at least in the second place we don't think it would necessarily be true over a period of time. We think our stock is more likely to be rationally priced over time following the present policies than if we were to split it in some major way. And we don't think the average price would necessarily be higher. We think that the volatility would probably be somewhat greater, and we see no way that volatility helps our shareholders as a group. So, five.

I am Peg Gallagher from Omaha. Mr. Buffett, are you interested in influencing Mr. Greenspan at the Fed to stop raising interest rates?

Well, I wouldn't have any influence with him. He was on the board of Cap Cities some years ago and I know him a bit, but I don't think anyone would have any influence with Mr. Greenspan on that point. But I generally think that his actions have been quite sound during his period as Fed chief. I mean, it's part of the job of the Fed, as Mr. Martin said many years ago, is to take away the punch bowl at the party occasionally, and that's a very difficult policy to quantify working with markets day by day. And of course it's always been the job of basically leaning against the wind, which of course means if the wind changes you fall flat on your face, but that's another question. I think what he has done has probably been somewhat appropriate. I think he's probably been surprised a little bit as to what has happened with long-term rates. He's not just up short-term rates. I think he was hoping — this is just a guess on my part — that the action sort of early in the cycle on the short-term rate front might make people feel more confident about the longer-term rates, and therefore that the yield curve would flatten some. I don't know that, and he may have been a little surprised on that, but it's not an easy job he has. So I would not second-guess him myself. Charlie, how do you feel about him?

Fine. Greenspan is safe. Zone Six.

Mr. Buffett, I'm Lee Miller from St. Louis. There was an article in the April 18th Barron's that attempted to calculate the value behind each Berkshire Hathaway share. I'm sure you have some views on that, and I'd be very interested in your perspective on that issue.

Yeah, there was an article about a week or so ago in Barron's. The same fellow wrote an article about four years ago reaching pretty much the same conclusion. I hope he hasn't been short in between. But I would say this: it is not the way I would calculate the intrinsic value of Berkshire. But everyone in securities markets makes choices on that every day. Somebody sells a few shares of Berkshire and someone buys them — they are probably coming to differing opinions about valuation. I say that I found it strange that apparently he forgot we were an insurance business, but it really doesn't make any difference. I mean, we don't pay any attention to what people say about Coca-Cola stock or Gillette stock or any of those things. I mean, on any given day two million shares of Coca-Cola may trade. That's a lot of people selling, a lot of people buying it. If you talk to one person you hear one thing and talk to another — you really should not make decisions in securities based on what other people think. If you're doing that, you should think about doing something else because a public opinion poll will not get you rich on Wall Street. So you really want to stick with businesses that you feel you can somehow evaluate yourself. Charlie and I — we don't read anything about what the economy is going to do or what the market is going to do or what anybody — anytime I see some article that says, you know, these analysts say this or that about some business, it just doesn't mean anything to us. You cannot get rich with a weather vane. Zone 7.

I'm Edward Barr from Lexington, Kentucky, and I'd like to ask: given the amount of capital in the banking industry, do you think that more banks should be buying back significant amounts of their stock like SunTrust, versus just the token amounts that they're buying back or just the authorized amounts? And then also related question in banking: are banks too focused on goodwill amortization when declining to buy other banks for cash, by using purchase accounting versus the normal practice in the industry of pooling accounting, even when the stock they issue may be depressed or undervalued?

Well, the first question about the capital in the industry — you really have to look at that on a bank-by-bank basis. And there is a lot more repurchasing of shares by banks taking place. You mentioned SunTrust, but National City — they bought back I think 5% of their — National City of Cleveland bought back five percent of their stock in the first quarter. There's much more repurchasing going on, and that's simply a judgment call by management as to the level of capital they need going forward and what level of capital enables them to earn the return on equity that they think appropriate, and whether they feel like paying for their own shares. So I think you have to look at that on a case-by-case basis. We certainly like it — if we were to own a bank, we would like the idea of the bank repurchasing its stock at a price that we thought was attractive. We would think that they probably know more about their own bank than some other bank they were going to buy, and that if the numbers are right, it's an attractive way to use capital. Your second question about goodwill amortization and purchase accounting versus pooling: we care not. At Berkshire, it absolutely makes no difference to us. We get on something we are interested in the economics of a transaction. Some banks, some businesses generally, most businesses perhaps prefer pooling because they don't like to take a goodwill amortization charge. We think our shareholders are smart enough — particularly we make it clear to them the accounting consequences — we think they're smart enough to look through to the economic reality of what Berkshire's businesses are all about. And I think some management sell short their own ownership group by doing various kinds of financial acrobatics in order to have the charges come in a certain way rather than, as you point out, often they might be better off buying for cash rather than their own stock as currency. But they may prefer to use their own stock because they avoid goodwill charges. We've written a few things on goodwill in past annual reports that might get to that subject. We don't care what accounting — we sort of rewrite the accounting for any business that we're looking at because in our heads we want to have in effect a standardized way of looking at businesses. And if one company goes through pooling transactions and another goes through purchase transactions, we're going to recast them in our own mind so that there's comparability. Charlie?

Yeah, the published accounting results are in accordance with standard convention and they're a place to start economic analysis. The figures are frequently quite silly on a functional basis. I'm not criticizing accounting inventions — except for some — but I think it's just a place to start thinking about economic reality. By their nature they can't tie perfectly, you can't even tie very well to economic reality. We regard it as a negative when we find a management that's preoccupied with accounting considerations, but we find it so frequent that we can't afford to use it as a total exclusionary factor. It really surprises me how many management focus on accounting and the time they spend on it. It's really unproductive. And if you find a management that doesn't care about the accounting but does explain to you in clear terms what's going on, I think you should regard that as a plus in owning a security. Zone One.

We have here today the chief executive of Salomon Inc., the parent company, and also the chief executive of Salomon Brothers, the investment banking arm. And I would say one of the things Charlie and I feel extraordinarily good about are the two fellows that are running that operation. They did an exceptional job under extraordinarily difficult circumstances, as did John MacFarlane, who is also here today. The three of them — I mentioned four people in the annual report, and Salomon wouldn't be here today without those three, and it wouldn't be the company in the future that it's going to be without them. And they did an absolutely fabulous job. It's the sort of business that, as you point out, uses a lot of leverage. In one way it doesn't use as much as it looks like, and another way it uses even more than it looks like. But the test will be, A, whether they control that business in a way that that leverage does not prove dangerous, and secondly, what kind of returns on equity they earn while using it. You certainly should expect to earn somewhat higher returns on equity when you are necessarily exposed to a small amount of systemic risk and significant amounts of borrowed money than you would in a business that's an extremely plain-vanilla business. But I don't know whether you've met Bob and Deryck, but I think you'd feel better about having that leverage in their hands than about any other hands you can imagine. Charlie, why don't we have those three gentlemen stand up. Yeah, you ought to give them a hand on a job well done. I'll lead the applause for them.

I mentioned this before, but it's worth mentioning again. Deryck took on the job of being the operating head of Salomon Brothers on, what, August 18th, 1991. He didn't know — he couldn't know what he was getting into exactly. Two months later, three months later — we never had a conversation about compensation. He did not ask me or Berkshire for a guarantee of indemnification because he was walking into unknown legal problems. We didn't know what we would finally uncover, and he worked incredible hours to keep that place together, which was not easy. Bob Denham — I called, I guess on the 23rd or so, 20th — caught him on a Friday. I got home on Saturday, the 24th of August. He was living a nice, pleasant, peaceful life in California. He had a first-class law firm, good group of clients, wife had a good job there. And I told him I was in a mess and there wasn't any second choice, and three days later he was back in New York and living in a small apartment in Battery City and having the general counsel's job at Salomon. They found John MacFarlane on that Sunday, on the 18th I think. He was running in a triathlon or something — not a practice that Charlie and I follow — but he was yanked from that and came down. I think John was over in New Jersey, but he holed up in the Downtown Athletic Club, and it was his job to keep funding what was then a hundred-and-fifty-billion-dollar balance sheet during a period when people right and left were canceling us — not because we weren't a good credit, but because they just didn't want to have anything to do with us for a while. The World Bank, the State of Texas pension fund, and CalPERS — all these people were shutting off funding at a time when funding — and if business, as the gentleman just indicated, is the lifeblood of an enterprise like Salomon, and so those three deserve an enormous hand, really by the Salomon shareholders, but by this group in turn, because we have an important investment in Salomon. So I thank them publicly. Zone Two.

I'm Kelly Ranson from San Antonio, Texas, and I wondered if you could comment on the Mutual Savings and Loan — there was just a footnote that the deposits had been assumed by a federal savings bank. And also, what about the annual report for Wesco Financial? I know it used to be in the annual report for Berkshire. Just wondered if you could comment on that, please.

The question is about — our 80%-owned subsidiary Wesco Financial sold its ownership in Mutual Savings and Loan to Pasadena last year. I'll let Charlie comment on that. And then the second question is about the Wesco report, which is available to any Berkshire shareholders simply by writing Wesco. But we found that the stapling problems and other things made it a little difficult to keep adding that every year to the reports, so now we just make it available to anyone who would like to have it. But Charlie, you want to comment on the sale of Mutual?

Yes. The savings and loan business became very much more heavily regulated after the huge nationwide collection of scandal and insolvency and so on. And meanwhile, we had a very small savings and loan association, and the combination of the new regulation and the fact that it was a very small part of our operation made us decide that we were better off without it. That does happen from time to time in Berkshire. We do exit once in a while.

And by the way, we would reserve the right to change our mind. I always liked Lord Keynes when he said that when you get new facts or new insights, well, he changed his mind. And then he'd say, what do you do? So we changed our mind. They started asking our directors at Mutual to go to school on Saturday or something. I think that helped change your mind.

There's a time to vote with your feet.

And even your wallet. Zone Three.

From Chicago. Can you speak to some of the economic characteristics of the shoe industry that allowed the business to be profitable and, in your view, attractive? He wanted you to comment on the merits of the shoe industry.

Well, I think our feelings for the shoe industry are very clear from what's been happening the last few years. We think it's a great business to be in as long as you're in with Frank Rooney and Jim IsLou and Peter Willder and Harold Alfond. Otherwise, it hasn't been too good. We have a couple of extraordinary shoe operations, and but they're not extraordinary because we get our leather from different steers or anything of the sort. It's that we have two companies, and really three now that Lowell has been brought into, that have truly extraordinary records. I think those same managements would have been enormous successes in any business they've gone into. But they are in the shoe business, and the companies earn unusual returns on equity, unusual returns on sales. They've got terrific trade reputations, and I think that to the extent we can find ways to expand in the shoe business while employing those managements, we'll be very excited about doing so. It isn't because we think that the shoe industry is any cinch per se or anything of the sort, but we've got a lot of talent employed in the shoe business, and whenever we've got talent, we like to try and figure out a way to give them as big a domain as we can. And it's not inconceivable that we would expand the shoe business, perhaps even significantly over time. So.

My name is Stuart Hartman from Sioux City. After the brevity of the last question from Section Four, I'll try to be extremely brief. Given the scrutiny that the tobacco business is going under right now, number one, what do you see as the business prospects for those huge cash cows? And at any point, would that be attractive to you, given their liability questions about the future?

The tobacco business — I probably know no more about that than you do, because it's fraught with questions that relate to societal attitudes, and you can form an opinion on that just as well as I could. But I would not like to have a significant percentage of my net worth in the tobacco business myself, but they may have better futures than I envision. I don't really think that I have special insights on that. Charlie?

You know, you have to come to a conclusion as to how our society is going to want to treat them, and the present administration for that matter. And the economics of the business may be fine, but that doesn't mean it has a great future.

