Berkshire Hathaway Annual Meeting notes

Compilation of BERKSHIRE HATHAWAY

ANNUAL MEETING NOTES from 2007-2017
- Ingrid R. Hendershot, CFA

Compiled and published with permission from the

author. No editing to the original content has been
done.

Source:
http://www.hendershotinvestments.com/berkshire-
hathaway-annual-meeting-notes

@VenkateshJayar2
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BERKSHIRE HATHAWAY ANNUAL MEETING ON MAY 5, 2007

I was one of the 27,000 folks who flocked from around the world to hear the Oracle of
Omaha speak at this year’s Berkshire Hathaway annual meeting. A glowing
introduction of Mr. Buffett was made to start the meeting…followed by Jimmy Buffett
bounding out on the stage to start the meeting by singing “Wasting Away again in
BerkshireHathawayville.” Some of the lyrics included

Wasting away again in BerkshireHathawayville,

Searching for some good companies to buy,

Who is the wizard that thought of the lizard?

Some people claim that Charlie Munger is to blame…

Then Warren Buffett and his partner, Charlie Munger, made their appearance on stage
to discuss first quarter results and answer shareholder questions for six hours. Here are a
few of my notes on the ensuing discussions:

First Quarter Results

Buffett noted that Berkshire reported a good first quarter, although insurance earnings
are expected to go down this year compared to the extraordinary period last year for the
insurance business when no catastrophes happened resulting in minimal losses. Over
time Berkshire hopes to break even on its underwriting with profitable years like last
year offset by expected losses in typical years. With Berkshire’s float at an all-time
high, Berkshire’s mix of business is such that the insurance business should do better
than in the past. Most of the non-insurance businesses did will although those
businesses serving the residential construction market, such as Shaw, Johns Manville,
and Acme Brick, did get hit by the housing downturn. Buffett is guessing this downturn
will continue for some time. Overall, Berkshire has the greatest group of managers and
shareholders ever. Charlie Munger made special mention of Iscar, whose plant they
visited in Israel last year. He noted Iscar is a great, great company, whose
manufacturing facilities were more automated than anything he had ever seen.

Private Equity
In regard to the private equity bubble, Buffett joked that things have become so
competitive that he has started to cry at the difficulty in finding anything to buy. On a
more serious note, he didn’t consider the private equity frenzy a bubble that will
suddenly burst as many investors are unable to leave their investments due to long lock-
up periods. It also will take many years for the score of the private equity results to be
put on the scoreboard. The activity in the private equity arena may slow if yields on
junk bonds rise and credit spreads widen. However, as long as the private equity groups
can collect fat fees and raise money, they will have a compulsion to invest the billions
being raised so they can collect even more money. In contrast, Berkshire buys to hold
companies forever, and the math has to make sense to do a deal. Berkshire doesn’t get
paid on activity. Charlie added the private equity activity can continue to go on for a
long time…even after folks are in a state of revulsion.
International Investments
A German shareholder mentioned that John Templeton had once said that Warren
Buffett was narrow-sighted in not making more international investments. Buffett
acknowledged that might be a valid criticism although Berkshire has long invested in
companies like Coke with strong international businesses. Berkshire for the most part
has not been on the radar screen of international companies seeking to sell their entire
businesses. Iscar, however, found Berkshire, and the publicity surrounding that deal will
enable Berkshire to get better known internationally. Iscar is also planning additional
activities to help Berkshire be better known in foreign markets. Berkshire does own a
number of non-U.S. securities, including two based in Germany. Certain markets like
Germany and the U.K. require Berkshire to report its position once it acquires more
than 3% of a stock. Telling the world what Berkshire is buying is not a favorite activity,
so the 3% reporting requirement is a real negative on making international investments.
Berkshire does, however, hold a half-dozen foreign stocks including 4% of Posco,
which is now worth more than $1 billion. Since Berkshire doesn’t have to reveal its
international stock holdings in the 13-F filing with the SEC, most of the international
investments aren’t picked up. Charlie added that Templeton made a fortune by investing
in Japan early, but noted that Berkshire did alright during the same time period with
domestic investments.

Executive Compensation
When Buffett didn’t hear the question clearly, he told a favorite joke about how he was
concerned about Charlie’s hearing. To test Charlie’s hearing, a doctor told Buffett he
should ask Charlie a question from across the room, and then get closer and closer until
Charlie could hear the question and answer it. So from across the room, Buffett asked
Charlie if Berkshire should buy GM at $30. Not hearing an answer, he moved halfway
across the room and asked Charlie again. Then he stood right next to him, and asked
Charlie directly in his ear whether Berkshire should buy GM at $30. Charlie replied,
“For the third time, ‘Yes’!” Charlie then told Buffett that the question was on executive
compensation, and said “Now that you know the question, you can solve it!” Buffett
then responded that CEO compensation has a natural tendency to increase due to
ratcheting up comparisons with other CEO’s and the lack of a bargaining process
between the board and the CEO in compensation committee negotiations. He noted
again how he had served on 19 boards but was only asked once to serve on a
compensation committee, which regretted that they had him on the committee. He said
management is looking for Cocker Spaniels not Dobermans to put on comp committees.
Envy drives up the ratcheting process in rising compensation. Envy is one of the
dumbest of the deadly sins as it only results in a grinding in the stomach of those
envious. Buffett noted that at least there is some upside to gluttony as he reached for
another piece of peanut brittle and joked that he would let Charlie explain the upside of
lust. Expressing his disdain for compensation consultants, Charlie noted that a child
once asked his mother why she told the man at the door that the man of the house was
in prison for embezzlement. The mother replied because she didn’t want to admit he
was a compensation consultant.
Private Jets
A shareholder asked for comments on a recent study which revealed that companies
with private jets underperformed by 4% other companies. Charlie proclaimed, “We are
solidly in favor of private jets!” Buffett joked that Charlie only used to travel by bus and
then only when he could get the senior citizen’s discount, but now even he has
purchased a membership in NetJets. Buffett said Berkshire is better off because they use
private jets to do deals, and that private jets have been a valuable business tool for
Berkshire. However, he did acknowledge that private jets have been misused at other
companies. Charlie stated further that if trappings of power are misused, then you could
indeed find a correlation with poor performance and private jets. As Buffett reached for
a piece of fudge, he joked that See’s Candy was a big part of Berkshire’s corporate
benefits.

Credit Contraction
A shareholder questioned what impact a credit contraction and higher interest rates
would have on Berkshire. Buffett noted that Berkshire often benefits from times of
chaos in the markets as they have liquidity when others don’t with Charlie chiming in
that Berkshire made a quick $3-$4 billion the last time there was a credit crunch. Buffett
doesn’t think we will see a significant credit contraction as the Fed will prevent huge
credit contractions, although there may be some external factor or shock which feeds on
itself that will result in wider credit spreads. Buffett mentioned how in 1998 the credit
markets seized up following the Long Term Capital Management fiasco. Even though
there were high IQ’s and lots of cash at Long Term Capital Management, extraordinary
things happen when people panic. Noting that history doesn’t always repeat but rhymes,
he expects we will have something else rhyme with 1998.

High Corporate Profits

Buffett admitted he was amazed that corporate profits as a percentage of GDP have
remained at such high levels. Typically, corporate profits represent 4%-6% of GDP, but
have jumped upward to 8% today. Given this high level, he would have expected taxes
to have risen, but there has been no reaction by politicians. Many companies are now
earning 20%-25% returns on tangible equity versus 4% bond rates. This is extraordinary
and something never seen before. Corporate America is living in the best of all worlds.
Buffett doesn’t know what will bring it to an end, but he doesn’t expect it to persist.
Charlie noted that profits are not high in the manufacturing and retail sectors but in the
financial sector such as banks, private equity groups, and mutual funds. With banks
levered up that explains their higher returns on equity. Financial sector returns are high
as consumer credit has been pushed to extremes never seen before. Other countries have
had tremendous collapses following such extremes, like Korea in 1997-1998. Charlie
muttered now is not a time to be swinging for the fences.

Short-Selling
When questioned about naked short selling and failure to deliver stock borrowed in
short selling, Buffett seemed to shrug off the issue. He said he has no problem with
short selling stock with shorts having the tougher time of it in the investment world. He
said he wished more folks would sell short stocks, including Berkshire. He said when
USG’s stock price got hammered, Berkshire lent out their USG shares to short sellers
and collected a large premium. Those shorting USG at $4 haven’t fared very well.
Charlie added that delays in delivering stock represent tremendous slop in the clearing
process system which is like having slop in atomic plants.

Gambling Companies
When asked about gambling companies, Buffett noted that daytrading is close to
gambling. He acknowledged that folks like to gamble. He even bought a slot machine
for his kids to play with when they were younger, noting that he usually had their
allowance back by nightfall. On a more serious note, he proclaimed that gambling is a
tax on ignorance for those who don’t understand the odds. With lotteries, governments
are preying on the weakness of people rather than serving them. While lotteries may
provide some tax relief, they are not a reflection of government at its best. Charlie
added that casinos use psychological tricks to cause people to hurt themselves. He
called gambling a grievous business and firmly stated you won’t see a casino business
in Berkshire Hathaway.

How to Become A Better Investor

In responding to a teenager asking how to become a better investor, Buffett advised him
to read everything he could. Buffett noted that when he read Ben Graham’s work when
he was 19, it set the framework for the rest of his investing career. He said it is
important to fill your mind with competing thoughts and then sort out what makes
sense. Then it is important to get experience in investing by investing real money,
noting that the difference between investing on paper and investing with real dollars is
akin to the difference in reading romance novels and doing something else. Charlie
advised that one should always ask “What do you own, and why do you own it?”
Buffett chimed in that you should take out a yellow pad of paper and write down the
business reasons why you are investing in a company.

Margin of Safety and Valuations

Buffett favors businesses where he “knows the answers.” If he can’t determine what the
nature of a business will look like in 5-10 years, he won’t invest in it. When you invest
in great businesses, you don’t need huge margins of safety in your purchase price
compared to the underlying business value. While he would love to find $.40 dollar
bills, if you invest in a superior business you can pay close to $1 for $1 worth of value.
There are rare times when you can buy wonderful businesses for a quarter of their value
like he did a few years ago with his personal investments in Korea. He seeks businesses
with high returns on capital and good management that he can hold for a long time. He
doesn’t invest in risky businesses and then try to compensate with a large margin of
safety. Charlie added that margin of safety boils down to getting more value than you
are paying. He said if you don’t understand algebra, you should take up something else
rather than investing.

When valuing a business, you must determine what discount rate to use in discounting
future cash flows. Buffett want to obtain significantly higher returns from the business
than he can obtain from government bonds. If bonds are yielding 2%, he’s not interested
in a stock that would provide 3%-3.5% returns. With current bond rates at 4.75%, he is
looking for stock returns which are far more than that. He wants enough of a stock
return that he can feel very comfortable with the business if the market closed or if
interest rates rose 1%-2%. Charlie added that serious errors are made by people treating
hurdle rates as the Holy Grail. There is no substitute for thinking of a variety of
investment options and the returns they may generate. If you know a certain investment
will provide a sure 8% return, then it doesn’t make sense to be tempted by a risky
investment offering an 8.5% return. You should make investment decisions based on
opportunity costs. Buffett added that most presentations made to Boards of Directors
result in nonsense figures for the most part. Charlie chatted about a private partnership
which claimed they were seeking to obtain 20% returns. When Charlie asked the
individual how he arrived at the 20%, he said he wouldn’t get any money to invest
unless that is what he claimed he could earn. Buffett then said many pension plans
believe in such nonsense as they stretch for returns even though they should know better
that no one running big money can make 20% consistently.

Solutions to Healthcare Problems

Charlie said the problems are too tough and not something he and Warren can solve.
Buffett added they prefer easy problems like investing. Berkshire does very little in
healthcare insurance, but would look for low distribution costs.

Intrinsic Value
The intrinsic value of Berkshire or any company is the discounted value of the cash that
can be taken out of the business during its remaining life. Acknowledging that the
calculation of Berkshire’s intrinsic value is not easy, Buffett does provide information
in the annual report to help investors value businesses Berkshire presently owns.
Berkshire owns lots of marketable securities currently worth more than $80,000 per
share. In addition, Berkshire owns operating businesses with earnings provided to
investors. However, in computing Berkshire’s value, one must also determine what
Berkshire will do with billions of dollars they will invest in the future. Back in 1965, the
intrinsic value of Berkshire’s textile business was worth $12 per share. Berkshire used
the operating cash flows from the textile business to buy other businesses notably the
insurance businesses. If management is skilled with the earnings they retain, then value
will be created. If management is inefficient in capital allocation, then the business will
be worth less. Buffett noted Berkshire’s strong business culture which he said will
remain intact for a long time. As far as capital allocation, Berkshire will do just fine as
long as management doesn’t do anything dumb. Berkshire’s board will reject irrational
ideas and the “animal spirits” which often arise in making acquisitions.

Charlie added that Berkshire’s balance sheet has grown to an extreme level compared to
its small start due to Buffett’s impressive investment results. Buffett became a learning
machine which resulted in these extraordinary results. Charlie added that Buffett
continues to improve with age, noting that there is an enormous advantage that comes
from practice over the long run. He stated more companies should copy Berkshire. He
said most company’s mandatory retirement ages don’t make much sense, as they just
pass the baton from one old codger to the next.
Charlie commented further that there is no one easy method to determine intrinsic
value. It is best to use multiple techniques and multiple models. Lots of experience is
also very helpful. Buffett added that one should understand the competitive position of a
business and understand how the business dynamics will change in the future. It is
important to evaluate the ability of management to distribute future cash or reinvest the
cash at high rates, which is what Berkshire is doing. Buffett is working hard to ensure
that Berkshire in the future will have the ability to distribute significant amounts of cash
even though they haven’t distributed any cash yet.

Both Charlie and Warren emphasized staying within your circle of competence when
investing. Charlie said Berkshire throws almost all investment decisions into the “Too
Hard” pile and only focuses on making easy decisions. Buffett laughed that he likes
walking over one-foot hurdles and stays away from the seven-foot bars.

Derivatives
Buffett said derivatives are not inherently evil, and that Berkshire uses them. Buffett
was planning on discussing 60 derivatives contracts he manages with the Board during
the board meeting. However, derivatives do put more leverage in the financial system,
which could lead to unpleasant things happening in the market. In 1987, the forced sales
that resulted from portfolio insurance contributed to the market’s more than 20%
decline in one day. Portfolio insurance, which essentially was automated stop loss
orders, was a joke which just poured gasoline on a fire and resulted in a “doomsday
machine.” Portfolio insurance is nothing compared to today’s “crowded trade” when
participants will all want to sell in response to some event. Given the leverage in
today’s market, it could create chaos. Charlie added that the accounting for derivatives
is deficient with most accountants not knowing how stupid they are behaving.

Short-termism
Buffett believes the short-term mindset many investors have is unhealthy and that it is a
fool’s game to trade daily. However, the electronic herd believes they need to make
daily trading decisions, which has resulted in portfolio turnover of 100% or more
compared to 15-20% years ago. Even bond turnover has increased dramatically.

Search for Investment Successor

Buffett said Berkshire is not looking for someone to teach in searching for a chief
investment officer but somebody who already knows how to invest. He wants someone
with a good investment record that has the ability to scale up to invest more than $100
billion with results mildly better than the S&P, such as 1%-2% better over time. He
wants to make sure he finds somebody that “doesn’t blow it.” They’ve seen plenty of
smart people do that. He wants somebody who sees risks that others don’t see. In all
likelihood, he will find out of the 700 applications several people who he will hire to
manage up to $5 billion each to see how well they do. He said this isn’t exactly a new
process for Berkshire as Buffett had to find somebody to replace him when he wound
up his partnership in 1969. Many of his shareholders then went to Bill Ruane and the
Sequoia fund, which proved to be a terrific steward of their capital. In 1979, he found
another highly successful investor when he hired Lou Simpson to manage Geico’s
investments.

Global Warming
Buffett said global warming is a serious problem in which we should err on the side of
the planet. Berkshire’s insurance business will be impacted by global warming if it
results in increased frequency and intensity of hurricanes. Katrina was not a worse case
scenario of what might happen. While Berkshire is plenty cautious about global
warming, they will manage the business so that it won’t have a significant financial
impact on Berkshire’s business. Charlie commented that he is more comfortable being a
little bit warmer than colder and doesn’t see global warming as the utter calamity some
make it out to be. He wryly noted that one would need to be a “pot-smoking journalist”
to see it that way.

Chinese Banks
Buffett said he has zero insight into Chinese banks and thus passed on an opportunity to
invest in them. Charlie added that China’s economic progress has been made despite
banking practices that would make other bankers shudder, although the Chinese banks
may now be improving. Buffett added that strong economies can overcome banking
problems just as the U.S. did during the S&L crisis.

Stocks vs Bonds
In 1969 when Buffett closed up his partnership, he said the prospective returns on
stocks were equal to what one could obtain on municipal bonds. Today, he doesn’t think
that is the situation. If he had a choice of investing in a 20-year bond or stocks, he
would choose stocks. While he would rather buy stocks cheaper, he would also rather
see bond yields higher. Relative to bonds, stocks currently appear more attractive which
is why he purchased $5 billion of equities during the first quarter. A follow-up question
asked about his 1999 Fortune article in which he advised investors to lower their
expectations on future stock returns. Buffett stated back then (at the height of the tech
bubble), he felt people were extrapolating high returns and were bound to be
disappointed. He repeated that today he feels stocks offer higher potential returns than
you could get from 4.75% bonds and that while he still doesn’t have high expectations
for stocks, he prefers them over bonds. Charlie added that Warren was right back in
1999 and he is right now in advising folks to have modest expectations. Buffett
concluded that if you buy good businesses and hold them for a long time, you will do
just fine.

Silver
Buffett joked that he bought his silver position too early and sold it to early…other than
that it was a perfect trade. Charlie added the trade demonstrated just how much they
know about silver. Buffett added that commodities respond to supply and demand, and
that there is no silver conspiracy as some suggest.
Investing Small Sums
For small investors, there are many more opportunities to invest $10,000 than $100
billion. Buffett stated, “If we had small sums to invest, we would invest differently.”
Charlie growled, “No point in thinking about that now.” Charlie later mentioned that the
best investment opportunities may be found where the market is most inefficient.

Subprime Market
The subprime market is a result of folks not being able to afford homes. Buffett stated
that dumb lending and dumb borrowing occurred in the subprime market on the belief
that home prices could only go up. The resulting problems in the subprime market will
cause plenty of misery for those involved, but it shouldn’t spill over into the overall
economy unless unemployment rises significantly or interest rates rise dramatically.
Buffett concluded that he doesn’t think the subprime woes will trigger a major impact
or be a huge anchor on the overall economy. Charlie added that a combination of sin
and folly resulted in the subprime mess with accountants letting profits be shown on
loans when they shouldn’t have. He further added that he didn’t know how those who
were making subprime loans to the undeserving poor or the overstretched rich could
face themselves in the mirror…as they would find a face looking back at them that was
evil and stupid. Buffett added that securitization of the loans accentuated the problem
similar to what happened in the manufactured housing industry a few years back. He
noted that the flippers will get flipped but in a different way than they may have
expected.

Managed Futures Funds

The form of an investment vehicle whether it is private equity, a hedge fund or a
managed futures fund doesn’t produce value. What creates value is the management of
the funds. Berkshire makes sense since they have the ability to invest in any asset class.
A managed futures fund shrinks the possibilities of investments. Charlie added that he
believes the average return of a managed futures funds is between lousy and negative.
Buffett said it is a mistake to get sold on something like a managed futures fund as a
great area of opportunity. Brains provide the opportunity not the investment form.

Insurance Regulatory Changes

Following Katrina, many insurance companies cited exclusions in the policies for wind
or water damage to not pay claims. Buffett said when folks buy insurance they don’t
read every line item and their insurance agents don’t always point out the fine print. He
said any exclusion on coverage should be disclosed in big and bold type. Buffett said
government interference or new regulations will thus occur when folks think they
haven’t been treated fairly. Insurance companies in turn will then be reluctant to write
new insurance as it may become too expensive to provide insurance coverage for
hurricanes. This has resulted in states like Florida having to self-insure by providing
citizens with coverage at lower prices. Under new regulations, Florida plans to provide
$30 billion in coverage. The problem occurs if a $100 billion storm hits. Florida may
then look to the federal government for help. This leads to a tussle on whether folks in
Nebraska should subsidize the insurance costs of those choosing to live in Florida.
Funds for Future Acquisitions
Even though Buffett spent $5 billion on equity investments in the first quarter,
Berkshire still has plenty of funds for future acquisitions of entire businesses. Buffett
cited the TTI acquisition that closed in the first quarter as a very attractive acquisition.
With $46 billion in cash, he is as prepared as ever to purchase more businesses and
could sell part of his investment portfolio to fund even larger acquisitions if they should
arise. Charlie repeated that Berkshire won’t make the returns like they did 5-10 years
ago, and investors should have more modest expectations.

Volatility as a Measure of Risk

Buffett said volatility is NOT a measure of risk. While beta is a nice mathematical tool,
it is wrong as a measure of risk. Beta is, however, useful if you want a career in
teaching. Beta may point out that the cheaper something becomes, the riskier it is which
doesn’t make sense. For example, when farm prices in Nebraska fell from $2,000 an
acre to $600 an acre, the beta increased which would indicate that is was riskier to buy a
farm for $600 an acre than it was for $2,000 an acre. Risk comes from the nature of
certain types of businesses and from not knowing what you are doing. Buffett cited his
investment in Dexter Shoes as an example of his not understanding the nature of the
business, which resulted in him making a terrible mistake in investing in the company
through the exchange of Berkshire stock. Charlie added that 50% of what is taught in
universities, such as concepts like beta, is twaddle. He noted that even with high IQ’s,
smart people can do very dumb things. He says you should try to understand why they
do the dumb things and who they are, so you can avoid them.

Evaluating Integrity of Management

Buffett stated that when he made the $5 billion in stock investments in the first quarter
that he had never met management of those companies or spoken to them. You can
learn a great deal about management by reading their letter to shareholders. If there are
dishonest or misleading messages in the letter, you should avoid those companies. If
the letter looks like it was written by an outside consultant, you may also want to avoid
the company. You should seek to invest in companies where management is willing to
directly talk to investors through their letters to shareholders. However, when Buffett
buys an entire business, that is different, and he needs to meet management. Charlie
added that if the quality of a business is good enough, it will carry a lousy manager.
However with a lousy business, even a good manager may not make much of a
difference. Buffett cited Ford as an example where even a first draft manager may have
a tough time due to outside factors like labor unions.

PacifiCorp Dam Removal

A couple of moving questions were asked about the impact PacifiCorp’s dams are
having on the salmon population and the livelihood of the Indians and fishermen who
rely on the salmon. Buffett responded that there have been 27 different proposals put
forth on what to do about the dams that FERC is evaluating. As a public utility,
PacifiCorp will respond to public policy and take action consistent with the guidelines
issued.
Merger of NYSE and Euronext
Buffett said he didn’t know much about the proposed merger but expected that if it goes
through it should result in narrower spreads and reduced costs while making trading
more efficient. Charlie succinctly responded that he didn’t know anything about the
merger. Buffett laughed and said, “I don’t either, but I took a whole lot longer to say it.”

Trust
A shareholder from Seattle joked that he could help global warming and save money, if
he could ride with Board Director, Bill Gates, in his jet to next year’s annual meeting.
He then asked, “How do you know the people to trust?” Buffett joked back, “You
probably have as good a chance of getting an answer from me on that question as you
do on getting a ride on Bill Gates plane!” Buffett said while he couldn’t really answer
that question, Berkshire has a high batting average (more than 90%) in joining with
people they could trust. Charlie added that you should be suspicious of propositions that
sound too good to be true like the fellow who only sold fire insurance to companies
with bridges under water.

Reviewing Stock Positions

Buffett was asked how often he reviews his stock positions. He said when he had more
ideas than money, he would look at the positions all the time as he evaluated the
opportunity costs and determined whether he needed to sell something to buy something
better. Now with more money than ideas, the opportunity cost is what he earns on cash.
He still thinks about all his businesses all the time which is a continuous process to
understand the businesses better. However, he isn’t reviewing them in order to actively
trade them, but to use the daily information he collects about them to make better future
decisions.

Abundant Cash
A shareholder noted that Buffett had invested $1 billion in several large cap companies
recently and asked why he didn’t invest more like $5 billion in each company given
Berkshire’s abundant cash. Buffett noted that if he acquires more than 10% of a
company, he faces some restrictions on selling a position due to short-swing profit
rules. He stated that subsequent to year end he has added to several of the positions he
took in 2006 by several billion dollars. Charlie added it is not as easy as it looks to buy
big positions as there is no easy way to move elephants around. Buffett commented
further that he can often buy up to 20% of the trading volume on large purchases
without pushing the stock price up, but Berkshire is a big ocean liner which creates
some difficulties in placing trades.

Role Models
In response to a question on who their present day role models are, Buffett said he
didn’t want to comment as he would leave somebody out. He acknowledged that
choosing your heroes is very important. When one marries, they should always hope to
marry up in stature and hope their spouse doesn’t mind marrying down. Charlie added
that one should not restrict themselves to picking living people as mentors noting that
some of the best heroes are dead. (Ben Franklin probably tops Charlie’s list.)

Ethanol
Charlie said that running cars on corn in one of the dumbest ideas he has ever seen. He
noted that the higher corn prices are driving up the cost of food, and the energy used to
make ethanol is more than the cost savings from using it. Buffett joked that they would
have to smuggle Charlie out of Nebraska.

Inflation Protection
Buffett stated that the best inflation protection is one’s own earnings power. He doesn’t
consider metals or other commodities as good inflation hedges. He thinks wonderful
businesses like Coke, Snickers, and Hershey provide better inflation protection. Any
business with low capital requirements that produce products people keep wanting to
buy will enjoy pricing flexibility.

Railroads
Buffett’s recent billion dollar investment in Burlington Northern and the mention of
other railroad investments prompted a question on the industry. Buffett noted that the
competitive position of the railroad industry has improved relative to trucks as oil prices
have increased. Higher oil prices hurt truckers four times more than the rails. The rails
have also negotiated better labor costs. There isn’t as much capacity in the railroad
industry as there was 30 years ago when the rails were a terrible business. While the
rails are a better business today, they should earn decent returns but not great returns as
the business still is capital-intensive.

Best Way for a 10-Year Old to Earn Money

In response to a 10-year old girl’s question on the best way to earn money, Buffett
mentioned his paper routes. He noted by the time he graduated from high school, he had
operated 20 different businesses, the most successful being a pinball business. He stated
that there was a study which showed that the best correlation of success in business was
with the age one started their first business. Charlie noted that one shouldn’t just focus
on compounding money but also on compounding their mental interests. He said he sold
the best hour of the day to himself to improve his mental game. Charlie then added that
if you make yourself very reliable and stay reliable, then it will be hard to fail at
anything you want to do.

Competitive Position
Buffett thinks Berkshire is in a good competitive position with the group of businesses
they own for the world we face today. While Buffett doesn’t really buy businesses
based on world trends, he does think businesses with high labor requirements will face
difficult times. He doesn’t want to invest in businesses where the competitive position
may be eroded away. He prefers to deal from strength with good management teams at
the right value. Charlie added that Berkshire learned the hard way about how foreign
labor could hurt their shoe businesses. In regards to Berkshire’s shoe business
investments, he quoted Will Rogers: “There are three kinds of men. The ones that learn
by reading. The few who learn by observation. The rest of them have to pee on the
electric fence for themselves.”

