Berkshire Hathaway Annual Meeting
May 4, 2019
(Notes taken by Professor David Kass, Department of Finance, Robert H. Smith School of Business, University of Maryland)
A humorous film was shown containing scenes (1) from Warren Buffett in a classroom speaking to young children about investing, (2) Warren Buffett and Bill Gates walking around in a candy store pointing out their favorite pieces of candy. Gates explains how he and Paul Allen came up with the idea for the PC, and (3) Buffett goes to Apple’s headquarters to create a newspaper tossing app. Tim Cook appears as well. Incorporated into the film were numerous commercials of Berkshire owned companies including Geico, Coca-Cola, American Express, Fruit of the Loom, Dairy Queen, Berkshire Hathaway Energy, and Duracell.
Warren Buffett (88) and Charlie Munger (95) then walk on to the stage and sit down. The format for asking questions was similar to the last nine annual meetings. One-third of the questions were selected by three business journalists: Andrew Ross Sorkin (CNBC and the New York Times), Becky Quick (CNBC), and Carol Loomis (Retired, Fortune). Shareholders had e-mailed questions to the journalists, who then selected 6 questions each relating to Berkshire and its operations. The journalists who were seated on the stage, alternated with analysts Gregg Warren (Morningstar), Jonathan Brandt (Ruane, Cunniff, and Goldfarb), and Jay Gelb (Barclays) also seated on the stage, and with shareholders in the audience in the asking of questions.
Approximately 40,000 were in attendance. This compared to 40,000 in 2016-2018, 45,000 – 50,000 in 2015 (celebrating Warren Buffett’s 50 years at Berkshire Hathaway), 40,000 in 2014, 36,000 – 38,000 in 2010-2013, 35,000 in 2009, 31,000 in 2008, 27,000 in 2007, and 24,000 in 2006.
Warren Buffett discussed Berkshire’s operating earnings for the first quarter of 2019 and mentioned that Berkshire had signed a 20-year lease for its Omaha headquarters. He also mentioned that since Kraft Heinz has not filed its 10K for 2018 with the SEC, they have not released their first quarter 2019 earnings. Since Berkshire uses the equity method of accounting for its 27% stake in Kraft Heinz, it would normally include its percentage share of those earnings. But because Berkshire does not have those figures, it has not included anything.
Questions were asked in the following order:
Q1. Loomis: Why didn’t Berkshire repurchase more shares during the first quarter?
Buffett: We will buy back stock when we think it is selling below a conservative estimate of its intrinsic value, which should make the remaining shareholders who did not sell better off.
Munger: I predict we will get a little more liberal in repurchasing shares.
Q2. Brandt: Will BNSF adopt precision-scheduled railroading?
Buffett: We will consider it to improve efficiency.
Munger: I doubt that anyone is very interested in un-precision in railroading.
Q3. Audience: Question about renewable energy and BNSF
Buffett: We are becoming more efficient.
Munger: Sooner or later we will have it more electrified.
Q4. Quick: Why is Buffett so quiet about Wells Fargo?
Buffett: Wells Fargo incentivized the wrong practices. When you find a problem you have to do something immediately. That’s where they probably made a mistake at Wells Fargo. The shareholders of Wells have paid a price. During the financial crisis the shareholders of Goldman Sachs and Bank of America paid a price. They paid billions of dollars and they didn’t commit the acts. And there were no jail sentences. That is infuriating.
Munger: I don’t think people should go to jail for honest errors of judgment. It’s bad enough to lose your job. And I don’t think former Wells Fargo CEO Tim Sloan even committed honest errors of judgment. I wish Tim Sloan was still there.
Buffett: There’s no evidence Tim Sloan did anything wrong. But he stepped up to take a job where he was going to be a pinata for all kinds of investigations. And rightfully, Wells should be checked out on everything they do. All banks should. They get a government guarantee and they receive trillions of dollars in deposits. And they do that basically because of the FDIC. And if they abuse it, they should pay a price. If anybody does anything like a Paul Mozer (Salomon), they should go to jail. I actually proposed in one of my annual reports that if a bank gets to where it needs government assistance, that the responsible CEO should lose his net worth and his spouse’s net worth. And they should come after the directors for what they received over the last five years. The FDIC has not cost the US Government one penny. It now has about $100 billion in it. And that money has all been put in there by the banks. And that has covered all the losses of the hundreds of institutions.