It's on to five.

I'm Harriet Morton from Seattle, Washington. I'm wondering, when you are considering an acquisition, how you look at the usefulness of the product in looking at any business?

Well, obviously, we look at what the market says is the utility. In the market, the market has voted very heavily for Dexter Shoe, just to be an example. I don't know how many pairs of shoes they were turning out back in 1958 or thereabouts, but year after year people have essentially voted for the utility of that product. There are 750 million or so eight-ounce servings of one product or another from The Coca-Cola Company consumed every day around the world. And there are those of us who think the utility is very high. I can't make it through the day without a few. But there are other people that might rate it differently. But essentially, people are going to get thirsty, and if this is the way they take care of their thirst better than — and they prefer that to other forms — and I would rate the utility high of the product. But I think it's hard to argue with the market on that. I mean, some people may think that listening to a rock concert is not something of high utility. Other people may think it's terrific. And so we would judge that. I don't think we would come to an independent decision that there was some great utility residing in some product that had been available to the public for a long time but the public had not endorsed in any way.

Charlie? Well, I think that's right. But I'd say every store we're in, a bunch of high-utility products. I mean, nurses' shoes, work shoes, casual shoes. We don't have a lot of what — Italian pumps, Charlie? We may be here next year defending you. If you judge the existing portfolio as indicating what the future is likely to be like, certainly a lot of essentials are sold out of Berkshire. I gesture to hit. Yes.

I hear my family clapping. Yeah. Zone Six. We have no question up here. Okay, he's on seven.

Good morning, Mr. Buffett. I have a niece here who has a son named Berkshire. So at that — I'm Chris Blunt from Omaha. My first question, as in years past, we've had samples of various products. When are we going to have some Guinness samples? My second question is: in light of the multiple disasters that have taken place in LA, has that had any impact on the cats for Berkshire, on our super cat business?

Yeah, the LA earthquake, which originally I believe the first estimate of insured damage was a billion five, which struck us as kind of ludicrous, but has now — by the last official estimate, the one we use, that's a trigger in our policies — I think is either 4.5 billion or 4.8 billion, but it's going to be higher than that. Our losses are fairly minor. If it gets to 8 billion of insured damage, that would trigger another policy or two. But I would say that the LA quake, which did considerably more damage I think than people would have anticipated from a 6.7 for various reasons having to do with how quakes operate — that quake is not going to turn out to be of any real — it's not the kind of super cat that a 15 or 20 billion dollar hurricane which hit Florida or Long Island or New England would be. That's the kind of — we could lose — we could pay out six or seven hundred million dollars in sort of a worst-case super cat. Now our total premiums this year might be say 250 million or something in that area. So one super cat in the wrong place could produce, say, a $400 million or thereabouts underwriting loss from that business. The LA quake is peanuts on that scale. But it wouldn't have taken a whole lot more in terms of numbers on the Richter scale, if it happened to have an epicenter where it did and be of the type that it was, relatively shallow, that we could have had that sort of thing happen. I think that the insurance industry has vastly underestimated — maybe not now, but up till a few years ago — the full potential of what a super cat could do. But Hurricane Andrew and the LA quake may have been something of a wake-up call. They were far from a worst-case situation. A really big Type 5 hurricane on Long Island would end up leaving a lot of very major insurance companies in significant trouble. We define our losses essentially — 700 million sounds like a lot of money, is a lot of money — but there are limits on our policies. That is not true of people that are just writing the basic homeowners or business; those losses could go off the chart. There were certain companies in the LA quake that thought they had what they call a probable maximum loss for California earthquakes, and the LA quake, which is far from the worst case you can imagine, it turned out to far exceed those probable maximum losses. So I think the industry has had — and may still have — its head in the sand a little bit in terms of what can well, can happen either in terms of a quake in California or more probably in terms of a hurricane along the East Coast. So far this year, we're in reasonable shape, but that doesn't mean much because by far the larger exposure is in hurricane. And essentially 50% of the hurricanes hit in September, and about I think about 15% in August, close to 15% in October. So you have 80% roughly in those three months, and there's a little tail on both sides. But that's when you find out whether you've had a good or bad year. The super cat business, basically, it's a business we like at the right rates because there are very few people who can afford to write it at the level that the underlying company, the reinsured companies, need it, and we are in a position if the rates are right to do significant business. Charlie, anything? Nothing.

Clayton Reilly from Jacksonville, Florida. This is a little different than all the other questions, but what were the three best books you read last year outside of the investment field?

Well, why don't one will do. I'll give you a tout of a book first that I've read but that isn't available yet, but it will be in September. The woman who wrote it, I believe, is in the audience, and it's Ben Graham's biography, which will be available in September by Janet Lowe. And I've read it and I think those of you who are interested in investments for sure will enjoy it. She's done a good job of capturing Ben. One of the books I enjoyed a lot was written also by a shareholder who's not here because he's being sworn in I believe today or tomorrow as head of the Voice of America. And that's Jeff Cowan's book, which is on The People vs. Clarence Darrow. It's the story of the Clarence Darrow trial for essentially jury bribery in Los Angeles back around 1912 when the McNamara brothers had bombed the LA Times. And it's a fascinating book. Jeff uncovered a lot of information that the previous biographer didn't have. I think you'd enjoy that.

Well, I very much enjoyed Connie Bruck's biography, Master of the Game, which was a biography of Steve Ross who had Warner — and later was co-chairman of Time Warner. She's a very insightful writer, and it's a very interesting story. I am rereading a book I really like, which is Van Doren's biography of Benjamin Franklin, which came out in 1952, and I'd almost forgotten how good a book it was, and that's available in paperback everywhere. We've never had anybody quite like Franklin in this country, never again. He believed in compound interest. As you may remember, he set up those two little funds, one in Philadelphia, one in Boston, to demonstrate the advantages of compound interest.

Then I think that's the part Charlie's rereading. Zone Two.

Thank you for teaching so much to all of us about business. My name is Micah Sail from New York City. You mentioned earlier that Berkshire's shoe business was great but that other shoe businesses were not so good. What are the uncertainties of the global brand leaders that Berkshire seems to like — Coke and Gillette? The global brand leaders in the shoe business being Nike and Reebok, what are their uncertainties in terms of long-term competitive advantage, business economics, consumer behavior, and the other risk factors that you mentioned in the annual report this year? Thank you.

So you really asked about the future prospects of Nike and Reebok? Yeah, I don't know that much about those businesses. We do have one person in this audience, at least, who owns a lot of Reebok. But I'm not expressing a negative view in any way on that. I just don't understand their competitive position and the likelihood of permanence of their competitive position over a 10 or 20 year period as well as I think I understand the position of Brown and Dexter. That doesn't mean I think it's inferior. It doesn't mean that I think that we've got better businesses or anything. I think we've got very good businesses. But I haven't done the work, and I'm not sure if I did the work I would understand them. I think they are harder to understand, frankly, and to develop a fix on. But they may be easier for other people who just have a better insight into that kind of business. Some businesses are a lot easier to understand than others, and Charlie and I don't like difficult problems. I mean, if something is hard to figure — we'd rather X 3 than buy Pie. I mean, it's just easier for us.

Charlie? Yeah. Well, there is such an obvious point, and yet so many people think if they just hire somebody with the appropriate labels they can do something very difficult. That is one of the most dangerous ideas a human being can have. All kinds of things just intrinsically create problems. The other day I was dealing with a problem and I said — this thing, it's a new building — I said this thing has three things I've learned to fear: an architect, a contractor, and a hill. If you go through life like that, I think you at least make fewer mistakes than people who think they can do anything by just hiring somebody with a label. We've come at you — you don't have to hire out your thinking if you keep it simple. You don't have to — we've said this before, but you don't have to do exceptional things to get exceptional results. And some people think that if you jump over a seven-foot bar, the ribbon they pin on you is going to be worth more money than if you step over a one-foot bar, and it just isn't true in the investment world at all. You can do very ordinary things. I mean, what is complicated about this? We're three billion dollars pre-tax better off than we were a few years ago because of it. There's nothing that I know about that product or its distribution system, its finances, or anything that really hundreds of thousands or millions of people aren't capable of. That they don't already know, they just don't do anything about it. And similarly, if you get into some complicated business, you can get a report that's a thousand pages thick, you've got PhDs working on it, but it doesn't mean anything. What you've got is a report, but you won't understand that business, what it's going to look like in ten or fifteen years. The big thing to do is avoid being wrong. There's some things that are so intrinsically dangerous. Another of my heroes is Mark Twain, who looked at the promoters of his day and he said, 'A mine is a hole in the ground owned by a liar.' And that's the way I've come to look at projections, basically. I can remember when I was offered two million dollars worth of projections once, in the course of buying a business, and the book was this thick, and for nothing — we were giving it for nothing — and he wouldn't open it. We'd almost paid two million not to look at it. It's ridiculous. I do not understand why any buyer of a business looks at a bunch of projections put together by a seller or his agent. I mean, you can almost say it's naive to think that has any utility whatsoever. We just are not interested. If we don't have some idea ourselves of what we think the future is, to sit there and listen to some other guy who's trying to sell us the business or get a commission on it tell us what the future is going to be — like I say, it's very naive. Five years out. Yeah.

We had a line in the report one time: 'Don't ask the barber whether you need a haircut.' Quite applicable to projections by sellers of businesses. Zone Three.

Mr. Buffett, Greg Ulrich from Washington DC. In the last year, United Airlines and Northwest have resolved some of their financial problems by moving ownership over to the employees. With US Air's current positions and problems, what do you see as occurring with US Air? And do you see any movement toward employee ownership, and how will that affect Berkshire's interest in the company?

Well, US Air has a cost structure which is non-viable in today's airline business. That in an important way involves its labor costs, but it involves other things too. But it certainly involves its labor costs, and they've stated this publicly. And they are talking with their unions about it. They're talking with other people about other parts of their cost structure, and I think you'll just see what unfolds in the next relatively few months. Because there's any question that the cost structure is out of line. I think the cost structure could be brought into line, but whether it will be brought into line or not is another question. And looking backwards, the answer is not to get into businesses that need to solve problems like that. That was a mistake I made. And I think Seth Schofield — you've got a manager who understands that business extremely well, who probably is, in my view anyway, as well-regarded and trusted by people who are going to have to make changes as anyone could be in that position. But that may not be enough. I mean, there's enormous tensions when you need to take hundreds and hundreds of millions of dollars out of the cost structure of any business, and when you need cooperative action by various groups, each one of which feels that maybe they're having to give a little more than some other group, and understandably feels that way. That is an enormously tough negotiating job. I think Seth is as well-equipped for that as anyone, but I would not want to — I cannot predict the outcome.

Charlie? Yeah. Well, if I were a union leader, I would give Seth whatever he wants, because he's not the kind of a fellow who would ask for more than he needs, and it's perfectly obvious that's the correct decision on the labor side. But whether the obvious will be done or not is in the lap of the gods. It's a lot of people with a lot of different motivations.

I mean, those are really tough questions. I mean, Charlie and I've been involved with that sort of thing a few times, and frequently it works out, but it's not preordained. Zone Four.

My name is Sheldon Sycyk from Chicago, Illinois. I have two questions. The first one is concerning Mr. Munger. We know what Mr. Buffett's retirement plans are. I was wondering what your plans for the future concerning Berkshire are.

I've always preferred the system of retirement. Well, you can't quite tell from observing from the outside whether the man is working or retired. He doesn't — well, toke, you know. Problem.