Weak Dollar
Buffett stated he thinks the dollar will decline further in value. In the past, Berkshire
benefited by this belief through investments in foreign exchange contracts until the
carry cost became too expensive. Now Berkshire is buying companies that earn lots of
money in foreign currencies. He clarified, however, that the weak dollar is just one
factor in making investment decisions. He teased that Berkshire currently is only
involved in one foreign currency trade which would surprise us and that he would tell
us about it next year. Charlie added that despite this record decline in the value of the
dollar, Costco dollar inflation has been virtually zero. While U.S. oil prices have
doubled from $30 to $60 per barrel, oil is up only about 25% in Euro terms. Buffett
noted that currency will matter more to Americans in the future as it was something
they never really had to think about before.

Board of Directors
Buffett stated that in the past, Board of Directors were viewed as little more than potted
plants as management really didn’t want much input from the Board. Today with the
change in regulations, the Board has to be involved more in the management process.
The overwhelming responsibility for the Board is to make sure they have the right CEO
in place and that there is no overreaching by the CEO. The Board also needs to bring
independent judgment on reviewing potential acquisitions. Charlie commented that big
deals companies make usually are to the contrary of the best interests of the
shareholders on the acquiring company’s side. He growled further that the self-serving
delusional nature of those with high IQ’s is amazing. Buffett agreed saying that
companies need to weigh what they are giving away to make sure they are getting more
in value than what they are giving. Once again, he noted how Dexter Shoes was the
dumbest deal he ever made at Berkshire. Buffett concluded by stating that Berkshire has
a terrific Board of Directors who all possess significant ownership in the company
through shares they purchased in the open market not by shares that were given to them.

Deal Partners
Buffett said Berkshire doesn’t want to do deals with partners as they have enough
money to do deals on their own. Charlie reminded him that they did successfully do a
deal with Leucadia who brought the deal to them. Buffett agreed saying he would do
more deals like that and with the managers of the companies they already own.
Commodities
A shareholder noted that Berkshire appeared to be increasing its exposure to
commodities through investments in oil (PetroChina), steel (Posco), and rails (an
agricultural play). Buffett responded by saying he has no opinion on commodities and
very seldom does. He invested in Posco because it is one of the best steel companies
and was selling for about 4-5 times earnings when he purchased it with a debt-free
balance sheet. It also served as a play on the Korean won. Instead of commodities,
Buffett prefers to invest in companies which generate very high returns and require little
capital to operate…citing See’s Candies as a good example. Charlie echoed the
comment saying Berkshire invests in businesses not commodities!

Newspapers and Dual-Class Stocks

A shareholder questioned whether the dual-class of newspaper stocks like Dow Jones,
The New York Times and The Washington Post have resulted in the poor performance
of the businesses. Buffett stated that the woes of the newspaper industry had nothing to
do with the holding structure of the companies. He said the newspaper world has
changed due to the Internet. The Buffalo News has seen their earnings decline 40%
from peak earnings despite being one of the better newspapers in the country. Charlie
commented that shareholders stomping their feet and insisting that company’s change
their dual-status policy which was in place at the time they purchased the stock are
immature.

Divestment of PetroChina
In response to the proxy proposal that Berkshire divest its position in PetroChina,
shareholders voted 98% against the proposal. A discussion on the issue was held as part
of the business meeting.
BERKSHIRE HATHAWAY ANNUAL MEETING ON MAY 3, 2008

When we were checking into the hotel in Omaha for the Berkshire Hathaway annual
meeting, the young couple ahead of us asked the desk clerk what was going on in town
given that it was so busy (more than 31,000 people from around the world had arrived
to hear the Oracle of Omaha). The desk clerk responded that it was the Berkshire
Hathaway meeting. The young fellow quizzed, “The Berkshire what meeting?” The
desk clerk rolled her eyes and said, “You know, Warren Buffett!” The young fellow
shrugged his shoulders as he obviously had never heard of Berkshire or Buffet. He then
muttered, “It figures! Last place we visited was really busy, too, since an Elvis
convention was in town.” At this point, I couldn’t resist joking, “In Omaha, Warren is
bigger than Elvis!”

Warren Buffett and his 84-year old sidekick, Charlie Munger, got things “All Shook
Up” with these comments from the annual meeting:

INVESTMENT LESSONS

Warren Buffett said the best investment lessons still come from Ben Graham’s book,
The Intelligent Investor. If investors absorb the lessons from Chapter 8 and 20, they
can’t get a bad result. The three most important lessons are: 1) Think of a stock as part
of a business and seek to own a group of high-quality businesses, 2) Use the stock
market to serve you, not to instruct you, and 3) Always buy with a margin of safety.

INSURANCE BUSINESS

Currently, Berkshire owns 95% of Cologne Re, which is a subsidiary of General Re.
Cologne Re is the oldest reinsurance business in the world. Berkshire will soon own
100% of this “magnificent business.” Operations will continue as normal with the
exception of the investment portfolio at Cologne Re which will be taken over and
managed by Berkshire.

FORECASTING THE STOCK MARKET

Warren Buffett stated he doesn’t have the faintest idea of where the stock market is
going, and he has never been in the business of forecasting the direction of the stock
market. He advised investors not to think about the stock market, but to focus on
looking for businesses that are attractively priced. Seek to own companies you would be
happy to hold even if the stock market was closed for a couple of years.

FINDING GOOD MANAGEMENT

Buffett said he finds good management teams by “cheating.” Berkshire runs a

decentralized operation with 250,000 employees and only 19 people at headquarters.
He only buys businesses with good managers in place after watching how the
businesses have performed over decades. Buffett’s job is to retain the good managers
even though most of them are independently wealthy. Before buying a business, Buffett
questions whether the managers love the business or love the money. The Berkshire
managers love the business. Buffett can see the passion in their eyes and works hard to
create an environment in which the managers are appreciated. Buffett looks for
managers who are batting .400 and who are good communicators. He told the story of
how Mrs. B worked at the Nebraska Furniture Mart until she was 103. After retiring,
she died the next year. He joked, “That should be a lesson for all our managers.”

USING STOCK OPTIONS AS PART OF INVESTING STRATEGY

Warren Buffett said he virtually never uses stock options as part of a strategy either to
enter or exit a stock position, although he did once sell a put option on Coca-Cola which
was never exercised. He would have been happy if it had been exercised so he could
have accumulated more Coke shares at an attractive price. However, he noted that if
you want to buy or sell a stock, you should just do it as you may miss the transaction
you want if you play around with options. If you want to buy a stock you don’t need
“fancy techniques.” Buffett added that teaching option pricing in business school is a
waste of time. What business schools should teach is how to value a business and how
to think about stock market fluctuations. Investment success is driven by buying good
businesses at the right price.

Charlie Munger chimed in that stock option exchanges turn the financial markets into
gambling parlors so the croupiers can make money.

CHARITABLE GIVING

Buffett said while he is giving away his excess money (the largest charitable donation in
history); his giving is not on par with those who give both money and time that makes a
difference in their lives. He cited his sister, Doris, as a generous giver. Buffett warned
that you can make mistakes in giving just as you can in any area, so he advised making
gifts to something you are involved with.

Charlie predicted that if you have an extreme political ideology, you are likely to make
a lot of dumb charitable gifts.

CORPORATE ETHICS

When questioned whether Fruit of the Loom runs “sweatshops,” Buffett commented
that Fruit of the Loom has terrific ethical standards. Buffett lets the managers run their
businesses as they see fit, and the ethical standards of the managers have been
extraordinary. While Buffett doesn’t provide them with any guidelines, he has told them
that Berkshire has all the money they need but not a shred of reputation to lose.
Therefore, there is no pressure or incentive for the managers to “manage earnings” by
doing something unethical. While Berkshire is not perfect, Buffett is not unhappy with
the batting average of his managers.

COMMODITY PRICES AND INFLATION

High commodity prices (notably tungsten) had no impact on Iscar’s decision to build
their plant in China. They just wanted to be closer to the customers they serve in the
Chinese market. While there is no substitute for using tungsten in cutting tools, it
usually takes 3-6 months for changes in commodity prices to impact profitability for the
business. Iscar generally passes through the higher costs. Buffett commented that he had
very high expectations for Iscar when he purchased the business and that those
expectations have been exceeded. He described Iscar as the “dream acquisition” both
financially and from a people standpoint.

However, in certain Berkshire businesses, such as the carpet business, it is tough to pass
on higher costs given the slowdown in housing.

Charlie said he doesn’t like inflation since it is bad for the country and bad for
civilization, but noted that Berkshire will make more money because of inflation.

LARGE-CAP VERSUS SMALL-CAP EQUITY PURCHASES

Buffett acknowledged that he has made significant equity purchases over the last 12
months, but cautioned investors not to expect the same returns as Berkshire has earned
in the past. He said he will be happy if Berkshire earns a pre-tax total return of 10% on
these equity investments. Given Berkshire’s size, he must look at large stocks with
market capitalizations of at least $10 billion, since a 5% position would be $500
million. Even if that stock doubles, after paying taxes, the return of that investment just
won’t move the needle much at Berkshire. Buffett’s universe of stock investments has
thus shrunk enormously with Buffett generally seeking investments with market
capitalizations of at least $50 billion. Berkshire will buy large, first-class businesses
with first class managers. These large companies, however, will not produce as
profitable returns as may be found among smaller capitalization companies. Buffett
noted that Berkshire will still get decent results, but not indecent results.

Charlie added that investors can take Warren’s promise to the bank noting that
Berkshire’s returns will be less in the future than in the past and suggested investors
adopt that attitude.

In terms of the large businesses he knows, Buffett said he has a “Go-No Go” signal on
what businesses he can understand, which rules out lots of things. If he can’t make a
decision in five minutes on a business, then he knows he can’t make it in five months of
study about the business. Charlie added, “We don’t do start-ups.”
KLAMATH RIVER AND POLLUTION

Several questions were raised as to possible pollution from Pacificorp in the Klamath
River. In making the acquisition of Pacificorp, Buffett had to agree to prohibitions from
making decisions related to Pacificorp’s operations. He, thus, turned over these
questions to David Sokol, the chairman of Berkshire’s utility businesses. Mr. Sokol
explained that Pacificorp is in re-licensing discussions for their dams with 28 various
parties. These negotiations will be subject to FERC and state regulator rulings. If public
policy moves in the direction of dam removal or status quo, then Pacificorp will work in
whatever direction is dictated. There are trade-offs in government policy in terms of
looking at the economic cost of electricity versus what is best for society. There will
always be lots of competing desires and needs of society.

MAINTAINING GOOD PHYSICAL AND MENTAL HEALTH

When Buffett was asked how he maintains good mental and physical health, he reached
for a piece of See’s candy and chuckled, “It starts with a balanced diet. You need some
See’s, some Wrigley’s and some Coca-Cola.” He said what really helps is liking his
job. Other than meeting with a trainer three times a week for 45 minutes, he loves what
he does every day. He asked, “How can you be sour in life when you have great
partners, great managers and a great family? We count our blessings.” Buffett continued
that associating with wonderful people is as good as it gets especially when you live in
the best country in the world.

Charlie added that while he wishes they could be poster boys for running marathons,
neither of them pay much attention to diet and health rules and it has worked out pretty
well. He growled, “I don’t plan to change!”

CORPORATE COMPENSATION

Buffett ridiculed $10 million or more retention bonuses that some corporate CEO’s are
given. He said he doesn’t know a CEO who wouldn’t do the job for half the price.

Charlie added that, “In a job that you would pay to have, there is a lot to be said for not
paying yourself very well. You should be an exemplar.”

Buffett noted that individuals can’t do much about protesting excessive corporate
compensation, but that large mutual fund owners could. He said that if they would
withhold their votes and issue a short statement about why, it would get the board of
directors’ attention since “big shots don’t like to be embarrassed.”

DETERMINING A PROFESSION

A high-school student asked Buffett the best way to choose a profession to follow.
Buffett advised the student to choose something he is passionate about as it is terrible to
“sleepwalk through life.” For Buffett, it was investing since he was good at it, and it
required no heavy lifting. Buffett learned about investing by reading books in his Dad’s
office. He noted those books turned him on, while joking that was in the days before
Playboy. He also advised going to work for an organization or individual you admire,
which leads many people to become self-employed. Buffett recalled how he went to
work for Ben Graham for two years, and he was excited every morning to get out of
bed. He also said it was very important to find the right spouse, although that is
sometimes easier said than done. He joked about the fellow who looked for 20 years
before finding the perfect woman. Unfortunately, she was looking for the perfect man.

Buffett also advised a young student to read a daily newspaper and learn as much about
the world as he could. Find out what is most interesting to you. The more you learn, the
more you will want to learn. He also tells students, “The best investment is an
investment in yourself. You only have one body and one life, so take care of your body
to make it last a lifetime.”

Charlie added that you’ll do better in life if you develop a passion for something you
have an aptitude in…noting that if Buffett had gone into ballet, no one would have ever
heard of him. Charlie also said teachers should teach students how to avoid being
manipulated by vendors and lenders. He recommended that teachers include Robert
Cialdini’s books, “Influence, The Psychology of Persuasion” and a new book, “Yes” on
their reading lists. When speaking of books, Warren recommended Lawrence
Cunningham’s “The Essays of Warren Buffett” which has recently been revised.

COMMUNICATION

Buffett revealed that when he was in high school and college, he was terrified of public
speaking. It made him physically ill. He decided to take a Dale Carnegie course and
after signing up for the course with a check for $100, he promptly put a stop payment
on the check. The next time he signed up for the course, he paid with cash which forced
him to complete the course. Afterwards, he volunteered to start teaching which forced
him to speak in public. Buffett said the ability to communicate whether in person or in
writing is enormously important as it will provide you with an enormous advantage in
life. He advised folks to do it while young and force yourself into situations where you
have to do it.

PAIRS TRADING

Pairs trading is when investors may be long in one security which they believe is
undervalued while short in a similar security that they believe is overvalued. Ben
Graham was the first to employ this technique in the 1920’s and it worked modestly
well. Buffett employed the strategy in the 1960’s but did it by shorting the general
market and not shorting individual securities. Buffett added it is not something he
would do today. He said if you can buy an undervalued business, there is no need to
short the market. He commented on the many new 130/30 mutual funds that have
come out recently where they go long 130% and short 30% in the portfolio. He said,
“They are just trying to sell the idea of the day.”

Charlie added that Berkshire made their money by being long wonderful businesses not
by being short.

DISLOCATIONS IN CREDIT MARKETS

Buffett said Berkshire will make extra money due to dislocations in the credit markets.
Specifically, he referenced the severe dislocations which occurred in the auction rate
securities market for municipal bonds. There were huge dislocations involving billions
of dollars of securities. He cited the example of one security he purchased for an 11.3%
yield that someone was bidding 6% for at the same time. Buffett said when there are
extreme dislocations such as during 1973-1974 and the Long Term Capital
Management period, it is a great time to make money. Berkshire did invest $4 billion in
auction rate securities which will make extra money for Berkshire for a few months,
although it won’t be significant overall to Berkshire’s results.

Charlie added the extreme market dislocations generally provide very brief
opportunities to take advantage of them. Municipal securities were mispriced as hedge
funds had to dump them. Those who could think fast and act quickly were able to take
advantage of this brief opportunity.

GROWING A SMALL BUSINESS INTO A BIG BUSINESS

Buffett said it just takes time and the nature of compound interest to grow a small
business into a big business. Currently, Berkshire owns 76 wonderful businesses.
Berkshire will own more businesses in a few years than they do now and most of the
existing businesses will be better businesses. Buffett cited Gypsy Rose Lee who said, “I
have everything I had 20 years ago, except it is two inches lower.” With Berkshire, we
have everything we had 20 years ago, except it is better!

Charlie noted that most small businesses will not grow into big businesses and that most
big businesses fall into mediocrity or worse. Charlie noted, however, how Berkshire had
created from scratch a small reinsurance business and turned it into a large business
thanks to Ajit Jain. Charlie said Berkshire’s best investment was the fee paid to the
executive recruiter that brought Ajit to Berkshire.

BERKSHIRE HATHAWAY ASSURANCE

Ajit Jain has also built an entire municipal bond insurance business, Berkshire
Hathaway Assurance, in a matter of months. This business generated $400 million in
premium volume during the first quarter of 2008. They did 278 transactions out of
Ajit’s office of 29-30 people. This volume is larger than all the other muni bond
insurers combined. All of this business came from people who already had paid
insurance fees of 1% to other muni bond insurers, while paying Berkshire 2 ¼% to
provide secondary insurance in case the other muni bond insurers failed, which tells you
something about the meaning of the other insurers “Triple A” ratings. Berkshire
Hathaway Assurance recently also wrote $370-$380 million of primary insurance for
the Detroit sewer system with these bonds trading at lower yields than other issuers due
to Berkshire’s insurance.

BEST METRIC TO EVALUATE A BUSINESS

Buffett said the best way to evaluate an investment is to ask yourself if you understand
the business enough so that you will know the future of the business. You need to
understand the nature of a business before you can make a judgment on the financial
statements.

Charlie added that one metric he prefers is to find businesses that “drown in cash.” He
hates businesses where there is no cash left at the end of the year. Buffett agreed that he
likes businesses that send him cash year after year.

GROWTH VS PROFITABILITY and EUROPEAN BUSINESSES

When Buffett was asked whether he preferred a business like See’s Candies, which has
high profitability but little global growth or a company like Lindt Chocolates with lower
profitability but higher global growth, he said, “It doesn’t matter.” What Buffett is
looking for is a business with a durable competitive advantage with management he
likes and trusts and that he can acquire at a price that makes sense. He added that Lindt
is unlikely to sell at a price that Berkshire would pay. Unlike the stock market which
does occasionally provide one with bargain prices, private businesses don’t generally
sell for bargain prices. If Buffett can buy a private business at a fair price, he will do it,
but he will never do a deal “regardless of the price.”

He added that most private wonderful businesses should remain private. However, there
are times for either tax or family reasons that they need to sell the private business. In
that case, he hopes the business will consider Berkshire as a possible buyer since they
will be able to retain more of their attributes of the business if they sell to Berkshire
than to another buyer. Buffett is going to Europe to get on the radar screen of private
businesses that may want to sell to Berkshire.

Charlie told the story of a wonderful business that was sold to a known crook so the
seller could get a higher price. He said that was “insane” and you should always sell a
business to somebody you know will be a good steward of what you created.

HEDGING THE DOLLAR

Buffett said he is happy to invest in businesses in other currencies as he doesn’t expect

their currencies to depreciate against the U.S. dollar. Over the next 10 years, he expects
the U.S. dollar to continue to weaken. Berkshire’s investments already earn a fair
amount of earnings from outside the U.S. like Coca-Cola, which is benefiting from the
weaker dollar.

POLITICS

Asked what policies he would implement if he were President, Buffett joked that the
first thing he would do if elected would be to ask for a recount. Buffett noted that he
would do something about the tax system so that the super-rich paid more and the
middle class paid less.

He said we have three good candidates for President who are smart about economics.
He added that the country works pretty well despite politics. While the politicians have
to employ “situational politics” like calling for windfall taxes on the oil companies to
help them get elected, they will behave once they get in the White House.

Charlie commented that after Enron shocked the nation with gross folly, the politicians
passed Sarbanes-Oxley regulations which were equivalent to shooting an elephant with
a pea-shooter. The current convulsion in the market makes Enron look like a tea party.
We will end up with new regulations that also won’t work perfectly.

SUCCESSION

Berkshire has three internal candidates to assume the CEO position if needed.
Berkshire’s board is unanimous on knowing which one to pick if the decision had to be
made tomorrow. They will pick someone reasonably young.

As far as the Chief Investment Officer, there are four candidates that would be good to
fill the job. They meet the criteria Buffett laid out in the 2006 annual report, including
being genetically programmed to avoid risk. They are all reasonably young, rich and
happy where they are currently working. Compensation will not be a major factor.
Right now there is no reason for them to come to work for Berkshire as Buffett will
continue to make the majority of the investment decisions. (Buffett noted that he quit
working for Ben Graham, because he wanted to make his own investment decisions.)
However, the Board knows who they are and will decide on one or all four of them
when necessary. There will be no gap in having someone available to manage the
business.

Charlie chuckled that Berkshire still has a “rising young man named Warren Buffett” to
make investment decisions. Buffett retorted that is the advantage of having a partner
who is 84, since he will always appear young to Charlie. He also joked that with their
average age being 80, they are only aging at a rate of 1.25% per year which is the
lowest rate of aging in Corporate America. It is much riskier to have a 50-year old CEO
who is aging 2% a year.
DIVERSIFICATION

If you are confident in your investment decisions, there is nothing wrong with investing
75% of your net worth in a single investment idea. The problem occurs if you put 500%
of your net worth in an investment through leverage. That’s what happened at Long
Term Capital Management….they didn’t get to play out their hand. While Berkshire is
“not a cinch,” there is a strong probability that the business will do fine. Capital Cities
in 1974 was selling for 1/3 of the value of their properties with the best manager in the
industry, Tom Murphy, running the business. In that case, an investor could have put
100% of their net worth in that investment and not worried. At the initial time,
Berkshire acquired Coca-Cola, an investor could also have heavily invested in Coke
without worrying about diversification.

Charlie added that students learning about diversification in corporate finance classes
have it taught to them “bass ackwards.” Diversification is for the “know nothing”
investor not for the professional investor who knows what they are doing. Buffett
quickly added that there is nothing wrong with diversification (through a low-cost index
fund) for investors who don’t have time for investing.

As far as diversifying assets among taxable accounts and IRAs, Buffett advised looking
at your overall account as a single unit in terms of making investment decisions. Charlie
added that if you do have investments which generate high taxable income then you
may find those investments to be more suitable for an IRA.

OIL, COAL AND ETHANOL

Buffett said we will not run out of oil in the next century, although the production of oil
will at some point level off and decline gradually. Depletion will decline gradually from
the 87 million barrels of oil being produced daily now. The surplus capacity in oil is
less than at any other time in history. Buffett said he doesn’t know if peak oil will occur
in five years or fifty years, however, adjustments will be made.

Charlie added that if we have another 200 years of economic growth like in the past,
then all natural resources will be used up, and we will have to rely on the sun. There
will be pain along the way. Government policy is way behind rationality. Oil production
will be down 25 years from now at the same time demand will be increasing which will
result in “interesting consequences.”

On future trends in the coal business, Buffett noted in the short-term, the world will use
more coal. There is no doubt this will have an environmental impact, however, we will
figure out better ways to use coal. The U.S. is very dependent on coal and is using
cleaner coal than 20 years ago.

Charlie stated that turning corn into motor fuel was one of the dumbest ideas he has
ever seen. The “stunningly stupid” idea is probably on its way out.
DERIVATIVES AND RISK IN FINANCIAL INSTITUTIONS

Warren Buffett said he is the chief risk officer at Berkshire, a position he won’t assign
to a committee or to mathematical formulas. Buffett runs Berkshire so there won’t be a
problem even if the world doesn’t work the same way as it did yesterday. While Buffett
could have employed more leverage to boost returns, he wouldn’t sleep as well at night.
If you can earn a decent return on capital, why take on additional risk for 1% more
return?

He said the large investment banks may be too big to manage the risk they undertook in
the way they elected to conduct their business. The risk is very hard to manage as he
saw when he inherited General Re’s 23,000 derivative contracts. In the very large
financial institutions that have endured trouble during this latest crisis, if the CEO knew
what was going on with the risk they were assuming, they shouldn’t have allowed it. If
the financial institution is too big to manage the risk and the government also says the
institution is too big to fail, there will be interesting policies.

Charlie exclaimed that it is crazy to allow companies to get too big to fail, especially in
this crazy culture of greed and overconfidence in algorithms. It is demented to allow
derivative accounting to have become embedded in the financial system. It is too easy
for financial institutions to report earnings and assets that are “good until reached for.”
Charlie continued, “Wall Street believes in the tooth fairy. The accounting profession
utterly failed us.”

Buffett noted that there was controversy over fair value accounting for financial firms,
but he said he would stick with firms that report on a fair value basis as it is better to
have the discipline of valuing assets at market rather at cost, which could be fictitious.

Buffett said that the Federal Reserve did the right thing in regards to the near collapse of
Bear Stearns. If Bear Stearns had failed, the counterparties of $14.5 trillion of
derivatives would have had to undo their contracts promptly which would have resulted
in a “spectacle of unprecedented proportion.” There would have been other investment
banks that would have gone down. Many didn’t believe they could not borrow on a
secured basis. However, if the world doesn’t want to lend you money, they won’t--no
matter how much the interest rates are. During this chaos, the investment banks had to
wonder if others would think well of them the next day.

Buffett stated that CDO’s squared were nuttiness squared as you would have had to read
750,000 pages of prospectuses to have known what were in these deals. Charlie added
that there is much that goes on in the bowels of the financial industry that is not pretty.

BUYING WITH A MARGIN OF SAFETY-PETROCHINA AND MARS

After reading PetroChina’s annual report, Buffett though PetroChina was worth $100
billion. With the stock selling for $35 billion, there was no need for Buffett to talk to
management. He also didn’t need to refine his analysis any further. Buffett really likes
investments where you don’t have to carry out the analysis to three decimal points to
make the investment work. It is like when someone who weights 300-350 pounds walks
in the room. You don’t need to know how much they weigh to know they are fat.
Likewise, Buffett looks for “fat” investments. When PetroChina’s valuation reached
$275-$300 billion, it approached Buffett’s assessment of full value so he sold the stock.
At one point, PetroChina’s stock valuation made it the most valuable company in the
world. If PetroChina sold once again at a significant discount to its intrinsic value,
Buffett would buy it again.

Charlie added that Berkshire probably has lower due diligence expenses than anyone in
America and with better results. At Berkshire, they think like engineers and always
want a margin of safety when making investments.

Buffett commented further that if you think the auditor knows the business better than
you, then you are in trouble. He said if he already didn’t know the Wrigley’s and Mars
businesses when the phone call came in, he wouldn’t have made the recent deal.
Digging into details like lease terms just don’t matter. Many miss deals due to too much
due diligence. In terms of big deals, people will come to Berkshire when they want to
get the deal done fast. Mars only wanted to deal with Berkshire, since they knew
Berkshire had the $6.5 billion available and that Buffett would follow through with the
deal whether there was another 911 attack or whether Ben Bernanke ran off to South
America with Paris Hilton.

BERKSHIRE AFTER BUFFETT

When asked what safeguards were in place to ensure that Berkshire wasn’t raided by
LBO firms looking to sell off pieces of Berkshire after Buffett’s death, Buffett noted
that his stock will be sold gradually for 12 years after his death. (He has told his lawyer
to let his estate last as long as possible, which is like telling a teenage son to have a
normal sex life.) He expects Berkshire’s market value will be much larger then than it is
now. A $600-$700 billion or bigger takeover would thus be pretty unlikely as Berkshire
will be one of the largest companies in the U.S.

Charlie joked that Warren told him what he wants said at his funeral is “That is the
oldest corpse I have ever seen!”

BRANDS

While Buffett wouldn’t comment specifically on his purchase of Kraft, he noted that
most food companies are good businesses that earn good returns on tangible assets.
Branded products are good assets. For example, it would be impossible for a competitor
to take on a product like Coca-Cola around the globe. A company like RC Cola can’t
take away market share and Richard Branson’s Virgin Cola just didn’t work due to
Coca-Cola’s strong brand. Buffett feels good about branded products. If you don’t pay
too much for a strong brand, you will do OK with it as an investment.
OLYMPICS

When asked if Coca-Cola should boycott the Olympics in China, Buffett said he thinks
it is a mistake to not allow countries to participate in the Olympics.