Q5. Gelb: In a recent Financial Times article, you were quoted as saying that the time may come when the company buys back as much as $100 billion of its shares, which equates to around 20% of Berkshire’s current market cap. How did you arrive at that figure and over what time frame would you expect this to occur?
Buffett: If we are buying in $100 billion stock, it probably would be that the company wasn’t selling at $500 billion. So, it might be well over 20%. We will spend a lot of money. We’ve been involved in companies where the number of shares has been reduced 70 or 80 % over time. And we like the idea of buying shares at a discount.
Q6. Audience: Outside of Berkshire, what is the most interesting or fun personal investment you have ever made?
Buffett: They are always more fun when you make a lot of money from them. One time I bought one share of Atled Corp. (Delta spelled backwards). They had only 98 shares outstanding. I bought it 40 years ago for $29,200 per share. It was a duck hunting club. When one member accidentally shot into the ground, oil came out. They sold out to another oil company. I borrowed the money to buy the stock. The bank loan officer asked me if I wanted to borrow more money to buy a shotgun as well.
Munger: There are two investments. When I was young and poor, I spent a thousand dollars buying an oil royalty that paid me $100,000 a year for many years. On a later occasion, I bought a few shares of Beldridge Oil which went up 30 times rather quickly. But I turned down 5 times as much as I bought. It was the dumbest decision of my whole life. So, if any of you have made any dumb decisions, look up here and feel good about yourselves.
Q7. Sorkin: With all of the talk about socialism vs. capitalism taking place among Democratic presidential candidates, do you anticipate an impact on Berkshire in the form of more regulations, higher corporate taxes, or even calls for breakups among many of your companies if they were to win? And how do you think of your own politics as a fiduciary of your company and at the same time as someone who has said that simply being a business leader doesn’t mean you’ve put your citizenship in a blind trust?
Buffett: I have said that you do not put your citizenship in a blind trust. But you also do not speak on behalf of your company. You do speak as a citizen when you do speak. Berkshire has never contributed to any political candidate. Our regulated railroad and utility companies have political action committees that make contributions in order to gain access in Washington and state legislatures. These PACs existed before we bought these companies. It is no secret in the last presidential election I raised money (for Hillary Clinton). I’m a card carrying capitalist, but some regulations are needed.
Munger: I think we are all in favor of some kind of social safety net in a country as prosperous as ours. What a lot of us do not like is the vast stupidity with which parts of that social safety net are managed by the government. It would be better if we could do it more wisely. I think it also might be better if we did it more liberally.
Buffett: One of the reasons that we are involved in the effort along with J.P. Morgan and Amazon on the medical question is we have as much money (3.3 or 3.4 trillion dollars) going into medical care as we have funding the federal government. And it has gone from 5% to 17% or 18% of GDP while the amount going to the federal government has stayed about the same at 17%. So we hope there are some major improvements from the private sector because I generally think the private sector does a better job than the public sector in most things. I voted for plenty of Republicans over the years. I even ran for delegate to the Republican National Convention in 1960. I do not think the country will go into socialism in 2020 or in 2040 or 2060.
Q8. Gregg Warren: Since Berkshire’s class B shares are more liquid than its class A shares, are you planning to buy back class B shares with respect to Berkshire’s stock buyback program?
Buffett: When we repurchase we will spend a lot more on class B shares since they are more liquid. If we are able to spend 25, 50, or 100 billion dollars in repurchasing shares, more of the money is almost certainly going to be spent on B than A. We do not want the stock to be significantly under priced or significantly overpriced. We hope the stock is selling in a range approximating intrinsic value. If the stock is underpriced we will take advantage of it.
Q9. Audience: Question about 5G having an impact on industry.
Buffett: The world is going to change in dramatic ways. Just think how much it’s changed in the 54 years we’ve had Berkshire. And some of the changes hurt us. They hurt us in textiles, shoes, department store business, and trading stamps. These were the founding businesses of this operation. But we do adjust. And we’ve got a group, overall of very good businesses.
Q10. Loomis: To what extent do the changing dynamics in the consumer food market change your view on the long-term potential for Kraft Heinz?