Many businesses, particularly the more bureaucratic ones, is that your employees retire but they don't tell you. I think I could speak for Charlie on that. So Charlie and I are not in any hurry to retire. He's trying to outlast me, actually.

Thank you. My second question is: I was just curious why you sold a portion of Cap Cities.

We thought it was a good idea for Cap Cities to have a tender offer. They had cash that we thought they could not use in any — they were not likely to be able to use it a better way than repurchasing their own shares, because they do have some very good businesses. And we felt that a tender offer would not be successful in terms of attracting a number of shares unless Berkshire were tendering. We felt the price was reasonable to tender at. It turned out that the business was getting stronger during that period and various things were happening in media, so there were only a hundred thousand shares or so tendered outside of our million. That isn't necessarily what we thought was going to happen going in, but that is what happened. It's acceptable to us, but that doesn't mean that it was the desired outcome. We would not have tendered all of our shares or anything of the sort. We wanted to remain a substantial shareholder of Cap Cities. We've always, most of the time, favored Cap Cities buying in its stock, and it's bought in a fair amount of stock since the ABC merger took place in 1980 — started in 1986. So, five.

Good morning. My name is Matt VOC. I'm from Omaha. At last year's meeting, you made reference to structured settlements. I was wondering how is that business progressing for you?

The question is about the structured settlement business, which is a business in which Berkshire guarantees in effect an annuity to some claimant of another — usually of another insurance company — who suffered an injury and instead of getting a lump sum now, wants to get a stream of payments over many years in the future, sometimes going up to 75 years. We have set up a life company to do that business. We formerly did it all through our property casualty companies, and we have done some business, but it's not been a big business yet, and it may never be a big business. It's a perfectly satisfactory business, but it's not an important item at present in the analysis of Berkshire's value. Are you having a problem with sound out there on this or not? Just, no. Zone Six.

My name is David Samra from San Francisco, California. In your annual report, I noticed you mentioned Wrigley as being a company that has worldwide dominance somewhat like Coca-Cola and Gillette. And I was curious to know if you had looked at the company in any detail, and if so, whether or not — if you decided not to invest, what were the reasons why?

Well, we wouldn't want to comment on a company like that because we might or might not be buying it, we might or might not be selling it, and we might or might not buy or sell it in the future. And since it falls under that narrow definition of things that we don't talk about, we — it's a good illustration of a company that has a high market share worldwide, but you can understand the Wrigley company just as well as I can. I have no insights into the Wrigley company that you wouldn't have. And I wouldn't want to go beyond that and in giving you our evaluation of the company. Hate to disappoint you on those, but on specific securities, we're not too forthcoming sometimes.

Charlie? I'm good at not being forthcoming.

Seven. Mr. Buffett.

Kathleen Ambrose from Omaha. I have a question regarding global diversification. Just in general, what do you look for in a company, and as far as Europe or Latin America, if you'd like to be specific?

The question is about global diversification. All we want to be in is businesses that we understand, run by people that we like, and that are priced attractively compared to the future prospects. So there is no specific desire to either be in the rest of Europe or the rest of the world or Far East or to avoid it. It's simply a factor — it's not a big factor. There may be more chances for growth in some countries. We — 80% of Coca-Cola's earnings roughly will come from outside the United States. 80% of Guinness's earnings will come from outside the United States, but they're domiciled outside the United States, whereas Coca-Cola is domiciled here. Certainly, in many cases there are markets outside the United States that have way better prospects for growth than the US market would have, but they probably have some other risk to them that this market may not have. But we like the international prospects, obviously, a company like Coke. We like the international prospects of a company like Gillette. Gillette earns 70% of its money outside this country. So if you look on a look-through basis, Coke — we might this year get something like 150 million dollars of earnings indirectly for Berkshire's interest from the rest of the world just through Coca-Cola alone. But we don't make any specific — we don't think in terms of I like this region so I want to be there or something of that sort. It's something that's specific to the companies we were looking at, and we'll try to evaluate that. Coke is expanding in China. Well, I forget what they showed last year, maybe 38% growth or something like that in cases. It's nice to have markets like that that are relatively untapped. Actually, Gillette is expanding in China in a big way, and the Chinese don't shave as often, and more of them are what they call dry shavers than wet shavers there, which is electric shavers. But maybe we could stick something into Coke. Any little synergy at Berkshire, finally, who knows. Zone One.

Good morning. I'm Marshall Patton from Bandera, Texas, and back to the insurance losses — what is the comparison between natural disasters such as the earthquake and so on and the LA riots?

Well, I'm not sure what the connection is. They obviously can both lead to super cats that we insure against, because if there is enough insured damage, it's likely to trigger payment under some of our policies. It would take some really big riot damage to get to our levels, because normally we don't kick in now until an event gets up to at least, you know, five billion or so of insured damage under a very large majority of our policies. Something like a quake causes a fair amount of damage that is not insured, because to the extent that it's highways and things of that sort, public buildings, a lot of that is not insured. But you get interesting questions on this. Usually we insure an event, but what's an event? If you go back to the riots that occurred after Martin Luther King was shot, he had riots in dozens of cities. Is that one event or is that a multiple number of events? I mean, they started by different people, but maybe arising from a common cause. Some of those things aren't actually very well defined even after hundreds of years of insurance law and custom and experience. But I would say that rioting is very, very unlikely to get to a level that triggers our policy. The big risks we face are quake and hurricanes, and hurricanes are a more significant risk than quake. They call them typhoons in the Pacific Ocean, but floods — tremendous damage from floods last year. But basically there's not a lot of private flood insurance, so the insured losses do not get large. Just watch The Weather Channel. Zone Two.

Diane West from Corona del Mar, California. I know, Mr. Buffett, that you said that you don't read what other people say about the market or the economy, but do either you or Charlie have an opinion about how you think things are going to go? Are you bullish or bearish?

You may have trouble believing this, but Charlie and I never have an opinion about the market, because it wouldn't be any good and it might interfere with the opinions we have that are good. If we're right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do or anything of that sort, because we just don't know. And to give up something that you do know and that is profitable for something that you don't know and won't know because of that — it just doesn't make any sense to us, and it doesn't really make any difference to us. I mean, I bought my first stock I think in probably April of 1942 when I was 11, and since then — actually World War II didn't look so good at that time. I mean, the prospects really didn't. We were not doing well on the Pacific, and I'm not sure I calculated that into my purchase of my three shares. But just think of all the things that have happened since then: atomic weapons and major wars and presidents resigning and all kinds of things, massive inflation at certain times. To give up what you're doing well because of guesses about what's going to happen in some macro way just doesn't make any sense to us. The best thing that can happen from Berkshire's standpoint — we don't wish this on anybody — but is over time is to have markets that go down a tremendous amount. We are going to be buyers of things over time. I think if you're going to be buyers of groceries over time, you like grocery prices to go down. If you're going to be buying cars over time, you like car prices to go down. We buy businesses, we buy pieces of businesses — stocks — and we're going to be much better off if we can buy those things at an attractive price than if we can. So we don't have any fear at all. What we fear is an irrational bull market that's sustained for some long period of time. You, as shareholders of Berkshire, unless you own your shares on borrowed money, you are going to sell them — in a very short period of time, you are better off if stocks get cheaper, because it means that we can be doing more intelligent things on your behalf than would be the case otherwise. But we have no idea what — and we wouldn't care what anybody thought about it, most of all ourselves.

Charlie? I think that if you're agnostic about those macro factors and therefore devote all your time to thinking about the individual businesses and the individual opportunities, it's just a way more efficient way to behave, at least with our particular talents and lacks thereof. If you're right about the businesses, you'll end up doing fine.

We don't know and we don't think about when something will happen. We think about what will happen. It's not so difficult to figure out what will happen. It's impossible, in our view, to figure out when it will happen. We focus on what will happen. This company in 1890 or thereabouts — the whole company sold for $2,000, got a market value now of about 50-odd billion. Somebody could have said to the fellow who was buying this in 1890, you know, you'll have a couple of great world wars and you'll have the panic of 1907 — all these things will happen. Wouldn't it be a better idea to wait? We can't afford that mistake, basically. Yeah.

I'm Tim Medley from Jackson, Mississippi. Last year, the question was asked about your preference for purchasing entire businesses versus parts of public companies. You mentioned you preferred to buy private businesses because of the tax advantages and your attraction with people in those businesses. Are you finding today that there are better purchases within the private market versus in the public securities markets?

Well, I would answer that: no. We very seldom find something to buy on a negotiated basis for an entire business. We have certain size requirements, big limiting factors. It has to be something we can understand — I mean, that eliminates 95% of the businesses. And we don't pay attention — we get lots of proposals for things that just totally fall outside the boundaries of what we've already said we're interested in. We prefer to buy entire businesses or 80% or greater interest in businesses, partly for the tax reasons you mentioned, and frankly we like it better. It's the kind of business we would like to build if we had our absolute druthers on it. Counter to that is we can usually get more for our money in wonderful businesses in terms of buying little pieces of them in the market, because the market is far more inefficient in pricing businesses. That is, it is the negotiated market — you're not going to buy any bargains. I mean, you shouldn't even approach the idea of buying a bargain in a negotiated purchase. You want to buy it from people who are going to run it for you. You want to buy it from people who are intelligent enough to price their business properly, and they are. I mean, that's the way things are. The market does not do that. In the stock market, you get a chance to buy businesses at foolish prices, and that is why we end up with a lot of money in marketable securities. If we absolutely had our choice, we would own three times the number of businesses we own outright. We're unlikely to get that opportunity over time, but periodically we'll get the chance to find something that fits our tests. And in between, when the market offers the right prices, we will buy more — either businesses we already own pieces of, or we'll buy one or two new ones. Something's usually going on. There are tax advantages to owning all of them, but that's more than offset by the fact that you'll never get a chance to buy the whole Coca-Cola company or the whole Gillette. I mean, businesses like that, the sensational businesses, are just not available. Sometimes you get a chance to make a sensible purchase in the market of such businesses.

Charlie? Well, I think that's exactly right. And if you stop to think about it, if 100% of a business is for sale, you've got the average corporate buyer as being run by people who will have the mindset of people buying with somebody else's money, and we have the mindset of people buying with our own money. And there's also a class of buyers for 100% of businesses who are basically able and shrewd financial promoters — I'm talking about the leveraged buyout funds and so on — and those people tend to have the upside but not the downside in the private arrangements they've made with their investors. And that's why they tend to be somewhat optimistic. So we have formidable competition when we try and buy 100% of businesses. Most managers are better off in terms of their personal equation if they're running something larger. Now, they're also better off if they're running something larger and more profitable, but the first condition alone will usually leave them better off. We're only better off if they're running something that's more profitable. They also like it if it's larger too. But our personal equation is actually different than a great many managers' in that respect. Even if that didn't operate, I think most managers psychically would enjoy running something larger, and if you can pay for it with other people's money, that gets pretty attractive. Yeah.

How much — let's just say you're a baseball fan. Well, how much would you pay to own whatever your hometown — the Yankees? You might pay more if you were writing a check on someone else's bank account than if you're writing it on your own. And that happens in corporate America — animal spirits are there. And those are our competitors on buying entire businesses. In terms of buying securities, most managers don't even think about it. It's very interesting to me because they'll say that they'll have somebody else manage their money in terms of a portfolio of securities. Well, all that is is a portfolio of businesses. And I'll say, well, why don't you pick out your own portfolio? They'll say, that's much too difficult. And then some guy comes along with some business that they never heard of a week before and gives them some figures and a few projections, and the guy thinks he knows enough to buy that business. It's very puzzling to me sometimes. It's Zone One.