Charlie added that those who are distressed by imperfections in China should recognize
that China is moving in the right direction and also recall that it wasn’t that long ago
that the U.S. had questionable policies in regards to rights for women and blacks.

INVESTING IN BANKS

Buffett said he doesn’t invest in banks by looking at their market capitalizations but
rather at looking at the culture of the bank, which is driven by the CEO. At Wells Fargo,
U.S. Bancorp and M&T Bank, Buffett understands the DNA of the institutions. This
doesn’t mean they are immune to problems but that they are immune from institutional
stupidity.

Charlie added, “There are more banks than bankers, which says something!” Given that
many bank stocks have been pounded during this latest financial crisis, prospecting for
investment ideas in the banking area is prospecting in the right direction.

NUCLEAR PROLIFERATION

Buffett noted that nuclear proliferation is the greatest problem of mankind. The genie is
out of the bottle in terms of nuclear knowledge with many that wish ill on their
neighbors. Given these weapons of mass destruction and the threat to human mankind,
we should do everything possible to reduce access to materials to construct nuclear
bombs. As Einstein said, “The release of atom power has changed everything except
our way of thinking.” We are very lucky that nothing major has happened already, and
it is paramount for the administration to address the issue.

BASEBALL TEAMS AS INVESTMENTS

When a young man asked Buffett if he might buy the Chicago Cubs, he noted that it has
been a good investment to buy baseball teams especially as television has expanded the
stadium. However, he said that he didn’t think he would buy a team today although
many rich people like to buy baseball teams as it makes them “instant celebrities.”

SAVING

Buffett noted that the savings rate in the U.S. has fallen significantly while the
propensity to save in Asia is almost innate. If investors own Berkshire stock, they are
automatically saving through Berkshire’s retained earnings. As a nation we are
importing more than we are exporting. However, since America is so rich our standard
of living will continue to improve although nowhere near the rate of improvement that
will be seen in China or Korea due to their savings. However, given that the U.S. is
already so rich, perhaps we don’t need to save as much.

ECONOMIC STRESS

Buffett commented that this period of economic stress started with subprime mortgages
and then found a way to spread to other areas. He doesn’t remember a real estate bubble
that has sent out shock waves like this one. Stupid things were done that won’t be done
again soon, however, some variation will occur in the future.

Charlie added that this period has been a “foolish mess.” He had thought he had seen it
all during the dot-com bubble when asinine ideas like the Internet delivery of groceries
spawned companies like Webvan. However, Webvan was a smarter business than some
of the mortgage businesses.

CREDIT DEFAULT SWAPS

Buffett noted that there is $60 trillion of notional value of credit default swaps (CDS),
which basically provide insurance against a company going bankrupt. Berkshire holds
credit default swaps related to various high-yield indices. While Buffett believes
corporate default rates will rise, he doesn’t think CDS will lead to a financial meltdown
since for each person that loses on a swap, someone else wins.

Charlie differed in his opinion as he thinks we could have a big mess out of CDS as
there are big incentives to see somebody fail although a CDS is not as dumb as
sweeping bums off Skidrow to give them a subprime mortgage. He likened CDS to
having life insurance on someone you don’t know, which used to be illegal due to the
incentive to knock that person off. Big payoffs in unregulated markets are crazy.

DIVIDENDS

Buffett restated that as long as Berkshire can create more than $1 dollar of value for
each $1 retained, then the company won’t pay out a dividend as shareholders will be
better off by selling part of their holdings if they need income. However, for businesses
that can’t do that, then it does make sense to pay dividends. A good example is See’s
Candies which pays out everything it earns to Berkshire to be reallocated.

Charlie added that one day Berkshire will pay a dividend, but right now Berkshire is
like the man that exclaimed, “God give me chastity, but not yet!”

INVESTMENTS IN CHINA AND INDIA

Buffett said he expects that over the next 3-5 years he will buy companies of size
outside of the U.S. However, in looking at developing insurance companies outside of
the U.S., restrictions in India and China will likely prohibit him from doing insurance
business in those countries.
PHARMACEUTICAL COMPANIES

Buffett said he doesn’t know how to evaluate the pipelines of pharmaceutical

companies he owns like Johnson & Johnson and Glaxo, and he doesn’t try to assess the
pipeline. However, he believes if he buys a group of pharmaceutical companies at a
reasonable price, Berkshire should do well over a 5-10 year period.

Charlie added that Buffett has a monopoly on their joint knowledge of pharmaceuticals.

HOPES FOR BERKSHIRE

Buffett said he hopes that Berkshire will continue to deliver decent performance and
maintain a culture which is regarded as the best home in the world for large, family-
owned businesses even 20 years from now. He also hopes that Berkshire will live far
beyond Buffett’s tenure and thinks it will due to the finest board of directors and
managers around.

Charlie added that he hopes that Berkshire, as an exemplar, has more influence on
making changes in other corporations.

Buffett ended the meeting by joking that he also hopes that Berkshire ends up with the
oldest living managers.
BERKSHIRE HATHAWAY 2009 ANNUAL MEETING NOTES
For the Meeting Held on 5-2-09

Berkshire Hathaway started the meeting with its usual movie which featured a clip on the
Nebraska Furniture Mart’s new mattress, named The Nervous Nellie, which has a hidden
compartment for people who prefer to hide their money in the mattress than put it in the bank.
This was a good introduction to a slide used later at the meeting which showed just how nervous
folks had become during the past year. The slide showed a Dec. 19 trade ticket of a Berkshire
sale of $5 million of Treasury bills. They were coming due on April 29 this year, roughly four
months after Berkshire sold them. Berkshire sold the bills for $5,000,090.70. If that buyer had
instead put the money in a Nervous Nellie mattress, they would have been $90.70 better off.
Negative yields on Treasury bills show just how fearful folks were last year. Buffett noted, “We
may never see that again in our lifetimes.”

A record crowd of 35,000 folks from around the world attended this year’s annual meeting to hear
the wit and wisdom of Warren Buffett, chairman, and Charlie Munger, vice chairman of Berkshire
Hathaway. A new format was used for the question and answer period with questions being
rotated among individuals at the meeting and three reporters, who asked from among 5,000
questions that had been submitted to them prior to the meeting. I was delighted when the
question I submitted on General Re was one of the questions asked at this year’s annual
meeting.

PREVIEW OF FIRST QUARTER RESULTS

Buffett reported that first quarter operating earnings were $1.7 billion, down about 11% from $1.9
billion a year ago. Book value fell 6% in the first quarter due in part to losses in its investing
portfolio and losses on credit default swaps. Earnings fell in Berkshire's utilities operations in the
quarter due to mark-to-market accounting on Constellation Energy stock which declined during
the quarter and payments made to increase Berkshire’s interest in MidAmerican. Overall, utility
earnings were satisfactory while underwriting profit in the insurance businesses gained "a bit"
from last year. All the other businesses were basically down because of the weak economy. Float
increased to $58 billion primarily due to the $2 billion addition of Swiss Re float. Cash at quarter
end was $22.7 billion, but Berkshire spent $3 billion of that on cash on Dow preferred stock the
day after the quarter ended so effectively Berkshire ended the quarter with $20 billion in cash.
Buffett said Berkshire should do quite well in the insurance and utility businesses for the balance
of the year. Buffett wants to reinvest $1 billion of utility earnings in MidAmerican, but that will
leave the rest of the company’s earnings and change in float available for any other investments
that may come along.

DERIVATIVES

Berkshire’s derivatives require minimal collateral posting, less than 1% of the value of Berkshire’s
marketable securities. While Buffett stated in the past that derivatives were “weapons of financial
mass destruction” for the financial system as a whole, Buffett believes Berkshire will make money
on the equity put derivatives Berkshire holds. The odds are extremely good that Berkshire will
make money even though mark-to-market accounting can cause wild swings in earnings during
the interim. Despite the wild accounting swings, Buffett believed shareholders would understand
how advantageous these derivatives would be to Berkshire once he explained them. Berkshire
received $4.9 billion in cash on these equity puts which Buffett was able to initially invest for 15-
20 years. However, in the last week, two equity put derivatives were modified in terms and strike
prices, but still have 10 years to run. The modifications came about at the request of the
counterparty. At the time the derivatives were established, Berkshire received billions in cash and
set up a liability. The counterparty paid the cash and set up a receivable. However, the more the
receivable went up, the more credit default swaps the counterparty needed to buy to protect the
receivable. Due to the crazy market, the demand for Berkshire’s credit default swaps increased
and resulted in some silly prices. However, the net result was that Buffett was holding billions in
cash on what will likely be a profitable outcome for Berkshire, while the counterparty was forced
to continue to pay out more cash and wanted relief through modification of the terms of the deal.

On the credit default swaps, Buffett now says Berkshire will likely lose money as there have been
far more bankruptcies than he expected due to the “financial hurricane.” The derivative contracts
Berkshire holds have had no impact on the company’s financial flexibility as Berkshire is ideally
suited to hold them.

Buffett said Ben Graham probably would not have liked derivatives because the leverage
associated with them caused them to “run wild” which added strains to a fragile economic system.
However, he does think Graham would have acted on them if they were mispriced but not to the
extent that they could get him in trouble by investing in them. During the Great Depression, the
Fed regulated how much people could borrow through margin requirements. Derivatives made
margin rules a “laughingstock” as they were designed to get around leverage rules. By pushing
out settlement dates for the derivatives, this caused even more problems because of the
associated potential defaults by weak counterparties. Buffett recommended that everyone read
“The Great Crash” by John Kenneth Galbraith.

Charlie summarized that “derivatives are a dirty business” with a croupier advantage that results
in investment bankers selling things that are bad for their clients. He proclaimed, “We don’t need
more derivatives, we need less!”

FINANCIAL LITERACY

Financial literacy is a tough sell in a world of credit cards and calculators as people would rather
use these items than do the math behind their transactions. Buffett warned that folks can’t come
out ahead if they borrow using high-cost credit cards. Berkshire tries to contribute to financial
literacy through its annual reports.

People do foolish things with money. Buffett recounted going to Las Vegas on his honeymoon in
1952. He noted that people traveled miles to do something really dumb as the math expectation
behind gambling results in negative returns. However, as Buffett observed this, he saw it as a
world of opportunity for those folks who could calculate odds properly.

GOVERNMENT POLICIES DURING THE FINANCIAL CRISIS

Charlie Munger noted that in the midst of the worst financial crisis, it is unreasonable to expect
perfect government policies. The government should be judged leniently when they are
attempting their best. Buffett also “commended” the government actions noting that last
September we were facing a total meltdown of the financial system with a run on money market
funds, commercial paper markets frozen, and financial institutions falling like dominoes. When we
are being “punched from all sides,” the government won’t do everything perfectly. Decisions could
have been made better if they didn’t need to be made under emergency conditions. Buffett
commented that by and large, the authorities did a good job.

He also recommended that all investors read Jamie Dimon’s letter to JP Morgan shareholders for
a good overview of the financial crisis. He said it is one of the best letters to shareholders he has
ever seen. (I concur with both Buffett‘s recommendation and accolades for the JP Morgan letter.)

Buffett was asked whether he would let the government pressure him on disclosure (as they
supposedly did with Bank of America on the disclosure of Merrill Lynch losses). Buffett noted that
last December the financial system was still in a fragile position, and he could understand
Bernanke and Paulson’s decisions under those circumstances. Charlie added that you could
criticize Bank of America’s original deal in acquiring Merrill Lynch, but once they signed the
contract, both the U.S. Treasury and Bank of America acted “honorably.” Buffett joked, “I’m sure
they hope you will be on the jury!”
Given the massive government intervention in the market, there will be new rules in the game for
all financial institutions, including Berkshire. Charlie said it is hard to predict what will happen with
the new regulations, but that it will be very interesting. There is a “climate of hatred” in
Washington that is now directed at the financial industry. People are “coldly furious.” Berkshire
will have to adapt to whatever happens. Buffett concurred that there will be new regulations, and
they don’t know how it will all turn out as Washington DC thrashes the rules around. Americans
don’t like bankers now because they had to worry about even their safest assets like money
market funds. This anger has been accentuated since no one is going to jail. The fury right now is
hard to satisfy. The result has been legislation such as the proposed 90% tax on AIG bonuses,
which was an act of uncontrolled fury. Some of the new regulations will certainly impact Berkshire
and make life more complicated and costly.

FREE CASH FLOW ANALYSIS

Buffett noted that free cash flow analysis basically boils down to Aesop’s fable which concludes
that a bird in the hand is worth two in the bush. Investing is all about laying out cash now to get
more cash in the future. The more certain you are about the future cash flow, the better off you
will be. You don’t need fancy spreadsheets to do the analysis. If you need a calculator to figure
out the value, you shouldn’t make the investment. You only want to make investments where the
“value is shouting out at you.” Charlie added that some of the worst investment decisions have
been made with lots of elaborate projections. Both Charlie and Warren chided business schools
for making investing more difficult than it has to be. Warren joked that if a professor explained
investing as “a bird in the hand is worth two in the bush, “he wouldn’t get tenure. Instead, they
teach students about standard deviations, but the false precision provided by thinking about two
standard deviation events is “crazy.” Just look at what happened at Long Term Capital
Management. Luckily this only happens to people with high IQ’s. Buffett also cited what
happened last September and noted you can’t calculate the standard deviation when people get
fearful. While math will help you with investing, you don’t need higher math and fancy Greek
letters to be a successful investor.

MOODY’S

Buffett said supposed conflicts of interests at the rating agencies like Moody’s (which Berkshire
owns a 20% interest in) was not a major cause of the shortcomings in the ratings of the
mortgage-backed securities and CDO ratings. He noted that no one was modeling in the
probability of a housing decline as there was almost a total belief that home prices wouldn’t fall
significantly. The ratings agencies built this belief into their systems. However, the housing bubble
leveraged up significantly and once it melted down, it became a self-reinforcing cycle. Moody’s
thus made a major mistake in analyzing the mortgage-backed financial instruments. Congress
who was presiding over Fannie Mae and Freddie Mac also made the same mistake as did
individuals who were buying homes they really couldn’t afford. Berkshire didn’t try to influence
Moody’s ratings as they don’t make calls to companies they invest in to tell them how to run their
business. Berkshire wouldn’t question Burlington Northern on their safety practices or American
Express on their credit card policies. Even if Berkshire did call companies, their luck on changing
company behavior would be very low. Berkshire continues to maintain their investment in
Moody’s as Buffett calculates that the odds are that the rating agency business is still a good
business as 1) there are very few competitors, 2) ratings still affect a large part of the economy
and 3) the business doesn’t require much capital. Moody’s, however, won’t be doing the same
volume of business as they did during their peak years for a very long time. At Berkshire, they
never have believed in outsourcing their ratings decisions on credit decisions they make.

Charlie noted that the rating agencies being good at math, eagerly sought “stupid assumptions”
when supporting their rating decisions on CDO’s. Charlie repeated one of his favorite quotes, “To
a man with a hammer, every problem looks like a nail.” Warren added, “People believed their own
baloney and paid a big penalty.” In the securities markets when everyone else is “doing it” and
making money, it soon becomes industry acceptance, and it is very hard to stop. Buffett cited the
example of Salomon Brothers doing business with Marc Rich, a commodities trader with a
dubious background. When Buffett and Munger became involved in running Salomon, they
wanted to stop doing business with Marc Rich and faced a great deal of opposition…as Salomon
executives knew if they didn’t get rich doing business with Rich, their competitors would.

RESIDENTIAL REAL ESTATE MARKET

Buffett said he doesn’t know what real estate prices will do over the next couple of years.
However, in the last few months, Berkshire’s real estate brokerage business has seen a real
pickup in activity in California in the mid-to-low price (less than $750,000) homes. However, they
are not seeing a bounce back in home prices only in volume. Berkshire owns the largest real
estate brokerage firm in California, and they are seeing price stability in the mid-to-lower price
homes. However, with the higher price homes, there still is not much activity. The mortgage
market is getting much better in California. Buffett cited the statistics nationally about the housing
market with 1.3 million households being formed each year, although fewer households are
formed during a recession. During the peak housing years, 2 million housing starts were
occurring annually which resulted in the housing industry running into trouble as there was more
supply than demand. Now we have 1.5 million excess houses in the U.S. Housing starts have
now slowed to 500,000 units a year so it will still take 2-3 years to eat up the excess housing
inventory. Buffett noted that south Florida is in the worst shape, and it will be a tough real estate
market there for many years. Charlie added that there never was a crazy housing boom in
Omaha. With current low interest rates, he would buy a house in Omaha tomorrow. Buffett also
noted that there are 80 million houses in the U.S. and 25 million of them don’t have any
mortgages since they’ve been paid off. However, there are 5-6 million mortgages in trouble.

SUCCESSION

Buffett was once again asked about management succession plans at Berkshire. He repeated
that there are three internal candidates for the Chief Executive Officer. The Board knows who
they are and will tap an immediate replacement when needed. Howard Buffett will serve as
Chairman of the Board of Berkshire primarily to ensure Berkshire’s unique culture remains intact
and Bill Gates (a Berkshire board member) also has recently committed to maintaining Berkshire
culture in the decades ahead. There are also four current candidates willing to serve as
Berkshire’s investment officers, who all said they would be willing to work for Berkshire when
necessary. Buffett said the investment officer may be chosen on a more leisurely basis (within a
month or so of Buffett no longer being available) as the Board and new CEO make the final
decision. While the four current candidates did no better than match the S&P 500’s performance
last year, Buffett said they all remain on the list. Charlie wryly commented that “practically every
intelligent investment manager got creamed last year.” However, Buffett noted that over the last
10 years, all these investment managers have modestly-to-significantly performed better than
average, and he expects them to do the same in the future. Charlie added that Berkshire doesn’t
want an investment manager who tries to time the market by going to cash. He said Berkshire will
leave out anybody like that as they are “not dumb enough for us.”

Buffett said there was no need to bring the CEO succession candidates into headquarters for
“training” under Buffett. He said all three candidates are currently running businesses for
Berkshire and making capital allocation decisions. Buffett added it would be a “waste of talent” for
them to sit in his office and watch him read. He said all three CEO candidates are 100% ready for
the job now. Their biggest new challenge will be to develop relationships and get to know the
management styles of all the other Berkshire managers. Buffett concluded that he saw no
advantage of having a “Crown Prince” around now. In fact, it might even drive away the other
managers as it did at GE when Jeff Immelt was named the CEO successor.
When asked about the succession plans for Ajit Jain, who heads up Berkshire’s highly successful
reinsurance business, Buffett said it would be impossible to replace Ajit. He said he won’t even try
because Ajit is a unique talent. In reinsurance the authority goes with the individual. He won’t
“give the pen away in insurance” citing how Mutual of Omaha lost half of their net worth by not
being careful with who did their underwriting. Ajit and Buffett talk every day primarily because
Buffett finds Ajit’s deals so interesting, such as pricing Mike Tyson’s life insurance (and hoping
there are no angry girlfriends still around). While Ajit is needed and there is no substitute, Charlie
says Berkshire likes having businesses that are managed magnificently even if there is no
successor. Buffett concluded that they won’t assign a task to people which is beyond their
capacity and that not having a successor for Ajit is a one-off situation.

HEALTHCARE NATIONALIZATION

Charlie said the future U.S. healthcare system will likely resemble something more like Europe’s
system and be supplemented by a private system. He added, “As a Republican I am not horrified
by this but personally wish they would put it off for a year to focus on the economy.” Buffett added
that Berkshire will adjust to any new healthcare system as will other businesses.

HOW TO TEACH VALUE INVESTING

Buffett said he does his part in teaching the next generation about value investing as he hosts
students from universities every year in Omaha. If he were to teach value investing at a business
school, he would have just two courses:

1) How to Value a business

2) How to Think About Markets

There would be no classes on efficient market theory, beta or modern portfolio theory. Instead,
students should just stay within their circle of competence and look for businesses selling for less
than they are worth. While Buffett thinks it is important to understand accounting as it is the
language of business, one must also understand what a durable competitive advantage is in a
business…i.e. the difference between a hula hoop and Coca-Cola. It is also important to
understand that the market is there to serve you not to instruct you. Buffett joked that someone
with a 160 IQ could sell 30 of those points to someone else, since you don’t need a high IQ to be
a successful investor. Far more important is inner peace with your investment decisions and
emotional stability. You need to be able to think for yourself. Investing is not complicated.
However, investing is simple but not easy because of the emotional stability needed to make
sound investment decisions over time. Charlie added that half the future investors will be in the
bottom 50% of investors and that you can’t homogenize investment expertise. He said so much
taught in modern investment schools is “nutty.” The best that can be hoped for is that business
schools just “reduce the nonsense.” Buffett added that 25 years ago Efficient Market Theory was
taught as Holy Writ. He asked, “If everything is priced perfectly, how does a professor fill the rest
of the hour of a business class?” Buffett continued, “The famous physicist Max Planck was
talking about the resistance of the human mind, even the bright human mind, to new ideas…. and
he said science advances one funeral at a time, and I think there’s a lot of truth to that and it’s
certainly been true in finance.”

BERKSHIRE’S MARKET VALUATION

Last year, the value of Berkshire’s investments declined 13% as earnings dropped 4% yet
Berkshire Hathaway’s own stock value declined 31%. Buffett was asked if this then implied an
attractive valuation for Berkshire’s stock. In valuing Berkshire, Buffett noted that it is reasonable
to look at Berkshire’s investments and the earnings power of the operating companies. Buffett
explained that the investments are worth what they are carried for on the balance sheet, even
though Berkshire’s stock investments generally are priced less than their intrinsic value. Buffett
further explained that while the earnings power of the operating companies (excluding the
insurance business which provides no-cost float) was not as good last year as it has been in
normal times, most of Berkshire’s businesses will do well over time with operating earnings
increasing. At the end of 2008, Berkshire’s stock price was cheaper than its intrinsic value when
compared to the same metric at the end of 2007. However, Buffett was quick to add that this was
the case for many companies.

Charlie added that last year was a bad year for a float business. However, over the long term
having a large float at a cost of zero is a big competitive advantage. He noted that Berkshire’s
casualty insurance business is the best in the world, Berkshire’s utility subsidiary is among the
best in the industry, and that Iscar is the best in the world in its industry. Charlie said you could
continue to go down the list of all Berkshire’s businesses, and it would be a long way down the list
before finding a business that wasn’t among the best in its class. Charlie snorted, “If you think it is
easy to get that way, then you are living in a different world than I am.”

Buffett added that the financial meltdown last September, which he likened to the China
Syndrome, hurt Berkshire’s jewelry businesses, NetJets, the carpeting business and companies
Berkshire invested in like American Express, which saw its average ticket decline 10%. However,
the same meltdown caused the phone to ring off the hook at GEICO, as more people than ever
were looking to save $100 on their insurance. Last year, GEICO added 665,000 new
policyholders and through the first four months of this year, they have already added 505,000
new policyholders. GEICO has a strong competitive advantage as the low-cost provider of auto
insurance, which is paying off hugely now as people seek value. GEICO is the third largest auto
insurer in the U.S. with its market share having grown from 2.5% (when Tony Nicely took over
managing the business) to an expected 8.5% at the end of this year.

DIVIDEND POLICY

Buffett was asked about principle number nine in Berkshire’s owner manual:

We feel noble intentions should be checked periodically against results. We test the wisdom of
retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of
market value for each $1 retained. To date, this test has been met. We will continue to apply it on
a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings
wisely.
We continue to pass the test, but the challenges of doing so have grown more difficult. If we
reach the point that we can’t create extra value by retaining earnings, we will pay them out and let
our shareholders deploy the funds.
The shareholder asking the question indicated that Berkshire had not met this test for the rolling
five year period which ended on 12/31/08 and asked whether this meant Berkshire would now
pay out a dividend. While Buffett didn’t directly answer the question, he noted that there has
never been a rolling five-year period where Berkshire’s book value growth had underperformed
the S&P 500 (which is a different test than stated in the principle.)
Charlie added that he doesn’t get too excited about “oddball things” that happen every fifty years
implying that not meeting the test last year was one of those “oddball things.”
WELLS FARGO
Buffett noted that when Wells Fargo’s stock price dropped to $9 last year, their competitive
advantage had never been better and that they will come out of this financial mess even stronger.
At the time, Buffett told students that were visiting him that if he had to put his net worth in just
one stock, it would have been Wells Fargo when it was trading for $9 per share. Wells Fargo will
be much better off than if none of this had happened. Buffett noted that leverage is what causes
problems in the world. You don’t want to have emotions which force you to sell. He puzzled over
why people sold Wells Fargo at $9 per share when they were willing to hold it at $25 per
share….noting that emotions can cause people to do funny things. He reminded folks that they
should be looking at the asset to make intelligent investment decisions. “Don’t look at the price,
look at the underlying business.” Investors would be wise to re-read chapter eight of Ben
Graham’s book, “The Intelligent Investor.”
Unlike Fannie Mae and Freddie Mac who saw their preferred stock wiped out, Buffett doesn’t
think Wells Fargo should have their preferred stock converted to common equity through the bank
stress test. He says Wells Fargo has lots of common equity and earnings power. Buffett added
that he would love to be able to buy all of Wells Fargo and U.S. Bancorp if he could.
STIMULUS BILL
A shareholder asked if it would be better for the money in the stimulus bill to go to investments in
assets like building the Hoover Dam, which also put people to work.
Charlie answered with one word, an emphatic, “YES!”
Buffett added that he has received a notice from Social Security that he will personally benefit
from the stimulus package by getting $250. He joked that should last him 6-7 months. With the
stimulus package, one hopes that the money is used as intelligently as possible, although there
likely will be a fair amount of “slop.” The intent of the package is to get the money into action
quickly. Today’s current system with all its earmarks is not perfectly effective. Folks will get
distressed with what gets added to bills. However, the government needs to step in with fiscal
stimulus even with the likely consequences.
Charlie added that a “no-brainer” for the fiscal stimulus would be to establish a huge smart
electrical grid, acknowledging that this would benefit Berkshire’s utility subsidiary.

THE DISADVANTAGE OF A STRONG BALANCE SHEET

As Buffett wrote in the annual report, Berkshire currently is in the unusual position of being at a
significant disadvantage due to its strong balance sheet. This is especially the case at Clayton
Homes which has to compete against those institutions getting government aid. Money is the raw
material to fund mortgages, and it is costing Berkshire more for this money than those banks
which are receiving government guarantees. This can be seen even within the same companies
like Goldman Sachs and GE, which are able to issue debt at significantly lower spreads for the
funds guaranteed by the government versus the debt they issue without the government
guarantee. Fortunately, Berkshire does not need to borrow much except in its utility businesses,
which compete for funding against other utility companies with no competitive funding
advantages. Berkshire luckily gets most of its funding from its $58 billion in insurance float with no
cost at this time.
Charlie added that while Berkshire is at a disadvantage not being regulated as a bank holding
company right now, “we’d be ungrateful if we obsessed over this one disadvantage.”

