Berkshire Hathaway annual meeting, 2010

Opening remarks

Warren: I can see, he can hear, we work together for that reason.

What was a sputtering recovery seems to have picked up steam. We saw a pretty good
uptick in March and April, particularly in our housing-related businesses. Trends seem
stronger in the last few months. An undue focus on quarterly earnings is not just a bad
idea for investors; it's a terrible idea for managers. A study came out a few months ago,
taking out quarterly earnings one further digit. The result was a statistically impossibly
small number of four tenths showed up. Suggesting that if you get to four tenths, you find
a way to get to a place where you can round up instead of rounding down.

Charlie: I agree with you.

Warren: He's the perfect vice chairman.

Q: Goldman and the SEC lawsuit. Clearly they have lost reputation. Put this in the context
of Salomon Brothers and the "shred of reputation" comment.

A: Warren: The transaction is the important part, Abacus. There's been some misreporting
of the nature of that transaction. I would like to go through it, first. There were four losers.
Goldman was one. They didn't intend this, but they kept some of it because they couldn't
sell it, and lost about a hundred million. The main loser was ABN Amro. Why did they lose
money? They guaranteed the credit of ACA. They fronted a transaction. We do this at
Berkshire. It's a way of guaranteeing a credit. In the seventies we lost some money doing
this, with syndicates of Lloyd’s. ABN guaranteed about 900m, and got paid seventeen basis
points for this. ACA went broke. A bank made a dumb credit deal; it’s hard to be
sympathetic. ACA was a municipal bond insurer, like MBIA, Ambac. Like these other guys,
they moved from munis to insuring structured credits. Like Mae West said: "I was Snow
White, but I drifted." These guys drifted into things they didn't understand, and every one
of them got into trouble. There's nothing wrong with this business of insuring bonds, but
you've got to know what you're doing. Berkshire around this time went into insuring munis.
Here's an example of a deal we did insure (shows exhibit). We are in the business of
insuring bonds. A big investment bank asked us to insure some state bonds for the next
ten years, 160m premium. It was Lehman Brothers asking us to do this. Did they own the
bonds? Were they negative on the bond market? Did they have a customer who owned
them? Did the customers want to short the bonds? We don't care. Ben Bernanke could
have been on the other side of the trade, it doesn't matter. ACA negotiated a bit with
Paulson on which bonds were included in the deal. If we want to insure bonds, we have to
be prepared to deal with the result. The central argument seems to be that Paulson knew
more about the bonds than the insurer, but that doesn't make any difference.

Charlie: My attitude is simple, it was a 3-2 decision. I would have voted with the minority.

Warren: Ironically, it has probably helped our investment in Goldman. Goldman has a call
at 110% of par on the preferred stock; it would be $5.5 billion if they called it today. If we
got that money today, we'd have to put into some short term securities, which would pay us
much less than the preferred stock. Every day they don't call our preferred is money in the
bank, it's fifteen dollars a second. So it's like, as we're sitting here, it's 'tick-tick-tick-tick.'
I don't want those ticks to go away. Goldman would love to get rid of it. The Feds have
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Liberty Square Asset Management
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effectively been telling Goldman that they can't call the preferred until all the TARP stuff is
done. Recent developments (the SEC investigation), have had the effect of delaying the call
of the preferred. It's $500m a year instead of the $20m a year we could get in short term
bonds.

On reputation, the press coverage hurts the company, it hurts morale. But this is not the
first time we've seen this. They had a Penn Central connection, they had a connection to
Boesky. But allegations don't fall in the category of a loss of reputation. If something is
proven, that will be a different story, then we will reassess.

Charlie: I agree with all of that. But every firm ought to decline more business. The
standard should not be what's legal; it should be higher than that.

Warren: Charlie, do you think we should have done our (Lehman Brothers) deal?

Charlie: I think it was a closer case than you do.

Warren: Insurance is about when the prices are right and the premiums are wrong. You
have to turn down business, go play golf. We've bought more businesses through Goldman
than anybody else. They have helped build Berkshire. We don't use them as investment
advisors. We do trade with them. They don't owe us a divulgence of their position. That's
not a fiduciary position, when you are brokering a transaction. In 1967, our very first bond
issue, we were having trouble raising the money to buy a department store. The deal was
$5.5 million. I called (Goldman chief) Gus Levy and Al Gordon at Kidder Peabody. They
both said "we'll take a big piece." But they asked us to leave their names off the
tombstone; they didn't want their name to be associated with us! I feel a deep sense of
loyalty to Goldman.

Q: Thoughts on financial reform currently under discussion in Congress?

A: Charlie: I don't think anybody, including Congress, knows what's going to happen. They
haven't even read the bill, it's 1550 pages. Our governmental system was so permissive,
and the investment banking culture was so bad, the system was going to sink itself. It has
to be changed to prevent this again. The banks hate the idea of losing flexibility, on
derivatives for example. But what's good for the country is to change that.

Warren: Would you vote for it?

Charlie: If I were the benevolent dictator of America, I would make Volcker look like a sissy.
Reduce the activities that are permitted. The partners of the firms don't even understand
the complexity. They've proven they can't control it. We need a new version of Glass-
Steagall. Banking should be restricted to a simpler and safer mode of business. Savings
and loans should have a restrictive repertoire. Give human beings unlimited anything, they
will go plumb crazy.

Q: What's the impact of the legislation on Berkshire, especially relating to posting collateral
on derivatives contracts?

A: Warren: As I understand the bill now, the requirements would be zero. If we were
regarded a danger to the system then we would have to post collateral. But we're 1% of
the size of some other players. We had 23,000 positions when we bought Gen Re, now we
have less than 100. If they go back and decide all past contracts need to be collateralized,
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we would feel we were due substantial money. The prices are different for collateral
contracts and uncollateralized contracts. Its like the price for a furnished house vs. an
unfurnished house, if you sell me a furnished house and then the government says you can
charge me extra for the furniture after we agreed to a price, well ... Just a week ago we
were offered a put contract. $7.5m vs. $11m was the difference in price between the
collateralized and uncollateralized contracts. Geithner has testified about the need for the
sanctity of existing contracts. So right now I don't see any consequences. There would be
an opportunity cost, but then we would see what qualified as collateral. For example maybe
our Coke stock, which we're never going to sell, could be used as collateral, in which case
that might result in a competitive advantage for Berkshire.