A Dan Raider in San Mateo, California. This is a question for Mr. Munger. In your most recent letter to shareholders in Wesco's annual report, you calculated the intrinsic value of Wesco at about $100 per share and compared that to the then-current market price of Wesco of about $130 per share. In the same letter, you stated that it was unclear whether at then-current market prices Berkshire or Wesco presented a better value to prospective purchasers. In light of that, would you compare the intrinsic value of Berkshire to its current market price?

Well, the answer to that is no. Berkshire has never calculated intrinsic value per share and reported to the shareholders. And Wesco never did before this year. We changed our mind at Wesco because we really thought some of the buyers had gone a little crazy. You know, a lot of things were being said to respective shareholders that, in our opinion, were unwise. And we don't really like attracting — even though we've had nothing to do with it — we don't like attracting people in at high prices that may not be wise. So we departed from our long precedent, and we did in the Wesco report make an estimate of intrinsic value per share. But we're not changing the general policy. That was just a one-time quirk.

Well, also I think it's true that the Wesco intrinsic value per share can be estimated by anyone within fairly close limits. It just isn't that complicated, because there aren't a number of businesses there that have values different than carrying values or where they are — they're all footnoted in terms of numbers. So it'd be almost impossible to come up with numbers that are significantly different than the number Charlie put in there. Berkshire has assets, number one of which would be the insurance business, that it's clear have very significant excess values. But one person might estimate those at maybe three times what somebody else would estimate them at. That's less true of our other businesses, but it's still true in a way, so that Berkshire's range would be somewhat greater.

Charlie, we basically don't want to disappoint people, we also don't want to disappoint ourselves, but we have our own yardsticks for what we think is doable. We try to convey that as well as we can to the people who are partners in the business. And I think that we saw some things being published about Wesco that simply would, what might have led to, probably did lead to some expectations that simply weren't consonant with our own personal expectations, and that leaves us uncomfortable.

Hello, my name is Charles Pyle from Ann Arbor, Michigan. I'd like to ask you to expound on your view of risk in the financial world. And I ask that against the background of what appear to be a number of inconsistencies between your view of risk and the conventional view of risk. I mentioned that in a recent article you pointed out an inconsistency in the use of beta as a measure of risk, which is a common standard. And I mentioned that derivatives are dangerous, and yet you feel comfortable playing in derivatives through Salomon Brothers, and betting on hurricanes is dangerous, and yet you feel comfortable playing with hurricanes through insurance companies. So it appears that you have some view of risk that's inconsistent with what would appear on the face of it to be the conventional view of risk.

Well, we do define risk as the possibility of harm or injury, and in that respect we think it's inextricably wound up in your time horizon for holding an asset. If you intend to buy XYZ corporation at 11:30 this morning and sell it before the close today, in our view that is a very risky transaction because we think 50% of the time you're going to suffer some harm or injury. If you have a time horizon on a business, we think the risk of buying something like Coca-Cola at the price we've bought it over a few years ago is essentially so close to nil in terms of our perspective holding period. But if you ask me the risk of buying Coca-Cola this morning and you're going to sell it tomorrow morning, I'd say that's a very risky transaction. Now as I pointed out in the annual report, it became very fashionable in the academic world and then that spilled over into the financial markets to define risk in terms of volatility, of which beta became a measure. But that is no measure of risk. The risk in terms of our super cat business is not that we lose money in any given year—we know we're going to lose money on some given day, that is for certain—and we're extremely likely to lose money in a given year. Our time horizon in writing that business would be at least a decade, and we think the probability of losing money over a decade is low. So we feel that in terms of our horizon of investment, that is not a risky business, and it's a whole lot less risky than writing something that's much more predictable. The interesting thing is that using conventional measures of risk, something whose return varies from year to year between plus 20% and plus 80% is riskier, as defined, than something whose return is 5% a year every year. We just think the financial world has gone haywire in terms of measures of risk. We look at what—we are perfectly willing to lose money on a given transaction, arbitrage being an example, any given insurance policy being another example. We are perfectly willing to lose money on any given transaction. We are not willing to enter into transactions in which we think the probability of doing a number of mutually independent events of a similar type has an expectancy of loss. And we hope that we are entering into our transactions where our calculations of those probabilities have validity. And to do so, we try to narrow it down—there are a whole bunch of things we just won't do because we don't think we can write the equation on them. But we basically, Charlie and I by nature, are pretty risk-averse. But we are very willing to enter into a transaction—if we knew it was an honest coin and someone wanted to give us seven to five or something of the sort on one flip—how much of Berkshire's net worth would we put on that flip? Well, we wouldn't—it would sound like a big number to you, it would not be a huge percentage of the net worth, but it would be a significant number. We will do things with probabilities that favor us.

Yeah, we—I would say we try and think like Fermat and Pascal, as if they'd never heard of the modern finance theory. I really think that a lot of modern finance theory can only be described as disgusting.

Good morning, I'm Paul Miller from Kansas City, Missouri. I've got two questions. First, not too long ago my recollection is that Fortune magazine ran an article regarding personal tax rates, and at the risk of misquoting you, my recollection is that you favored higher personal rates—even higher than those proposed by those in Washington. The second question is: I've heard Berkshire Hathaway referred to as nothing more than a high-priced rich man's mutual fund. Would you care to comment on that also?

Well, on tax rates—if you ask me what I personally favor, I personally favor a steeply progressive consumption tax. That has a little more attention being paid to it now, although the steeply progressive might be modified by most of the advocates of the consumption tax—maybe it's a mildly progressive or something of the sort. There's a non-demented proposal along that line, and there are other people that are talking about it more. It may be examined by the new Kean-Danforth Commission, of which we've got a member in the audience. But in one way or another, I believe in progressive taxes, and so I am not shocked in terms of my own situation, and I don't think Charlie is particularly, about having a progressive income tax, although like I say, I think society would run better over time if it were a progressive consumption tax instead. You want to comment on the tax situation here?

Well, I think there is a point in which income tax has become quite counterproductive if the progression is too high, but I don't think we're there yet.

We think—at least I think I'm extraordinarily well treated by the society. I think most people with high incomes are. I think if you transported most of them to Bangladesh or Peru or something, they would find out how much of it is them and how much is the society. And I think there's nothing better than a market system in terms of motivating people and in terms of producing the goods and services that the society wants. But I do think it gets a little out of whack in terms of what the productivity may be of an outstanding teacher compared to somebody who is good at figuring out the intrinsic value of businesses. I don't have a better system on the income side, but I think society should figure out some way to make those who are particularly blessed, in a sense, to have talents that get paid off enormously in a market system, to give back a fair amount of that to the society that produces that. The question about Berkshire being a—I think it was a rich man's mutual fund or something—we don't look at it that way at all. We look at it as a collection of businesses, and ideally we would own all of those businesses. So to the extent that a mutual fund owns stock in a lot of companies and diversifies among businesses, and we try to own a lot of businesses ourselves, I guess that's true. But I guess you could say the same thing of General Electric or an operation like that. We are more prone to buy pieces of businesses than the typical manager, but we are trying to do in a sense the same thing Jack Welch is trying to do with General Electric, which is try to own a number of first-class businesses. He gets to put the imprint of his own management, which I think is very good, on those businesses, and we are more hands-off, both in the businesses we own outright and in the ones we own pieces of. But we're going at it the same way, and General Electric has been very successful under Jack's leadership in doing it his way. We think in terms of what we bring to the game and the problems of putting money to work all the time, that our own system will work best for us.

Yeah, I've got nothing to add to that.

Hello, I'm Christopher Davis from New York City. I'm interested in the fact that many of the holdings of Berkshire are in industries that are perceived as interest rate-sensitive industries, including Wells Fargo, Solomon, Freddie Mac, even Geico. And yet you have an admitted sort of ambivalence towards interest rates or changes in interest rates, and it therefore seems that you don't feel that those changes affect the fundamental attractiveness of those businesses. I thought maybe you could share your thoughts on what you see in these businesses that the investment community as a whole is ignoring.

Well, the value of every business—the value of a farm, the value of an apartment house, the value of any economic asset—is 100% sensitive to interest rates, because all you are doing in investing is transferring some money to somebody now in exchange for what you expect a stream of money to come in over a period of time, and the higher interest rates are, the present value is going to be. So every business by its nature, whether it's Coca-Cola or Gillette or Wells Fargo, in its intrinsic valuation is 100% sensitive to interest rates. Now, the question as to whether a Wells Fargo or a Freddie Mac or whatever it may be—whether their business gets better or worse internally, as opposed to the valuation process, because of higher interest rates—that is not easy to figure. I mean, Geico, if they write their insurance business at the same underwriting ratio—in other words, they have the same loss and expense experience relative to the premiums—they benefit by higher interest rates, obviously, over time, because they're a float business and the float is worth more to them. Now externally, getting back to the valuation part, the present value of those earnings also becomes less, but the present value of Coca-Cola's earnings becomes less in a higher interest rate environment. Wells Fargo—whether they earn more or less money under any given interest rate scenario is hard to figure. There may be one short-term effect and there may be another long-term effect. So I do not have to have a view on interest rates, and I don't have a view on interest rates, to make a decision as to an insurance business or a mortgage guarantor business or a banking business or something. Those are relative to making a judgment about Coke or Gillette.

I've got nothing to add.

Hello, I'm from New York. Could you speak about your insurance business a little bit, and especially the retroactive policies you've been writing? The reinsurance business—and the retroactive part for the first part, reinsurance—and also the market in Bermuda and how you see it as one of your potential markets?

I think the retroactive market—what's called retroactive insurance—has been pretty well eliminated by developments in accounting. So I would not expect us to really have any volume in retroactive type policies now. When we write workers' comp with a policyholder dividend, in effect that's a retroactive policy, but that's a small part of Berkshire's business. Did I answer what you were driving at there?

Did you get Benjamin's still—comment on the development of the insurance business in Bermuda?

Oh, Bermuda is simply a new competitor—they're not so new, I mean there's been companies in Bermuda before. But in the last 15 months, 18 months maybe, there's been four billion-plus raised, and because for tax reasons—maybe other reasons as well, but certainly for tax reasons—that capacity has been concentrated in Bermuda-based, Bermuda-domiciled reinsurers. But essentially there's no great difference between that type of competition and other reinsurers' competition, except for the fact that that capacity is new and the money's just been raised, and so there may be some greater pressure on the managers of those businesses to go out and write business promptly than on somebody that's been around for 50 years. But it's no plus for us anytime new capacity enters any business that we're in, and that certainly goes for the reinsurance business. The reinsurance business by its nature will be a business in which some very stupid things are done en masse periodically. I mean, you can be doing dumb things and not know it in reinsurance, and then all of a sudden wake up and find out the money is gone. It's what people have found out—I used that line in the report a year ago—people have found out that we're speculating on bonds with low margins recently. You don't find out who's been swimming naked until the tide goes out. And essentially that's what is in reinsurance—you really don't find out who's been swimming naked till the wind blows.

More cash, more stocks, more bonds—because how does Berkshire Hathaway feel about times of relative financial insecurity? Do you arrange for more cash reserves looking forward to a time when you might be able to buy, or do you go along your path?