SMALL INVESTORS
A shareholder asked about the number of positions a small investor should have and whether
they should sell stocks after they double in price which could result in high portfolio turnover.
Buffett said if he were small, he would own half a dozen stocks that he liked the best based on
their price/value relationship. He said the cost basis makes no difference to him. Charlie
chuckled, “Warren is tactfully suggesting that you change your way of thinking.”
BERKSHIRE’S COMPETITIVE ADVANTAGE
Buffett stated Berkshire’s competitive advantage is its business model and culture, which is very
difficult to copy. Other competitive advantages include Berkshire’s loyal shareholders, managers
who understand business differently, and Berkshire’s ability to provide private businesses with a
good home. No other company in the U.S. can adopt the same business model. Berkshire’s
culture is deeply embedded in the CEO’s of its various companies and will continue. This will
provide long-lasting advantages to Berkshire even without Buffett and Munger around. As a result
of Berkshire’s unique culture, the future Iscar’s and GEICO’s of the world will want to join with
Berkshire.
Charlie added that many companies in the U.S. are “run stupidly.” When they focus on quarterly
earnings management, they make terrible business decisions. This is not the case at Berkshire.
The stupid practices of the rest of the world will give Berkshire a competitive advantage well into
the future.

BUY AND HOLD

A shareholder asked how Buffett justifies holding stocks “forever” when business fundamentals
change. Buffett responded, “We don’t.” Berkshire sells stocks plenty of the time if management or
business fundamentals change. However, if Berkshire owns a wonderful business, they do want
to hold it forever. While Berkshire is more reluctant to sell stocks than other investment
managers, if the business loses its competitive advantage or Berkshire was wrong in its analysis
of if a better opportunity comes along, Buffett will sell. He cited his sale of part of his position in
Johnson & Johnson last fall to enable him to make the investments in Goldman and GE as an
example of a better opportunity coming along when he didn’t have available cash (as he was
keeping extra cash handy for the insurance business).

ANNUAL MEETING WEBCAST

Buffett said it was unlikely that he would webcast the annual meeting because there is something
to be gained by personal contact. Besides, Buffett likes the turnout of the shareholders, and most
of what goes on at the meeting gets plenty of publicity for those that are unable to attend.

PIGGYBACKING BUFFET’S IDEAS

Buffett said some folks do “piggyback” his investment ideas instead of buying Berkshire
Hathaway stock directly. However, he says they don’t have the advantage of free float. Charlie
said there is nothing wrong with identifying skilled investors and copying what you please from
their investments. Buffett noted that he used to get ideas from Graham-Newman when he started.
INFLATION
Buffett commented that it is certain that we will have inflation over time. While inflation is
unpredictable, Buffett said he could guarantee that the dollar will buy less in terms of purchasing
power 15-20 years from now given the unprecedented deficits being run around the world to
offset the contraction in demand. We are doing things today that haven’t been done in the past
which will have consequences and result in higher inflation. Paul Volcker was upset with the 2%
inflation targets the Fed is supposedly considering. While 2% inflation might sound great, in a
generation it will cut purchasing power by 50%. Currently, the government is following policies
which will have inflationary consequences. The government would rather repay the world with
dollars that are worth far less than what they borrowed, which is one way to reduce the external
debt. Buffett noted that the taxpayers are upset because of all the bailout policies, but the
taxpayers haven’t paid anything yet as we haven’t raised taxes to pay for the stimulus bill. The
people who are really paying for the fiscal stimulus are the Chinese through their purchase of
U.S. Government bonds. The best protection against inflation is your own earnings power with
the second best protection being the investment in a wonderful business that doesn’t require
much in capital investment like Coca-Cola.
Charlie summarized, “You should become a brain surgeon, and invest in Coca-Cola and not
government bonds.” Charlie also noted that when he was young, he could buy a $.02 stamp and
a $.05 soda pop, saying, “A little inflation won’t ruin our lives. The trick is to avoid runaway
inflation.” He concluded, “We’ll leave that for the younger generation. “
NEWSPAPERS
Buffett joked that he and Charlie will likely be the last guys in the world to read newspapers with a
landline phone nearby. Due to the erosion of newspaper moats related to advertising, Buffett will
not buy newspaper stocks today at any price. While 20-30 years ago, newspapers were the
ultimate business that had pricing power and were essential to the customer, newspapers today
are no longer essential due to the Internet and other news sources. Ten years ago, Stan Lipsey
told Buffett from an economic standpoint he should sell the Buffalo News, but one of Berkshire’s
business principles is not to sell their businesses unless they have unending losses or union
problems. He commented further that while The Washington Post also has no answers for the
newspaper part of the business, they still have good cable and education businesses. He
concluded that Berkshire will “play out” the Buffalo News and Post businesses as long as they
can. Charlie lamented that it is a “national tragedy” for daily newspapers to go out of business,
but “this is life.”
RECESSION
Buffett said he didn’t know when the recession would end. However, if housing starts begin to
stabilize in two years time, then Berkshire’s housing-related businesses like paint, bricks and
carpet will begin to improve. He expects Berkshire’s retailers will continue to “struggle” for some
time.
SHARE REPURCHASES
Buffett said most of the share repurchases done by companies in recent years have been
“foolish” as management paid too much for their shares. He noted it was interesting to see how
many companies today are NOT buying back their stock when they were eagerly buying back
their stock at much higher levels. Back in the 1970’s and 1980’s, Buffett had advised
management teams to consider share repurchases when valuations were much more attractive.
The only time Berkshire had ever considered a share repurchase program was in 2000 when
Berkshire’s stock price was selling well below intrinsic value. Buffett doesn’t think that is the case
right now. Even if Berkshire announced a share repurchase program, it would likely be self-
defeating as investors would likely bid the stock price up on Berkshire’s announcement.
OPPORTUNITY COSTS
Buffett noted that investment opportunity costs increase when things are moving very fast in
markets. In chaotic markets, Berkshire frequently faces opportunity cost calculations. However,
this is a good problem to have, and it occurred last September and October when Berkshire
received many calls. Berkshire always wants to keep plenty of money around. Buffett noted that
the Goldman deal couldn’t have been made the week before or the week after Berkshire struck
the deal. However, given the $5 billion committed to Goldman, the $3 billion to GE, and the $6.5
billion to Mars, Berkshire was faced with opportunity cost considerations. He thus sold part of
Johnson & Johnson (which he would have preferred to hold) to ensure Berkshire maintained
sufficient liquidity for the insurance businesses. Since it is harder to sell things in huge quantities
than to buy them during chaotic times, he made a deal on a floor price when he placed the order
to sell JNJ. Buffett’s position was that he could reacquire the JNJ stock, while the other deals
would not be available in the future.
GEICO ADVERTISING
Buffett noted that GEICO’s advertising budget has grown from $20 million to an expected $800
million this year. Buffett noted that they are getting more bang for the buck from their advertising
today given the soft advertising market which is providing them with more exposure for the same
dollars. He noted that it is difficult to measure the returns on advertising, joking that someone said
that “you waste half the money spent on advertising, you just don’t know which half.” Berkshire
spends so much on advertising at GEICO because they want the world to know that GEICO will
save them money on their insurance. GEICO’s brand is a promise that consumers will save
money. Buffett said you never really know when the advertising will pay off, but GEICO did begin
to see big increases in sales starting Sept. 30 of last year as people everywhere were seeking to
save money. Buffett noted that the value of GEICO goes up much more than the earnings show
due to brand enhancement. Buffett believes Berkshire is getting terrific returns on GEICO’s ads.
GEICO’s business model is very attractive since they are the low-cost producer in a product that
people are required to buy. Buffett emphasized, “It is a very good business!”
FINANCIAL STOCKS
Buffett said he was dead wrong on making investments in the Irish banks last year, since they
had incredible exposure to land development loans. He said the information was there for him to
see, but he wasn’t paying attention and made a terrible mistake. He said there were lots of signs
in financial stocks that highly-leveraged institutions could be in trouble if housing prices declined,
with the signs especially clear at Fannie Mae and Freddie Mac. Banking has real differences that
most people don’t look at. For example, he said there was no comparison between Wells Fargo
and Washington Mutual, which was loaded with subprime loans. He believes Wells Fargo has the
best competitive position of all the large banks with conservative accounting--citing their
amortization policies for core deposits that are very different from other banks. Buffett added that
many banks are “black boxes” that can produce numbers but not cash. He said it is much easier
to analyze a business like Coke and Procter & Gamble than it is to analyze a bank. He concluded
that it is not a bad idea for investors to put banks in the “too hard pile.”
Charlie added that GAAP accounting allows banks to show vastly higher earnings than they
should even if they make lots of dumb loans. GAAP shouldn’t allow dumb decisions to be
incentivized. Charlie noted that many new regulations could have been avoided if accounting had
done a better job. However, Charlie has yet to meet an accountant who says he is ashamed of
his profession.

BYD

On display at the meeting were electric cars from BYD. BYD makes 65% of the world’s nickel-
cadmium batteries and 30% of the world's lithium-ion mobile phone batteries. Based on this
background, BYD Auto has ambitious plans for hybrid and electric automobiles. Berkshire owns a
10% stake in BYD. Charlie is a huge fan of the founder of BYD and brought the idea to Buffett.
Charlie noted that their lithium batteries will be needed in every utility in the future as the sun’s
power is harnessed. Their Chinese electric car went from a zero start to become the best-selling
auto in China with little capital. BYD makes practically every part of the car but the tires. Charlie
described BYD as not a speculative company but a “damn miracle.” They have hired thousands
of engineers and have a very talented group of people working at the company. It is a small
company with big ambitions that Charlie said he wouldn’t want to compete against. By investing
in BYD, Charlie proclaimed, “We have not gone crazy.” Buffett joked, “One of us at most!” Buffett
chuckled, “Last year BYD was Charlie’s idea and Irish Banks were my idea. Charlie is the
winner!”

LOSS OF TRIPLE-A CREDIT RATING

While S&P maintains Berkshire’s Triple-A credit rating with a negative outlook, Moody’s cut
Berkshire’s Triple-A rating. Buffett said Berkshire won’t likely regain the Triple-A rating anytime
soon as the ratings agencies don’t turn around that fast. However, the ratings cut will make very
little difference in Berkshire’s borrowing costs. Nevertheless, Buffett was disappointed in the
Moody’s rating cut because he liked the Triple-A rating and it caused Berkshire to lose some
“bragging rights.” However, in the insurance industry, Berkshire still is the strongest firm
financially. In Buffett’s mind, Berkshire still is a Triple-A company as he can’t think of a company
with a stronger capital position. Buffett will continue to run Berkshire as a Triple-A rated company.
He concluded, “The rating change is not material, but it still irritates me.”

Charlie wryly noted, “At least Moody’s showed considerable independence.” He also said
Moody’s will likely increase the rating in the future because they are smart. Buffett laughed noting
one of Charlie’s favorite sayings, “In the end you will see it my way because you’re smart, and I
am right.”

WIND FARMS

MidAmerican is Berkshire’s utility subsidiary and boasts the largest wind farms in Iowa, while
producing the highest percentage of its energy from wind. In fact, MidAmerican is a net exporter
of electricity in Iowa. As a result, they have not increased electricity rates in Iowa in a decade due
to their operating efficiencies and wind power. MidAmerican will continue to be a leader in wind
power, and Berkshire fully benefits from the wind power tax credits since Berkshire is such a big
taxpayer. Buffett noted that Berkshire will do a lot more investing in utilities in the future. While the
Constellation deal didn’t work out, he wishes it had. He cited the Constellation deal as an
example of Berkshire’s durable competitive advantage. When Constellation was facing
bankruptcy last fall, Berkshire was able to provide them with a firm bid within a matter of hours.
Few other companies would have that capability. Charlie reminded Buffett that Berkshire used its
competitive advantage to do a successful energy deal when they bought a pipeline in two hours.
The Dynegy deal worked out very well for Berkshire. Buffett recalled that they needed Federal
government approval for the deal which they received quickly as they didn’t need to go through
layers of lawyers. Buffett said Berkshire’s competitive advantage is that Berkshire can move fast
as they always have money and have the managers that can deliver.

OUTLOOK FOR FUTURE GROWTH

Buffett said it is impossible for Berkshire to repeat its past growth rates by growing 20% annually
in the future given the company’s current size. His hope is that the company’s intrinsic value will
increase a couple of percentage points ahead of the S&P 500’s growth in the future. Berkshire’s
book value is an understated proxy of its intrinsic value. Charlie added that while Berkshire’s
percentage growth won’t multiply as fast as it had in the past, Berkshire’s future is “way better”
than the past in terms of Berkshire’s contributions.

CHINA

Buffett said he doesn’t know what future Chinese investments Berkshire may make. There are
some restrictions since Berkshire can’t own more than 25% of an insurance company in China.
China will likely increase their dollar holdings in the future. If the Chinese continue to send us
$250 billion in goods, we will send them dollars in return. They can spend that $250 billion on
bonds, stocks, U.S. real estate or seek to trade the dollars for some other currency. So far, China
has elected to put the dollars in U.S. government bonds, but Chinese officials have indicated that
they are not happy at the prospect of the loss in purchasing power they face from these
investments. Charlie proclaimed that China’s economic policies are “exactly right.” With the way
their economy is advancing, the loss of purchasing power will be “a trifle.” China will be very hard
for anyone to compete with in the future.
POST-MORTEM ON GENERAL RE ACQUISITION

While Buffett acknowledged companies should do post-mortems on acquisitions, he didn’t think

the post-mortems should be made public. Buffett said it is important to reflect on past decisions,
but not always healthy to make those reflections public. However, he said he was “dead wrong” in
buying General Re and thinking it was the same company it had been 15 years prior to the
purchase. However, thanks to the good and hard work of Joe Brandon and Tad Montross,
General Re today is the company he though he was buying in 1998. It was a very tough job in
restoring the business, but General Re now has a great future. Charlie added it is important to
have the ability to turn lemons into lemonade. It wasn’t “pleasant or pretty” and ordinary
managers couldn’t have fixed General Re. However, Berkshire got a “decent result” out of the
deal while General Re got a “fabulous result.”

CONTRACTS

Buffett said Berkshire doesn’t use contracts much. When they make a deal for a business, they
want people who have the same passion for the business after they sell the business as they had
before they sell the business. Charlie added that at Berkshire, “We have a seamless web of trust
that is deserved on both sides.”

SPINNING OFF SUBSIDIARIES

Buffett said Berkshire won’t spin off any of its subsidiaries as Berkshire owns wonderful
businesses and will never look for a quick jump in market value as a result of a potential spin-off.
Berkshire’s advantage in maintaining these businesses is allocation of capital. For example, if
See’s Candies is generating more cash than their business can use, Berkshire can always
allocate the cash to other businesses within Berkshire that can use the cash. In addition,
Berkshire makes promises to companies that they acquire that Berkshire is “buying businesses to
keep.” This is a basic principle of Berkshire. Charlie noted that so many spin-offs are sold by Wall
Street to companies just in order to generate investment banking fees.

STUDENT LOAN BUSINESS

Buffett said he doesn’t know much about the student loan business while Charlie noted there has
been a fair amount of scandal in the industry over the years. Buffet joked, “It has been a long time
since Charlie or I thought about getting a student loan.” Buffett did acknowledge that he was
approached about investing in Sallie Mae, and he’s glad he didn’t understand the business and
passed on the “opportunity.”

GE AND GOLDMAN SACHS

Berkshire invested $3 billion and $5 billion, respectively, in GE and Goldman Sachs because they
were attractive businesses selling at attractive prices. Buffett feels good about the quality of both
businesses and their very smart CEO’s. The extraordinary period last fall allowed Berkshire to get
good coupons on both deals. Noting these were “decent deals,” Buffett said he didn’t see
anything he liked better at the time. Charlie noted that while the investment bankers have been
heavily criticized, Berkshire has had excellent service from Goldman Sachs over the years.
Buffett added that Berkshire has done a lot of business with GE and will continue to sell and buy
lots from them. If he also makes lots of money on his investment in GE, it will make him very
happy.

WORLD ECONOMY

Buffett stated there are always lots of things wrong with the world economy, but it is the only
world we have. Over time, we will live better because our system works to unleash human
potential. In 1790, there were only 35,000 people in the U.S. (the approximate attendance at the
annual meeting). Since that time, we’ve had many bad years in capitalism with six bank panics,
the Great Depression, two World Wars, etc., but overall, we have moved ahead at a very fast
rate. Our standard of living has increased sevenfold. Right now the economy is sputtering, but
there is enormous potential ahead. The opportunities will win in the end.

Charlie added that the closer he gets to death, the more cheerful he feels about the world’s
potential. He is especially excited about the potential to harness the power of the sun, which will
enable us to turn seawater into fresh water and preserve hydrocarbons for future use. He said it
would be a mistake to think only of misfortunes. If we have enough energy, we can solve lots of
other problems.

SWISS RE

Buffett said Berkshire will assume 20% of Swiss Re’s reinsurance business over the next five
years and acquired 3% of their common stock. Berkshire made a three billion Swiss franc
investment in Swiss Re yielding Berkshire 12%. This investment may be called at 120% of
principal by the third year. Buffett said the odds are that the investment will be called, but
meanwhile Berkshire is collecting 12% and then will get back 120% of their principal. Buffett also
noted that Swiss Re’s underwriting is fine. It was their derivative investments which got them into
trouble similar to AIG but not to the same extent. Berkshire was able to make this deal when
Swiss Re’s stock was under pressure. Charlie commented, “If this is a terrible problem, we wish
we had more of them.”

COMPENSATION PLANS

For capital-intensive businesses, a compensation plan needs a factor that includes capital cost.
For a business that needs no capital, the compensation structure should be different. Boards
generally have really little impact on compensation packages. The CEO usually determines the
compensation package, including for himself, and then seeks a Board to approve the package
that is not filled with Dobermans but tail-wagging Cocker Spaniels. When choosing CEOs, it is
very important to make sure they don’t overreach. Boards should think like owners. Charlie added
that liberally-paid Boards are counter-productive to the good management of a company. It gets
very club-like in a Board where the practice is “if you raise my compensation, I’ll raise yours”.
The whole system would work better if Boards were not paid at all. Buffett added that 100-page
proxies to explain compensation packages are not necessary. Charlie grumbled that one-tenth of
one percentage of America structures compensation like Berkshire, and “the way everybody else
does it is silly.”

Executive compensation is once again a hot button with a Senator calling Buffett on how to
design an executive compensation plan following the AIG bonus fiasco. He wanted to quickly
enact a statute on executive compensation. Buffett noted that the last time Congress became
involved in corporate compensation, Congress passed the tax deductibility limit for compensation
on the top five executive officers. This was probably the most unproductive legislation as it
resulted in executive compensation getting ratcheted up even more. He told the Senator they
should start by repealing that rule, but his suggestion didn’t go over very well. He said the best
way to address egregious executive compensation is for half a dozen of the largest investment
managers to publicly speak out against it. By embarrassing the management team and the
Board, director behavior will change. Directors don’t like to look foolish or to see their names in
the newspapers. Charlie wasn’t optimistic that executive compensation could be fixed by
investment managers as there is no restraining factor for compensation consultants.

WORST CASE SCENARIO FOR BERKSHIRE

Charlie said the worst case scenario for Berkshire would be some catastrophe that causes
Berkshire to lose billions in its insurance business. However, he quickly added Berkshire has a
marvelous insurance business. Buffett noted that Berkshire’s insurance business will normally
pay 4%-5% of industry losses and cited Hurricane Katrina as one of the worst case scenarios
when the losses exceeded $60 billion. However, Berkshire has curtailed its insurance exposure
and would currently likely pay 3%-4% of industry losses. However, Buffett said the worst-case
scenario for Berkshire would occur if we ran into so much inflation that people expressed outrage
over insurance payments and wanted to nationalize insurance. He gives this a low probability, but
said it would be the worst case scenario.

HEDGING THE DOLLAR

Buffett said Berkshire has no goal designed to have x% of its earnings from international
operations to hedge the dollar. Berkshire will simply keep doing things that make sense such as
investing in companies like Procter & Gamble and Coca-Cola, which have substantial earnings
outside of the U.S. Charlie added that democracies around the world are filled with defects.

LAYOFFS

Buffett said if business changes in a material way, then it is necessary to change the business
model because competitors will. There sometimes are no alternatives to layoffs. While GEICO is
adding 1,000 jobs during this recession, the brick companies have had to close half their plants,
but this business will come back. On the other hand, the business at the Buffalo News will not
come back so layoffs will likely be permanent. Berkshire had to lay off everyone in their textile
business years ago as capitalism is creative destruction. Overall, Berkshire’s employment this
year will be reduced. Charlie cited a Ben Franklin quote: “It is hard for an empty sack to stand
upright.” He said while he prefers businesses that can share hardships, many operations don’t
lend themselves to that. Sometimes you have to amputate a limb to stay alive.

ATTRIBUTES OF GREAT MANAGERS

Buffett said Berkshire buys businesses with great managers, who have already proven their track
records. He likes managers that get excited about their businesses. Charlie noted that Berkshire
sometimes is slow to recognize when a manager need to be replaced citing an example of not
wanting to face the problem of a manager who had developed Alzheimer’s disease.

NY TIMES ARTICLE LAST OCTOBER

Last October, Buffett wrote an editorial which was titled “Buy American, I Am.” Buffett noted after
he wrote the article, stocks did get cheaper, but he wasn’t trying to call the bottom in the stock
market. He said he buys when it makes sense. “Pricing is our game, and that is not difficult.” The
fact that the price goes lower after he makes a purchase doesn’t bother him. The cheaper things
get, the better he likes buying them whether it is hamburgers or stocks. He likes low prices, and it
makes sense to buy when items are on sale. Buffett said the best sale in his lifetime was in 1974
when stocks got much cheaper than today, although he acknowledged that it was a very different
interest rate environment back then. Charlie observed that if stocks prices decline more than
40%, then they are obviously more attractively valued. He said the current environment is nothing
like the ‘73/’74 period, but added, “I wouldn’t wait for another ‘73/’74.” Buffett added that while
stocks did get cheaper during the current period, bonds became even cheaper. He said he
bought corporate bonds with 10% yields. Charlie noted these were “perfectly safe bonds” with
9%-10% yields that subsequently have gained 25% in value.

CAPITAL-INTENSIVE BUSINESSES

Buffett acknowledged that Berkshire’s utility businesses are capital-intensive but the earnings
come with regulated returns on equity. He said capital-intensive businesses outside of the utility
sector “scare me.” However, the utility businesses will provide Berkshire with decent returns. You
won’t get rich investing in utilities, but you won’t get poor either. Over time, Berkshire will do
better with businesses that don’t require much capital and earn high returns on equity. Those
types of businesses with durable competitive advantages are the best businesses.

*************
The session ended with Buffett’s grand-nephew proposing marriage and getting an enthusiastic
“Yes!” in response.
BERKSHIRE HATHAWAY 2010 ANNUAL MEETING NOTES
BY INGRID R. HENDERSHOT, CFA

We spent the weekend with Warren Buffett along with 40,000 other folks from around the world who were
attending Berkshire Hathaway’s annual meeting on April 30, 2010. Mr. Buffett and Mr. Charlie Munger,
Berkshire’s Vice Chairman, were in great spirits as they answered questions for more than five hours.
Here is a summary of my notes from the meeting:

PRE-MEETING MOVIE

Berkshire Hathaway always plays a movie prior to the meeting featuring newsworthy and humorous clips
about the business, management and topics of the time. Many of the segments repeat year after year, but
new material included in this year’s movie is highlighted below:

This year’s movie included a sneak preview of “The Secret Millionaire’s Club,” the cartoon Buffett will be
starring in to help children gain financial literacy. Charlie Munger and Bill Gates made “fleeting” guest
appearances.

As the newest addition to Berkshire’s collection of companies, Burlington Northern Santa Fe enjoyed a
long segment of the movie showing the storied history of Burlington against a scenic and musical
background.

A clip from Buffett’s interview with Hank Paulson on the financial crisis included Buffett’s quip that
George Bush understood the crisis better than most thought. At the time Bush uttered a sweet and short
statement similar to the Gettysburg Address that captured the essence of the situation: “If money doesn’t
loosen up, this sucker can go down!”

A movie clip was shown from “Wall Street: Money Never Sleeps,” Michael Douglas’ new movie which
reprises his “Greed is Good” Gordon Gecko role. Buffett made a cameo appearance.

A clip from an interview with Charlie Munger was played in which he bristled over the “perfectly screwy
decisions” that led to the financial disaster. While it is popular to think that Berkshire found a trick to
sidestep the problems of other financial institutions, Munger wryly noted that it wasn’t brilliance on
Berkshire’s part but the ability to “just avoid stupidity.” Berkshire makes its investment decisions by
evaluating opportunity costs. Munger muttered it is just like in marriage, “You want to choose the best
spouse you can find--who will have you. The rest of life is the same damn way!”

Jordon’s Furniture ran a promotion last year that if the Boston Red Sox won the World Series, furniture
purchased during a certain time period at the beginning of the season would be free. A clip was shown of
a panicked Jordon executive calling Buffett to see if he had any ideas on what to do as the final game of
the World Series was approaching and it looked like Jordon’s might have to pay off on their offer. A
comical clip ensued with Buffett being called in to pitch for the Red Sox against Yankee all-star, Alex
Rodriguez. The first few Buffett pitches were pitiful and called balls by the umpire as the announcer
woefully noted that Buffett only had three speeds to his pitches-- slow, slower and reverse. Others hooted
that Buffett’s pitches were falling like Acme Bricks and that they had seen Pampered Chefs throw faster
balls. However, after Buffett drank some Coke and munched on some See’s Candies on the pitcher’s
mound while watching Berkshire ad’s for all of his companies flash across the electronic billboards, he
found new energy and struck out A-Rod and won the World Series for the Red Sox! At the end of the
game, they panned to a dejected Alex Rodriguez and asked him in Disney fashion, “Now that you have
lost the World Series, what are you going to do?” He barked out, “I’m going to Omaha! I need to figure out
this Buffett guy!” With that warm-up, the actual meeting commenced.
FIRST QUARTER RESULTS

Warren Buffett began the meeting with a preview of the first quarter results which showed that operating
earnings increased 30% to $2.2 billion, aided by the contribution from the acquisition of Burlington
Northern Santa Fe and improvement in most of Berkshire’s businesses. Net earnings for the first quarter
were $3.6 billion versus a loss of $1.5 billion last year. Buffett noted that a sputtering recovery had picked
up steam in March and April with Berkshire seeing a good uptick in business, although he cautioned that
there was still a long way to go. In discussing quarterly earnings, Buffett noted that he thinks it is a terrible
practice for companies to manage their earnings to the penny that is “whispered” to Wall Street. At
Berkshire, they don’t worry about earnings per share or focus on quarterly earnings. When Buffett asked
Charlie if he had any comments, he succinctly stated, “I agree with you.” Buffett laughed and said, “That
is why Charlie is the perfect Vice Chairman. They don’t get any better!”

GOLDMAN SACHS

Buffett spent a great deal of time discussing the Goldman Sachs’ Abacus transaction that has prompted a
SEC complaint. Buffett felt there had been a great misreporting of the nature of the transaction, so he
attempted to explain the transaction. He noted that there had been several losers in the Abacus deal.
Goldman Sachs was a loser of about $90 million in the deal, although Buffett noted that Goldman only
lost the money because they couldn’t sell all of the deal. The main loser in the deal was a large bank,
ABN Ambro, which is now part of the Royal Bank of Scotland. They lost money because they guaranteed
the credit of another party, ACA.

Buffett noted that Berkshire has made lots of money guaranteeing credit, but they also have lost money at
times. ABN Ambro took on about $900 million of risk for 17 basis points, which meant they received about
$1.6 million in premiums for insuring the $900 million risk. Buffett added that it is hard to be sympathetic
for a bank that made a “dumb credit decision.” Many of the bond insurers had started out by insuring only
muni bonds. However, when profits were squeezed, they entered the business of insuring structured
financial products. They were like Mae West who said, “I was Snow White, but I drifted.” They drifted into
things they didn’t understand as well and got into trouble. Berkshire, on the other hand, drifted into
insuring muni bonds, but Berkshire never insured collateralized debt obligations or residential mortgage-
backed securities.