Charlie: It would be of dubious constitutionality, unfair and stupid. I don't think they are
that crazy.

Warren: The net effect of forcing firms to post collateral ex post facto would be to pull a lot
of money from real uses in the economy and send it to Wall Street. That's not what they
want.

Q: Greece, the Euro, fiscal discipline, sovereign risk. How do we prepare? How is Berkshire
prepared?

A: Warren: Charlie and I haven't talked about it recently. We have a lot of exposure to the
Euro, on both the asset and liability side. If the Euro depreciates, we benefit in certain
places and lose in other places. I can't tell you what our net balance is on any given day
and I am not concerned about it. Charlie will explain to you why.

Charlie: We're agnostic about the relative values of currencies. Greece is an interesting
problem. The past conservatism of the US gives it wonderful credit. We used that credit to
rebuild nations like Germany and Japan which were the best foreign policy decisions this
country has ever made, we used it to win wars, to generate prosperity for decades. The
government doesn't have quite so good a credit anymore. Greece is just the start of an
interesting period. It's dangerous when governments push their credits so hard. In this
country and others, responsible voices are realizing that we're nearing trouble.

Warren: It’s important to distinguish between countries that borrow in their own currency
and countries that are not allowed to do that because other countries don't trust them. So
Japan and the USA are a different case. The Euro is really interesting, because Greece has
their own budget but can't print their own currency. You may be seeing a test case play out
here, I don't know how this movie ends. I try not to go to movies like this, though. It will
be high drama. We seldom develop a strong view on one currency vs. another. But the
events of the last few years should make you bearish on all currencies. If you really could
run deficits for a long time, believe me, the world would have been doing it forever, it’s a lot
of fun. How will we wean ourselves? It will be interesting to watch. The USA won't default,
we can print our own currency.

Charlie: The published stats are quite misleading, because the unfunded promises aren't
counted. The problems are miles bigger. You can afford those promises if you have good
growth, but without growth, we will have enormous social strains.

Q: Who should run Goldman Sachs, if not Lloyd Blankfein? The Wells notice, did they
disclose that to you? Any comment on the Galleon allegation, have you been contacted in
that investigation?
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Liberty Square Asset Management
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A: Warren: We have not been contacted about Galleon. I can't pronounce the name of the
guy who runs Galleon. We didn't get notified about the Wells notice. We got one on Gen
Re, I'm quite sure we disclosed it. I have been on the board of one company where they
received a Wells notice and they didn't publicize it, and nothing came of it. I don't really
consider it material.

Charlie: If every company reported every little thing, you'd have too much meaningless
information. We have to have a materiality standard.

Warren: On who should run Goldman, I'd go for Lloyd's twin brother if he had one. I don't
think at all about who should run Goldman other than Blankfein.

Charlie: There are plenty of CEO's I'd like to see gone, Blankfein isn't one of them.

Q: There have been improvements in technologies to reduce distracted driving. Will Geico
and/or the Gates Foundation make a bet on these technologies?

A: Warren: Auto deaths per mile driven have diminished. Cars have become safer, thanks
to technological innovations. Cell phones are clearly not among them. Everybody has an
interest in bringing down deaths, Geico works on this. The Gates Foundation, in terms of
reducing deaths in this country is mostly focused on smoking, which I think is responsible
for more deaths.

Charlie: I've got nothing to add.

Q: Do the regular gifts to the Gates Foundation and other gifts impact the stock price of
Berkshire? Do they exert downward pressure on the stock?

A: Warren: I give money to five foundations. It's about 1.5% of the outstanding every
year. Contrast that with trading on the NYSE, which is well over 100% of shares annually.
It's a free country. I've never sold a share in my life.

Charlie: I consider it a nonevent, and maybe a good event in terms of getting it into the
S&P500. You've got more important things to worry about.

Warren: If no stock had been given away, the stock might be lower, there might be more of
an overhang. It's hard to know the impact of these things.

Q: The US economy's strength and resulting thoughts about investing globally?

A: Charlie: We haven't made our way in life by having broad global allocations. We prefer
some countries to others, the more responsible countries seem, the more we like them.

Warren: We didn't buy Burlington with the idea of moving it to China. We love that it's in
the US. Barring a massive nuclear, biological attack, the US will be OK. We've had
incredible progress in the status in mankind in the last two centuries. This country has a
system that unleashes potential. This crowd is not smarter and doesn't work harder than
200 years ago, but boy we live better. We're not even close to realizing our human
potential. China and India doing well may mean we do better. I would be perfectly content
if Berkshire were forced in some way to limit itself to the USA. I'd rather have the world to
choose from, but do not run from the USA.
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Liberty Square Asset Management
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Q: How did the four CIO candidates do? Has there been any change in the list?

A: Warren: In 2008 they didn't distinguish themselves, but in 2009 they did pretty darn
well. None of them used leverage.

Charlie: One guy did 200% with no leverage.

Warren: It's not the same four people. This is not as urgent as the CEO position. I can go
on vacation on investments. The directors could wait a few months to fill that job, the CEO
job would be filled within 24 hours if something happened to me tonight. We have some
very able people who would like very much to be managing money for Berkshire. I just had
a physical and it came out fine. The way I eat, my doctor wants to find something wrong
but he can't and it drives him nuts.

Charlie: I am optimistic the culture of Berkshire will outlast the founder.

Warren: We have the strongest culture of any large company in America.