Buffett: We paid too much money for Kraft. The profits for Kraft Heinz – $6 billion pretax on $7 billion of tangible assets, is a wonderful business. But you can pay too much for a wonderful business. Amazon itself has become a brand. Kirkland, at Costco, is a $39 billion brand. All of Kraft Heinz is $26 billion. And it’s been around for – on the Heinz side – it’s been around for 150 years. And it’s been advertised – billions of dollars. And they go through tens of thousands of outlets. Kirkland does more business than Coca-Cola does. Kirkland operates through 775 stores. Coca Cola is through millions of distribution outlets. Kraft Heinz is still doing very well operationally.
Q11. Brandt: Is online competition for furniture hurting Berkshire?
Buffett: We do a significant percentage of furniture sales online in Omaha. Many of these customers then come to the store to pick up their furniture. The first quarter was weak in all 4 of our furniture operations. But home building generally has also been weak. More people are living in apartment rentals. Nebraska Furniture Mart is a good operation.
Munger: We’ll do better than other furniture retailers.
Q12. Audience: What are your thoughts on using leverage for private alternative investments for public pension funds?
Buffett: Some very smart people lost a lot of money at Long Term Capital Management. I asked a guy one time in the past “How in the world can you ask for 2-and-20 when you have no evidence that you can outperform an index fund? And he said, “Well that’s because I can’t get 3-and-30”.
Q13: Quick: Does Berkshire’s investment in Amazon indicate that it is moving away from value investing?
Buffett: Our portfolio manager who bought Amazon is a value investor. As Charlie has said, all investing is value investing. You are investing some money now to get more later. You are making a calculation as to the probabilities of getting that money and when you’ll get it and what the interest rates will be in between.
Munger: I don’t mind missing Amazon, “but I feel like a horse’s ass for not identifying Google better. I think Warren feels the same way. We screwed up.”
Buffett: We blew it. And we did have some insights into that, because we were using them at Geico, and we were seeing the results produced. We were paying $10 per click for something that had a marginal cost to them of zero. And we saw it was working for us.
Munger: We could see in our own operations how well that Google advertising was working. And we just sat there sucking our thumbs. So, we are ashamed. We are trying to atone. Maybe Apple was atonement.
Q14. Gelb: How do you value Berkshire’s insurance business?
Buffett: I don’t have a number, but we have $124 billion in float and make very efficient use of it. We have the best property and casualty business in the world.
Q15. Audience: A 13 year old asks about how to develop delayed gratification skills.
Munger: I’m a specialist in delayed gratification. I’ve had a lot of time to delay it. You are either born with it or not. You will probably see some nice old woman of about 95 out there, in threadbare clothing. And she is delaying gratification right to the end and probably has 4,000 A shares (worth $1.2 billion). It is just these second and third generation types who are buying all the jewelry.
Buffett: But with a 30 year Treasury bond paying 3% and you pay some taxes on it and if we have 2% inflation, you may not have much more in 30 years than you have now. So you might as well spend now. You don’t see a correlation between happiness and money beyond a certain point. So, don’t go overboard on delayed gratification.
Q16: Sorkin: With respect to succession planning, would you consider having Greg Abel, Ajit Jain, Todd Combs, and Ted Weschler on the stage with you at an annual meeting?
Buffett: We are considering having Greg Abel and Ajit Jain on the stage. Ted and Todd are not going to answer investment questions. We regard investment decisions as proprietary. They belong to Berkshire. It is not in the interest of Berkshire to have them answer questions about securities they own. We are the only place in the world where somebody can call on a Saturday morning and have a $10 billion commitment on Sunday morning (Occidental Petroleum proposed takeover of Anadarko). Ted and Todd are very useful to Berkshire. They could be very useful if at some time in the future there are major defaults on junk bonds.
Munger: We have a lot of cash and we know how to behave in a panic.
Q17. Gregg Warren: Would you consider owning more than 10% of a company?
Buffett: If you own over 10% of a common stock and you sell it within 6 months at a profit, you are required to give the money over to the company. Also, you have to report within two or three business days every purchase you make once you are over 10%. So you are advertising to the world, but the world tends to follow us, so it really has a huge execution cost to us. We did go over 10% recently with Delta Airlines by accident, but I do not mind. With respect to banks, owning over 10% results in becoming a bank holding company. We do not want to become that. The Federal Reserve may increase the threshold from 10% to 25%. Then we will not have to sell down our shares in Wells Fargo as it buys back its shares.
Q18. Audience: What advice can you give to someone starting an investment fund?