Buffett then disclosed a Berkshire deal in which Berkshire insured $8.25 billion of municipal bonds in a
variety of states with muni bonds from Florida and Texas making up the largest component of the deal.
Berkshire insured that for the next 10 years that they will pay the bonds if the states can’t. For that
insurance, Berkshire collected $160 million in premiums. Buffett then revealed that it was Lehman who
came to Berkshire seeking the insurance for the deal. Buffett said Lehman may have had a variety of
reasons why they wanted the insurance:

1) They owned the bonds and wanted protection.

2) They were short the bonds.

3) Customers owned the bond and wanted protection

4) Customers wanted to short the bonds.

Berkshire really didn’t care what the reason was that Lehman came to them for the insurance. Berkshire’s
job was to assess the bonds and determine the premium they would charge to provide the insurance if
they chose to do the deal.

Buffett said that was the same thing ACA should have done when putting together the Abacus deal. Out
of 120 bonds offered in the deal, ACA picked 80 to insure through mutual negotiation. All of the bonds
ended up going south very quickly as the housing mania caused the bonds to blow up. ACA has a team
to do the due diligence analysis on the bonds, so it didn’t really matter who was on the other side of the
deal, whether it was John Paulson, Ben Bernanke or Berkshire. ACA made a “dumb insurance decision.”

Buffett went on to say that ironically the SEC complaint against Goldman Sachs probably helps
Berkshire’s $5 billion preferred investment in Goldman Sachs, which is paying Berkshire $500 million a
year in interest. Goldman has the right to call the preferred stock at 110% of par at any time. If they did
call the preferred stock, Berkshire would likely be earning $20 million on that $5 billion instead of $500
million given today’s low interest rates. Buffett joked that the $500 million in annual interest equates to
$15 per second and he started counting the dollars by saying, “Tick, tick, tick, tick!” He added, “I don’t
want those ticks to go away. They even go on at night while I’m sleeping. Tick, tick, tick!” Buffett noted the
government is doing Berkshire a big favor by requiring Goldman to hold onto the preferred stock until they
feel their capital is adequate. The recent developments with the SEC will likely delay Goldman from
calling in the preferred stock. “Tick, tick, tick!” Buffett concluded, “We love the Goldman Sachs
investment!”

Buffett acknowledged that the SEC allegation alone did cause Goldman to lose some worldwide
reputation and likely hurt morale at the company. But Buffett doesn’t believe that the allegation alone
would cause Goldman to lose reputation from Buffett’s viewpoint. However, if the allegation were to lead
to something more serious at Goldman, then Berkshire would look at it.

As far as advice Buffett would offer Goldman, he quoted the motto: “Get it right, get it fast, get it out and
get it over.” He emphasized that the “Get it right” is the most important action to take in a situation like
this.

Charlie added that while he thought the SEC complaint against Goldman was a “closer case” than Buffett
thought, he still would have voted with the 2 SEC commissioners who voted against bringing the
complaint against Goldman instead of with the 3 SEC commissioners who voted for the case to be
charged. Charlie went on to say that every business should decline doing business that may be legal but
is below their standards of business ethics. He noted that all investment banks “took on too many scuzzy
customers and did too many scuzzy deals.”

Buffett noted that Berkshire’s experience with Goldman Sachs goes back 44 years. Berkshire has bought
more businesses from Goldman than anyone else. In essence, Goldman helped build Berkshire.
Berkshire also has done more trading with Goldman, and Buffett noted that when Berkshire trades with
Goldman, they don’t owe Berkshire a divulgence of their positions. Goldman acts in a non-fiduciary
capacity when they trade with Berkshire. When it comes to acquisitions, that is a different story.

Buffett recounted Berkshire’s first bond issuance in 1967 for $5.5 million of an 8% debenture for
Diversified Retailing. It was Berkshire’s maiden voyage in seeking to do a bond offering. He showed the
tombstone which listed the lead underwriters for the deal with New York Securities and First Nebraska
Securities taking the lead spots among the various underwriters on the deal. With Berkshire having
trouble raising the $5.5 million, Buffett called Goldman Sachs and Kidder Peabody to see if they would
participate in the offering. Each firm agreed to put up $350,000 making them the largest underwriters in
the deal. However, they both were so “ashamed” to be part of such a little company that they asked that
their names not be included on the tombstone. However, Buffet has never forgotten their help at that time
and noted that he has a long memory for people who help Berkshire.

Buffett said he had not been contacted about the SEC’s investigation into potential insider-trading by the
Galleon hedge fund. As part of that investigation, the SEC has phone records of a Goldman Sachs
director, who allegedly may have leaked information about Berkshire’s investment in Goldman to Galleon.
Buffett said all he knows about the case is what he read in the newspaper, and he can’t even pronounce
the name of the fellow from Galleon being investigated.

As far as whether Goldman Sachs should have disclosed the Wells Notice they received from the SEC as
part of their investigation of the Abacus deal, Buffett said that many boards don’t feel it is necessary to
disclose the notices if they don’t believe it to be material to their operations. Buffett didn’t think the Abacus
deal was material. However, Buffett did note that when General Re executives were served Wells
Notices, Berkshire did disclose that information.

Charlie added that he also didn’t think the Abacus deal was material. He also noted that if all information
had to be disclosed, there would be unlimited confusing reports.

When Buffett was asked if Goldman Sachs’ CEO, Lloyd Blankfein, were to step down, who he would
choose as his successor, Buffett quipped he’d pick Lloyd Blankfein’s twin brother if he had one. He
shrugged off the succession question saying he hasn’t thought about it at all.

Charlie commented, “There are plenty of people on Wall Street, I’d like to see gone, but Lloyd Blankfein
isn’t one of them!”

Buffett quickly moved to the next question, joking he didn’t want Charlie to start listing names.

FINANCIAL REFORM

Charlie Munger noted that no one really knows what will happen with financial reform as most people
haven’t even read the 1500 page bill, not even in Congress. A permissive government system and the
nature of investment banks put them all in stress. Reform should change the system so it is less
permissive. Banks hate the idea of losing flexibility so they don’t want to give up derivatives, but that is
not good for the country. Charlie added that if he were in charge of financial reform, he would make “Paul
Volcker look like a sissy!” He would reduce the activities of the investment banks. He noted we shouldn’t
have financial statements that no one can understand. “Crazy complexity is unproductive!” Charlie thinks
there should be a new version of the Glass-Steagall Act that limits what banks and investment banks can
do. He added that if you give banks the flexibility “to do whatever they damn please, they will go plumb
crazy, which is what they did.”

BERKSHIRE COLLATERAL REQUIREMENTS UNDER FINANCIAL REFORM

Berkshire Hathaway has $63 billion in notational value in derivatives (less than 1% of the derivatives of
large institutions) and is not required to post collateral on the majority of those derivatives under the terms
of the contracts. Buffett added that under proposed legislation to post collateral on retroactive contracts,
Berkshire’s collateral requirements would still be zero since Berkshire would not be regarded as a
“danger to the system.” After acquiring General Re, Berkshire had 23,000 derivative contracts but now
has only 250. However, if Treasury requires that all past contracts have to be collateralized, Berkshire
would lose money. Buffett likened it to selling a house to someone at a certain price and then the rules
were changed saying that you now have to sell the house at that same price but you also need to furnish
the house. There is a price to be paid for collateralized contracts. Buffett put up a Dec. 2009 slide of a
quote by Treasury Secretary Timothy Geithner stating that the sanctity of past contracts needs to be
maintained. So as the financial bill reads now, Berkshire will not need to put up a dime of collateral on its
past contracts.

Charlie added that if collateral requirements for past contracts were changed, he believes it would be
dubious that it would hold up constitutionally. Not only would it be unfair to tell someone who purchased a
$1 million home that they now needed to pay $2 million for it, it would also be stupid. He doesn’t think that
the government is that crazy.

Buffett added that there is nothing peculiar to Berkshire opposing retroactive collateral requirements as
there are hundreds of companies opposing it from IBM to 3M. Berkshire doesn’t care if the government
changes the requirements going forward as Berkshire will be indifferent to the collateral requirement if
they are paid for it.

GREECE AND PREPARING FOR CURRENCY FAILURES

Buffett noted that Berkshire has currency exposure in various countries both on the asset side (Munich
Re and Cologne Re) and the liability side (Lloyds of London). Buffett is not concerned about Berkshire’s
net position in Euros. Overall, Berkshire does not have any dramatic exposure to foreign currencies.
Buffett, however, did acknowledge that the fallout from debt problems in Greece could be important to
world economies.

Charlie added that Berkshire is agnostic to the relative value of currencies although he noted that Greece
is “an interesting problem.” He reflected on how after WW II, the U.S. helped rebuild Germany and Japan
which was the “wisest decision ever.” Today, governments around the world don’t have as good credit as
they once did. It is more dangerous to civilization when “governments blow credit.” In the U.S., Munger
stated, “We are nearer to trouble in credit than at any time in my lifetime.”

Buffett noted that if a country can borrow in its own currency like the U.S. and Japan, the country will
never default as they just print more money to pay back their debts. This can lead to inflationary problems
but not default. However, if the world doesn’t like weaker credits, they force the countries to borrow in
other currencies like countries in Latin America had to do. Greece also can’t print their own currency as
they are part of the Euro experiment, which was started 20 years ago. Greece will be a test case for the
strength of the Euro. Buffett said he doesn’t know how this movie will end, but expects “high drama.”
Buffett concluded that countries can’t run budget deficits at 10% of GDP for long time periods, but he’s
not sure how the world weans itself off high deficits.

Charlie warned that when one reads statistics on budget deficits, they should keep in mind that the
deficits are “miles bigger” than reported as they don’t include unfunded promises. He further warned, “If
growth stops, God help us!”

SALE OF BERKSHIRE STOCK BY GATES FOUNDATION

Buffett makes annual donations of Berkshire stock to five charitable foundations, including the Bill and
Melinda Gates Foundation with the goal of giving away all of his Berkshire stock to charity over time.
When asked if the regular sale of Berkshire’s stock by the Gates Foundation will put downward pressure
on Berkshire’s stock price, Buffett didn’t think so. He noted that the shares he gives away each year
amount to 1 ½% of Berkshire’s shares outstanding. Even if the foundations sold the stock promptly, it
wouldn’t be anything unusual since most stocks have turnover of more than 100% each year. Buffett said
if Berkshire’s stock declines it is due to something other than the 1 ½% of the shares being sold by the
foundation. Charlie added that the charitable sales are a non-event admonishing the questioner, “You
have more important things to worry about.”

INVESTING IN THE U.S. VERSUS INVESTING GLOBALLY

Charlie Munger said Berkshire finds things that are sensible and concentrates its investments there while
letting the world economies fluctuate as they will. Charlie muttered, “Berkshire doesn’t have a global
asset allocation policy, unless Warren is keeping a secret.” Buffett quipped, “Not that one!”

Buffett noted that the U.S. has made incredible progress over the last 200 years as our economic system
“unleashes human potential and encourages ordinary people to do extraordinary things.” He said the
game is not over by any means in the U.S. and that it is not a zero-sum game as he hopes the rest of the
world does just as well. Buffett concluded that he would be perfectly content if Berkshire was limited to
investing just in the U.S. as there is still plenty of opportunity.

SUCCESSION PLAN FOR CHIEF INVESTMENT OFFICER

Buffett noted that the four external candidates to succeed Buffett as chief investment officer didn’t
distinguish themselves during 2008, but did pretty well in 2009. He also noted that they may not always
be the same four people. If something were to happen to Buffett, it is critical that a Chief Executive Officer
be named within 24 hours, and the Board knows who that would be. The CEO would then determine the
CIO and that decision could be done on a more leisurely basis as Coca-Cola and Procter & Gamble won’t
go away just because Buffett does. The current CIO candidates are very able people who will do a good
job managing money for Berkshire. Buffett joked that he just had a physical, and it drives his doctor nuts
that he can’t find anything wrong with Buffett given the way he eats.

Charlie added that he is quite optimistic that Berkshire’s culture will last for a long, long time. Buffett
agreed saying that Berkshire’s distinctive culture both in management and shareholder ownership is self-
reinforcing. He concluded, “We love it, and you will love it after I’m gone.” As folks started clapping,
Buffett exclaimed, “Hey, don’t clap!”

INVESTING IN CAPITAL-INTENSIVE BUSINESSES

When asked why Berkshire has been shifting its investments towards capital-intensive businesses like
Burlington Northern, Buffett acknowledged that it was a good question. He said that Berkshire is
generating significant sums of money that are being invested in good businesses but not as good
businesses as Berkshire had acquired in the past, which required little incremental capital to earn high
returns. Wonderful businesses don’t soak up capital-- that is why they are wonderful businesses.
Berkshire is in the position where it can’t find small companies that can” sop up” the money Berkshire is
now generating. While Berkshire’s capital-intensive businesses won’t generate “brilliant” returns, they will
generate good returns. Thus, Buffett doesn’t think it would be better to return the cash to shareholders as
he is still able to translate the cash into decent returns through investments like MidAmerican and
Burlington Northern. While these investments are not Coca-Cola, Berkshire’s shareholders’ equity is still
growing. He concluded, “I hope we don’t disappoint you.”

When Buffett asked Charlie if he had any comment, Charlie said, “I’m just as good as not knowing as you
are.”
INVESTING IN DEBT VS EQUITY

Buffett was asked why Berkshire chose to invest $300 million in Harley-Davidson debt instruments over
its stock during the height of the financial meltdown. Buffett answered that he didn’t know the value of
Harley-Davidson’s business, although he liked a business where customers tattooed the company’s
name on their chest. What he did know was that Harley-Davidson was not going out of business, so the
15% return on the debt was attractive. He knew enough to lend money, but not enough to buy the equity.
It was a simple decision. If Harley didn’t go broke, he would make good money.

Charlie noted that Berkshire serves as a fiduciary for many people, so they may be constrained when
looking at distressed situations. However, he acknowledged that one should often buy the stock if they
are willing to buy the bonds.

Buffett concluded that he sleeps better with senior securities. He is running Berkshire so it can withstand
anything. Berkshire is positioned so that Buffett can do things when other people are paralyzed during
market downturns.

CHANGING CORPORATE CULTURES

Buffett said it is hard to change a corporation’s culture. Buffett noted that when he ran Salomon briefly, he
tried to change the company’s culture and would not receive an A+ for his efforts. It is much easier to
start from scratch to build a new culture. At Berkshire it would be very difficult to change the company’s
culture as everything is designed to reinforce the corporate culture. With the luxury of time, Berkshire’s
culture has had decades to develop. Since 1965, Berkshire has added complementary companies which
have bought into the company’s culture.

Charlie grumbled, “The failure rate in trying to change a company’s culture is 100%.”

COMPETITIVE ADVANTAGE OF AJIT JAIN

A shareholder questioned whether National Indemnity would be able to continue to grow its float if Ajit
Jain retires. In other words, he wanted to know if National Indemnity would maintain its competitive
advantage without Ajit Jain. Buffett praised Ajit Jain by saying he has maximized the competitive
advantage of his business and added significant value to Berkshire. Ajit also has schooled his 30-person
cadre to run a disciplined operation. While Ajit can’t be replaced, that doesn’t mean that the reinsurance
business won’t continue to be a special operation that will be able to operate effectively.

Buffett noted that every year he thinks the insurance float has peaked with it now approximating $60
billion. Although every day float runs off, the float is still growing. Berkshire is the premier insurance
operation in the world. While Buffett doesn’t expect float to increase significantly without further
acquisitions, the float may stabilize around $60 billion.

INVESTING IN INDIA

Buffett noted that there are limitations to Berkshire investing in the insurance business in India due to
government regulations. Next March, Buffett plans to go to India with Iscar to review Iscar’s operations
there. Buffett does not rule out investing in India either directly or through stocks.

Charlie added that one trouble with India is that the government has a fair amount of paralysis. He noted
that China will grow much faster than India as the Chinese government causes less paralysis. Charlie
likes India but not its paralysis.
Buffett concluded that Berkshire should figure out ways to do business in India. His preference would be
to invest in the insurance business both in India and China, but it depends on the laws. While there is no
shortage of drivers around the world, both India and China restrict foreign ownership in their insurance
companies to 24.9%. Berkshire would rather work hard on 100% ownership like with Geico, which has
seen its market share grow from 2% to 8.5% in recent years. There is still plenty to do in the U.S. with
Geico. Berkshire has looked at possibly expanding into Canada, but since there is still so much
opportunity just in the U.S., Berkshire has also passed on Canada.

Buffett concluded by saying, “People in India, China and the U.S. will all be living better in 20 years.”

INFLATION

Buffett said he may be biased, but he believes the prospects of significant inflation have increased due to
government action during the financial crisis. He also noted that the dollar has depreciated more than
90% since he was born, and Charlie reminds him that the U.S. has still done pretty well. However,
weaning ourselves from the medicine of massive debt undertaken by the government during the crisis
may be a harder problem than dealing with the original problem. High deficits relative to GDP will cause
inflation as he noted in his Aug. 2009 Op-Ed piece, “The Greenback Effect” in The New York Times. If he
was betting, he would bet on higher inflation in the future. Through the Op-Ed piece, Buffett was flashing
a yellow caution light.

Buffett said there is no single measure to evaluate inflation. However, once inflation gets going, it can
become self-reinforcing. He reminded shareholders of the inflationary period in the 1970’s which only was
brought under control after Paul Volcker “took a sledgehammer to it.” He said we may see a re-run of the
1970’s if inflation “gets into the saddle.” It will be very hard to predict how fast it will accelerate. The trend
is not destiny as we have the power to change the course through policies enacted by elected officials.

Charlie added that one’s own earnings power will help protect against inflation. Buffett concluded that
money can be inflated away but talent can’t.

PREVENTING FINANCIAL MAYHEM

Buffett said we will see financial mayhem from time to time. It is not a function of IQ. We can’t modify the
madness of mankind which occurs from time to time. It is good to provide financial lessons early in life.
That is why Buffett is participating in the “Secret Millionaire’s Club” cartoon designed to improve financial
literacy for children at the elementary level. Buffett says if he can reach 2%-5% of kids and help them
develop healthy financial habits, the cartoon will be a success. Ben Franklin taught those types of
financial habits, and we’re lucky if parents also teach good financial habits.

Charlie added that McDonald’s has succeeded better than universities in educating young folks on
responsibility. McDonald’s hires people that are marginal and trains them to go to much higher job levels.
Our society owes much to McDonald’s employment culture.

TAXES

A shareholder asked why Buffett is in favor of higher taxes on the wealthy, yet he plans to donate all of
his wealth to charity, which avoids paying taxes. Buffett noted that the government could impose a wealth
tax to prevent that kind of “tax dodge.” Currently, Buffett has an unused tax carry forward over $7 billion
due to his charitable giving and recommended others use his “tax dodge.” He is giving all his money to
charity as he believes it will do a lot of good. He noted that if he gave it all to the government instead of
charity, society wouldn’t be better off. He concluded that to reduce the deficit and solve today’s problems,
the U.S. will need to increase taxes and reduce expenditures.

NETJETS

Buffett said Berkshire will make mistakes from time to time. The biggest mistake at NetJets was to
continue to buy planes at “fictitious prices” in terms of the prices Berkshire could sell the planes. NetJets
didn’t prepare properly for the industry conditions. They took on to much inventory and let operating costs
get out of line. However, Berkshire is now operating NetJets at a profit greater than $50 million in the first
quarter due to a better business plan and the efforts of David Sokol.

Buffett noted another mistake Berkshire made was with its textile business which took him 20 years to fix.
He said he was like Rip Van Winkle when it came to the textile business.

Charlie added that when you buy 30 businesses, 95% of the time the acquisitions work out fine by leaving
the original people in charge. One failure won’t change Berkshire’s culture on acquisitions.

BYD INVESTMENT

When asked how the decision was made to invest in BYD, Buffett turned over the question to Charlie
saying he deserved 100% of the credit for that investment.

Charlie indicated that Berkshire would not have made the investment 10 years earlier due to the nature of
the business. He joked it shows that old men can learn. He added that David Sokol helped the learning
process.

CEO COMPENSATION

Buffett said Berkshire uses no compensation consultants when determining compensation. Each
business has different characteristics. For example, the insurance business requires negative capital to
run due to its float while Burlington Northern is a capital-intensive business. Berkshire has some
businesses that are so easy that “a chimp could run them” while other businesses are so hard that Alfred
P. Sloan couldn’t operate them.

Berkshire has to determine a sensible compensation plan for each business. It is not rocket science, but
requires the ability to differentiate the businesses. If Berkshire had a human resources department, it
would be a disaster. All it requires is common sense and interaction with management to agree on which
measures add value to the company.

Charlie noted that at GE and in the Army, a centralized payment plan works for them. At Berkshire a
decentralized plans works which makes Berkshire “peculiar.” Charlie chuckled, “We like it that way.”
Berkshire doesn’t want folks to feel that headquarters is imperial.

Buffett noted that at Berkshire there are managers that make $10 million or more annually. It is a matter
of treating folks fairly. Berkshire wants to pay managers for widening their moat around their businesses.
He noted that no manager has left Berkshire over compensation.

DEALING WITH UNETHICAL BEHAVIOR

Buffett said if unethical behavior is discovered in a Berkshire unit, management jumps in to investigate.
Berkshire has a hotline and encourages folks to report any unethical behavior. Any alleged bad behavior
is immediately investigated. Charlie added that Berkshire cares more about unethical behavior than most
businesses and action is taken.

Buffett noted that Berkshire sends out a periodic letter to each business unit CEO asking them for
suggestions on their replacement if something were to happen to them. In the letter, Buffett reminds
management that Berkshire won’t trade reputation for money. He also reminds them that if any issue is
even close to the line from an ethical standpoint, they should call him. Buffett concluded that with 260,000
people working for Berkshire, Berkshire will have things happen. However, Buffett wants to do everything
he can to protect the reputation of Berkshire.

Charlie added that Berkshire has earned a great reputation. The idea is not just to make money at any
cost. Berkshire “celebrates wealth only when it is fairly earned.” If that philosophy is also embraced by
shareholders, it is very helpful.

REGULATED RETURNS

Buffett said both Burlington Northern and MidAmerican Energy operate in regulated industries. Over the
years, the railroads have adapted to a 10.5% return on invested capital (including debt) business model.
This isn’t a crazy trend as we need railroads to continue to invest to improve their infrastructure. Both the
country and the railroads have a common interest in making much needed investments. To do so, the
railroads need to be allowed to earn a decent return on their investments. Utilities are generally allowed to
return 11%-12% on shareholders’ equity. While railroad returns have more downside due to recessions,
utility returns tend to be more certain as demand generally doesn’t typically fall off significantly even
during recessions.

Charlie added that railroads are an example of a hugely successful system in terms of regulated
businesses. The railroad system has been rebuilt in the last 30-40 years to operate more efficiently with
new tracks and new trains which now can operate twice as long and twice as heavy. Railroads have
adapted well to needs thanks to wise regulations and wise management. That has not always been the
case, but the existing system has worked well for all of us.

INSURANCE RISKS

Buffett said its insurance business insures significant risks from earthquakes and hurricanes. The Chilean
earthquake is an example of the types of losses that might be seen. However, Berkshire’s peak risk for
hurricanes and earthquakes is down considerably. This is not due to Berkshire’s diminished appetite to
insure risk but because rates are currently not attractive. Berkshire has a $5 billion risk appetite, and
Buffett reminded us that Berkshire lost $3 billion on Hurricane Katrina and $2 billion on 9/11. However,
those losses didn’t impact Berkshire’s capital position. In the insurance business, Berkshire is willing to
take risk and get lumpy earnings.

Charlie added that Berkshire seeks insurance business that will occasionally provide big losses, but they
also want Berkshire to be rich enough so that any big loss is just a blip on Berkshire’s overall financial
condition. By being able to insure large risks, Berkshire enjoys a big competitive advantage in the
insurance business as other insurance companies can’t do it. Charlie chuckled that after enduring a big
loss, Buffett knows he can look in the mirror the next morning and say, “Our shareholders still love you.”
DERIVATIVES

Charlie thinks the function of derivatives is overrated. While derivatives are convenient for hedges, he
thinks most should be restricted to trading commodities and currencies on regulated exchanges. He
exclaimed, “If all derivatives vanished from the face of the earth, it would be a safer place!”

Buffett noted that some businesses like Burlington Northern want to use derivatives to hedge fuel costs.
Buffett doesn’t think there really is any need to use hedges as they likely only provide the business with a
slight edge over 100 years. However, if Burlington and MidAmerican want to employ hedges in their
businesses, he will let them do it.

In discussing derivatives, Buffett put up the 1935 quote by John Maynard Keynes from Chapter 12 of his
book, The General Theory of Interest, Employment and Money: "Speculators may do no harm as bubbles
on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a
whirlpool of speculation.”

Buffett believes derivatives on the S&P 500 index has led to the speculation that Keynes warned about.
Back in 1982 when Congress was considering these derivatives, Buffett sent a letter to Dingell warning of
the increased speculation this would bring to the stock market. Buffett said this would turn the market into
more of a casino. And there were plenty of people that said, yeah, but it's more fun having a casino.

In a 1982 Fortune interview, Buffet also publicly stated that in his judgment, a very high percentage,
probably at least 95%, of the activity generated by these contracts would be strictly gambling in nature
and not good for capital markets. S&P 500 contracts also get better tax treatment than investing in stocks
as 60% of their gain is treated as long-term, which he found nonsensical as many of the contracts aren’t
held longer than 10 minutes.

Charlie added that the tax treatment is neither fair nor sensible and just shows how a small group can be
effective at lobbying if others are indifferent. He groused, “You shouldn’t watch sausage making or
legislation making!”

In a subsequent interview, Buffett explained further: “After the 1929 Crash, we decided that people buying
stocks on 10 percent margin was dangerous for the economy, and we passed a law that said the feds
should set margin requirements. And then what did we do in 1982? We validated an S&P 500 contract
which let people gamble in untold numbers on tiny margins, all the while maintaining 50 percent margins
with the Fed. It was crazy. But we took the safety net of high margins away from the stock market and
nobody said a word. Buffett added, “I'm in favor of having leverage limited with organizations that can
produce dangers for the system. And I actually think leverage ought to be -- extreme leverage ought to be
prevented for individuals speculating in the market. We decided that was dangerous back in 1934 and I
still think it's dangerous, and we totally negated the benefit of that legislation when we let the S&P 500
and the derivatives come in to the game big time.”

SYNERGIES BETWEEN BERKSHIRE BUSINESSES AND HIRING PRACTICES

A shareholder wanted to know why Dairy Queen stores in Omaha served Pepsi instead of Coke and
didn’t accept American Express cards. Buffett quipped that most Dairy Queen stores do sell Coke--“at
least the enlightened ones.” Buffett further commented that Berkshire does not direct their subsidiaries on
their operational decisions. Charlie added, “We really like it that way!”