Q: Berkshire has shifted to investing in capital intensive businesses, which is the opposite
of what you have described as 'wonderful businesses' in the past. Does this mean lower
returns?

A: Warren: That's as important a question as you can ask at Berkshire. Were putting big
money into good businesses, but you can't put his much money into better businesses. The
wonderful businesses don't soak up capital, that's why they are wonderful. Our standard
has become: can we put the money to work intelligently if not brilliantly. It just can't work
brilliantly in capital intensive businesses. This is a limitation. So why not pay it out? We
will not pay it out if we think we can make more than a dollar in earnings by keeping the
money. But we can't find a big enough Coca Cola. See's is not growing, it’s wonderful, but
if it's not growing it doesn't soak up capital at good returns. You can't get brilliant returns
from this base.

Charlie: I'm just as good at not knowing as you are.

Q: Why did your investments lean towards debt instruments during the crisis? Harley
Davidson stock is up a lot more than the returns on the debt Berkshire has generated.
.
A: Warren: Tough question, maybe I was wrong. Harley Davidson, I like a business where
your customers tattoo your name on their chest, but I don't know what the equity is worth.
But I knew Harley wasn't going out of business, and 15% is a good return. I knew enough
to lend them money, but I didn't know enough to buy their company. If I think I can make
very good money on just answering "are they going to go broke?", that's easy. To buy the
equity you have to have a view on the margins and so forth.

Charlie: Often in distress, you feel good buying the bonds, but you'd be better off buying
the stock.

Warren: You often do better in the junior securities, but the seniors help you sleep better.
Ben Graham wrote about that. We run this place to withstand anything.

Q: How do you change the culture of an organization?

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Liberty Square Asset Management
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A: Warren: It's a lot easier to build a new organization than to change an existing culture.
It would be tough to change the culture of Berkshire. It took decades to build the culture.
At Salomon, I tried to change the culture, but I wouldn't get an A-plus for that effort.
Charlie: The failure rate at trying to change a culture is likely to be 100%.

Q: Does National Indemnity have any competitive advantages other than Ajit Jain?

A: Warren: It does, they are the processes, and they were developed by Ajit. You can't
imagine a more disciplined organization, the Jesuits have nothing on our guys in terms of
discipline. Ajit would be a huge loss. But the insurance operation would still be a unique
place. As to our float, I think it has peaked every year. We've got sixty billion now. I was
ready to quit at twenty billion. It has become the premier insurance organization in the
world, but I don't see how we can increase it from here, other than an acquisition. Equitas
was a real find three years ago. If anything I have understated Ajit’s value.

Q: 1 of 6 people is Indian. Why not invest in India?

A: Warren: In insurance, there are limitations on what a non-Indian company can do. Ajit
has looked a lot. I agreed to go there next March. Iscar is doing well there. Iscar belongs
in every industrial country in the world. We do not rule it out. Posco has big plans for
India.

Charlie: The governments have a fair amount of restrictions, zoning is hard, etc. (Founder
of modern Singapore) Lee Kuan Yew favors China because India has more paralysis due to
the government. I admire the democracy.

Warren: It's not ordained. China forty years ago, you wouldn't have dreamt of what could
happen. Countries learn from each other and they adapt. You can steal a few good ideas.
Impediments to growth can be resolved. My preference would be in insurance, I
understand it and we have terrific people. Both China and India limit us and I don't want to
take my best talent and put it to work on a company that we only own 25% of. India will
do well.

Q: Thoughts on inflation?

A: Warren: I've always worried a lot about inflation and there’s been a lot. Since 1930, the
dollar’s down 90%, but we've done OK. The prospects for inflation have increased. The
actions of governments in the last few years will have consequences. The medicine will be
tough to wean ourselves from, possibly as bad as the sickness in the first place. Deficits as
a big percentage of GDP will result in diminution of the currency. If you have to bet, bet on
inflation being higher and possibly a lot higher.

Q: What can we teach children about preventing financial mayhem?

A: Warren: Conventional wisdom in leading business schools has been one source of the
problem. But mankind has gone mad throughout history. Getting good lessons about
money early in life is important. This is what Secret Millionaires Club is about. It's not
going to change the world but it could be a plus. Ben Franklin taught these habits. We're
just trying to teach ideas. Good learning at the elementary level is more important than
business schools.

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Charlie: McDonald’s is a better educator than most universities. They hire marginal people,
but they learn to show up for work on time and learn discipline and they go on to much
better jobs. A lot of people get into better lives thanks to working at McDonald’s.

Warren: I learned a lot from mentors, especially when I was younger, a manager at the
Washington paper where I worked when I was 14 years old taught me a lot about business,
simple stuff like try doing things a certain way.

Q: On taxes, you say your tax rate should be higher and yet you reduce your own tax bill
through charitable gifts. How should the system be changed?

A: Warren: You could have a wealth tax, the property tax is basically that. I have an
unused carryforward of seven billion dollars from charitable contributions. It's not bad to
dodge taxes with charitable contributions because the money goes to better use than the
government could use it for. But if we keep spending like this, we will certainly have higher
taxes. Alan Simpson and the deficit reduction committee will have to recommend both
higher taxes and lower spending and that will not be popular. You can't get there without
taxing the higher income people, you just can't generate enough income from lower income
people.

Charlie: When you die, you leave it all behind. So the ultimate tax rate is 100%.

Warren: If I gave it all to the government, we wouldn't be better off.

Q: On inflation, what are the key metrics that you look at? Catalysts for inflation taking
off?

A: Warren: You give me credit for too much brain power on this subject. There's no
metric. Inflation creates its own dynamic, once it gets going. We had a demonstration
project thirty years ago about what happens when people get fearful about money. If we
don't change our policies, we will have a rerun. But trend is not destiny. The yellow light is
flashing, that's what I was tying to convey in an editorial last year. Based on what I see
around the world, currencies are a poor bet. If inflation gets in the saddle, it's very
unpredictable how fast it can accelerate.