I think the question is: do we get sort of into an asset allocation by maintaining given levels of cash depending on some kind of outlook or something of the sort? We don't really think that way at all. If we have cash, it's because we haven't found anything intelligent to do with it that day in the way of buying into the kind of businesses we like. And when we can't find anything for a while, the cash piles up. But that's not a true choice—that's because we're failing at what we essentially are trying to do, which is to find things to buy. And we make no attempt to guess whether cash is going to be worth more three months from now or six months from now or a year from now. You will never see—we don't have any meetings of any kind anyway at Berkshire, but we would never have an asset allocation meeting. We would keep looking—I mean, Charlie's looking, I'm looking, some of our managers are looking—we're looking for things to buy that meet our tests. And if we showed no cash for short-term securities a year, we would love it, because it would mean that we found ways to employ the money in ways that we like. I think I would have to admit that if we have a lot of money around, we are a little dumber than usual. I mean, it tends to make you careless. And I would say that the best purchases are usually made when you have to sell something to raise the money to get them, because it just raises the bar a little bit that you jump over in the mental decisions. But we have—I don't know what we'll show, but certainly well over a billion dollars of cash around, and that's not through a choice. You can look at that as an index of failure on the part of your management, and we will be happy when we can buy businesses or small pieces of businesses that use up that money.

Gentlemen, my name is Richard Sir, from Tucson, Arizona. I understand that 40% of all home mortgages have been securitized by Fannie Mae and Freddie Mac—the duopoly. At the risk of asking you for a projection, since you talked about projections before, I'd be interested in understanding what you think will happen to that market share over time for this duopoly.

Yeah, well, the answer—that doesn't involve much of a prediction—that market share is essentially certain to go up. That doesn't mean that those are wonderful businesses to buy, but the market share is essentially certain to go up because the economics that those two entities possess compared to other ways of intermediating money between investors and people who want to borrow—no one else has those economics. So what holds the share of Freddie Mac and Fannie Mae down is the fact that they are only allowed to loan roughly $200,000 on any mortgage. That's a limiting factor—it's probably been a good thing for them that it has been a limiting factor—but they are shut out of a part of the market. But the market that they are in, they essentially have economics that other people can't touch for intermediating money, including the savings and loan business that we were in. We had a business that intermediated money—it got money from depositors and lent it to people who want to borrow on a home. Freddie Mac and Fannie Mae do it the same way—they don't do it exactly the same way, but they performed the same function, and they could do it so much more cheaply than we could do it by having branches or anything of the sort and paying the insurance fee we paid. They're going to get the business—they should get the business—and so their market share will grow.

Well, I think that's right.

Good morning, I'm Sara Pruitt from Milwaukee, Wisconsin. And I wondered if you feel that the speed with which information is available and disseminated today has affected your business buying decision process, and do you believe that speed has caused you to miss opportunities?

No, the speed of information today doesn't affect our decision-making process. I would say that we perform about like we were doing 30 or 40 years ago. I mean, we read annual reports—the speed of information really doesn't make any difference to us. It's the processing and finally coming to some judgment that actually has some utility—a judgment about the price of a business or a part of a business, a security, versus what it's essentially worth—and none of that involves anything to do really with quick information. It involves getting good information, but usually we're not looking for needles in haystacks or anything of the sort. We like haystacks, not needles, basically, and we want it to shout at us. Virtually everything we've done has been reading public reports and then maybe asking questions around to ascertain trade positions or product strengths or something of that sort. But we never have to—we can make decisions very fast. When we get called on a business or we can make up our mind whether we're interested in two or three minutes—I mean, that takes no time. We may have to do a little checking on a few things subsequently, but we don't need—I can't think of anything where we really need lots of price data or things like that extremely fast to make any decisions. We've got good management information systems in our operating businesses, but that's just a question of keeping inventories where they should be and all of that sort of thing. I don't think the investment—I think you could be in some place where the mail was delayed three weeks and the quotations were delayed three weeks, and I think you could do just fine in investing.

James Pan, New York City. I have a two-part question. One: do you think the stock price of Berkshire Hathaway is trading within 15% of its intrinsic value currently? And two: if you think Berkshire Hathaway is undervalued, with the amount of cash you have on your balance sheet, would you consider a buyback?

The answer about a buyback is that we generally have felt that market conditions that would make Berkshire attractively priced is probably going to make other things even more attractively priced, because we think our shareholders are more rational than the shareholders of many companies. It's more likely that we will find some wonderful business at a silly price than we will find Berkshire at a silly price as we go along, so that tends to eliminate repurchases. But it doesn't rule them out—it just explains why the circumstances will not arise very often where repurchases would make good sense. In terms of giving you a number on intrinsic value, I don't want to spoil your fun—I mean, you really should work that one out for yourself.

Well, your attitude on that subject reminds me of a famous headmaster who used to address the graduating class every year and he'd say: 'You know, 5% of you people are going to end up criminals. I know exactly who you are, but I'm not going to tell you because it would deprive the excitement.' Companies that constantly told their shareholders what the intrinsic value was were the real estate holding companies in corporate form, and I must say that the amount of folly and misbehavior that crept into that process was disgusting. We would be disassociating with a bad group if we were to change our ways. Bill Zeckendorf, Senior, I think was probably the first one to do that with Webb & Knapp back in the late '50s, and I still have those annual reports. He would announce—like to eight decimal places—what the intrinsic value of Webb & Knapp was, and he did it right till the day they filed for Chapter 11. I remember that well because somebody said that he fell into bankruptcy, and somebody else said: 'How can you fall off a pancake?' Beware of people that give you a lot of numbers about their businesses.

In terms of projections or valuations or that sort of thing—we try to give you all of the numbers that we would use ourselves in making our own calculations of value. If you read the Berkshire reports, you essentially have all the information that Charlie and I would use in making a decision about the security. And if there's anything really lacking in that respect, we would actually truly appreciate hearing from you, because we want to have that kind of information in the report. But then we want you to make the calculation. We've stuck to that material—for example, on the float in the insurance business, we consider that quite relevant obviously, because we use up almost a page printing it. Pretty serious stuff at Berkshire. But that is relevant—I mean, your interpretation may be different than mine or Charlie's, but those are important numbers. And we can give you a lot of baloney about satisfied policyholders in Lincoln, Nebraska—that wouldn't tell you a thing about what the company is worth—and have pictures of them and happy people receiving the check from the agent and all of that. We're not going to do that.

Mike Macy from Indianapolis. I have really enjoyed reading your annual letters and your annual report, and I've gone back and read all the older ones too—they're terrific. I have also enjoyed reading the two books by Peter Lynch, and I see a lot of commonalities between the two of you—the way you think and your philosophy, etc. I'd certainly appreciate it if you'd make a few comments on what you think of Peter Lynch, the things he says in his two books, and the advice that he gives to investors.

Well, I know Peter—I don't know him well, but we played bridge together in Omaha as a matter of fact. I like him personally, and obviously he has an outstanding record, and he has written those two books which have been bestsellers about his investment philosophy. I don't really have anything—I'm not going to embroider on his—there is certainly a fair amount of overlap, there's some difference. Peter obviously likes to diversify a lot more than I do—I mean, he owns more stocks than the names of companies I can remember. But that's Peter, and I've said in investing in the past that there's more than one way to get to heaven, and that there isn't a true religion in this, but there are some very useful religions. Peter's got one, and I think we've got one that's useful too. There is a lot of overlap, but I would not do as well if I tried to do it the way Peter does it. He probably wouldn't do as well if he tried to do it exactly the way I do it. I like him personally very much—he's a high-grade guy.

Mr. Buffett, Mr. Munger, my name is Dave Lanka, I'm a senior editor at Business Insurance magazine. A two-part question for you: can you explain a little bit regarding your primary insurance operations—what drove up written premiums by more than 50 percent last year, and if you expect that to continue this year? And then regarding your earlier comments on the stupid things reinsurers can do en masse, can you explain what potential pitfalls that the new cat facilities in Bermuda will have to avoid that you feel Berkshire Hathaway won't fall into?

Well, the first question about our primary insurance—the figures I find somewhere back, but they're a little distorted because we bought Central States Indemnity late in the year '92, so there's a lot more premium volume in there for Central States in '93 than there was in '92. Our basic—National Indemnity's basic insurance, which is auto and commercial auto and general liability—premium volume was barely flat. The Home State operation fairly flat, Cypress up somewhat, but those numbers were not anything like the changes. So our business last year, pro forma for including Central States Indemnity for all of '92, would not have shown a dramatic change. There really hasn't been much happen in our primary business except that it's been run—it's done very well, but it is not growing or exploding, and that's true this year as well as last year. It's a good business, and it could grow in certain kinds of markets very substantially, but it is not growing in this market, and it did not grow last year although its underwriting was very good. In the reinsurance business, I think essentially the difference in our reinsurance business from many others—it doesn't include them all in a place like Bermuda—is essentially the difference that may exist in our operations and securities versus other people. We will offer reinsurance at any time in very large quantities at prices we think make sense, but we won't do business if we don't think it makes sense, just like we will buy securities to the extent of the cash we have available if they make sense. But we have no interest in being in the stock market per se just to be in it—we want to own securities that make sense to us. I think for most managements, if the only thing they're in is the reinsurance business, they may like it better when prices make sense, but they will be prone to do quite a bit of business when prices don't make sense as well, because there's no alternative except to give the money back to the owners, and that is not something that most managements do somersaults over. So I think we are in a favored position essentially, having the flexibility of capital allocation that lets us take the lack of business with a certain equanimity that most managements probably can't, because of their sole focus on the business. Rates will get silly, and in all likelihood, after a period when nothing much happens, when you've had a couple of years of good experience. We price to what we think is exposure—we don't price to experience. I mean, the fact that there was no big hurricane last year—I forget the name of the one that was coming in at North Carolina and then it veered out essentially—but to us it has nothing to do with the rates next year whether that hurricane actually came in in a big way or veered out into the Atlantic again. We are pricing to exposure, and everyone says that, but the market tends to price and respond to experience, and generally too recent experience. That's why all the retrocession operations in London, you know, then the spiral went bust, because they priced to experience rather than to exposure. It's very hard not to do that—to be there year after year with business coming by and investors expecting things of you and not do that. But we will never knowingly do that. We may get influenced subconsciously in some way to do that, but we will not do that, any more than we will accept stock market norms as being the proper way for us to invest money in equities. Basically, when you lay out money or accept insurance risks, you really have to think for yourself. Nobody—you cannot let the market think for you.

Yeah, I think Berkshire is basically a very old-fashioned kind of place, and it tries to exert discipline to stay old-fashioned. And I don't mean old-fashioned stupid—I mean the eternal verities, so to speak. Basic mathematics, basic horse sense, basic fear, basic discriminations regarding human nature—all very old-fashioned. And if you just do that with a certain amount of discipline, I think it's likely to work out quite well.

David Goddesmen from New York. It's no wonder that this meeting draws stockholders from all the country. And despite the talk about age today, I'm happy to say this meeting gets better every year. Berkshire stands unique in American business as a company whose name has become synonymous with management excellence. Unlike many American corporations, we as stockholders don't have to worry about reorganizations, large write-offs, massive restructurings, overstated earnings, and overpaid executives with strategic visions. Instead, year in and year out, we enjoy the benefits of the common sense and brilliance of Charlie and Warren.

I want to add to that—to say nothing of your good humor. It's easy to take such consistently outstanding results for granted, but we in this room are the direct beneficiaries of their efforts. By our presence here today, we show our appreciation to them for their exceptional performance, but we can also demonstrate it another way. I would like to suggest we give them a rousing hand of applause for a job well done.

Thank you. That was Sandy Goddesman—we've worked together for 30-odd years, and he's finally got that out. I appreciate that, Sandy. With that, we will adjourn, and anyone who wants to stay around, we'll reconvene in 15 minutes, and then we'll be here till about 1:15. And for the rest of you, there's buses, candy, and World Books out there. Thank you.

Do you feel basically the same about your investment in Guinness now as when you made the investment in terms of the company?