When an investor asked what qualities he needed to be able to succeed Buffett, Buffett joked, “Probably
the ability to shoot me.” Buffett doesn’t make any decisions on who gets hired at Berkshire’s subsidiaries.
Berkshire is not a very good employment agency with just 21 people at headquarters. Charlie added that
there is “no indication that we would be good at hiring either!”
An investor asked why Berkshire didn’t hire more people to provide folks with hope. Buffett responded,
“Berkshire hires people when we have something for them to do.” Berkshire can’t serve as a socialization
safety net. Berkshire is currently now in a net hiring mode. However, Buffett doesn’t expect
unemployment to away fast.

Charlie added that if Berkshire created jobs just to help human hope, over time it would reduce human
hope.

INVESTING IN CHINA

When asked what the most important thing Berkshire has learned about investing in China, Charlie said it
was the unusual people at BYD. Buffett quipped that he learned that Sprite outsells Coke 2 to 1 in China.
Buffett noted that on a growth per capita basis China will grow tremendously in the future after showing
little progress in improving their standard of living for the past 170 years. Charlie chimed in that he always
knew that the Chinese had enormous ability for rapid growth. The Chinese will be a huge credit to
civilization. However, even he had underestimated how rapidly China would set records for advancement.

CHANGES TO BERKSHIRE HATHAWAY’S ANNUAL REPORT

An investor wanted to know why Berkshire no longer discloses the “look-through” earnings of its
investments. Buffett said Berkshire provides four logical breakdowns of Berkshire’s various businesses
and tries to communicate as much information to investors as they would want if their positions were
reversed. At the same time, he doesn’t want the annual report to become unwieldy and tries to keep the
letter to shareholders to about 12,000 words. He doesn’t repeat the reports on look-through earnings and
the breakdown between investments per share and operating earnings every year in an effort to conserve
1,000 words. He is guided in writing the annual report by writing the letter to his two sisters, who are two
intelligent and interested investors but who may not be familiar with all the financial lingo. He quipped
after starting the letter, “Dear Doris and Bertie,” he crosses out their names and substitutes “Dear
Shareholders.”

Charlie added that details in the annual reports change as facts change. Look-through earnings used to
be much more important to Berkshire’s overall results than they are now. Buffett agreed by saying look-
through earnings now account for only about 15% of total earnings.

ROTH IRA CONVERSION

When an investor asked whether it made sense to do a Roth Ira conversion, Buffett said he didn’t have
an IRA. Charlie jumped in and succinctly said that he had an IRA and “I will convert it to a Roth IRA.”
Buffett tried to get him to explain further by saying, “I don’t understand.” Charlie retorted, “You don’t need
to!” Buffett laughed, “If Charlie says it is true, than it must be!”

NEWSPAPERS

Buffett said the money to run a newspaper comes from its advertising. Newspapers are no longer the only
game in town when it comes to advertising. Given the distribution and print costs, the math no longer
works on newspapers. Buffett said “it blows your mind” to see how many people are dropping newspaper
subscriptions. It’s not just young people. Back in the 1970’s, nothing looked more bulletproof than the
newspaper industry as advertising went to the papers as the only microphone in a town. However, the
newspapers primacy has withered away.
Charlie recalled that the independent papers once were dominant with impregnable economic strength.
As we lose the newspapers, “It is very sad, but there is nothing we can do about it.”

CAREER IN INVESTING

A young person asked whether it was worth pursuing a career in investing as competition seems to be
driving down investing opportunities. Buffett responded that there may be fewer fifty-cent dollar bills
around but there will always be investment opportunities available if one is not working with large sums of
dollars. He pointed to a company that Charlie manages, The Daily Journal. The Daily Journal maintained
about $15 million in cash for many years. Then the financial meltdown occurred and Charlie took
advantage of the downturn with the 2009 annual report of The Daily Journal showing that the $15 million
in cash had been converted to equities which within six months had increased to be worth $45 million.
Investors need to be prepared for opportunities when they come around.

Buffett also noted that investment management has conflicts as asset gathering often becomes more
important than asset management.

Charlie growled that people should take the high road when it comes to money management as it is much
less crowded.

MUNICIPAL BONDS

An investor was worried about whether muni bonds would default in 5-10 years and whether the federal
government would need to bail out some states. Buffett said if the bonds are insured by Berkshire, then
the investor needn’t worry. He then cited Harrisburg, PA’s recent default and that Assured Guaranty is
now paying the interest on those muni bonds. The worry is that there may be contagion with other muni
bonds defaulting. Bond insurers need to worry about contagion. Some bond insurers have enormous
liability for the exposure they have assumed. Berkshire is not getting paid fair premiums for insuring muni
bonds currently so they are curtailing their muni bond insurance. Buffett believes that it will be hard for
the federal government to turn away a state that gets into trouble after bailing out GM and others.

Charlie quoted Ben Franklin, “It is hard for an empty sack to stand upright.” Charlie said bad behavior is
contagious and that he would rather be with the disciplined and prosperous crowd like those attending the
Berkshire annual meeting.

RETURNS FROM EQUITIES OVER THE NEXT DECADE

Buffett said in October 2008 he was premature on buying stocks, but he still knew that it was way better
to own stocks than cash or bonds. While he doesn’t know what stocks will do over the short-term, he still
would rather own stocks over the next 10-20 years than bonds or cash as he is very unenthusiastic about
the latter. Stocks should at least provide a modest, positive return.

Charlie added that it is a cheerful thought to think that equities are the best of bad lots. He believes we
are in a long period of time of ordinary returns which won’t be that exciting. Investors should lower their
expectations on returns. Berkshire, however, will still seek companies with competitive advantages that
can be purchased at reasonable prices. “We will find some.”

MOODY’S

Buffett said the rating agencies have incredible business models with significant pricing power and little
incremental capital needs. The world needs the rating agencies although they succumbed to the same
mania of the rest of the financial world. The rating agencies didn’t see the national housing collapse. It is
hard to think contrary to the crowd. With hindsight, there is now a backlash towards the rating agencies. If
the agencies are not forced to change their businesses totally by new regulations, they will still be good
businesses. Berkshire doesn’t pay attention to credit ratings by the agencies as Berkshire does its own
credit analysis.

Charlie added that the rating agencies had been a constructive influence in the country for many
decades. However, “They drifted with the stupidity of the times. “ The rating agencies over believed in
ridiculous models from academics, who were huge contributors to the system’s failure.

OIL

Buffett noted that oil was discovered in 1850 and changed the world. Since then, we have been sticking
straws in the earth with 5,000 wells in the U.S. today. Oil has contributed to the prosperity of the world.
However, the world will not be as dependent on oil over the next 100 years. There is a lot of potential to
meet energy needs through solar power and in other innovative ways. The world has a bright future with
tremendous opportunities for future growth.

Charlie added that with the technology today, the world can get ahead without oil if necessary. “It is not
that horrible if we run out of oil.”

Buffett concluded by saying that any adjustment in oil usage will be gradual.

KRAFT AND CADBURY DEAL

Buffett said he didn’t like the deals Kraft did on buying Cadbury or selling its pizza business, but added,
“We make dumb deals at Berkshire, too.” Charlie agreed and muttered that “Our dumb deals were
department stores and Irish banks.”

Buffett went on to say that Kraft selling the pizza business was “particularly dumb” as it was tax inefficient
and didn’t make sense. Buffett hated to see Kraft give up a great business for Cadbury at a fancy price.
However, he said Irene Rosenfeld, the CEO of Kraft, is a perfectly capable manager. As to her $26 million
in compensation, he said Berkshire has rational compensation practices while other companies do things
differently.

Berkshire owns a lot of Kraft and still believes it is selling for less than its parts…especially if you value
the parts they way Kraft valued Cadbury.

Charlie recalled when Xerox acquired Crum and Foster, an insurance company. He described that as the
“dumbest deal of all time.” Managers often think another business is easier to manage than what they
already own. At Berkshire, “We have avoided slight subsets of stupidities like armies of lawyers to advise
on such deals.”

INTEGRITY

Charlie said a lack of integrity led to the financial crisis. Integrity is very important and the easiest way to
make money. He added, if there is God, Cardinal Richelieu has much to answer for. If not, he has done
well.

Buffett noted that the excuse that “everyone else is doing it” is the toughest thing to avoid. A good
example of that was when companies were not expensing stock options on the income statement. After
intense lobbying, the accounting standards board initially backed off on their requirement that stock
options be expensed. Instead they allowed companies to choose whether to expense the options (the
preferred method) or just disclose the option expense in the footnotes. Given the choice, 498 of the 500
companies in the S&P 500 chose not to expense the options because “everyone else was doing it.”
Situational ethics is huge. Another example Buffett provided were companies carrying out EPS
calculations to four or more digits so they could round up their EPS by a penny. At Berkshire there is no
budget, which is designed to prevent weakness in human behavior such as management teams making
short-term decisions just to meet a budget instead of focusing on the best decisions for long-term growth.

Charlie noted that so much bad behavior doesn’t come from malevolence but from the subconscious. A
cure is very difficult. During the financial crisis, no one owned mortgages, which were quickly packaged
up and sold, so no one took responsibility. “People didn’t realize they were immoral.” No one is
apologizing.

HOW TO BE GREEDY WHEN OTHERS ARE FEARFUL

An investor wanted to know how to be greedy when others are fearful as he also was fearful that we were
facing a global financial meltdown and couldn’t take advantage of a buying opportunity. Buffett said it is
natural that when other people are fearful, that you may get scared, too. If so, however, you won’t make
much money. You just become your broker’s friend. If you don’t look at stock quotes daily, then you won’t
get fearful. If you own a farm, you don’t look at what price you can sell it every day. When stock prices go
down, Berkshire will buy more stocks.

Charlie said you gain more courage after you have handled a hardship. He advised the fellow, “Get your
feet wet a little with more failure.”

Buffett concluded by saying that it would be better if there were no stock quotes at all. Stock prices don’t
tell you anything about the value of an investment. What counts is buying a good business at a good
price and forgetting about it for a long time.

SOLAR ENERGY

Charlie said solar solutions are coming because they are so obviously needed. At the same time, he has
always passed on solar panels for his home as he expects them to get cheaper. Buffett quipped that at 86
Charlie shouldn’t wait much longer. Charlie retorted, “I need to think long term, and I’m going to miss you
terribly.” He then went on to tell the joke about the husband who asked his wife if she would still love him
if he lost all his money. She answered, “Of course, honey, I’ll always love you, but I will miss you terribly.”

Charlie went on to say that ethanol was a “stunningly stupid idea” and another example of our politicians
failing us. However, he does believe that we will create an enormous electrical grid in this country and
that solar power will solve our energy problems.

Buffett quipped, “I have nothing to add.”

UNDERVALUATION IN BERKSHIRE’S STOCK PORTFOLIO

An investor said he and his wife were having an argument as to whether the investments in Berkshire
stock portfolio were undervalued or not and asked for help in solving the debate.

Buffett said the degree of undervaluation in the stock portfolio is not dramatic. The undervaluation has
been exceeded much more in prior periods. Berkshire expects to do reasonably well with its investments.

Charlie muttered, “I can’t solve domestic dribbles. I always just accepted the other point of view.”
OPTIMISM

An investor asked why with Berkshire’s outlook for inflation, government debt, increased regulations, and
the need for reduced return expectations, they are still optimistic that our children will live better than we
do?

Charlie said the solar energy solution “makes me very optimistic.” Berkshire’s culture will still work over
the long term which is another source of optimism. The living standards in China and India are rising. He
stated, “If I can be optimistic when I’m nearly dead, surely the rest of you can handle a little inflation!”

BUFFETT’S MEDIA EXPOSURE

A shareholder asked if Buffett’s time with the media is the best use of his time for Berkshire shareholders.
Buffett said “probably not” but he does lots of things like playing bridge online 12 hours a week in the
evening which may not be the best use of his time for shareholders. Buffett said he believes broadcasts
of his comments communicates his message better than when he is quoted in print, which may be edited
to not reflect his thoughts properly. He referred to Lloyd Blankfein’s joke that “Goldman Sachs was doing
God’s work.” A comment he is sure Blankfein wishes he could take back after the printed media treated
the comment seriously rather than as a joke. Buffett now prefers being on TV so that there is a permanent
record in his own words of his comments. Even then, he has to be careful of broadcasts. Charlie Rose
interviewed him on the acquisition of Burlington Northern. They had footage of Grace Kelly and Marilyn
Monroe riding the rails and Buffett quipped that he would have paid more for Burlington if they had thrown
in Grace Kelly and Marilyn Monroe. However, when they edited the show, they were running six minutes
over the time allotted so they took out the footage showing Grace Kelly and Marilyn Monroe on the trains
but left in Buffett’s comment, which made him appear to be a lecher.

LOYAL SHAREHOLDERS

Buffett said anyone can buy stock in a public company. Buffett believes it is important to let shareholders
know what kind of place Berkshire is. He mentioned how Phil Fisher said that if a restaurant advertises
French food, customers won’t be satisfied if they go into it and only find hamburgers being offered.
Berkshire wants shareholders that think like “we do” not investors that just focus on earnings every
quarter. Buffett exclaimed, “We do have the best shareholders who believe they are buying a business
and consider themselves partners in the business.”

Charlie added that what happened at Berkshire is an accident. They started investing money for family
and friends and morphed into a public company although they still treat shareholders as family. If a public
company has the average institutional investor who looks at performance every six months, they will have
unreasonable expectations and management won’t love their shareholders.

Buffett chimed in that at Berkshire they are blessed not to have an Investor Relations department. It is
much better to get shareholders in sync with your management style than to try an attract new
shareholders all the time.

ZERO PERCENT INTEREST RATE POLICY

Buffett acknowledged that it is difficult for investors to earn .1% on their cash these days with interest
rates kept so low. If those rates had been in place when Columbus landed, investors might have
managed to double their money by now. Low interest rates won’t go on forever although it feels like
forever for folks invested in fixed-income investments. Their purchasing power is getting eaten away.
Buffett said he wouldn’t want to be the Fed chairman or Treasury Secretary.
Charlie added that the situation is amusingly depressing. Stocks are going up because money returns are
so lousy. If the low interest rates can’t last, then stocks will go down. If low interest rates do last, then we
might find ourselves mired in a Japanese type of situation. “What a cheerful message!”

Buffett agreed saying that with interest rates so low, there is pressure to push stock prices and real estate
prices up. For people having to live on short-term rates, it is agony.

VALUING A BUSINESS

An investor wanted to know how one gets better at valuing a business and determining a margin of
safety. Buffett said that when he started out, he knew nothing about valuing businesses. Then Ben
Graham taught him a way, but the universe of those types of investments dried up. Although Buffett did
say about 5-6 years ago, he discovered Korean stocks that were selling at such cheap prices that he
could follow Graham’s approach once again, and Buffett diversified by buying a package of 20 of the
Korean stocks. Charlie then helped teach him about buying businesses with a durable competitive
advantage. Buffett said you don’t need to know how to value all businesses. It is not how big your circle of
competence is, but that you know where the perimeter is. You need to only know how to value a few
businesses that you can understand with those businesses likely to be around for 10-20 years. If you buy
them with a margin of safety, you should do fine. You just need to avoid the dumb things and know your
limitations.

Charlie said that if you want to get good at valuing businesses, you need to think and learn a lot and
practice a lot. You need to keep learning as the world changes. Accumulated experience will help make
sure you never fail utterly. You also need the right temperament to watch value rise slowly. Charlie said
he started valuing businesses when he was a little boy. He remembers watching a friend who did no work
but grew quite prosperous. Buffett joked, “Your ideal!” So how did this boy do that? He gathered up and
rendered dead horses. There was no competition! Charlie quickly learned that’s the best kind of
business.

BUSINESSES WHICH PROVIDE THE BEST RETURNS ON CAPITAL

Buffett repeated that a good business doesn’t require much capital to be invested in the business. He
said some of Berkshire’s businesses have negative capital requirements like Blue Chip Stamps and
Berkshire’s insurance businesses which provide float. He also described how a magazine is a type of
business with negative capital as subscribers pay in advance and not much capital equipment is needed
to produce the magazine. See’s Candy also doesn’t require much capital, but Buffett hasn’t figured out a
way to get people to eat 10 pounds of candy every day.

Charlie bluntly stated, “The formula doesn’t change. Monopolies are the best businesses.”

ACQUISITIONS

An investor asked if Berkshire’s phone has been ringing with companies wanting to sell their businesses
to Berkshire. Buffett said the phone doesn’t ring very often at Berkshire since his requirement that
companies have at least $75-$100 million in earnings weeds out a lot of phone calls. If Buffett receives 3-
4 phone calls in a year, then it is a good year. He said, “We’re as interested as ever in acquisitions. We
would love it if the phone rang with a big deal.”

Charlie added that Berkshire has been successful and helped by “human revulsion.” People don’t want to
sell their businesses to somebody else that won’t care for their employees. Berkshire gets offered
companies by people who won’t sell their business to anyone else. Buffett chimed in that Iscar is a good
example as they were willing to sell to Berkshire or not sell at all.
Buffett described the options for selling a business. When companies seek to sell their businesses they
may sell to a competitor, who might dismantle the company after a founder had spent 30 years building
the company. They might sell their business to a leveraged buyout firm, which looks at the business as a
“piece of meat to be resold.” Or they can sell the business to Berkshire which promises them a permanent
home.

Charlie added that deal making at Berkshire will be slower, but it is not over. He remarked, “That’s not so
bad given how much richer we all are.”

WHAT QUESTION WOULD YOU ASK YOURSELF

An investor wanted to know what questions Charlie and Warren would ask if they were in the audience.

Charlie said he would ask about the BYD investment as Berkshire typically doesn’t invest in the
developing edge of a new technology. Charlie said the investment shows their capability for learning. The
investment has worked out very well and will help solve significant problems of the world. He gushed
about the disciplined people at BYD, “It has been a pleasure to be associated with such people.”

Charlie also said he would have asked about Burlington Northern. He said the deal was a better deal for
Burlington shareholders than Berkshire shareholders but also noted that the deal will be satisfactory for
Berkshire shareholders. Both Burlington and MidAmerican have brought in a fair amount of engineering
into Berkshire.

Buffett said he would ask, “Can you keep using the capital you are generating for a long time?” He
answered the question by saying it is extraordinarily hard to add value when you get as large as
Berkshire will be in the next 10-15 years. While a portion of the money can still be invested, there is a
limit. There will come a time when Berkshire can’t use 100% of the capital it will be generating. At that
point, Berkshire will do what is in the best interest of shareholders.

HOW TO BUILD WEALTH

Buffett said the best way to build wealth is to follow your passion. You should love what you do. For
Buffett, it was “dumb luck” that his father was in the stock brokerage business. This led to Buffett reading
investment books much sooner than he likely would have. He then recounted the story of Rose Blumkin
(Mrs. B) who ran the Nebraska Furniture Mart. Immigrating to the United States, she didn’t go to school a
day in her life, but she loved what she was doing. She started the business with $500 and turned it into a
$400 million sales operation. He laughed about how he was invited to her house for dinner and found that
all her furniture in her home had green price tags hanging on them. She said it made her feel at home.
The power that was within her produced amazing things.

PRAGMATISM

When asked by a shareholder what is the unified management theme that runs through both their work
and life, Charlie answered: “It is pragmatism. It suits out temperament and it works better. It is just that
simple. It is the fundamental algorithm of life.”

HIGH-SPEED PASSENGER RAIL

Buffett doesn’t think high-speed rail in the United States is economically viable as it has to compete with
auto and air travel. In the U.S., we don’t have point-to-point density to make it economically feasible
unless the rail system was heavily subsidized. Therefore, he doesn’t think private firms will devote
resources to it due to the economics. The math doesn’t work for money that wants a return.
Charlie added that it is dubious that the costs can be overcome for high-speed rail. While it works great in
Japan and Canada, it is a different calculus. In Los Angeles, it would be a bottomless pit.

COSTS OF EARTHQUAKE INSURANCE

Buffett said he didn’t know what the costs would be if a Chilean-type earthquake were to hit California. In
Chile 40% of the damage was from the tsunami and 60% from the quake itself. Buffett did say that an
extreme earthquake in California could approach $100 billion in costs. Fire after the earthquake would
likely result in the most damage. In insurance lingo, the event would be known as “Shake and Bake.” No
matter what happens though, Buffett reassured folks that Berkshire will be well prepared to cover its
share of the costs. There will be huge catastrophes, but Berkshire has so much earnings power that they
will be able to cover insurance costs. Even if a $250 billion catastrophe struck, Berkshire’s exposure
would likely be 3%-4% of the event which is a maximum exposure of $10 billion.

GLOBAL FINANCIAL MELTDOWN

A shareholder asked what impact a global financial meltdown would have on Berkshire. Buffett answered
that in 2008, we came close to a meltdown. However, things work out in our system unless the gears get
completely off track. Buffett said huge amount of debt in the system won’t “do Berkshire in.” However, in
the event of a nuclear attack, “Who knows?” Berkshire can withstand anything that any company can.

Charlie retorted, “I’m not worried about it.”

*************
BERKSHIRE HATHAWAY 2011 ANNUAL MEETING NOTES

BY INGRID R. HENDERSHOT

We attended the Berkshire Hathaway annual meeting held on April 30, 2011 in Omaha along
with about 40,000 other folks from around the globe who gathered once again for the
Woodstock for Capitalists. Warren Buffett, Chairman of Berkshire Hathaway, and Charlie
Munger, Vice-Chairman, answered questions for nearly six hours.

FIRST QUARTER RESULTS

Warren Buffett began the Berkshire Hathaway annual meeting with a discussion of the
preliminary 2011 first quarter results which revealed that operating earnings declined 28%
during the first quarter to $1.6 billion with net earnings down 58%, primarily due to a swing to an
$82 million loss on investment and derivatives compared to a $1.4 billion gain in the prior year
period. On the operating side, the railroad, utilities and energy group increased earnings 79% to
$908 million, which included a full year of Burlington Northern Santa Fe’s (BNSF) results
compared to just a portion of last year’s earnings from the period when BNSF was acquired.
The railroad business is expected to have a very good year this year with the industry’s
competitive advantage growing by the day as oil prices increase.

The manufacturing, service and retailing group increased earnings 17% to $558 million as all
businesses, with the exception of housing, have been getting better quarter by quarter since the
fall of 2009. With Berkshire owning more than 70 companies, they represent a good cross-
section of the U.S. economy.

On the other hand, the insurance operations suffered the second worst quarter ever for the
insurance industry (behind Hurricane Katrina losses in the third quarter of 2005) with industry-
wide damages estimated around $50 billion. Berkshire generally coves 3%-5% of industry
damages. While the first quarter felt the brunt of extraordinary earthquakes, the worst part of the
year (hurricane season) for reinsurers is still to come.

Around the globe, there were major catastrophes which hit the reinsurance industry hard
especially in Asia/Pacific, including the earthquake in New Zealand, the Australian floods and
cyclone Yasi, and the major earthquake and tsunami in Japan. Berkshire’s estimated losses
incurred from these events totaled $1.7 billion, of which approximately $700 million came from
their 20% quota share of Swiss Re’s business. As a result, Berkshire booked an $821 million
insurance underwriting loss in the first quarter compared to a $226 million gain in the prior year
period. Subsequent to quarter end, the tornados in the South will result in losses for GEICO.
While GEICO doesn’t insure homeowners (only acts as an agent for homeowner insurance),
they will suffer losses from the estimated 25,000 cars which will put in claims as GEICO has 9%
of the market share for auto insurance.

Nevertheless, GEICO had a tremendous first quarter with auto policies in force increasing 46%
to 318,676. In the annual report, Buffett had written how the real value of GEICO’s economic
goodwill is about $14 billion even though Berkshire is carrying the goodwill on its books at only
$1.4 billion due to accounting rules. With GEICO off to a strong start in the first quarter, it is
easy to see why Buffett said the company’s value is likely to be much higher ten and twenty
years from now. GEICO is gaining market share every day with a very significant percentage of
its customers having been with the company for 10 years or longer. Buffett joked that the cost of
holding the annual meeting could be defrayed if just 66 shareholders would sign up with GEICO
at the booth during the annual meeting, as this would increase GEICO’s valued by $100,000
(since each new policyholder generates $1500 in goodwill value).

In the annual report, Buffett had written that he expected Berkshire’s normalized pre-tax earning
power to be around $17 billion and $12 billion after tax, assuming breakeven insurance
operations. For the past eight yeas, Berkshire’s insurance operations had done better than
breakeven. However, in 2011, given the first quarter catastrophes, it appears that for the first
time in nine years, Berkshire will have an underwriting loss. This doesn’t change Buffett’s
expectation that over time the insurance operations will break even, and Berkshire will get the
benefit of the free use of float.

Insurance investment income dipped 4% to $952 million in the first quarter, and Buffett expects
that investment income will go down even more since the 12% Swiss Re investment was called,
the 10% Goldman Sachs preferred stock was called subsequent to quarter end, and the 10%
GE preferred stock is expected to get called later this year. As a result, Berkshire will be losing
three high-yielding investments.

As of quarter end, Berkshire held $38 billion in cash, not including the $5 billion received from
Goldman Sachs after the quarter closed. The cash is earning virtually nothing today, but over
time Buffett expects Berkshire’s investment income will grow even though it will drop this year.

In discussing first quarter results, Buffett also talked about the $337 million loss which had to be
taken on part of his Wells Fargo investment due to the loss having to be classified as an other-
than- temporary impairment loss. He said accounting rules required this loss to be run through
the profit and loss statement even though it had already been reflected on the balance sheet. At
the same time, the $3.4 billion in total unrealized gains on Wells Fargo had to be ignored in the
profit and loss statement. Berkshire determines its gains and losses on a specific identification
basis. Had gains and losses been determined based on average cost, Berkshire would not have
been required to record an other-than-temporary impairment charge with respect to the
investment in Wells Fargo. This “fuzzy” accounting is why Buffett advises investors to ignore
gains and losses on investments and derivatives on a quarterly basis. It is more important to
focus on the operating earnings and gains in book value and intrinsic value when evaluating
Berkshire’s financial results. However, Buffett cautions that news headlines will focus only on
the “all deceptive figure” of net income and not what is important to understanding Berkshire’s
underlying business results.

QUESTONS ON DAVID SOKOL AND HIS TRADING IN LUBRIZOL STOCK

As expected, there were a number of questions on David Sokol’s trading in Lubrizol stock,
which Buffett called “inexplicable and inexcusable.” The complete transcript of all the Sokol
questions and Warren Buffett and Charlie Munger’s answers has been posted on Berkshire
Hathaway’s website linked below:

http://www.berkshirehathaway.com/dlsokol/TranscriptSokolQuestions.pdf

IMPLICATIONS OF THE END OF QE2

With the government’s quantitative easing program set to end in June, a shareholder asked
what the implications would be for the stock and bond markets. Buffett noted that there is no
secret about what the Federal Reserve is going to do or what the Fed’s balance sheet will look
like. As a result, he believes the effect of the ending of QE2 has already been discounted in the
stock market. He sees no reason why having the program come to an end will have any effect
on the stock market or the bond market on that date. With the government no longer buying
Treasuries, a big purchaser will no longer be in the market. The market will be different, but that
has already been anticipated. Charlie Munger wryly said, “I have nothing to add.”

SUCCESSION PLANS

Given that many folks felt David Sokol was a leading contender to be Buffett’s successor and
the controversy over Sokol’s trading in Lubrizol stock, a shareholder asked how Buffett could be
sure there were no more Sokol’s in the successor lineup. Buffett commented that the
shareholder made an assumption about Sokol being the next in line, which he is not sure was
warranted, but the shareholder certainly was entitled to think that Sokol was a candidate.