Charlie: The best defense is to contribute to civilization and counter inflation's effects on
your own merits.

Warren: Talent doesn't get inflated away. You can command your share of the resources
around you. Talent is the best inflation hedge.

Charlie: Trying to outsmart everybody and somehow profiting from inflation is a mug’s
game.

Q: You have said Netjets has proven to be a mistake, why did it take so long to correct?

A: Warren: We make mistakes from time to time, sometimes conditions are extraordinary.
Here the mistake was buying planes at prices that we couldn't ultimately make a margin on.
We lost a lot of money. We had to write down inventory. Some were new planes, many
were planes coming back from owners. We also let our operating costs get ahead of
recurring revenues. But hey, I stayed in the textile business for twenty years. I was like

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Rip Van Winkle. Now Netjets is making a decent profit. We just got things in line that
needed to be in line. David Sokol deserves enormous credit.

Charlie: The episode ought to be reviewed in context. We have many big businesses, it
works out well generally and in this case we lost some profit but we protected the franchise.

Warren: It does not change our management approach at all. We let managers do their
stuff. It's worked for us and we'll keep doing it.

Q: BYD is a technology company, is this an uncharacteristic investment?

A: Charlie: We wouldn't have done it five or ten years earlier, and it shows the old men are
continuing to learn. Again Dave Sokol helped, he helped convince Warren.

Q: Could you describe Berkshire’s compensation methodology, particularly for the CEO's of
the subsidiaries?

A: Warren: First, never engage a compensation consultant. Our businesses have many
different economic characteristics, so we have no standard. Insurance generates capital,
others consume it, some do neither. Some businesses are so good a chimp could run them
and some are so hard than Albert Sloan couldn't run them. What is a sensible way to
compensate somebody considering time and the economic characteristics of a business?
The managers stay with us, so they must be reasonably happy. It's not rocket science, it
doesn't take many hours of my time in a year. We have no HR department. What are
those people actually adding to the company?

Charlie: The US Army and General Electric have centralized policies and they work for them,
we have the opposite and that works for us.

Warren: We get worried when people agree with us. We pay some good money. Some
managers make in the tens of millions annually. Others, if we suffer, they suffer.
Communicate the rationale for how somebody’s compensation is set. Consultants are
nonsense. The thing I want to pay managers for is widening the moat. That's pretty
subjective. Nobody's ever left us over compensation.

Charlie: It's amazing how simple it has been and how well it has worked. Headquarters are
typically hated in the field, and we don’t want to be hated.

Q: Berkshire managers operate with minimal interference. What makes you intervene?
What about ethical violations?

A: Warren: We have a hotline. I get letters directly sometimes about ethical or legal
problems. We have an internal audit function. Anything alleged with bad behavior gets
investigated and it does happen from time to time.

Charlie: We care more about that than business mistakes.

Warren: We send a letter periodically asking each manager who we should ask to take over
if the manager died that night. We won't trade reputation for money; reputation is the only
thing we don't have enough of. If the only reason you're doing something is because the
other guy is doing it, that's not good enough. We want to protect the reputation of
Berkshire.
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Charlie: Berkshire is admired, and that is precious to us. The idea is not to just make
money, we celebrate wealth only when it has been fairly won and wisely used.

Q: Comment on regulatory allowable returns in transportation and utilities?

A: Warren: It's about ten and a half percent. If you had a major change in interest rates,
you could argue for a change. In utilities you use return on equity. In railroads, they use
return on invested capital, so that allows for different uses of capital. Railroads have more
downside than utilities if you have a big industrial recession. You want the railroads
investing more than depreciation, so you want the allowable return to be high as a
regulator. There is much-needed investment.

Charlie: The railroads have been a hugely successful system in terms of regulated business.
The whole thing has been rebuilt over the last few decades, the trains are longer, heavier,
the bridges are stronger.

Q: Reinsurance uses models, how are these different from Wall Street’s reliance on models
to assess risk?

A: Warren: Risks come from earthquakes. In Chile, we'll have losses. Our peak risks are
hurricanes and earthquakes. They are down from a few years ago, not because a lower
appetite but the rates have not been so good. If the rates are better, then we'll take more
risks. We lost $3 billion in Katrina, we lost $2 billion in 9/11.

Charlie: We are deliberately seeking a business that will result in a big loss in a single year,
because we're the only player in that market. It's a huge advantage.

Warren: Our competitors know what we do, they just don't want to do it. It comes close to
a permanent advantage. A big loss on something like Katrina, it doesn't faze us because it
actually makes our advantage greater. Everybody else wants to smooth earnings, we like
larger, lumpier earnings.

Charlie: If we have a big loss, shareholders will still love Warren. That’s not true for other
decision makers.

Warren: I had a friend who was insistent on owning 100% of everything and he said it was
because when he looked in the mirror he wanted to know all his shareholders still loved
him.

Q: Derivatives, do they serve any purpose?

A: Charlie: The usefulness of derivatives has always been overrated. We'd still have wheat
if we had no derivatives. The test is, is the net benefit vs. the disadvantage positive? If we
got rid of everything but the hedgers, the world would be a better place.

Warren: Burlington hedges diesel fuel as well as having cost-plus provisions. If I were
running the place, I wouldn't use any, you have no edge. And if you do, why not just do
that, rather than run the railroad? But I don't run that, I have a great manager who does
that. Keynes’ Chapter 12 of his General Theory, it’s the best description of markets.
Everybody should read it, although it starts a little slow. (Quotes from the chapter). Wall
Street has always had a socially important operation with a casino attached to it. Business
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schools got to the point where they were teaching more about how to value an option than
how to value a business. When the index options became available in 1982, for the general
public, that was a sea change, speculation for all. I warned against it at the time.
Academia was applauding all along the way and getting hired as consultants.

Charlie: If I remember it this was perhaps the only letter against this new world of better
gambling for all. It basically says the whole idea is insane.