Buffett: Start small and get an audited record. Get investors who are in sync with you.
Munger: Let me tell you a story about Mozart. A young man came to him, and he said, “I want to compose symphonies. I want to talk to you about that.” And Mozart said, “How old are you?” And the man said, “Twenty-two”. And Mozart said, “You’re too young to do symphonies.” And the guy says, “But you were writing symphonies when you were ten years old.” He says, “Yes, but I wasn’t running around asking other people how to do it.”
Q19. Loomis: Since SEC 13F filings do not include foreign stocks, what are Berkshire’s five largest foreign stock holdings?
Buffett: We disclose what we have to disclose. We aren’t giving away what belongs to our shareholders for nothing. We do not have to report foreign stocks. Some countries have lower thresholds than the U.S. for reporting a percentage of the company’s outstanding stock.
Q20. Brandt: Precision Castparts pre-tax profit margins are fine relative to American industry as a whole, but continues to be almost 10 percentage points below where they were in the years preceding the acquisition. What is the outlook?
Buffett: My expectation is that earnings of Precision will improve significantly. But profits have been below what I would have anticipated.
Q21. Audience: How can being older and having a better understanding of human nature lead to better investments?
Buffett: You can and should understand human nature better as you get older.
Munger: Figure out what works and do it.
Q22. Quick: How do you price unconventional insurance contracts?
Ajit Jain: It is more of an art than a science. We estimate the risk from limited data and the maximum exposure to Berkshire such that the worst outcome would not have a major impact on Berkshire’s income statement or balance sheet. We then, if we can, price it with a sufficient margin of safety. Then I call Warren and ask what he thinks.
Munger: It is not that easy. You would not want just anyone doing it for you.
Buffett: The only one I would want doing this is Ajit. There isn’t anyone like him.
Munger: In the past, Ajit talking to you, has added more than $50 billion to the balance sheet at Berkshire, by making these oddball calls.
Buffett: If he hadn’t talked to me, it’d be probably 49.9 billion.
Q23. Gelb: As a result of challenges at Kraft Heinz, would you still consider partnering with 3G Capital in the future to make a major acquisition?
Buffett: Jorge Paulo is a friend of mine and I am pleased that we are partners. In certain types of situations they would be better operators than we would. They go into situations that need improvement and they have improved them. The problem here is the retailer or intermediary who is also trying to make money.
Munger: With 3G there was a long series of transactions that worked out very well and finally there was one transaction that didn’t work so well. That is a very normal outcome of success in a big place with a lot of young men who want to ger rich quick. It is much easier to take the good ideas and push them to wretched excess.
Buffett: It is not at all inconceivable that we could be partners in some other transaction in the future
Q24. Audience: Why continue to hold on to Kraft Heinz when the moat appears to be dry?
Munger: The problem was paying too much for the last acquisition.
Buffett: Kraft Heinz is earning more money than Kraft and Heinz were earning six or seven years ago. It is still a terrific business. The margins are still very good. They earn terrific returns on invested capital. But we paid too much in the case of Kraft.
Q25. Sorkin: Since Apple is Berkshire’s largest holding, what regulatory challenges does it face?
Buffett: I like our Apple holding very much. I prefer that Apple be at a lower price so we could buy more stock. The lower the price, the more shares Apple can buy back for a fixed dollar amount in their buyback program and this increases our ownership stake without having to invest any more money.
Munger: In my family, the people who have Apple phones, it’s the last thing they’ll give up.
Q26. Gregg Warren: Why does Union Pacific have higher profit margins than BNSF?
Buffett: We’ve got a wonderful franchise and we should have margins comparable to other railroads.
Q27. Audience: What do you value most in life now?
Munger: I’d like to have a little more of it.
Buffett: It’s the two things you cannot buy, time and love. And I’ve been very lucky in life being able to control my own time. That’s why we really wanted to have money, so we can do what we wanted. But time is valuable. We get to do what we love to do every day. Charlie designs dormitories and reads lots of books. We have been very lucky being born in the U.S. And Canada would be fine too. I don’t want to offend anybody.
Q28. Loomis: Berkshire owns about $200 billion in stocks. Why don’t you tell us how the portfolio has performed?