Well, I wouldn't like to comment on anything that we own in terms of how we rank it for desirability or anything. We made decisions at a given time at a given price, which you can figure out by looking at our purchases, but we may be buying or selling any of those securities right as we talk, and we simply don't think it's in the interest of Berkshire shareholders as a group to be talking about things that we could be buying or selling.

David Winters from Mountain Lakes, New Jersey. Just worried World Book had a tough time lately, and I'm wondering if there's things you're doing to try to improve that. And also the Buffalo News has been fabulous, and I'm kind of wondering what's driving the Buffalo News.

Buffalo News—they're doing fabulously, doing well, right. Well, I would say you got to give credit to Stan—let's see, I'm not sure where Stan is right now—who's been running the news. World Book in terms of unit sales, as we put in the report, have fallen off significantly the last few years. It's actually surprising in a sense how well the profits have held up, because they've done a good job, a very good job in that respect. And as we put in the report, we don't know the answer precisely. We are—Ralph Shea has taken some actions, is taking some actions, that he thinks will improve the operations. Ralph's record as a manager is absolutely at the top of the list. I mean, I wrote about it in the 1992 report, in 1993 Ralph did even better. I mean, it was fabulous. I think it's probably been 110 or so million pre-tax on 97 million of average equity capital or something. So it's a fabulous record. But Encyclopedia Britannica, as you probably know, ran a loss last year. The encyclopedia business has been—or could be—due to electronic competition, could be due to recruiting problems for salespeople—obviously it can be a combination of many factors. If we knew the answer, you wouldn't be seeing those figures right now. But it is a top item of attention for Ralph. He takes anything that's not performing as well as before very seriously, and we will see what happens. But I don't have a prediction on it—I wish I knew the answer. I don't see any variables to do in any intelligent way tell you. We put in the report the best we could do on that, the profitability, and then as I say, it's been pretty good, but obviously current trends of new sales will catch up with us at some point unless we boost unit sales. I don't think our market share, if you look at print encyclopedias, has fallen, but I can't be sure of that. But I think that's probably true, but there are an awful lot of encyclopedias going out there as part of a bundle of product with computer sales.

Sydney again, from Palo Alto. By Omaha standards, you are a relatively young man, and every year you point out that Berkshire's size now precludes you from making the great relatively small trades which made you build your reputation. How much thought have you given to breaking up Berkshire into smaller entities, which will allow you to make those nice small wonderful trades that you made from the beginning?

It wouldn't do any good to break into smaller entities, because we'd still own—you know, we'd still have ten billion plus of capital to be responsible for wherever it would be. So we could distribute it out to the shareholders and let them make their own decisions, and anytime we thought that we weren't going to get more than a dollar of value per dollar retained, obviously that would be the course to follow. But there's no magic to creating multiple little—I mean, we could call Berkshire 2, Berkshire 3, Berkshire 4—but you still got the problem: there's ten billion dollars to invest, and it doesn't really solve anything.

No. Berkshire is incredibly decentralized in terms of power and decisions resting in the operating divisions. In terms of the marketable securities, it's incredibly centralized. And so far we have not had any big penalty from not being able to do the things that we did when we were young. Eventually we will reach that penalty.

Yeah, I think there's no question we could earn a higher percentage return working with $100,000 than $10 billion, but it hasn't hurt us as much as we thought it would as size has increased. But your universe opportunity shrinks, but it shrinks no matter—you can set it up in 20 bank accounts or one bank account, but the universe still has to fit the ten billion in aggregate.

Michael, New York City. Two questions. One: last year you discussed in your annual report your investment in General Dynamics, and you also gave your proxy to the company and its management. This year it appears you have sold the stock. What has changed that you sold 20% of your stake?

This is question number one, and I have number two—probably inappropriate to be talking about what we're buying or selling, except to the extent that we have to make a public announcement, which on something like General Dynamics, we've got 13G requirements if we change by more than 5%, and we also have as long as we own more than 10%, we have monthly reporting requirements under Form 4. We think the management of General Dynamics has done an absolutely sensational job. Obviously, also, it isn't the kind of business basically that we have a 20-year view on or something of the sort. So the shareholders of General Dynamics have been extraordinarily well served by the management of that company, and we were thankful because we prospered accordingly.

Should I take from your comment that you have changed your view about the business itself?

No, I think you can take my comments as just what I've said. Okay, question number two—we want to get people a chance around the room, and then when you're in the zone you're in, when a second question comes along, that will be fine, but we want to get as many people in this hour as we can.

It appeared to me that in 1993 the variation between the stock price for the high and the low was much greater than years in the past. Would you mind commenting on that?

Well, there was more volatility in the price of Berkshire last year, and as I put in the annual report, the stock overperformed the business last year. Now, over any 10 or 20 or 30 year history, every year the stock is going to perform a little differently relative to the business. I mean, it may slightly underperform or slightly overperform. We would prefer that those variations be as small as possible, but there was more variability last year than historically has been the case, although we've had one or two other—we had a few years like them. Our best way to handle that is to give all the information we can to shareholders and prospective shareholders, and follow policies that we think will induce the investment-oriented with long time horizons to join us and not to encourage other people. But occasionally, we can't guarantee that result. One of the things that was interesting to me—I don't know, it was three months ago or when—but I happened to be talking to the specialist, terrific specialist Jimmy McGuire. He had to leave, but he was here earlier in the session. And I think at the time the stock was around 16,000 or something like that, and he had some rather significant stop-loss orders on the books at 15,500 or thereabouts, involving some hundreds of shares. And that to me is a signal that we have some people that are, in my view, not really the kind of owners that we would like to attract, because why somebody wants to put in an order to sell something for 15,500 that they don't want to sell at 16,000 is beyond me. The idea of people using stop-loss orders with Berkshire obviously tells me that we've got some people that are using it as a trading vehicle of some sort, or have some totally non-investment type calculations in their mind. I don't think we have very many of them, but obviously if we have enough people like that, you will have a more volatile stock than if you have a whole bunch of people who look at it as something that they're going to hold for the rest of their life. And the stock did go down at that time and hit 15,500—that I think was close to 300 shares, which is four and a half million dollars worth of stock. And somebody made a decision, apparently—a small number of people made a decision—that they wanted to sell something at 15,500 that they could have sold for 16,000. The lower it went, the better they liked it, apparently—the better they liked the sale. It's always struck me as like having a house that you like and you're living in, and you know it's worth $100,000, and you tell your broker: 'If anybody ever comes along and offers it, I want to sell it.' It doesn't make any sense. But there's been some small, relatively small tendency for people to get—relatively few people—but to get more interested in the price of the stock in terms of thinking of it in terms of what it's going to go up or down in the next six months than might formerly have been the case. I think we're unusually well blessed in that respect, in that we've got people who basically want to own it for a very long time. But to the extent that you get people who are owning it because they think the stock market's going to go up or something of that sort, that is not good news from our standpoint, and it will increase the volatility in it. We will do nothing to encourage that.

Yes, Mr. Buffett. Steve Lang from Toronto. I was just curious about when you were saying that one of the best things that could happen to shareholders is to see the market go down and you're able to buy good businesses at foolish prices. And then a little later on you were saying that we could judge your ability to do what you feel you should be doing by how much cash you have in the account at any given point in time. And by the amount of cash that you have in the account—in other words, I guess what you feel you're supposed to be doing is investing the cash in good businesses. So I'm just wondering about that kind of dichotomy: where does the cash come from when the market does go down? If you've been successful in your first ability, would that be from the cash flow on the operations of the business? Is that it? So really the success of the company then is to some degree the fact that you're able to dollar cost average into the market on an ongoing basis. Is that right?

Well, it is that precise, but a way we generate cash in a considerable amount. So we will not husband cash simply because we think the market is going to go down or to buy something. But obviously, as cash comes in, we're always looking for things to do, and the cheaper the market is generally, the more likely it is that we will find something that we understand, that we like, and that the price will be attractive, and that we will do. But it isn't like we can change around the whole portfolio then, because that doesn't gain us anything—I mean, we'd be selling things at lower prices to buy things at lower prices. But to the extent that we have net cash coming in—which we do and which we will have unbalanced—we are adding to our businesses at more attractive prices than would be the other case. And it's no prediction on any given company—I mean, whether it's Gillette or Coke—it might be something we already own, it might be something we don't own, but we welcome the chance to buy more shares. We're not wishing it on anybody, but if you asked us next month whether Berkshire would be better off if the whole stock market were down 50% or where it is now, we would be better off if it was down 50%, whether we had any cash on hand now or not, because we would be generating cash to buy things.

Byron R. Ensteel from Raleigh, North Carolina. Thanks for your hospitality this weekend—but we thank you for coming. My question concerns Solomon Inc. and more specifically Salomon Brothers. I know that you owned the board of directors, I think from '87 to the current time, very much interested in compensation—maybe on the compensation committee—between 1987 and 1992. Solomon's financial results were quite dismal, in a very lumpy way but overall quite dismal. In your opinion, if the compensation had been rational during this time, would Solomon have shown results that would make it quite a decent business? In your opinion, if the past compensation had been wrong, irrational decisions had been more rational, '87 to the current time, would Solomon have done better?

Yes. Well, I wouldn't—I would say that if the present people and the present compensation philosophy, which allows for very large payments for very large results—I think the company would have done better. Now, you're going to see very big numbers paid on Wall Street—that is the nature of it—but the trick is to pay them only when you're getting very big results for the owners. I mean, there's no way you're going to pay numbers that look like numbers in other industries and get great results for owners. But if you pay these big numbers, I think you should be getting very good results for owners. The old system was not totally off the mark on that, but it was far from an ideal system in my view.

I have one question, please. Here you were using Coca-Cola puts as a way to increase income, and conversely, if they were exercised, as a way of increasing your position. Do you still use puts on investments? You had five million shares, as I remember, of Coke sometime early fall or thereby last year, and the puts—I think the premium was around $7.5 million and they were priced around $35.

We have not done that very often, and we're unlikely to do very much of it. For one thing, there are position limits on puts which don't apply to us, but they apply to the brokers which we do them through, and those position limits were not clear before. But we could probably write puts on that same amount by doing it through a bunch of different brokers. It's not something we're really very likely to do. I was happy to do it, and in that particular case we made $7.5 million. But we're probably better off—if we like something well enough to write a put on it, we're probably better off buying the security itself. And particularly since we can't do it in the kind of quantities that really would make it meaningful to Berkshire. There are securities I would not mind writing puts for 10 million shares or something, but it's probably not allowable for us to do it—we'd probably have to do it through multiple brokers to get the job done. And in balance, I don't think it's as useful a way to spend my time as just looking for securities to buy outright.

Do you know?

Mr. Buffett, I'm from West Point. My name is Rogers. A couple of months ago there were stories in the World Herald that Berkshire Hathaway had taken a large position in Philip Morris and UST, but in your annual report I don't see anything about that. Can you comment?

I would say in the last two years, maybe—I'm just approximating—we've probably seen reports in either the Wall Street Journal, USA Today, maybe picked up by the Associated Press, or in the Herald, but in papers of some significance—probably seen stories that we were buying maybe any one of ten companies. In aggregate over that period of time, I would say a significant majority were erroneous. We don't correct the erroneous ones, because if we correct the erroneous ones and don't say anything about the correct ones, in effect we're identifying the correct ones too. So we will never comment on those stories, no matter how ridiculous they are. And it's interesting because they keep getting printed, and frankly from our standpoint, the fact that most of them are inaccurate is probably useful to us. We don't do anything to encourage it, but the fact that people are reading that we are buying ABC or XYZ when we aren't—I don't think people should be buying stocks because they're reading in the paper that we're buying something. But if they do, they may get cured of it at some point—maybe the newspapers will even get cured of writing the stories when they don't know what the facts are. But it's something we live with, and we'll probably continue to live with. And I would say that based on history, if you read something about us buying or selling something, other than through reports we've filed with the SEC or regulatory bodies, the chances are—well over 50%, I can tell you based on history—that it's wrong.