Warren: The tax treatment on index derivatives is insane. It favors short term holding
periods.

Charlie: It's neither fair nor sensible. But if a small group cares deeply about something
and the rest of us are indifferent, the small group will get its way. Bismarck said don't
watch sausages or laws get made.

Q: Short sellers speaking out to criticize companies have generally been attacked in recent
years, but have also largely been vindicated. What can we do to encourage this behavior,
the communication from short sellers?

A: Warren: People have to be responsible for the statements they make. But there's
nothing wrong with people making statements, long or short. I could create a false run on
a bank by hiring 50 people to stand outside it in line. You have to be responsible. Any time
you attack the conventional wisdom, it will be unpopular. Look at the efficient markets
theory. Any institution will attack the source if they see a threat. Both sides, short and
long. There are bad practices on both the long and short side.

Charlie: You're criticizing the wrong people. The accountants get very little criticism and
that's a mistake.

Q: Comment on synergies at Berkshire. Dairy Queen wouldn't take my Amex card and
served me Pepsi.

A: Warren: There are six thousand franchises. About sixty stores are company-owned. We
don't control the franchisees. The enlightened ones serve Coke, but it’s entirely their
business. Some franchise operations have more control than some others. Dairy Queen
goes back to the thirties, before McDonald’s or anything else, and the franchise
arrangements are the sort that were written on the back of a napkin. So we have less
control than some franchisors. But keep asking for Coke. Any synergies that come about
do so at the operational level, we don't ask anybody to do business with each other, other
than asking people to do a good job.

Charlie: We like it the way it is.

Warren: It’s less work.

Q: What do I have to do to be hired by a Berkshire company? More specifically, what do I

have to do to become your successor?

A: Warren: Probably shoot me. The managers hire their own people. I make no decisions
about who gets hired at any of these companies. They are responsible for their operations.
We occasionally have a death or resignation or something, but I'm not a very good
employment agency. We have twenty one people at headquarters.
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Charlie: There's no indication we'd be any good at it either.

Warren: But when you do find somebody outstanding, boy, they stand out. In terms of
advancing, think and work like an owner and you'll find you don't have that much
competition. Before long, you'll be running something.

Q: Will you pay a dividend and buy back stock? You have stated that over any five-year
period the increase in the market value of Berkshire should meet or exceed the retained
earnings if you are succeeding in producing in excess of a dollar for each dollar of retained
earnings you keep. But this has not always held true.

A: Warren: It’s in the economic principles in the annual report. I actually rewrote that
section last year. We would have flunked the test at various points in time, so when I wrote
that in 1984, it was not well thought out. If the stock market went down over five years,
we would have looked wrong. But it is still intellectually honest.

Charlie: I like people who look at documents and make calculations and find mistakes.

Q: What America needs is hope and jobs. Can't Berkshire create more jobs?

A: Warren: We will hire people when we have something for them to do. And we're hiring
now, in Burlington and some other businesses. Carpet is down six thousand jobs from the
peak. But people will not stop buying carpet forever. We tried to make the textile mills
work, but retraining doesn't mean much to a fifty year old person who's been only doing
textiles their whole life and speaks mostly Portuguese. We have significant unemployment,
it's going to go away but not fast. In my view, society owes some minimum living standard
to people who want to work, but Berkshire is not the social safety net.

Charlie: If we hired to create hope, over time we would have reduced human hope.

Q: Car ownership in India and China are booming. Can you grow the car insurance
business overseas?

A: Warren: There's no shortage of drivers. In terms of India and China, we can only own
24% of an insurance company, so we’re not likely to work hard there if we don't own the
company. We want to expand Geico. But we do not have the same advantages in other
markets. Canada may be an exception, but there is so much opportunity in the USA, and
we don't have the advantages. We love the idea of expanding but yes, we know there are
cars in other countries.

Q: What’s the most important thing you've learned from China?

A: Warren: They prefer Sprite to Coke. Sprite outsells Coke two-to-one. The growth is
going to be dramatic in China; they are just starting to exercise their potential. For two
hundred years, relatively little progress was made despite the Chinese having all the native
abilities that Americans had. But in recent decades the potential is being unleashed. We’re
going in September. They haven't taught me how to eat Chinese food, though.

Charlie: Chinese people always had potential for huge and rapid progress, you could see it
in Chinese Americans, they rose so rapidly. I underrated how fast it could happen that they
could advance their civilization so fast. It's fun to watch.
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Q: There have been some changes in the annual report. What happened to the discussion
of look-through-earnings? Financial statements of the group companies?

A: Warren: We break them down into four groups, we think it's logical, and we will
continue to do that. Adding a hundred pages may obfuscate rather than illuminate. In a
reasonable number of words, we think it’s the information we would like to have as
shareholders, if our positions were reversed. On look-through-earnings, we don't do them
every year, but some years it’s more relevant. The whole report is guided as ever by the
idea that I'm writing to my two sisters, two very intelligent and interested people but with
the caveat that they have been gone for a year. They are capable of understanding
everything, but they don't know the lingo. I haven't changed that framework.

Charlie: It's perfectly natural that the focus should shift as the company had evolved.

Q: Considering the tax opportunity this year, does it make sense to convert to a Roth IRA?

A: Charlie: I have an IRA and yes I will convert.

Q: Last year you were down on the newspapers industry. How about now? Is it possible
that technologies like the iPad can change the decline in the newspaper business?

A: Warren: My opinion on the technology is relatively uninformed. The papers have

become less useful to advertisers. They were the only game in town and that’s no longer
the case, regardless of technology changes. We looked at the Philadelphia Inquirer. But
the math is really tough. There are plenty of things I don't understand, but I don't see any
change. I still look at the circulations of newspapers, I can't help it. The numbers are bad,
communities are thriving and people are still dropping their papers, so if anything people
are dropping papers faster due to these new technologies. Newspapers used to be bullet-
proof. But it's a form of distribution of information and entertainment that has lost its
immediacy. You used to look in the paper for stocks, sports, you don't do that anymore.
Newspapers become less valuable as the advertisers float away and so the advertisers float
away even more.