Buffett added that is one of the reasons he thinks it's a good idea if his son, Howard Buffett, who
would get paid nothing and have no activities in the company, becomes the chairman of
Berkshire after Buffett is not around because you can make a mistake in selecting a CEO.
Buffett continued, “I think the odds of us making a mistake are very, very low. And certainly the
candidate that I think is the leading candidate now; I would lay a lot of money on the fact that he
is straight as an arrow. But mistakes can be made. You know, the Bible says the meek shall
inherit the earth, but the question is, will they stay meek?”

Buffett thinks an independent chairman, particularly one that represents a very large block of
stock and has no designs himself on taking over the place, is a safety measure for the
possibility, however remote, that the wrong decision is made. But the directors at Berkshire will
also be thinking every bit as much about the quality of the person as a human being as they will
be thinking about their managerial skills because it's vital that you have somebody at Berkshire
that is running the place that really cares more about Berkshire than he does about himself in
terms of advancement. Buffett thinks Berkshire has multiple candidates that fulfill that role and
the idea of an independent chairman is part of the company’s belt and suspenders.

CIRCLE OF COMPETENCE

A shareholder asked if Buffett and Munger were to live another 50 years, what sector would
they add to their investment circle of competence. Buffett joked that he liked the part about living
another 50 years. He said he would choose a sector that is large, perhaps like the technology
sector. However, he warned that while the technology sector is large, it is very hard to pick
winners in the sector as the degree of disparity among technology companies is very dramatic.
Charlie Munger said he would likely choose the energy or technology sectors. However, he said
he and Buffett are the wrong people to develop expertise now in these sectors, summing it up
by bluntly stating, “If we were going to do it, it would have already happened.”

LUBRIZOL’S COMPETITIVE MOAT

When David Sokol mentioned Lubrizol to Buffett as an investment idea, Buffett said it struck him
as a business he didn't know anything about initially. He said he would never understand the
chemistry of petroleum additives, but that's not necessarily vital. What is important is that he
understands the economic dynamics of the industry. Is there a competitive moat? Is there ease
of entry into the industry? Buffett suggested to Sokol that he contact Charlie with the idea since
Charlie is a lot smarter about oil than Buffett felt he was. When Buffett talked to Charlie a few
days later, Charlie said he didn’t understand the business either.

What Dave passed along to Buffett after having dinner with James Hambrick, Lubrizol’s CEO,
and which Buffett later confirmed in a lunch with James Hambrick in February was a good
understanding of industry dynamics and how the business had developed over time and what
the role of oil companies was and would be in relation to a chemical additive. The oil companies
are the biggest customers. They sell base oil to Lubrizol, but they are also Lubrizol’s biggest
customers. The oil companies have gotten out of the business to quite a degree, although there
are two of them left in it. So this industry has consolidated over time.

Every time Buffett looks at a business, he also looks at the ease of entry of competitors into the
business. When Berkshire bought See's Candy in 1972, Buffett asked himself, “If I had a
hundred million dollars, and I wanted to go in and take on See's Candy could I do it? And I
came to the conclusion, ‘No,’ so we bought See's Candy. If the answer had been yes, we
wouldn't have done it. I asked myself that same question, can I start a soft drink company and
take on Coca-Cola if I have a hundred billion dollars. Richard Branson tried it some years ago
in something called Virgin Cola. The brand is supposed to be a promise. I'm not sure that's the
promise you want to get if you buy a soft drink, but in any event, I felt after my conversation with
Dave subject to a second conversation with
James Hambrick, but covering the same ground, that it's not impossible at all for people to
enter this business but in terms of the service and the relatively low cost of what Lubrizol brings
to the party, and in terms of people trying to break into a market and take them on -- and it's not
a huge market, it's probably only about a $10 billion market overall, I decided there's probably a
good size moat on this.”

“They've got lots and lots of patents, but more than that they have a connection with customers.
They work with customers when new engines come along to develop the right kind of additive.
So I felt that I had an understanding --didn't understand one thing more about chemistry than
when I started, but I felt I had an understanding of the economics of the business, the same way
I felt when the Iscar people talked to me. I mean, who would think you can take some Tungsten
out of the ground and shine it and put it in little carbide tools and that you could have some
durable competitive advantage, but I decided Iscar had some durable competitive advantage
after looking at it for a while. That's the conclusion I and Charlie reached--that the Lubrizol
position is the dominant --or the No. 1 company, in terms of market share and that business is
sustainable and that it's a very good business over time. They are helping engines run longer
and run smoother. When metal is acting on metal, the lubricants are important, and they're
always going to be around, and I think Lubrizol will be the leading company for a very, very long
time. And that's the conclusion I came to. And I did not have a fix on that, nor did Charlie, prior
to Dave relaying to me what he had learned at that dinner, which incidentally, Lubrizol had been
telling the world. They made investor presentations and all that quite extensively over the years.
I simply hadn't paid any real attention to it. And when it was explained to me, I thought I
understood it, and I still think I understand it. I think Lubrizol will be a very, very good addition to
Berkshire, and I saw James Hambrick just yesterday and despite the turmoil around this, they
are very enthused about becoming part of Berkshire, that they regard it as the ideal home.”

Charlie added, “Iscar and Lubrizol, to some extent, are sisters under the skin. You've got very
small markets that aren't really too attractive to anybody with any sense to enter, so if you have
any more like that why, please give Warren a call.”

BERKSHIRE VALUATION

A shareholder said he uses information provided in Berkshire’s annual report to estimate the
company’s value. He takes the investments per share ($95,000 at year end) and adds it to the
operating earnings discounted at a 7% rate ($90,000) to come up with an estimated value for
Berkshire of $185,000 per A share.

Buffett said he provides the investments per share and pre-tax operating earnings in the annual
report because he thinks they are important figures. He added that Berkshire’s operating
earnings are almost certain to increase over time with the investments per share currently about
the same as they were at year end. Buffett’s goal is to build both numbers; however, his primary
goal is to increase operating earnings. He added that Berkshire’s intrinsic value should be
considered a range of numbers as it is “ridiculous” to come up with one specific number. He
noted that intrinsic value ranges will differ even between himself and Charlie.

He said investors have received once or twice signals from him when he believes Berkshire’s
stock is undervalued. For example, when he announced that he was willing to buy back
Berkshire stock in 2000 that was a signal. It turned out to be a self-defeating signal as the stock
moved up swiftly after he announced the buyback offer. On the other hand, most of Corporate
America typically buys back stock at high prices rather than low prices. Currently, Buffett doesn’t
think Berkshire’s stock is “overpriced.” He noted that a very large international company may
have wanted to do a deal with Berkshire. However, the deal was too big to do without Berkshire
issuing stock. Buffett didn’t do the deal because Berkshire’s stock is not fully priced, and it
would have been a disadvantage to Berkshire’s current shareholders to have issued stock.

Charlie added that the shareholder was looking at the two right factors when determining
Berkshire’s value. He also said that Berkshire hasn’t permanently lost the ability to do
something interesting in terms of future deals

DEBT PROBLEMS

A shareholder asked Buffett how he could remain optimistic about the U.S. given the country’s
debt problems. Buffett repeated that he remains enthused about this country. Since 1776,
America has enjoyed the most extraordinary economic period in the history of the world. Buffett
was born in 1930. He joked that he might have stayed in the womb if someone had told him
what was about to occur: a stock market crash with the Dow dropping from 381 to 42; 4,000
bank failures; 25% unemployment; the Dust Bowl and grasshoppers taking over the world.
However, since 1930, the standard of living has increased sixfold in this country. We have a
capitalistic system that works magnificently. Every once in awhile it gets gummed up, and we
will always face problems.

Buffett recalled a talk he had with his future father-in-law, Doc Thompson, before he got
married. Doc said, “Warren you are going to fail, but it won’t be your fault. The Democrats are
going to take the country down the road to Communism.” In 1951, both Buffett’s father and Ben
Graham warned Buffett about getting into stocks since stock prices were too high with the Dow
trading over 200. Buffett said there are always negatives. This country in the past has faced a
Civil War and 15 recessions, and there will always be a list of things on why this country can’t
continue to prosper. However, the power of capitalism is incredible, and it will bring us out of
future recessions as it has in the past. In the fall of 2008, we needed all the fiscal and monetary
policy the government could provide. However, half of the recessions this country has faced
occurred prior to 1900 before fiscal and monetary policies were established. The game is not
over for the U.S. The rest of the world, like China, is catching up with the U.S. by tapping into
our system. Over the next 100 years, we will certainly face another 15-20 lousy years, but we
will still be far ahead of where we are now.

Charlie succinctly said, “The world is going to go on.” Buffett joked, “Now that is wildly optimistic
for Charlie.”

BEST BUSINESS FOR INFLATIONARY ENVIRONMENT

A shareholder asked what type of business is the best for an inflationary environment. Is it
companies like See’s Candy and Coca-Cola which earn high returns on tangible capital and
have pricing power or companies with hard assets like utilities and railroads?

Buffett answered that the best inflation protection comes from one’s own earnings power. For
example, a doctor’s services will always be in demand which will enable him or her to charge
higher prices for their services.

The worst business in an inflationary environment is one that requires tons of receivables and
inventories to operate the business. Normally, Buffett is not enthused by businesses which
require high capital expenditures. A utility generates a bond-like return and has high capital
expenditures so it won’t do as well during inflation just like bonds won’t do well in an inflationary
environment.

The ideal business in an inflationary environment is a company like See’s Candy. Businesses
with little capital investment needs and in a strong position to increase pricing with inflation do
the best. When Berkshire first bought See’s, they were making 16 million pounds of candy and
generating $25 million in volume. Today, the company’s sales top $300 million with only an
incremental $30 million invested in the business since purchase. See’s now sells 75% more
pounds of candy and generates more than 10 times the revenue it did when it was acquired.
See’s has virtually no receivables and the inventories turn fast. The best businesses are those
that are able to increase prices to offset inflation without incurring high capital expenditures.

Charlie added, “We didn’t always know this.” Buffett joked, “Sometimes we now forget this.”
Charlie explained, “That is why continuous learning is important.” Buffett quipped, “I am a better
investor, because I am a businessman, and a better businessman, because I am an investor.”
Charlie noted that while their railroads and utilities are capital-intensive businesses, they are
among the best in the world. It is not bad to be a world-class business. Buffett said that
Berkshire’s $43 billion purchase of Burlington Northern Santa Fe included 22,000 miles of track,
6,000 locomotives and 13,000 bridges. The replacement value of Burlington during inflation will
increase dramatically. The country will always need railroads, which is a terrific asset to own.

Buffett also mentioned a 1977 Fortune article he wrote, “How Inflation Swindles the Equity
Investor,” which concluded with this quote from Buffett, “Stocks are probably still the best of all
the poor alternatives in an era of inflation - at least they are if you buy in at appropriate prices."

DIVIDENDS

When asked if Berkshire would pay dividends, Buffett responded that Berkshire will pay a
dividend once management has lost the ability to create shareholder value. As long as
Berkshire is able to create more than $1 dollar of market value for every $1 they retain in the
business, it makes sense for Berkshire to retain capital rather than pay it out in dividends. So far
by leaving their money in Berkshire, which has retained $160 billion of shareholders’ equity,
investors are better off since they could cash out for $200 billion (Berkshire’s current market
capitalization). There will come a time when Berkshire can’t continue to create value. The day
Berkshire declares a dividend, the stock price should go down as it will signal that Berkshire’s
cash-compounding machine has come to an end.

Charlie added that if an investor wants a dividend, he sees no problem in selling a little
Berkshire stock if the proceeds are used to buy jewelry at the right store.

WELLS FARGO AND U.S. BANCORP

In a response to the revenue outlook for Wells Fargo and U.S. Bancorp, two Berkshire holdings,
Buffett said he consider Wells Fargo and U.S. Bancorp to both be among the best large banks
in the country, if not the best. However, he acknowledged that for U.S. banking as a whole,
profitability will be considerably less in the years ahead as leverage is reduced. It is a good thing
for society but not for individual banks that know how to use leverage intelligently. He chuckled
as he noted that, of course, all banks prior to the financial collapse thought they knew how to
use leverage intelligently. Return on assets and return on equity will be less for banks going
forward. However, he still thinks Wells Fargo and U.S. Bancorp have very good operations, just
not as attractive as when their leverage was higher. Buffett thinks we have seen the worse of
the banking crisis. He quoted Wells Fargo’s John Stumpf who said, "I don't know why the banks
had to find new ways to lose money when the old ones were working so well.” Buffett said he
likes his banking positions and added to the Wells Fargo position.

Charlie pointed out that Berkshire’s position in M&T Bank is headed by a sensible person, Bob
Wilmers, and that it has been a wonderful investment. Buffett chimed in saying that he would
recommend everyone read Wilmer’s letter to shareholders and that he also would recommend
Jamie Dimon’s JP Morgan letter to shareholders for insights into the banking industry. Charlie
agreed that M&T’s annual report was the best to come out of the banking industry.

GOLD

When Buffett was asked why he doesn’t invest in gold or other commodities, Buffett noted,
“Gold and Berkshire A stock were once very close in price several decades ago. Gold has a
way to go before catching up.” Buffett went on to explain that there are generally three
categories of investments:
 1) Fixed-income investments such as bonds, cash, money market funds.
He then reached into his pocket to pull out his wallet, joking that we were watching an
historic event, as he never likes to pull out his wallet. He held up a dollar bill and read
the back which says “In God We Trust” which he says should better be stamped “In
Government We Trust.” Any currency- related investment is a bet on how government
will behave. If you had been in Zimbabwe, it might not have been such a good bet.
However, almost all currencies have declined over time. As a class, currency-related
investments don’t make much sense.

2) Invest in items that don’t produce anything like gold.

Buffett repeated his comment on gold noting that, “If you take all of the gold in the world
and put it into a cube, it would be about 67 feet on a side, and you could get a ladder
and get up on top of it. You can fondle it, you can polish it, and you can stare at it. But it
isn’t going to do anything. All you are doing when buying commodities, like gold, which
are assets that cannot do anything, is hoping that someone else will pay you more for it
down the road.” He recalled that at least when he bought silver, it had some industrial
uses…joking that his investment timing was just 13 years off.

3) Invest in assets based on what they can produce, such as farms or businesses.
This is the category of investments that appeals to Buffett and Munger. The success of
the investment depends on whether it meets expectations and what the farm or business
can deliver over time. In this type of investment, you don’t worry about getting a price
quote every day. Instead you look at how the underlying business is performing.

While Buffett acknowledged that commodities have risen sharply recently and pointed out the
doubling of cotton prices, much to the chagrin of Fruit of the Loom, he also noted that over time
commodities have not been good investments. He added that he understands why rising prices
can create excitement and draw in buyers, but it's not the way to create lasting wealth. He said
he’d rather bet on strong businesses instead of something "that doesn't do anything."

Charlie Munger agrees:"There's something peculiar to buy an asset that will only really go up if
the world goes to hell." He added that people who want to leave the country should own gold,
while the rest of us will be better off owning Berkshire.

Buffett added that $100 billion of gold is being produced each year to add to that 67 foot cube.
All the gold in the world is currently valued at $8 trillion. Instead you could own 1 billion acres of
U.S. farmland valued at $2 trillion, ten ExxonMobils valued at $4 trillion and still stick $1-$2
trillion in your pocket as walking around money. Or Charlie grumbled, “You could have a 67 foot
cube of gold that you would need to hire an army to protect.”

Buffett, concluded, "I've found the problem with investing in gold is that the only way you can
make money is by having someone to pay a higher price than you. It pays no dividend or
interest, so if sentiment moves - and it often does, and quickly - you're left holding the bag.
Cotton, gold and silver haven't been good investments over the long term. So rather than
speculating, a smarter and safer strategy to beat inflation would be to concentrate your efforts
on investing in businesses that have little debt, the ability to increase prices, and a history of
paying strong dividends."
ATTRACTING INVESTORS

When asked how to attract investors, Buffett joked the shareholder must be an aspiring hedge
fund manager. He recounted how he started his investment business in 1956 by managing a
few family and friend’s accounts. He said he didn’t like selling securities, and he didn’t like
people watching every investment decision he made. For six years, he operated his business
out of his home. When Charlie came along, Buffett tried to hurry him into the investment
business by telling him that law was OK as a hobby, but Charlie still joined the business slowly.

Charlie said it helps to attract investors if you conduct your life so other people trust you, and
they have the right to trust you.

CONGLOMERATES

A shareholder asked Buffett to contrast Berkshire with the Go-Go conglomerates of the 1960’s.
Buffett acknowledged that Berkshire is a conglomerate, which permits the tax-efficient transfer
of cash flows between Berkshire businesses, which is a significant plus. In the past,
conglomerates were stock issuance machines. Basically, they were semi-Ponzi schemes. They
would issue stock to acquire companies at lower multiples than their own. Buying companies for
“free” became an unspoken conspiracy among the Go-Go conglomerates until it all collapsed.
Teledyne was one conglomerate which compiled a wonderful record by issuing significant
amounts of their stock when it was overpriced and then buying back significant amounts of their
stock when it was underpriced. At Berkshire, Buffett is reluctant to issue stock. He does like to
acquire good businesses that he can keep forever. In turn, these businesses throw off cash,
which allows him to buy more good businesses.

Charlie added that in the past, the conglomerates took the view that they knew what numbers
they were going to report, they just didn’t know how they were going to do it.

LEGACY

When asked about legacies, and what he’d like to be known for in 100 years, Buffett quickly
quipped: “Old age!” Munger adds that he thinks Buffett would want to be known as “the oldest
corpse I’ve ever seen.” This prompts Buffett to joke that Wilt Chamberlain’s gravestone reads,
“At last, I sleep alone.”

On a more serious note, Buffett said he hopes he is remembered as a good teacher, noting that
he had great teachers like his Dad, Ben Graham and Tom Murphy, former CEO of Capital
Cities/ABC. Munger said he would like to be remembered for “A fortune fairly earned and wisely
used.”

WEAK U.S. DOLLAR

When asked about the depreciating U.S. dollar, Buffett said there is no question that the
purchasing power of the dollar will decline as will most currencies. Last year, Berkshire shorted
two currencies and made about $100 million doing so. He added that he is unlikely to make
another big currency bet like he did a few years ago. To take advantage of a weaker dollar,
Berkshire does own businesses like Coca-Cola with 80% of their earnings non-dollar earnings.
Buffett has worried about a rapid decline in the dollar, but also noted that since 1930 $1 is now
worth $.06 due to a loss of purchasing power, and our country has still done well despite
inflation. While Buffett hates inflation, he says the country has adapted pretty well to it.

Charlie added, “God knows where the world is headed, but it will muddle through.” He pointed
out that Greece’s main industry is tourism. Even though Greece has a dysfunctional system, it
has lasted a long time. “A great civilization has a great deal of ruin in it.” Buffett chimed in that
he thinks we will see a lot of inflation, but it still is better to be born in the U.S. today than at
any other time.

BERKSHIRE VERSUS MUTUAL FUNDS

When asked if an investor should invest in Berkshire or mutual funds, Buffett said dollar-cost
averaging into index funds over time is fine if one is not an active investor. However, Buffett said
he would rather own Berkshire at the present time than index funds.

Charlie said he liked Berkshire much better than index funds, and he would be very unhappy if
he had to own index funds. He advised investors to lower their expectations on stock market
returns, although he acknowledged that Berkshire is a “pretty good investment.” Buffett joked
that Charlie’s wife lowered her expectations when she married Charlie and he lived up to them.

BERKSHIRE’S COMPLIANCE REGULATIONS

(See transcript on Berkshire website.)

SLUGGISH U.S. ECONOMY VERSUS FOREIGN ECONOMIES

When asked about the sluggish U.S. economy versus foreign economies, Buffett said the U.S.
government had their foot to the floor on monetary and fiscal policy. He joked that when Ben
Bernanke was asked to define what an extended period would be for low interest rates, he said
an extended period. Buffett said the problem is that we are taking in 15% of GDP in tax receipts
and spending 25% of GDP. However, the natural resuscitative policies of capitalism will be what
gets the economy going.

When the real estate market comes back after working off the crazy excess oversupply, we will
see a big improvement in employment. It won’t be just a pickup in construction jobs, but also
indirect jobs like workers at Shaw Carpets (which now has thousands fewer workers) and
workers at furniture marts. Buffett thinks the real estate market will be coming back perhaps by
the end of this year as households are now forming faster than the number of new homes.

The pace of the recovery is picking up and has come back quite a bit since the recession. This
can be seen in the weekly number of railroad car loadings which peaked at 219,000, dropped to
151,000 during the depths of the recession and currently are running at about 190,000. Certain
Berkshire companies are setting records, including TTI, a distributor of electronic components,
and Iscar, which provides tools for basic industry.

Charlie added that we are not learning enough from the wretched excesses of the financial
industry. All financial collapses are due to asinine and greedy behavior. We need to use an ax
on the financial industry. Our tax system should discourage trading. Securities should trade with
the frequency of real estate rather than on algorithms with one computer system front-running
another computer system. Charlie hates the idea that 25% of the best minds in this country are
going into finance. “The lack of contrition in the finance industry makes Dave Sokol look like a
hero.” Charlie stormily concluded with a discussion of the problems with our tax code, “A hedge-
fund operator having a lower tax rate than taxi cab driver is demented!”

TEN YEAR BET

Prior to the lunch break, Buffett put up a chart which showed that he is still on the losing end of
his 10 year bet with hedge funds that S&P 500 index funds could beat five selected hedge fund
in performance. This is a $1 million bet with the proceeds going to charity. Since 2008, the S&P
500 is down 8.18% while the Hedge funds are down 4.24%, although the index funds are
gaining ground.

Year S&P Hedge Funds

2008 -36.97% -23.9%

2009 26.62 15.92

2010 15.08 8.46

RON OLSON COMMENTS

After lunch, Ron Olson, director and attorney for Berkshire, made some clarifying remarks
regarding the Sokol trades. See the transcript on Berkshire’s website.

BYD

A shareholder asked if BYD, the Chinese battery and auto company, was still attractive given
recent product delays. Buffett turned over the question to Charlie, whom he called the expert on
BYD. Charlie said BYD’s price was higher than when Berkshire purchased its 10% stake in the
company, so the company is not as attractive on a valuation basis today. Any company moving
as fast as BYD will have delays and glitches. BYD tried to double their sales every year, and it
worked for the first five years. Grinning from ear to ear, Buffett said, “I have nothing to add.”

COMMODITIES

When asked about trading oil, Buffett said in the 1990’s he took a position in oil at $10 a barrel.
With oil, we are dealing with a finite resource. In exploring new frontiers for oil, we have stuck a
lot of straws in the earth. Some day, oil will sell for a lot more than it does today. We have
500,000 producing oil wells in the U.S. Traditionally, Burlington Northern Santa Fe has hedged
a certain amount of their oil needs. Buffett suggested that they didn’t need the hedges. If they
know where oil prices are going, they don’t need to bother with running a railroad. They could
just open a hedge fund. Buffett concluded by saying that an intelligent person can make more
money over time on investing in productive businesses than on speculating on commodities. He
added he has no edge on commodities.

Charlie simply added, “We like to keep life easy.”

LESSONS FROM THE LAST YEAR

When asked what they had learned in the last year, Charlie said he had read the book, “In The
Plex: How Google Thinks, Works, and Shapes Our Lives.” He found the book very interesting
and likes engineering cultures. He said he doubted he would make any use of the book, but he
enjoyed learning about Google. He stated, “We are here to go to bed wiser.”

Buffett joked that he learned that he will have Charlie write the company’s next press release.
Charlie responded, “I approved that damn press release without any objection. Shareholders
are going to be in terrible trouble if they expect me to correct your errors.”

TOO BIG TO FAIL

When asked if taxpayers will still have to bail out a company too big to fail, Buffett said there are
institutions around the world that the government would still need to bail out if they failed. In
Europe, there are countries too big too fail.

Freddie Mac and Fannie Mae still haven’t paid back their government loans. He said Freddie
Mac and Fannie Mae are “too big to figure out.”

However, Buffett said “hats off” to Chrysler for paying back its loans. He said he was skeptical of
the government giving loans to the auto companies, but the government made the right decision
to save the auto companies.

Buffett said incentive practices should be put in place so the propensity is for companies not to
become too big to fail. If a company needs to be bailed out, the CEO and his spouse should be
left dead broke. The Board of Directors should be forced to give back five years of their fees.
We should also reduce the leverage in the financial system, otherwise in 10 years we will once
again have too big to fail institutions.

Charlie said past panics and depressions always started on Wall Street due to great waves of
speculation and bad behavior. This last mess should have caused something like the 1930’s
when new regulations were put into place to prevent future problems. Charlie said he
confidently expects a new mess or two in the future and thinks it “is really stupid for a country to
allow this.” He said the finance and economics fields tend to attract people who should have
gone into snake charming.

THE WASHINGTON POST AND COSTCO

Buffett was asked about his resignation from The Washington Post’s board of directors and
whether that meant he might sell some of his Post shares.

He said he will not sell any of The Washington Post stock he owns and that he is just a phone
call away from Don Graham, if he ever wants any advice. At age 80, Buffett said he preferred to
spend more time on Berkshire than traveling for board meetings. He added that his enthusiasm
for The Washington Post and its management is the same as always, and that he is now
available to the Post a lot cheaper than before.
Charlie, who sits on Costco’s board of directors, says he admires Costco so that is why he is
staying on their board, but added that “serving on a bunch of boards is for the birds.”

Charlie said that Costco is the best in the world in its category with extremely ethical people.
Costco takes all their cost advantages and pass them on to their customers. This has created
ferocious customer loyalty. Costco has one store in Korea that is generating $400 million in
revenue. Costco has the right management, personnel, ethics and diligence, which is quite rare
to find. It is more normal to find businesses like GM, which once was the most successful
business, and then later wiped out their shareholders. It would be good for business schools to
teach the history of GM to students so they could learn how heavily unionized businesses and
tough competitors can wipe out a business. However, no business school is yearning for graphs
on the history of businesses. Harvard once taught that way, but quit when it trampled on other
disciplines being taught. IBM would also make an interesting case study.

After Charlie’s Costco discussion, Buffett joked that he and Charlie were recently on a plane
which was hijacked. The hijackers gave each of them one last request before they said they
would shoot them. Charlie said, “Let me give my speech on the virtues of Costco once again
complete with illustrations and graphs.” The hijackers then turned to Buffett to find out what his
last request was, and Buffett said, “Just shoot me first.”

INVESTING IN BERKSHIRE FROM AUSTRALIA

A shareholder from Australia wanted to know if Buffett thought that the value in Berkshire’s
stock could offset currency losses. Buffett said that part of his $100 million currency gain last
year came from the Australia dollar, but he said he couldn’t tell the shareholder what the relative
change in the Aussie dollar to the U.S. dollar will be over their investment time horizon. He said
every day at Berkshire they focus on increasing the intrinsic value and the earnings power of
Berkshire. He said their interests are 100% aligned with shareholder interests. He also
cautioned that they can’t do remotely as well as in the past given the larger size of Berkshire’s
assets.

Charlie added that Australia has fabulous mines which are benefiting from Asia’s boom. He said
that Berkshire will do well compared to other U.S. companies.