Buffett: It could be calculated easily and it represents 40% of Berkshire’s value. But 60% is the businesses. We are not in the business to explain why we own a stock. Of the $200 billion, $150 billion of them are buying in their stock and increasing our interest every year. We will do considerably better in the next ten years if our stocks do terribly during certain periods and that they buy lots of stock in. It’s like buying it ourselves, except they are using their money. Why would we want to tell others to buy our stocks since that would increase our cost in the future if we added to these stocks. In terms of calculating our performance, you can take the top 10 or 12 stocks and look how they did in the previous year where the Wall Street Journal shows year to date performance.
Q29. Brandt: Do you expect the worldwide regulatory and commercial response to the MAX’s problems to result in increased demand for FlightSafety simulators? And could you please more generally discuss FlightSafety’s competitive position and growth prospects?
Buffett: I don’t think what’s happened with the 737 MAX will have any particular effect. We do business with a large percentage of Fortune 100 companies because FlightSafety has the talent and simulators like nobody else has for that business.
Q30. Audience: Should Berkshire invest in the leading technology companies?
Buffett: We are trying to enlarge our circle of competence with Ted Weschler and Todd Combs. We want to invest in areas where our batting average is high.
Q31. Quick: Warren and Charlie, after your ownership has been completely distributed, will Berkshire be more vulnerable to activist investors?
Buffett: No, anything can happen. It’s a low probability. It can’t happen for a lot of years, in terms of the way my stock gests distributed. But in the end Berkshire should prove itself over time. There are no perpetuities. And it deserves to be continued in its present form. It has a lot of attributes that are maximized by being in one entity, which people do not understand.
Q32. Gelb: Progressive is gaining the most market share among the major auto insurers, based on its presence in the direct and independent agency channels, as well as now bundling its auto and homeowners insurance coverage. How does Geico plan on responding to competitive threats so that it can retain its place as the second largest auto insurer?
Buffett: Progressive is a very well run business. Geico is a very well run business. I think for a long time they will be the two companies that the rest of the auto insurance industry has trouble not losing share to. They have an appetite for growth. Sometimes they copy us a little, sometimes we copy them a little. I think that will be true five years from now and 10 years from now. We grew in the first quarter about 340,000 policies, net, which will look quite good compared to anybody but Progressive. We don’t own any Progressive, but I think that Progressive is an excellent company. We will see, five years from now or 10 years from now, which one of us passes State Farm first.
Ajit Jain: Geico has a significant advantage over Progressive when it comes to the expense ratio, to the extent of about seven points or so. On the loss ratio side, Progressive does a much better job than Geico does. They have a 12-point advantage over Geico. So, net-net, Progressive is ahead by about five points.
Buffett: Progressive has a very sophisticated way of pricing business.
Munger: In the nature of things, every once in a while somebody’s a little better at something than we are.
Q33. Audience: How would you build a circle of competence today?
Buffett: It is more competitive today than when I got started. You should figure out where you may have a knowledge advantage over others.
Munger: I recommend specializing in a narrow area.
Buffett: Tom Watson Sr. said at IBM: “I’m no genius, but I am smart in spots and I stay around those spots.” That is basically what Charlie and I try to do.
Q34. Sorkin: Larry Fink of BlackRock has predicted that in the near future, all investors will be using ESG – environmental, social, governance metrics to help determine the value of a company. I’m worried we do not score well on everything from climate to diversity to inclusion. How well do you think Berkshire measures up on those metrics and are they valuable metrics?
Buffett: I think we measure up well, but we don’t participate in preparing reports for anybody who asks about it. 100% of the electricity we sell in Iowa comes from wind generation.
Munger: When it gets to so-called best corporate practices, I think the people who talk about hem don’t really know what the best practices are. They just know what they think are the best practices. And they determine that based on what will sell, not what will work. And I like our way of doing things better than theirs, and I hope to God we never follow their practices.
Buffett: Independent directors in many cases are the least independent. If the income you receive as a corporate director, which typically is about $250,000 a year, and now it is an important part of your income, and you hope that some other corporation calls the CEO and says “How’s so and so as a director?” and the current CEO says “Oh, he’s fine and never raises any problems.” And then you get on another board at $250,000 and that is an important part, how in the world is that independent? You don’t get invited to be on boards if you belch too often at the dinner table.
Q35. Gregg Warren: Should Berkshire Hathaway Energy invest more in the future to meet expected increases in demand in electricity from electric vehicle charging, datacenters, and cannabis cultivation?