Charlie: Local papers had impregnable economic strength. They were called the fourth
estate, they helped keep government honest. It’s not good for the country, we’re losing
something there's no substitute for, and I don't know what to do about it.

Warren: Newspapers are as vital to me as ever but their value has clearly changed to the
populace as a whole. Philadelphia is not going away, but the paper’s not worth what it was
because the advertiser doesn't need you anymore.

Charlie: The politicians are not behaving better, the newspapers are weakening,

Q: It seems like most young investors today think of themselves as value investors. Will
there be fewer opportunities? Perhaps I shouldn’t go into investing?

A: Warren: Probably there will be fewer, but if you’re not working with a lot of money there
will always be opportunity. Asset gathering can become more important to your income
than investment performance; this is a conflict in the investment industry. Opportunity with
a smaller amount of money will still be there, people still make the same mistakes. The

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Daily Journal Company, Charlie owns it; it has a lot of cash. Finally in 2009 they spent the
cash on stocks and made money on it. You have to be patient.

Charlie: One piece of advice, take the high road, it’s far less crowded.

Warren: There will be opportunities for talent, regardless of what you do. For me it was
faster to scale up in managing money, I was too impatient to move up through the ranks.

Q: Municipal defaults haven't materialized yet, will they? Are there bailouts coming?

A: Warren: We’re not insuring a lot of muni’s now because the prices are not right.
Harrisburg is in trouble now and the bond insurer is paying the interest. Maybe nothing
terrible will happen, but correlation is the concern. It's hard to tell how that will play out. It
will be hard in the end for the federal government to turn away a state when they have
saved GM and various other entities. How do you stiff-arm a governor? Many bond
insurers had extraordinary liabilities relative to capital, and they got in trouble just on
structured securities. I think they are too optimistic, but I don't know how it’s going to play
out.

Charlie: Try to invest in places that are prosperous and disciplined. Ben Franklin said it’s
hard for an empty sack to stand up. Integrity still matters, it’s not complicated.

Q: What can you expect from stocks going forward?

A: Warren: I write articles about the stock markets infrequently, and in 2008 I was
premature. And I knew then I could say the long term would be better in stocks, but that
was compared to bonds or cash. I have no idea what the stock market will do, I don't think
about it. Over twenty years, I'd like equities, but that’s in part because I am unenthusiastic
about the alternatives. Stocks will give you some modest positive real return over time.

Charlie: I think you’re right. People should get accustomed to doing less well on their
investments. The ordinary returns will be lower for a long time.

Warren: We like owning businesses that have an advantage. They are not dramatically
attractive, but they are better than cash or bonds.

Q: What is the future of the Moody’s investment, and how is it affected by regulation?

A: Warren: The ratings agencies under current conditions still have a wonderful business.
Certain parts of the world need them, they take no capital, and they have pricing power.
They made the same mistakes that everybody else made, they couldn't see a world where
residential housing would collapse. I don't think that was because of incentives, it’s just
because it’s very hard to think contrary to the crowd. There will be a backlash, with
egalitarian remedies. If they are not forced to make wholesale changes, it is still a darn
good business, mostly because you can't shop prices. At Berkshire, we pay no attention to
ratings for bonds, that's outsourcing investment opinion. But some need it.

Charlie: They have overall been a very constructive influence for many decades. But they
drifted. Part of the problem is asinine business education. I've yet to hear a single apology
from business education about their huge contribution to our current difficulties.

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Q: You often cite optimism about the prosperity of future generations. How dependent is
our current and future prosperity on oil and the economic windfall it has brought in the last
century?

A: Warren: The discovery of oil changed the world and its only 150 years ago and since
then we've been sticking straws in the ground. It has contributed to prosperity in a huge
way. But in my view, the world will not be dependent on that windfall. There will be other
free lunches available. Don't ever give up on humans’ ability to innovate and solve
problems. We've faced all kinds of predictions of dire futures. If you could pick a time to be
born, I would pick today.

Charlie: Back then they needed the oil to get ahead, but now we can get ahead with other
technology. Freeman Dyson has written a lot, contemplating a world that goes off oil. It
was impossible at times, but it’s not impossible now. We need it now as chemical
feedstocks more than anything else. If it doesn’t bother Freeman Dyson, it shouldn’t bother
you too much.

Warren: And the adjustment will be gradual.

Q: How would you grade Kraft's board and the board’s compensation based on their M&A
strategy?

A: Warren: We’ve made some dumb deals, so I've become more tolerant. The frozen pizza
deal was particularly dumb. But we've done some dumb things, a few Irish banks and other
things. The pizza deal is a tax-inefficient deal when a tax-efficient deal was possible. They
sold pizza which was growing ok to buy Cadbury at a higher multiple which was also
growing ok. I would have voted against it. But Kraft is still selling at a discount to its
constituent parts, especially if you value it the way they valued Cadbury. On compensation,
we've got a rational system, and other companies have different systems.

Charlie: Managers always yearn for a better set of competitors and generally overestimate
the value of strategy.

Warren: An army of people with a strong economic interest will always push you to do
deals.

Charlie: We are very stupid in many ways, but we have avoided a subset of stupidities,
important ones.

Q: Has the crisis changed the integrity of management?

A: Charlie: Integrity and lack of it is what led us here. Fortunately, some are gone. As
someone said of Cardinal Richelieu: If there is a God, he has much to answer for, but if not,
then he's done rather well. Everybody mouths integrity, so it's hard to tell the difference
between mouthing and doing it.

Warren: Think of when stock options were an expense, and corporate America fought back
and the FASB backed off and Congress backed the executives. FASB offered two options,
listing one as preferred and one as unpreferred. Of five hundred companies in the S&P500,
498 took the unpreferred method. And everybody said they did it because the other guys
were doing it. We try to create as few situations as possible in Berkshire that could create

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this dynamic. I don't make people submit a budget, because they would fudge. It's human
behavior.