Do you expect that Berkshire would become one of the Standard & Poor's 500 stocks or Dow Jones stock?

Well, I think it's not likely it ever becomes a Dow Jones stock. I don't know what the criteria are for the S&P 500, but I imagine there's some reason why we don't fit. I don't know whether they have questions about number of shares outstanding or—I've never checked with S&P. I wouldn't be surprised if we have the largest market capitalization of any company that isn't in the S&P, although I don't know that. But they may have some criteria that exclude Berkshire being part of it. I've always thought it would be very interesting for those of you who like to think about such things, that if we were part of the S&P 500 and enough people became indexed so that 60% of the market was indexed, and if Charlie and I wouldn't sell—which we wouldn't—it'd be an interesting proposition as to how the index funds would ever get there. If 60% of them tried to replicate the S&P, it'd be—I don't know whether they have rules even about concentration of ownership. That same line of thinking might have applied to Walmart or some company, because just take the extreme example of a company that had 90% of its stock owned by one individual and 12% of the money in the market were indexed, and the 90% wouldn't sell—it would bring back the Northern Pacific corner or something of the sort. In any event, I don't think that's going to be a problem, and I don't think we are going to end up being in either index.

Mr. Buffett, my name is Aaron Morris, I'm from California. What I wanted to know was how you think about how large a position you're willing to take in a given security, both in your case where you view cash coming in that you can invest, and in a case of an investor where they have a fixed amount of capital and they're trying to decide what's the maximum position in a security that they really love.

Well, Charlie and I have probably—at our present size, we will never find anything that we get as much money into as we want. That's probably true, surely, if we really like it. So we will probably never hit the limit. We would love to find something we felt that strongly about, and occasionally we do, but we won't get as much money into it as we would wish, or as if we were running a million dollars of our own money or some number like that. So we are willing to put a lot of money into a single security. When I ran the partnership, the limit I got to was about 40% in a single stock. I think, Charlie, when you ran your partnership, you had more than 40%? And we would do the same thing if we were running smaller partnerships or our own capital were smaller and we were running that ourselves. Because now we're not going to do that unless we think we understand the business very well and we think that the nature of the business, what we're paying for it, the people running it and all of that lead up to virtually no risk. But you find those things occasionally, and we would put—assuming it were that much more attractive than the second, third, and fourth choices—we would put a big percentage of our net worth in it. We would only advise you to do that—well, probably don't advise you to do it at all, maybe—but we would only advise you to do it if you're doing it based on your own conclusions about your own ideas of value, and something that you really feel you know enough to buy the whole business if your funds were sufficient and it was being offered to you. But people do that all the time, incidentally, in private businesses, which have got terrible prospects—I mean, people buy dry cleaning establishments or filling stations or whatever, franchises of some kind—they put a very high percentage of their net worth into something, a business, is very risky basically. I mean, people put all their money in a farm—it's a business—it's subject to all kinds of business risks. So it's not crazy if you understand the business well and if the price is sufficiently attractive to put a very significant percentage of your net worth in it. And if you don't understand businesses, then you're better off diversifying, and fairly widely diversifying. Berkshire has a substantial shareholder whose father accumulated the original position, and when he died he left a very large estate, correctly, all of which was in two securities—Berkshire and one other outstanding company—and a bank was co-trustee. And the bank trust officer said: 'You've got to diversify this.' And it was a very large estate. And the young man who was co-trustee with the bank said: 'Well, look, my father had believed the way you do—he might have been a trust officer at the bank instead of leaving this large estate.' And that young man holds the position to this day. And I suppose the bank is still giving the same advice.

Mr. Buffett, this is Chuck Peterson from Omaha, and I was just wondering if you could comment on the Coca-Cola company. Haven't really talked about it too much today. In regards to what you foresee over the next five years, earnings per share growth, and where this growth is perhaps going to come from.

Yeah, you really have to come to your own conclusion. Coca-Cola company writes their reports are extremely good—I mean, they're very informative. My guess is that at least if you read a few of the reports, you absolutely know as much about the Coca-Cola company as I would. But in the end, you have to make your own decisions about growth potential, profitability potential, and all that. But the one thing I can assure you is that probably, if you spend a relatively small amount of time on it, the facts that you will have available to you for making a decision on that question will be just as good essentially as the facts you'd get if you worked at the Coca-Cola company for 20 years, or if you were a food and beverage analyst on Wall Street or anything of that sort. That's the kind of businesses we like to look at—things that we think we can understand that way, and there are also businesses that usually I think you could understand that way. But we don't like to give you our answers—I mean, that would not be a good idea.

David Swab from Austin, Texas. I have a question pertaining to the convertible bonds that were outstanding for about four years. Any thoughts on, if you're a teacher, to grade if that was a good deal, that deal—how money was applied compared to the cost of getting out of the bonds? Any thoughts? We also know if you think in retrospect your deal with the Lions was a good deal for Berkshire.

No, I would say that if I knew everything at the time that we did the Lions deal—which was a convertible coupon debenture—if I knew everything now that I know now, would we have done it? Probably pretty close. We had relatively few bonds converted when we called them, and so it really wasn't a negative in that sense. But if we'd had more common, we could have easily had a lot more converted, and that would not have been so good. Obviously, if we ended up selling a lot of stock at $11,800 or whatever it was—it's very hard to measure exactly what we did with the $400 million or so that we took in at the time, so money being fungible, separating that 400 million from other resources to measure what happened on the plus side from having the money is hard to do. But my guess is, if you could play the whole hand over again, it probably was maybe a tiny plus to have issued them. What do you think, Charlie?

It's certainly close to a wash. Now, you can ask about Aaron—that is one we would have been welded up, and I might say Charlie had nothing to do with that decision. He didn't even know about it till I did it, and when he knew about it...

With respect to Berkshire's large non-permanent holdings that are therefore liquid, I'm just wondering what your strategy is for managing market impact when you do decide to sell portions of those holdings, given the intense scrutiny you're under.

Question about the things we might sell and what's going to happen to the market when we sell them—that depends. It can be a very significant impact, it can be a negligible impact, and it depends on market conditions. It depends on whether we might sell in a couple of large blocks to some institutions. It could be a tender offer or something that sort we would sell through. So it's hard to measure, but it is a disadvantage. Size is a disadvantage, you're absolutely correct in the basic point, both in buying and in selling, and we don't know any way around that. So we allow for it in terms of what we expect, the kind of possibilities we need to say, and we sell so infrequently that it's not a crusher of a negative point, but it's a negative we have that you do not.

Do any of its subsidiaries have key-man insurance on you, and does Berkshire have key-man insurance on you?

No, no, we have no life insurance to my knowledge on anyone except maybe standard group life contracts that people have. No key-man insurance. It really wouldn't be material. I mean, if we have a market value of $18 billion or something like that, and it really didn't—if it made a 1% difference at $180 million—and basically the math of intelligently selling insurance is better than the math of intelligently buying insurance.

Mr. Buffett, I'm Barry Siskin from Mesa, Arizona, a longtime admirer of yours. Question pertains to Guinness. I remember reading in a publication I greatly respect, Outstanding Investor Digest by Henry Emerson in New York, that back in—I think it was '58 or '59—you made an investment in Cuba, decided never to make an investment outside the United States again. At that time, you have subsequently invested in Guinness. I'm a fellow investor in Guinness and its sister company Louis Vuitton Moët Hennessy for over five years, and I'm very happy with those investments. By the way, there's been a restructuring, as you know, of the Guinness-LVMH relationship, where Guinness no longer owns 24% of LVMH—rather it owns only its distilling, or I should say alcoholic beverage-related, interests—the Moët and Hennessy part. The other parts of LVMH are showing better results these days, namely the Louis Vuitton luggage as well as the Christian Dior perfume. They've also expanded into the newspaper business this past year—a business that you understand. Do you intend to look at the possibility, first of all, of participating in those businesses that you no longer own now with the restructured Guinness-LVMH deal through some other form? And the second question relates to the currency risk inherent in the Guinness investment—having bought it at about $1.80 as you mentioned, pound sterling now down to about $1.48. The cost of hedging foreign currency through the FX has diminished through the combination of lower interest rates in the UK and the higher interest rates most recently in the US to just about zero. I take it all investors in companies are not speculators in currencies. So the second part of the question is: do you intend to do anything about the currency risk portion of that investment?

Well, LVMH, which as you mentioned, was 24% owned by Guinness—that's one of thousands of securities that we could be a buyer or seller of, so I really don't want to comment on LVMH's specific attractiveness or lack thereof. Guinness—I think what they did was quite logical. Their interest in that operation was basically through the distribution advantages that it gave to Guinness's own brands around the world—to be hooked up with Moët Hennessy and vice versa. So I think what they did was logical. You can form your own opinion on the exchange rate in terms of what they got in the spirits business versus what they gave up in the luggage businesses and Christian Dior and a few things, but I think the logic was sound. But in terms of whether we want to own LVMH by itself—that's like any other security, which we really can't answer.

Second question related to hedging.

Yeah, the answer to that is: we don't. And Coca-Cola, as I mentioned, gets 80% of their earnings from a variety of currencies—the yen and the mark being two very important ones. They're going to be getting a very high percentage five years from now, ten years from now. They do certain currency transactions, but as a practical matter, if you own Coca-Cola, you own a bunch of foreign bonds with coupons on them denominated in local currencies that go on forever. Now, should you try and engage in currency swaps on all those coupons? You don't know what those coupons are yet because you don't know how much they're going to earn in Japan or Germany, but you do know it's going to go on for decades and they're going to be very significant sums. Should you try and engage in a whole bunch of currency to go out and convert all that stream into dollars? We basically don't think it's worth it. We don't think our opinion on currencies is any good. We don't think—we think the market probably knows what we know. It knows as much about it, probably knows more about currencies than we do. We do not know more than the market does about currencies. So there are costs to hedging, and even though interest rate structures may cause the curve to look flat going out forward, so that in effect there's no contango on it, there are still costs in it. Now, it's a relatively efficient market, so they're not huge, but we see no reason to incur those costs with what we regard as a totally 50/50 proposition. And it really doesn't go out that far anyway—I mean, we could do it for a couple of years, but if you take the way we look at businesses, being the discounted flow of future cash flows between now and Judgment Day, we can't really hedge that kind of a risk anyway. We could keep rolling hedges, but there's a cost to it that we don't want to incur. We wouldn't worry a whole lot about whether some portion of earnings—whether it's from Guinness, whether it's from Coke, whether it's from Gillette—are denominated some mixture of marks and pounds and yen and dollars, or whether they're all in dollars. We'd slightly prefer it were all in dollars, but we don't lose sleep over the fact that it may be coming from a mix of currencies like that. We wouldn't like it in terms of obviously some very weak currencies.

Liam, Mill Valley, California. On page 13 of the annual report, in Kenton, talking about the insurance operation, you say that it possesses an intrinsic value that exceeds its book value by a large amount—larger, in fact, than is the case at any other Berkshire business. To refine an earlier question that was asked: could you tell me whether you mean that it is larger by a percentage or by absolute dollars?