Buffett: We have three owners of Berkshire Hathaway Energy. We are the 91% owner. It is just a question in finding sensible projects.
Munger: We are as good as you can get. You should worry about something else.
Greg Abel: We have focused on building new renewable energy projects in Iowa, expanding the grid. We are expanding at PacifiCorp and NV Energy. Our rates are half of that of our leading competitor in Iowa.
Q36. Loomis: Why doesn’t Berkshire put its cash into a stock index fund?
Buffett: We want to have the flexibility of investing large amounts when the opportunities present themselves.
Munger: I watched Harvard put all of their cash into the market at exactly the wrong time. And they suffered for two or three years. We don’t want to be like Harvard.
Q37. Brandt: Fannie Mae and Freddie Mac have new financing programs for manufactured home loans. What impact will this have on Clayton?
Buffett: It would be good for America if Freddie and Fannie did more in that area. We would sell more homes, but we would lose the financing and we might come out behind or we might come out ahead. But, I think it would be a good thing.
Q38. Audience: What impact has automation and part-time employment had on good full-time jobs?
Buffett: Capitalism creates jobs. We have creative destruction.
Q39. Quick: Do you feel that regulators and/or politicians are running the big banks instead of CEO’s?
Buffett: Insurance is regulated by the states. I like the fact that there is regulation in the insurance business, or the banking business. Those businesses should be regulated. They are too important.
Q40. Gelb: Why are shareholders being provided less detailed information about Berkshire’s businesses?
Buffett: We write the Letter to Shareholders to explain the businesses without using details and terminology the they would not understand.
Q41. Audience: Do you have any plans to set up a company in China?
Munger: We have got one now – Dairy Queen. I really makes sense for the two countries to get along.
Q42. Sorkin: What’s your appetite to invest in the U.K. and Europe and how will Brexit impact that? What’s your advice for solving U.K.’s Brexit dilemma?
Buffett: I gave a 3 hour interview to the Financial Times so Berkshire’s name would be better known in the U.K. and Europe and increase the chances of a European business being sold to us. We would love to put more money into the U.K. I think it was a mistake for the U.K. to vote to leave the European Union.
Q43. Gregg Warren: Should Berkshire put more boots on the ground in these overseas markets to make acquisitions?
Munger: Our problem is not a lack of boots on the ground. Our problem is the people on the ground are paying prices that we don’t want to pay. Our competitors are buying with somebody else’s money, and they get part of the upside and take none of the downside.
Buffett; They’ll leverage it up, they’ll make a lot of money if it fails, and a lot more money if it succeeds. That’s not our equation.
Q44. Audience: Please elaborate on Berkshire being a “compounding machine”.
Buffett: We feel good about Berkshire as a long-term compounding machine.
Q45. Loomis: Can we expect Berkshire’s growth in intrinsic value to outperform the S&P 500 Index?
Buffett: If we just owned stocks our performance would be worse than the S&P 500 because we would be incurring a corporate tax, which would now be 21 percent on capital gains, plus possibly some state income taxes. And effectively our tax rate on dividends is –depends where they are held- but somewhere between 10 ½ or 11 and 13 %. An index fund has no tax at the corporate level, but just passes through to shareholders. I don’t know whether we will outperform the S&P 500 or not. If there were to be a very strong bull market from this point forward, we would probably underperform during that period. If the market 5 years from now or 10 years from now is at this level or below, we will probably over perform.
Munger: Berkshire shareholders, even if we just matched the S&P, would be way ahead after taxes.
Q46. Brandt: How is NV Energy working to recover from casino defections?
Greg Abel: We are building substantial renewable energy there now. I think NV Energy will prosper in the long term. We bought Nevada Power 5 years ago. In the 10 years before, Nevada Power was raising rates every two years by inflation. We plan to lower them and rates are 5-7% lower than when we bought them. In Iowa (renewables) we never raised rates since we owned them in 1999. By 2023, we will eliminate 100% of their use of coal, which was substantial when we acquired it.
Q47. Audience: Since Todd Combs and Ted Weschler have slightly underperformed the S&P 500, what changes are they planning to make?