Charlie: So much of the bad behavior doesn't come from malevolence, it is unconscious and
generally due to poor cognition. The cure is to have a system where the people who are
making the decisions bear the consequences. The systems on Wall Street therefore are
inherently irresponsible and it is immoral to have systems like that. Who do you see
apologizing? There are very few. People think they did fine.

Q: In terms of market declines, are we out of the woods? When the market is down, it
always seems like it can go down more. How do you know when to act?

A: Warren: Ninety percent of the time you don't know where you are, it often doesn't
scream at you. If you have a temperament that gets scared when others are also scared,
you are probably not going to make money in securities. Don't look at quotations; look at a
stock the way you look at a farm. You don’t buy a farm and then look for a price the next
day or the next week. We love it when prices go down because we can buy more. You
have to have a mental attitude. Otherwise you'll just be a broker’s friend.

Charlie: I developed more courage after encountering hardship. Get your feet wet with
some hardship.

Warren: Keynes talked about this, if there were just fewer quotes, people would be better
off. You even hear people say "the market’s saying" this or that, it’s unbelievable. Buy it
based on the merits and then forget about it for a long, long time.

Q: BYD is entering the solar business. Berkshire also owns companies in roofing and
utilities. Can you get these businesses to work together?

A: Charlie: On solar, I always decline to put solar panels in because I think they are going
to get a lot cheaper. A solar solution is coming, because it's obvious we need it. I'm quite
negative about growing corn for energy; it’s a stunningly stupid idea. But I am optimistic,
we'll have a better grid, technological problems are being solved. Solar can cost twice as
much as what were used to and still be a good solution. That extra cost is a blip compared
to what is in our economic future. If you want to put in solar panels, wait, they're going to
get cheaper.

Q: A married couple asks: How can we gauge what impact on Berkshire overall the recent
purchases will have?

A: Warren: The degree of undervaluation in our portfolio today is not dramatic, and has
been exceeded many times in the past. We've got a lot of good businesses, but not a lot of
things that will increase a lot in value.

Charlie: On marriage, just try to accept the other point of view.

Q: You both seem to be expressing reserve. You talk of inflation, of reducing expectations.
And yet you also have made many optimistic statements about the future. What explains
the contrast?

A: Charlie: Many human problems are energy-related and we have good solutions on the
horizon. That is a huge benefit to civilization. I'm optimistic about the culture of Berkshire
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preserving in the future. And yet there are terrible problems, too. The best way to be
happy is to get your expectations down, it’s much easier than getting your results up! Hey,
I’m 86 years old, if I can be optimistic about the future, you all can handle a little inflation.

Q: Is Mr. Buffett’s escalating media exposure really the best use of his time from the
perspective of Berkshire shareholders?

A: Warren: It's not the best use of my time, but I play bridge on the internet twelve hours
a week! Broadcast television is a good record, it’s more important than written word today.
Look at Blankfein with the “God’s work” comment, you can be judged by your own words,
whether you’re kidding, etc. So it's easier to be on television, it’s clearer. But you even
have to be careful about broadcast. During the Charlie Rose taping there was a section
about railroads and the video segment had images of Marilyn Monroe and Grace Kelly, and
when we came back from that segment I said how I would have paid a higher price if they
had thrown in Marilyn Monroe and Grace Kelly. But in the final production they cut out the
railroad video segment so they just came back to me saying out of nowhere how I wished
Marilyn Monroe and Grace Kelly had been thrown into the Burlington deal! So broadcast is
clearer but still it can be tricky.

Q: How do you get loyal shareholders?

A: Warren: If you run a public company, anybody can buy your shares. Osama bin Laden,
the Pope, whoever. They select you, not the other way around. So what you do is convey
exactly what kind of a place Berkshire is. To some the sign on the door says come in, to
some it says stay out. Phil Fisher wrote about this, French food vs. Hamburgers; don't try
to be everything to everybody. If we get a bunch of people looking to hit the quarter, they
are going to be disappointed. We don't want people to be disappointed with us. People
look at becoming partners in this business and they know we'll treat them like partners.

Charlie: We started out investing money for family and friends, and so we've always
thought about it as family. Other people can’t get to this point because they don't come
from the same place. I don't think we deserve such credit; we came up from a different
place. We just had enough sense to preserve it.

Warren: Also we don't have an investor relations department, they are just ridiculous.
You're soliciting shareholders? The shareholder list won't be empty, somebody has to own
it. You just want people who know what to expect.

Q: Comment on the impact of zero percent interest rates?

A: Warren: Well it’s tough if you've got your money in short term. You'd have doubled
your money once since Columbus landed at these rates. It’s called ‘easy money’ but it's not
easy for the people on a fixed income. It won't last forever but it feels like forever to people
who live on a fixed income. It won't work forever to run deficits and have easy money.
And if we do run into trouble, the blame goes to Congress, not the Fed.

Charlie: Stocks are up because you can’t do anything else with your money. It can’t last, as
it has in Japan, and if it does that is not a good scenario either.

Warren: The pressure from low rates on the price of everything else cannot be
overestimated. The last year of stock prices has been the result of the agony that people
are being put through that have savings and expect to be living on fixed income.
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Q: How do you get better and better at valuing companies?

A: Warren: Ben Graham taught me how to value a certain type of company, it was a
guarantee against failure, but the opportunities dried up. Charlie taught me a lot about
durable competitive advantage. There are lots of things I don't understand. The key with a
circle of competence is not the size of the circle but where the perimeter is. Think of every
business, keep asking yourself, talk to other people. Always remember the margin of
safety, and recognize your limitations. I never thought I'd be buying Korean stocks. You
don't have to find very many good ideas.