By absolute dollars. And that's what you're referring to. By absolute—it's very hard to stick a percentage figure on the insurance business because we have so much capital in there. And we have other businesses—I think we've got businesses with a book value in the tens of millions that are worth in the many hundreds of millions. So you couldn't apply that to the insurance company base. So it's absolute dollars, but in terms of absolute dollars, we think the excess of intrinsic value over carrying value—at least I do—is substantially greater for the insurance business than any other business we own.

No, that's exactly right.

Joe, Little, Vancouver, Canada. Does the management succession issue for the top job at Coca-Cola concern you at all? The management succession issue over the next several years.

Oh yeah, Joe—I think any announcement that would come from Coca-Cola, he said—do you like it? Does it concern you? Oh, I'm not concerned at all, no. Now, Coca-Cola is very well managed.

Chris Stavrou from New York. According to the latest Solomon Brothers proxy, if Deryck earns 30% on allocated equity of Salomon Brothers, provided that that's at least 10% above the return for competitors, he could earn a bonus of $24 million. My question is whether that return number is reduced by a charge for preferred dividends. I remember in the confirmation—I can't remember the detail.

Well, I think the equity—I'm fairly sure, but I'm not positive—that the equity figure would include our preferred but not non-convertible preferred, and it would apply to the earnings applicable to our preferred plus common, but it would be after dividends on non-convertible preferred. But I'm not on the comp committee and I have not read the description that carefully.

Well, I am, and I can't remember.

Well, I will tell you one thing I do remember about that, and that is a target which would be one would be hellishly hard to hit. I mean, that is—you're talking about Babe Ruth's squirt doing 150 home runs in a season instead of both. If that happens, you'll be very glad to pay the money—either under either calculation. But I'm glad it's there. I hope Deryck's paying attention to it.

Chris Davis, again, from New York. I wanted to ask if you feel there's such a huge discrepancy between the valuation of some of your holdings versus others in terms of the market valuation, in terms of price-to-earnings, price-to-book. In your opinion, do the growth prospects of Salomon Brothers, or the quality, or your anticipation of your ability to clip the coupons at Salomon Brothers, justify such a dramatic discount to the growth prospects of Coca-Cola or Gillette in terms of our ability as Berkshire shareholders to clip those coupons? And if you could explain or perhaps share your thoughts on why the market perception, if it is, justifies that distinction.

Yeah, I'm not sure I can answer that question without getting into a discussion of the relative merits of the two companies or the three companies you mentioned at these prices. But Salomon and Coca-Cola are obviously very different kinds of businesses, or Salomon and Gillette. And Charlie and I do our best to try to understand the businesses. Obviously it's easier to understand the future of a Coca-Cola than it is Salomon, but that doesn't mean it's a better buy. And what you see at any given time in our holdings is partly the historical accident even of when we bought and when we had money available and all that, but it reflected an affirmative decision at that point obviously. And our guess would be that we would feel reasonably good about anything that we owned in terms of the price at which we bought it and the facts at the time we bought it. And the facts change over time. Salomon, I think, is a better company now than it was some years back, but it's still in a business that can be very volatile and it has a small amount—as does any investment banking firm and as any commercial banking firm—of systemic risk coming, you can't get rid of that.

I've got nothing to add.

Sean Barie, Regina, Canada. Mr. Buffett, you've indicated that most of us in this room could acquire a lot of the information that you and Charlie acquire through the annual reports. Yet you both also indicated that the GAAP rules a lot of times leave a little to be desired. Could you perhaps give an indication as to how you and Charlie come up with the economic value or the intrinsic value of the businesses that you finally decide to invest in, and a little bit about the process that you go through?

Well, like you noted in the 1992 annual report, we discussed that a fair amount. But the economic value of any asset essentially is the present value, at the appropriate interest rate, of all the future streams of cash going in or out of the business. And there are all kinds of businesses that Charlie and I don't think we have the faintest idea what that future stream will look like. And if we don't have the faintest idea what the future stream is going to look like, we don't have the faintest idea what it's worth now. So if you think you know what the price of a stock should be today, but you don't think you have any idea what the stream of cash will be over the next 20 years, you've got cognitive dissonance, I guess is what they call it. So we are looking for things where we feel a fairly high degree of probability that we can come within a range of looking at those numbers out over a period of time, and then we discount them back. And we are more concerned with the certainty of those numbers than we are with getting the one that looks absolutely the cheapest, but based upon numbers that we don't have great confidence in. And that's basically what economic value is all about. The numbers in any accounting report mean nothing per se as the economic value—they are guidelines to tell you something about how to get at economic value. But they don't tell you anything—there are no answers in the financial statements. There are guidelines to enable you to figure out the answer, and to figure out that answer you have to understand something about business. You don't have to understand a lot about mathematics, and the math isn't complicated, but you do have to understand something about the business. But that's the same thing you would do if you're going to buy an apartment house or a farm or any other small business you might be interested in. You would try to figure out what you're laying out currently and what you're likely to get back over time, and how certain you felt about getting it, and how it compared to other alternatives. That's all we do. We just do it with large businesses basically. The accounting figures are very helpful to us in the sense that they generally guide us to what we should be thinking about. And of course, if we find numbers where it looks like people are taking the most optimistic interpretation of things that they can under GAAP and all of that, we get very worried about people who look like they massage the numbers in any way, and there are plenty of people that do.

Howard Baskin from Kansas City. When you are estimating a growth rate on a company—I'm at a very predictable company—I imagine you apply a big margin of safety to it. What kind of rate do you generally apply? I mean, high single digits in the margin of safety—what kind of growth rate would you, on a predictable company, might you use?

We are willing to make things that aren't going to grow at all, okay, assuming we get enough for our money. So we are not—we're looking at the ejected numbers out as to what kind of cash we think we'll get back over time. But you know, would you rather have a savings—if you're going to put a million dollars in a savings account—would you rather have something that paid you 10% a year and never changed, or would you rather have something that paid you 2% a year and increased at 10% a year? You can work out the math to answer those questions. But you can certainly have a situation where there's absolutely no growth in the business and it's a much better investment than some company that's going to grow at very substantial rates, particularly if they're going to need capital in order to grow. There's a huge difference in a business that grows and requires a lot of capital to do so, and a business that grows and doesn't require capital. And I would say that generally financial analysts do not give adequate weight to the difference in those. In fact, it's amazing how little attention is paid to that. Believe me, if you're investing, you should pay a lot of attention to it.

Hey, I agree with that. But it's fairly simple—but it's not so simple it can all be explained in one sentence. Some of our best businesses that we own outright don't grow, but they throw off lots of money which we can use to buy something else, and therefore our capital is growing without physical growth being in the business. And we are much better off being in that kind of a situation than being in some business that itself is growing but it takes up all the money in order to grow and doesn't produce that high returns as we go along. A lot of managements don't understand that very well, actually.

Sam Friedman from New York. You said that you decentralize the operating decisions but centralize the capital allocation decisions. What kind of staff do you have in Omaha to help you with the capital allocation decisions and the stock selection decisions you make? Or do you and Charlie do that pretty much by yourselves?

Yeah, we don't have any staff to help us on it. I mean, basically we tell them to mail all the money to Omaha, and then when we get there, we put our arms around it and we allocate all the capital ourselves. I mean, that is our job, and we don't feel we should delegate. I mean, we wouldn't do it anyway—our personalities are such that we wouldn't delegate allocating our own money to somebody else. But we feel that's our job. And it's interesting—I've written about this in the past—that's an important job for most managements. There are some companies where it's not, but it usually is a very important job for most managements. And if you take a CEO that's in a job for 10 years and he has a business that earns, say, 12% on equity and he pays out a third—that means he's got 8% per year of equity—when you think of this tenure in office, how much capital is allocated—it's an enormous factor over time. And yet probably relatively few chief executives are either trained for or are selected on the basis of their ability to allocate capital. I mean, they get there through other routes. So I've said it's like somebody playing the piano all their life and then getting to Carnegie Hall and they hand them a violin. I mean, it is a different function than the functions that exist along the routes to the CEO's job in most companies. And so many CEOs, when they get there, think they can solve it by either having a staff that does it or by hiring consultants or whatever it may be. And in our view, that's a terrible mistake, because it is if not the key function of the CEO, it's one of two or three key functions at, say, 80 or 90% of all companies. And if you can't do it yourself, you're going to make a lot of mistakes. You may make a lot of mistakes even if you do it yourself, but you wouldn't want anybody in any other position of that importance in the company essentially saying: 'I don't know how to do this, so I'm going to have somebody else do it,' when it's their key responsibility. But that's the way it works in business. And Charlie and I take responsibility for all capital allocation decisions other than just sort of routine expenditures at the operating businesses, and we don't get into those at all. I mean, if our managers are spending three or four million dollars a year on machinery—I mean, on machinery, equipment, plants, new leases—we have no review process on that. We don't have a staff at headquarters, we don't waste the time to do that. We think those people know how to allocate the money that relates to the actual operations of their business, but in terms of the capital that is generated above that—that's our job.

Yeah, I would say we have practically nobody at headquarters in Omaha. One of the reasons Warren shines up so well is, you know, he's being compared to practically nobody. I might say—one interesting thing when we're having this meeting, for example—I think there's one person there in the office. I mean, the rest of her brother are down here helping on the meeting. I'm here—here we are—Lauren and I are selling candy and encyclopedias and so forth. The chief financial officer of Berkshire Hathaway is handling the microphones. I mean, this makes Southwest Airlines look like they don't understand cost accounting. It's a very old-fashioned place. And by the way, speaking of hawking our merchandise—if any of you have safety deposit boxes full of Berkshire Hathaway certificates and have children or grandchildren who don't have World Book and Printed in the House, you are making a very serious error. That is a marvelous thing to have in the household, and the discount only applies today. I think that's right. It may not be selling too well because of the current vogue for encyclopedias on computers, and by the way, those encyclopedias that are available are inferior compared to a World Book, which is very user-friendly for children. And I like it that way myself. And that is one product you really ought to buy. We both use it personally. I mean, I keep a set at the office and a set at home. And I give away more of that product than any other product that Berkshire Hathaway makes in any subsidiary. It's a perfectly fabulous human achievement—the editing, to make that user-friendly with that much wisdom encapsulated. It's a fabulous thing.

Patrick, from Houston, Texas. From time to time you have quoted John Maynard Keynes, the British economist. So I would assume that you have read investment writing very extensively. What are two or three investment writings, in your opinion, one can learn from that economics?

Well, I forget which—I think it's chapter eight of the General Theory. Remember, General Theory—that's a chunk. There's one chapter in the General Theory that relates to the markets and the psychology of markets and the behavior of market participants and so on. There probably is—aside from Ben Graham's two chapters, eight and 20, in The Intelligent Investor, I think you'll find we've got as much wisdom from reading that as anything written in investments. And you'll know it when you see it in the General Theory—it's a chapter that jumps out to you about the securities and so on. I could be chapter eight, but I may be wrong on that. But I would recommend reading that. Keynes and Graham, from vastly different starting points, came to the same conclusion at about the same time in the '30s as to the soundest way to invest over time. They differed some on their ideas on diversification—Keynes believed in diversifying far less than did Graham. But Keynes started off with the wrong theory, I would say, in the '20s, and essentially tried to predict business cycles and markets, and then shifted to fundamental analysis of businesses in the '30s and did extremely well, and about the same time Graham was writing his first material. I think Janet Lowe in her book on Ben Graham actually has a little correspondence that took place between them. So I would advise you to read, agree with that, and there's some letters of his—Keynes's—that he wrote to co-trustees of life insurance societies and colleges and so on that I think you'd find interesting too.

It's 1:15, and Charlie and I have to go to our directors meeting at Berkshire, which starts in about 15 minutes. So we thank you all for coming.