Buffett: As of March 31, one is modestly ahead, and one is modestly behind. But they are extraordinary managers. It’s been a tough period to outperform the S&P 500. They have also helped in many ways. Todd has put in many hours per week in connection with the medical initiative with J.P.Morgan and Amazon. Ted did a great job with Home Capital where we stabilized a financial institution that was under attack and experiencing runs in Canada. And he did the whole thing. I heard about that on a Monday, and on Wednesday, we put an offer before the company. It was remarkable what he did and I think it is appreciated in the Toronto area. Ted and Todd are doing better than I am running their portfolios. They are very, very smart. They have been smart with their own money over the years. They have been smart in running other people’s money over the years. And they have made us a lot of money, but they made it during a market where you would have made a lot of money in the S&P as well.
Q48. Quick: How is American Express’s competitive position today?
Buffett: American Express has a lot of competition. But it’s got a very large constituency that has a renewal rate, a usage rate, that’s the envy of everybody else in the industry. So, I like our position in American Express very much. By next year, our share of the earnings of American Express will be equal to the cost of our position. We will earn 100% on what that position cost us, and I think it will grow. And the number of shares will go down (buybacks) and our interest will go up without us laying out a dime. They dominate the luxury end of the credit card business.
Q49. Gelb: Berkshire has committed to providing $10 billion in financing in the form of an 8% preferred share and attached warrants to Occidentals’ proposed acquisition of Anadarko. What did you find attractive about the Occidental deal in terms of its business. Should we expect other large financing transactions in the future as a way for Berkshire to deploy its excess cash?
Buffett: I can get a call on Friday afternoon, and they can make a date with me on Saturday, and on Sunday it is done. And there will be times in the future when something similar comes along and we are the one to call. And I hope it is larger than $10 billion. Their board of directors met at 10 p.m. Monday to approve it so they could announce it Tuesday morning. With Berkshire they could do it.
Q50. Audience: Question about assessing risk.
Buffett: We don’t have any formula that evaluates risk. We make our own calculation of risk versus reward for every transaction we do. This applies to marketable securities, private investments, or investments in a business. Sometimes we are wrong.
Q51. Sorkin: Elon Musk says that Tesla will start to offer insurance for its cars and can price it better than a typical insurance company because of the data it collects from all of the vehicles on the road. Is it a threat to Geico if automobile manufacturers get into the insurance business?
Buffett: I would say that the success if the auto companies getting into the insurance business is probably as likely as the success if the insurance companies getting into the auto business. I worry much more about Progressive than all of the auto company possibilities that I can see in terms of getting insurance business. It is not an easy business at all. I don’t think the auto companies will have any advantage or make money in the insurance business. The gross margin on new cars is 6%. The internet is another competitor. But the auto dealer takes good care of the customers and is there to service the customers.
Q52. Gregg Warren: Will Berkshire be returning capital to shareholders when Buffett is no longer there?
Buffett: It is possible under me or my successors. It’s a question of can you invest truly large sums reasonably well. You can’t do it as well as you can do small sums. I have confidence in the ability of the Berkshire culture to endure and that we have the right people to make sure that happens.
Q53. Audience: How do you deal with conflicts between the two of you (Warren and Charlie)?
Buffett: Charlie and I have not had an argument in 60 years. We have disagreed on things, but emotion and anger have never entered. Having the right partners in life is enormously important. I recommend looking for someone who is better than you are and then try to be like they are.
Q54. Audience: Should we expand our circle of competence over time?
Q55. Audience: You have said you could earn 50% per annum if you were managing a $1 million portfolio. What strategy would you use?
Buffett: It might well be the arbitrage strategy but in a very different way than customary arbitrages. Charlie and I could do that without a lot of leverage. But if you change $1 million to a $100 million, that 50% goes down like a rock.
Munger: Li Lu using nothing but the float on his student loans had a million dollars. He found just a few things to do, and he did them.
Q56. Audience: Why has See’s not grown to the scale of Mars and Hershey’s?
Buffett: See’s candies does not do well outside of California.
Munger: We failed to turn See’s into Mars or Hershey’s for the same reason that you fail to get a Nobel Prize in physics and achieve immortality. It is too tough for us.
Buffett: But we put $25 million into it and it’s given us over $2 billion in pre-tax income. And we have used it to buy other businesses. Cadbury doesn’t do well here and Hershey’s doesn’t do well in the U.K.
Munger: Think of all of the people you know that have tried to take one extra step and have fallen off a cliff.
Buffett: Well on that happy note, we will conclude the meeting.