Charlie: If you want to get good at something that is competitive, you have to keep
learning, do it a lot, and practice a lot. Get up each morning and try to go to bed that night
a little wiser, keep doing that, people that do that almost never fail. Maybe you’ll have
some bad luck, but with the right temperament you'll rise. I didn't take any business school
classes other than accounting. I started valuing companies when I was a little boy. If you
take the rulers of the businesses, a lot went broke. It's hard to get near the top and it’s
hard to hold that position. But you can predict who's going to win, they care more, they are
more disciplined. What works, what fails? Have that temperament.

Warren: You don't have to be brilliant, just avoid the big mistakes.

Q: What are the best return-on-capital businesses?

A: Warren: Are you looking at the capital required, or what we bought it for? We think of a
good business based on how much capital it requires. A great magazine operates with
negative capital, the subscribers pay up front. Sports Illustrated operates with negative
capital. Blue Chip Stamps, it generated float. Apple doesn't need much capital. See's is a
good example, but it can’t grow much because there's only so much candy you can eat.
Great consumer businesses, where people pay you in advance. We like those, but so does
everybody else so they go for a high price. Service type businesses like Businesswire.

Charlie: The formula never changes. Incredible pricing power is illegal, remember, because
it’s a monopoly.

Q: What are the growth prospects for Berkshire in terms of acquisitions? Has the phone
been ringing?

A: Warren: The phone hasn't been ringing much. We lay out the parameters in the annual
and there just aren't that many businesses that meet those criteria. We might get 3-4 calls
a year, that's a good year. We’re as interested as ever, we wrote a big check for BNSF, but
I would love it if we could do another big deal.

Charlie: It's amazing to me we have been successful with our model, it's human revulsion
that helps us. People who sell to us are revolted by the alternatives, and that's marvelous
for us. We get offered things by people who would not sell to anybody else, that is really
peculiar.

Warren: I had never heard of Iscar, they said they either won't sell or they will sell to us.
There's not much we can do to accelerate the process.

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Charlie: Our growth isn't over. It will be slower. But that's not so bad considering we’re all
so much richer than we were.

Q: What question would you ask yourself?

A: Charlie: It's strange that we're involved in BYD, and we've always bragged about
avoiding technology. But we’re learning, and I think it will work out. BYD, they’re those
guys, the ones that work harder, are more disciplined. We wouldn't normally have been
involved in something like that, so it’s unusual, but unusual is OK sometimes. The
Burlington deal was better for their shareholders than for ours, because after all they were
getting into Berkshire. But it was good for us, too. We're getting a fair amount of
engineering into Berkshire now; I hope everybody’s comfortable with this, because we'll
keep doing it.

Warren: Can you keep employing capital effectively for a long time? And I think the answer
is yes, but it is getting extraordinarily hard. So eventually we will have to return some of
that capital. But we've come a lot further than I would have thought thirty years ago, but
that doesn't mean there's not a limit, there is. And at that point we'll do something good
for shareholders.

Charlie: I think we'll do something with a CIO before many people expect.

Q: Can you give some advice for a young entrepreneur?

A: Warren: There's nothing like following your passion. We love what we do. The common
factor among our managers is they love what they do. Some people are lucky in finding
what they enjoy early on. For me it was dumb luck, my father was in securities. If you find
something that turns you on, you'll be successful. If you choose the race, there won’t be
that many that are faster than you. If you haven't found it yet, you've got to keep looking.
Among our managers, some went to school, some dropped out. Mrs. B never went a day.
But she loved what she was doing. I went to her house for dinner and she had the price
tags from the store hanging on her furniture and she said “it makes me feel at home.” I
said, “Mrs. B, you’re my kind of woman.” Remember what Emerson said: “the power that
lies within you is new in nature.” Find your passion, don't let anything stop you.

Q: What is the central philosophy of Berkshire? What is the unifying theory?

A: Charlie: It's pragmatism. We do things our way because it suits our temperament. And
we have found that it works better, for us. And when something is working well, keep doing
it. It’s the fundamental algorithm of life, repeat what works.

Q: Does the US need a high-speed passenger rail service?

A: Warren: By its nature it is noneconomic, competing with auto and air. We don't have
the density of demand, that's my guess. Unless it’s heavily subsidized, it doesn't meet the
test for private investment.

Charlie: I'm at least as dubious. The cost is awesomely large if the area is already densely
populated. It’s great in Japan and China, but they have a different calculus. Just think of
how hard it would be.

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Warren: If it’s high speed it can't stop very often. And the cost gets staggering. We’re
talking about a trolley system in Omaha, it’s completely uneconomic. It’s more expensive
than paying for everybody to take taxicabs. It's been done in Buffalo and people like it, but
the numbers just blow your mind.

Q: What would be the impact of an earthquake as bad as Chile in California?

A: Warren: I don't know. And the damage is different from the severity. In San Francisco,
in the big quake, the big damage was the fire. They call this the “shake and bake,” the
earthquake is the shake and the fire is the bake. It’s hard to get above $100 billion. The
big ones we know about, in one case in Missouri there were three eight’s (on the Richter
scale) in a few weeks. It'll happen again at some point. When I think worst case in
California, $100 billion is way up there. Berkshire is totally prepared to handle anything
that comes along. Katrina was like $70 billion. We would still have positive earnings in a
year like that.

Charlie: A lot of damage is fire and a lot is totally uninsured. Earthquake coverage is not
actually that common.

Q: We’re seeing an increase in debt everywhere. What is our exposure to a financial crisis;
could Berkshire ever be an AIG?

A: Warren: If you postulate that there was a total panic, we came close to that. I thought
we could, but it was clear it wouldn't get screwed up. Barring a massive nuclear or
biological thing where a big part of the population is done in, barring something
extraordinary like that, we can survive anything that corporate America as a whole can deal
with. As long as the land doesn't get less fertile, people get less innovative, we're built to
withstand anything.

Charlie: I'm not worried about it.

Warren: Huge amounts of debt won’t do us in.

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Liberty Square Asset Management
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