ACQUIRING COMPANIES VERSUS INVESTING IN EQUITIES

When asked whether he will spend more time focusing on large acquisitions than on investing in
equities, Buffett said he prefers large acquisitions. However, he spends more time on the equity
portfolio since large acquisitions only occasionally come along. He said he hopes to get lucky in
adding significant companies to Berkshire through more acquisitions. Many of the existing
companies at Berkshire do bolt-on acquisitions. Most of these companies will earn materially
more money in 5-10 years

Charlie added that Berkshire will always have a fair amount of marketable securities because of
the insurance business, but said Berkshire will do less well with its larger asset base. Buffett
said Berkshire now needs to put billions of dollars to work, and it is impossible to have a big
edge, but he continues to think Berkshire will have a small edge. Charlie said it more fun to
have people call looking for a permanent partner via an acquisition than it is shuffling little bits of
paper around through equity investing.
VALUING THE INSURANCE BUSINESS

When Buffett was asked if he is too conservative on valuing Berkshire’s insurance business by
not including any underwriting profit, he said it is conservative to assume break even
underwriting results for the insurance business. However, every few years, there will be an
underwriting loss like this year may have. He acknowledged that it might not be inappropriate to
include some normalized underwriting profit to the $17 billion normalized pre-tax earnings.

Charlie said he wouldn’t trade any other insurance company for Berkshire’s insurance
companies.

Buffett agreed and said GEICO has a marvelous business; Ajit Jain has built a business from
scratch which is capable of providing huge amount of insurance; Tad Montross has a terrific
operation at Gen Re; and all of Berkshire’s smaller insurance businesses are also first class.

Charlie warned that the property and casualty insurance industry has the “temptation to be
stupid” like the banking industry.

STOCK SPLIT FOR THE A SHARES

When asked if Berkshire would consider splitting the A shares, Buffett said they already split the
B shares, and there was no disadvantage to owning the B shares except voting rights. He said
don’t count on Berkshire splitting the A shares.

Charlie grumbled, “May you live until the A shares split.”

AJIT JAIN AS POSSIBLE SUCCESSOR

When asked if Ajit Jain might be the possible successor for Buffet, Buffett said Ajit Jain is not a
publicity hound. Buffett said he can’t think of any decision Ajit made that Buffett could have
made better. He said Ajit is as rational a thinker as Charlie Munger is. Ajit loves what he does
and is very creative. Ajit moved Berkshire into new reinsurance areas. Ajit’s mind works like a
machine day after day. Buffett said his best deal ever was hiring Ajit.

Charlie said that the secret of success in a field is finding something which you are very
interested in like Ajit found in insurance. He said every Thanksgiving, Ajit flies to London
because they don’t have a Thanksgiving holiday, and he can continue to work. Buffett joked,
“We do give him Christmas off.”

Buffett said they are not exaggerating on how valuable Ajit is to Berkshire. Ajit could monetize
himself for $100’s of millions of dollars by going to work elsewhere. He is smart and always
thinks for himself. He is a remarkable human being. He always thanks Buffett for his bonus,
even though Buffett feels he has left off a zero on the amount when he writes the check. Buffett
concluded that we are very lucky that Ajit has fun at Berkshire.

WORST BUSINESS AT BERKSHIRE

When asked what the worst business at Berkshire is, Buffett said it would be smaller businesses
without the potential to get big. He said retailing businesses, like Dexter, might be the worst.
Despite the success of the Nebraska Furniture Mart, the retailing businesses at Berkshire
haven’t created lots of earnings power for the company. Charlie agreed that retailers haven’t
been Berkshire’s best businesses.

GOODWILL AND RETUN ON TANGIBLE CAPITAL

Buffett said that the goodwill Berkshire pays for a business should not be judged as to how
attractive the business is. Instead one should look at the return on the tangible capital the
business earns. In terms of judging how Berkshire deploys capital, one does need to look at
goodwill, since that is what Berkshire paid. Amortization of goodwill makes no sense, but write-
offs of goodwill make sense when appropriate.

For example, Buffett said that Berkshire is paying $9 billion for Lubrizol which is earning $1
billion in pre-tax earnings, so that is what investors should judge Berkshire on in terms of capital
deployment. However, Lubrizol’s business should be judged on the $1 billion it is earning pre-
tax on $2.5 billion of its equity. One can buy a good business, but if you pay too high a price for
the business, it may not be a good investment.

Charlie added that it is difficult to find decent operating businesses selling for low prices, but if
you can earn $6 billion in earnings on $60 billion of float that is not all bad.

RAISING CHILDREN

Answering a question on raising children, Buffett said that if you are rich, bringing up kids to
think they have privileges is a big mistake. He said Charlie raised 8 kids with good results.
However, if one raises kids to think that they will have others wait on them, you won’t get good
results. Buffett didn’t want to give his own kids an idea that they were rich when they were
growing up.

Charlie added that when you are wealthy, it is difficult to raise children to think that they will
have to dig ditches in the hot sun for 60 hours a week. He muttered, “Just lose your fight as
gracefully as you can. If you were a proctologist, you might also not like your day.”

SUCCESSOR

Buffett said the next Berkshire CEO will make a lot of money. His base salary will likely be
supplemented with an option system with the option strike price set to what the business is
worth at the time. Berkshire’s present compensation system won’t be a factor for the successor.
It is important to get the right person with the right values who can interact with the other
managers and knows how to allocate capital. There are several managers at Berkshire who
already make eight figures, and they earn it.

Charlie added that he hopes it will be a long time in the future before the successor question
arises, but that Buffett’s spot will be occupied by the right person who doesn’t grab all they can.

RENEWABLE ENERGY AND CLEAN WATER

In response to a question on renewable energy, Buffett said it was an important subject but not
one that impacts his investment strategy. He looks at earnings streams 5-10 years down the
road when making his investment decisions. There are a number of societal issues that don’t
impact his investment decisions, such as clean water.

Charlie said that if we have enough energy, we will have enough clean water, noting that Israel
gets half of their water from seawater. Charlie is a great believer in conserving carbons. He said
those who think “Drill, drill, drill” is the answer are “all nuts.”

EASY LUBRIZOL QUESTION

When asked if Lubrizol’s board breached its fiduciary duty to its shareholders by not running an
auction of the company, Charlie responded, “No, the board of directors did not breach their
fiduciary duty because we don’t participate in auctions.” Buffett added, “They got a very certain
deal, and they got a very significant price in my view. If they said, ‘we want to conduct an
auction,’ we’d say good luck and would have moved onto something else.” Charlie snorted,
“Anybody else have an easy question?”

CAPITAL ALLOCATION

In judging Berkshire’s capital allocation skills, Buffett said the real test is whether Berkshire’s
earnings progress at a rate higher than the capital retained. Does Berkshire’s market value
increase at a rate greater than retained earnings? Buffett said, “If we keep shareholder money,
we need to earn a better than average return on that money, which we so far have done.”

Charlie added that Berkshire keeps beating the market. It won’t be at the rate as in the past, but
Berkshire should continue to do so.

HIGH YIELD INVESTMENTS

A shareholder asked why Buffett had negotiated different yields on a variety of high-yield
investments. With the Goldman Sachs and GE investments, Berkshire received 10% yields plus
warrants, while the Swiss Re deal earned a 12% yield.

Buffett explained that every deal was done at a different time and under different market
conditions. As a result, opportunity costs were different. He said Berkshire could have done
better if they had struck their deal with Goldman and GE five months later. He bluntly said, “I
was early.” He said the Swiss Re deal didn’t compare to the Dow deal done one and a half
years earlier. He had to consider what was available at the time. He said past deals don’t make
any difference when negotiating new deals. He said it is a big mistake to compare a current
deal with the best deal ever made. The goal is not to do the best deal ever, but to do the best
deal available at the time.

Charlie agreed that you make different deals based on opportunity costs at the time.

SPEED READING

When asked what advice he would give children on taking speed reading classes, Buffett said
he reads five newspapers a day along with 10-K’s and 10-Q’s, but he said he is not a fast
reader. He said he is not sure how effective speed reading is but thought it would be a huge
advantage to read fast. Buffett added that there is nothing more pleasurable than reading and
that perhaps learning speed reading when he was younger would have been helpful. Buffett
then retells an old Woody Allen joke about speed-reading. When Allen tells someone he read
“War and Peace” in about 20 minutes, the person is stunned. “What’s it about?” the other
person asks. “Russia,” Allen responds.

Charlie grunted, “Speed is overestimated. What the hell difference does it make how fast one
can read?”

DEBT CEILING

When asked what would happen if Congress doesn’t raise the debt ceiling, Buffett said, “It will
be the most asinine act Congress ever did.” He then recounted the story about how Indiana
once passed a law to change the mathematical function, Pi, to three figures so it would be
easier for kids to learn. Buffett said the only thing stupider than that would be for Congress not
to raise the debt ceiling. He explained that even having a debt ceiling is a mistake as the
economy of 1911 is different than the economy of 2011. It is a waste of time debating the debt
ceiling, as a growing country has a growing debt capacity. He went on to say that Congress will
raise the debt ceiling. The U.S. will not have a debt crisis as long as they issue notes in their
own currency. Instead of worrying about a debt crisis, the real worry should be about the
printing press and inflation. Japan has high debt/GDP with no debt crisis due to issuing their
notes in their own currency. On the other hand, European countries may face a debt crisis,
since they are forced to pay in a currency they don’t control.

Charlie said that with regard to the debate over the debt ceiling, “Both parties are competing to
see who can be the most stupid! And they keep trumping one another.”

MIDAMERICAN’S NUCLEAR LIABILITY

When asked if MidAmerican’s bond-like return is worth the risk of a potential mega-catastrophe
from its nuclear operations, Buffett said that nuclear power is an important part of dealing with
the energy problem. France receives a high percentage of their power from nuclear operations.
Currently, 20% of U.S. electric power comes from nuclear power. Buffett thinks it is safe,
however, he doesn’t think new nuclear operations will go anywhere fast given what happened in
Japan.

Charlie said that you can’t be so risk-averse that something which is remotely possible prevents
useful solutions. You need a reasonable amount of courage in running companies. Buffett
added that toxic waste is carried on railroads, but that he doesn’t think Berkshire has any risk
that would threaten Berkshire whether it be leverage, derivatives or nuclear power plants.
Charlie agreed saying that new nuclear plants are much safer than the old ones, while Buffett
chimed in that more people have lost their lives in coal mines than from nuclear power. Charlie
concluded by wryly stating, “If a tsunami gets to Iowa, it will be a hell of a tsunami.”

REINSTATING CHARITALBE CONTRIBUTION PROGRAM

When asked if Berkshire would reinstate its charitable contribution program, Buffett said that
shareholders loved that program for 20 years. He said it was a tax-efficient way to let
shareholders give away money to charity. Nobody in Corporate America copied Berkshire’s
plan, as CEO’s prefer to direct company charitable contributions instead of allowing
shareholders to do so. While Berkshire always had a backlash on where some of their
charitable contributions were directed, Berkshire ended the program when a campaign
developed to boycott Pampered Chef’s representatives. This program was hurting a lot of
innocent people and threatening their livelihood, so Berkshire reluctantly stopped the charitable
program.

Charlie added that he didn’t want Berkshire, through its charitable program, to always have to
deal with various social issues of the time. He said that a lot of Berkshire stock is given away to
charity every year.

ESTIMATING GROWTH OF LONG-TERM CASH FLOWS

When asked how to estimate long-term cash flows, Buffett said growth is part of the investment
equation, but one should focus on profitable growth. He spoke of Coca-Cola growing for the
past 125 years and now being in 200 countries. Buffett said he likes to see high returns on
incremental capital, but that he doesn’t rule out low-growth companies if they can be acquired at
a reasonable price.

Charlie said business schools teach students to make projections well into the future, but growth
projections do more harm than good. “There is enormous false precision when making long-
term projections.”

Buffett recounted the story of when they acquired Scott Fetzer. Even though they struck the
deal on their own, Fetzer’s broker received a $2 million fee. The broker, feeling a bit guilty,
offered to provide them with the book he prepared on all of his growth projections for Fetzer.
Charlie retorted, “I’ll pay you $2 million if you don’t show me the book!” Buffett chimed in that he
never saw projections from an investment banker that didn’t show everything going up. He
warned, “Don’t ask the barber if you need a haircut.”

13-F

When asked if a shareholder could determine what securities Buffett personally owned from
reviewing the company’s 13-F, Buffett turned over the question to Berkshire’s CFO, who does
the SEC filing. He explained that the securities which have Buffett’s name by them are for
Berkshire’s profit-sharing plans which Buffett manages. Buffett added that he personally owns
very few securities. Most of his personal money is in government bonds, which he said are not
good investments right now. However, he focuses his attention on investing Berkshire’s
investments not his own.

CHINA

Buffett said he will invest in foreign companies such as those in China, however, he
acknowledged that he knows less about their tax laws, customs and government policies than
he does about domestic companies. He said he did buy PetroChina a few years ago because it
appeared extraordinarily cheap, so the uncertainty was already built into the valuation. Besides,
PetroChina’s annual report disclosed that the company would pay out 45% of their earnings in
dividends, which they did. Buffett said he is more comfortable investing in China than in Russia.

Charlie added that Buffett loves to look at new companies in different parts of the world. He said
there is one private company in China that is making $3 billion after taxes that they looked at.
However, one has to be careful in evaluating things not seen before. Charlie told a joke about a
professor going out West one summer. He came back and told his students that Indians always
walk in single file. When asked how the professor knew that, he said, “Because I saw one Indian
while I was there, and he did.”

CASH

When a shareholder asked Buffett where he holds Berkshire’s massive $38 billion cash stash,
he said all the choices for short-term money are currently lousy. Berkshire does not own any
commercial paper or money market funds. Basically, all Berkshire’s cash is in U.S. Treasuries.
Berkshire is getting paid virtually nothing on the cash which is irritating. However, it serves as a
parking place, and Buffett knows he will get his money back. In Sept. 2008, he was able to
complete the $6.5 billion Wrigley deal which had been previously negotiated because Berkshire
had the money liquid.

Charlie said he has seen people struggle to get 10 basis points more on short-term money.
However, cash allows one to do opportunistic deals. He recounted how Berkshire was able to
acquire a pipeline over a weekend because they had the ready cash available.

Buffett added that the ability to come up with cash easily when the rest of the world is petrified
allows Berkshire to do good deals. For example, he joked, if Bernanke were to run off to South
America with Paris Hilton, Berkshire would still be able to get deals done.

WESCO MEETINGS

In response to a question about Wesco shareholder meetings which will no longer occur after
the remaining shares of Wesco are acquired by Berkshire, Charlie said he plans to hold annual
“Afternoon Meetings with Charlie” which are only for hard-core addicts.

WIND POWER

In response to a question on wind power, Buffett said wind power was terrific but only when the
wind blows, which it does about 35% of the time in Iowa where MidAmerican has its wind power
operations. However, you can’t count on wind power for your base load of power. Wind power
economics only make sense right now if companies receive a government subsidy in the form of
tax credits. The central part of the country is the best for wind power, and Berkshire is number
one in providing wind power. Since Berkshire pays a lot of taxes (20% of all corporate taxes in
the U.S), the tax credits it receives on its wind power projects are valuable so Berkshire will
continue to build wind power operations in Iowa. The wind power Berkshire generates also has
helped keep Iowa’s electric rates unchanged for a decade.

NETJETS

When a shareholder asked if NetJets was destined for bankruptcy absent Berkshire’s support,
Buffett said Berkshire never had an intent to bankrupt the company. However, Buffett did
acknowledge that NetJets would have gone bankrupt if it had been an independent company.
Buffett said in the past they had two insurance companies that would have gone bankrupt but
Berkshire agreed to make them whole.
HIGH YOUTH UNEMPLOYMENT

Given high youth unemployment, a shareholder asked what advice Buffett would give youths
about starting their own businesses. Buffett recommended that they take a Dale Carnegie
course as communication skills are the most important skill to improve. If they are lucky, they
will find what they are passionate about and start a career in that area.

Charlie added that economics is a tough subject, and he wouldn’t urge students to hurry into
economics. He would suggest students master the easy stuff first.

REINSURANCE

When asked about whether Berkshire should limit the reinsurance it agreed to take on for Swiss
Re, Buffett said he wouldn’t change the direct risk Berkshire is willing to bear in reinsurance.
Currently, Berkshire is well below their capacity for reinsurance and would love to add more
reinsurance to the books but only at attractive rates. . With normalized earnings power of $17
billion, Berkshire is unlike any other insurance company in the world. The insurance industry just
went through the worst quarter since Katrina. Buffett added that Berkshire didn’t succeed in the
reinsurance business in their first 15 years in the business, not until Ajit Jain came along.

Charlie added that the reinsurance business looks easier than it is. The industry needs to factor
in worst-case events. The investment bankers who sell reinsurance products are the same ones
that sold derivative products that blew up.

TODD COMBS

When asked how Berkshire came to hire Todd Combs as an investment manager, Charlie said
it was “very complicated.” Todd sent Charlie a letter, and Charlie agreed to have a meal with
him. Charlie said Todd has been thinking about financial stocks for a long time, which will be
useful for Berkshire. Buffett added that Todd’s results over five years were good. He also noted
that Berkshire will likely have more than one investment manager over time.

JOHNSON & JOHNSON

When asked what Buffett thought about Johnson & Johnson (one of Berkshire’s investments)
using stock to acquire Synthes, Buffett said he hadn’t talked to anyone at JNJ about the deal,
but he would have liked the deal better if it was done using all cash. When a company trades
away its existing business for another business, one would draw the inference that the
company is not valuing its own business as you might think they should.

Charlie reminded Buffett that he knows more about chocolate and pizza (Kraft’s deal that Buffett
criticized) than he does about medical devices.

ACQUISITION APPETITE

With cash potentially reaching $60 billion by year end, Buffett was asked about his acquisition
appetite. Buffett said his acquisition appetite is always there. However, he won’t borrow a lot of
money to do an acquisition, and he won’t issue many Berkshire shares. He also won’t sell an
existing business to buy another business. Cash will build over time, and Buffett is willing to sell
portfolio securities to fund an acquisition. He said he is looking at a couple of deals right now in
the $9 billion range, but they are still just a gleam in his eye. He said Berkshire can’t really do a
big elephant deal right now given that he just committed $9 billion to do the Lubrizol deal.
Berkshire has never really taken a risk in deals because it doesn’t need to.

Charlie added that Berkshire is very reluctant to issue shares. In fact, he said Berkshire hates to
issue shares as they would be divesting parts of a wonderful business they already own.

RESIDENTIAL REAL ESTATE MARKET

When asked about the residential real estate market, Buffett said the immediate real estate
market situation is terrible. He sees it at Berkshire’s real estate related businesses like Shaw,
Mitek, Johns Manville, and Acme Brick. There has been no bounce at all in those businesses.
But that hasn’t stopped Berkshire from investing further in the real estate business, noting that
they recently bought the largest brick company in Alabama. We will once again build houses
which will equal future household growth. Over the long term, Berkshire will make significant
money when we get a normalized housing market. While there is still no movement in the real
estate industry, Buffett expects things to improve by year end or next year.

Charlie added that real estate is a very cyclical business, noting there is no one else right now
bidding on brick companies in Alabama. Many people don’t like cyclical businesses, but at
Berkshire they don’t mind lumpy business results as long as they are good businesses.

Buffett added that See’s Candy loses money eight months out of the year, but Berkshire never
worries that Christmas won’t come. With cyclical businesses, Berkshire looks at the business
over the next 20 years. They recognize over that period there will be 3-4 bad years. If they can
buy the cyclical business cheap enough, they will do OK over time.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

BERKSHIRE HATHAWAY 2012 ANNUAL MEETING NOTES

BY INGRID R. HENDERSHOT, CFA

We attended the Berkshire Hathaway annual meeting held on May 5, 2012 in Omaha along with
about 35,000 other folks from around the globe who gathered once again for the Woodstock for
Capitalists. Warren Buffett, Chairman of Berkshire Hathaway, and Charlie Munger, Vice-
Chairman, answered questions from shareholders, analysts and the media. Here are my notes
from the meeting.

FIRST QUARTER RESULTS

Warren Buffett began the meeting with a brief recap of Berkshire Hathaway’s first quarter
results. In general, all of Berkshire’s companies, with the exception of the residential
construction companies, have shown good earnings growth. Each of Berkshire’s five largest
non-insurance companies-- Burlington Northern Santa FE (BNSF), Iscar, Lubrizol, Marmon
Group and MidAmerican Energy—delivered record operating earnings in 2011 of more than $9
billion in aggregate. Unless the economy weakens in 2012, Buffett expects each of the
“fabulous five” to once again set a record, with aggregate earnings comfortably topping $10
billion. In the first quarter 10-Q insurance section, Berkshire disclosed how an accounting
change for GEICO on deferred policy acquisition costs resulted in a decline in earnings of $250
million although there was no impact on cash flow. GEICO had a terrific first quarter as float
grew and the underlying business was better than presented. Buffett feels good about the first
quarter and the year.

SUCCESSION AND CHIEF RISK OFFICER

Buffett was asked if his successor will have the knowledge and temperament to take on the role
of chief risk officer at Berkshire. Buffett agreed that the next Berkshire CEO should also be the
chief risk officer of the company, as that duty should not be delegated. He noted that he has
seen the duty delegated to risk committees at other firms, which resulted in real trouble. Buffett
is the Chief Risk Officer at Berkshire and his successor will have the same responsibility and
ability, which he ranks as highly as capital allocation duties. The basic risk at most companies is
excessive leverage. In terms of insurance risk, one needs to be sure the insurance leaders
correctly assess the risk and how it accumulates.

Charlie added the risk duties have been delegated in America and business schools have
taught a silly way of trying to model risk with Gaussian curves and Value-at-Risk (VAR) models,
which are some of the “dumbest ideas ever recorded.”

Buffett agreed, noting that making calculations to eight decimal points provides a false sense of
precision to gauging risk and that the Gaussian curve is not appropriate to measuring risk in
securities markets. He joked, “We won’t have an arts major in charge of Berkshire.”
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

In response to whether Buffett’s successor will have the ability to do special deals like Buffett
did with the GE, Bank of America and Goldman Sachs preferred stocks and warrants which
added to Berkshire’s returns, Buffett noted that Berkshire will still be able to act with speed and
will have occasions to do large transactions even after he is no longer managing the company.
In striking the Bank of America warrants deal, Buffett had never previously talked with Brian
Moynihan, CEO of Bank of America. However, when he did call Brian to propose the deal, Brian
knew Berkshire had the money and was good for its commitment. Subsequent to Buffett’s
departure, Berkshire will still have the money, and his successor will have the ability to do other
things, even if he doesn’t do negotiated deals which Buffett may have done. Buffett quickly
pointed out the negotiated deals, such as the GE, Goldman Sachs and Bank of America deals,
have not been key to Berkshire’s returns. They are not as important as his purchase of Coca-
Cola over many months. The value that has accumulated in Berkshire over special transactions
is peanuts compared to the purchases of entire companies like GEICO, Burlington Northern
Santa Fe and Iscar. Sizable deals will still be available to Berkshire given the billions in cash
available.

Charlie added that the Berkshire Board of Directors will also provide risk controls with Walter
Scott being a great risk control analyst. He also noted that Berkshire director, Sandy
Gottesman, once fired an associate who exclaimed, “How can you fire me?” Gottesman
responded, “Because I am a rich old man, and you make me nervous.”

REINSURANCE RESERVES

When asked about the reserving practices for a Swiss Re reinsurance contract, Buffett noted
that it was a large contract which applied to 2004 business reinsuring American life. With
American mortality figures coming in above expectations, Berkshire set up a reserve for a worst-
case situation and took a charge as the ability to reprice the business could be subject to
controversy. In all of Berkshire’s insurance businesses, the overriding principle is to reserve
conservatively which is the mindset of all the insurance managers. Reserving practices are
different among Berkshire’s insurance businesses as GEICO’s auto insurance has a short-tail
versus General Re’s long-tail business. At the time Berkshire acquired General Re, they were
underreserved on their book of business, but now with Tad Montross in charge, General Re’s
reserves are generally developing favorably.

Charlie noted that there will always be some insurance contract which works out worse than
expected, snorting, “Why would anyone buy insurance if that was not the case?”

PROVIDING ADVICE TO CHINA

When Charlie was asked about what advice he might provide Chinese companies, Charlie
grunted that he is not spending much time giving advice to China. He noted that China has been
doing very well from a tough start, and we should be seeking advice from China rather than
giving it. Overall, Berkshire has had little influence in giving advice to any business as it would
be like pushing on a noodle.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Buffett added that Berkshire’s four largest investments are worth $50 billion today and some of
them Berkshire has held for 25 years. He said the number of times he has talked to the CEO’s
of these companies probably doesn’t average more than twice a year. Berkshire is not in the
business of giving advice. If Berkshire thought the success of a business depended on
Berkshire’s advice, they would move on to something else.

When asked if there will be great companies like Coca-Cola in China, Charlie said China
already has great companies even though he can’t pronounce their names. Buffett agreed,
adding that China has huge companies which may eclipse U.S. companies.

BERKSHIRE’S VALUATION AND BUYBACK PROGRAM

A shareholder noted that Berkshire is willing to buy back Berkshire’s stock at 1.1 time book
value or less, and he now feels like a chump for paying two times book value for his shares.
Buffett noted they have never encouraged people to buy Berkshire stock over its intrinsic value.
In an ideal world, Berkshire’s stock would sell once a year, and he would like to see it trade at
an intrinsic value conservatively calculated by Charlie and him. If they think the stock is
overvalued, they would like to announce before the market opens that the stock is overvalued
so that folks don’t overpay for the stock. He noted that when Berkshire issued their Class B
shares in 1996, the prospectus included an unusual warning not seen on any prospectus: “Mr.
Buffett and Mr. Munger believe that Berkshire’s Class A Common Stock is not undervalued at
the market price stated above. Neither Mr. Buffett nor Mr. Munger would currently buy Berkshire
shares at that price, nor would they recommend that their families or friends do so.” When it
comes to repurchasing Berkshire stock, Buffett wants to let shareholders know that he is buying
back the stock because it is too cheap. He said he knows that Berkshire’s intrinsic value is
“significantly above” 1.1 times book value.

An analyst asked what Berkshire’s capacity would be to repurchase shares and if a repurchase
program above 1.1 times book value would be attractive. Buffett said he feels very comfortable
buying back shares at 1.1 times book value as he wants the stock to be “significantly
undervalued” to do a buyback. He said Berkshire’s capacity for a buyback is in the “tens of
billions of dollars” range as long as Berkshire’s overall cash position doesn’t fall below $20
billion. He said Berkshire would make significant money for shareholders if they buy back stock
at 1.1 times book value.

Charlie added that some companies buy back their stock regardless of the stock price which is
not Berkshire’s practice.

Buffett agreed that some buyback programs are “idiotic”, which are done more for
management’s ego. They buy back stock at a high price and then issue stock options at a low
price. He said Berkshire will only do a buyback for one reason and that is to increase
Berkshire’s value and then do it in a big way.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Buffett was asked if Berkshire’s buyback program put a ceiling on the stock price. He responded
that he didn’t think it put a ceiling on the stock price, and it also didn’t necessarily put a floor on
the stock price. With the stock currently selling close to Berkshire’s buyback price, it perhaps
signals that an investor won’t have much to lose, but perhaps have a lot to gain. If we get into
any kind of chaotic market, Berkshire will buy back a lot of stock.

EUROPEAN BANKS VS U.S. BANKS

Buffett said U.S. banks are in a much better position than 3-4 years ago. They have taken
abnormal losses and increased their capital in a big way with liquidity now coming out of their
ears. U.S. banks today are in fine shape. On the other hand, European banks were gasping for
air last year until Mario Draghi, the European Central Bank president, injected $1.3 trillion into
European banks, equivalent to 25% of all bank deposits in the U.S. This was a huge act
designed to replace wholesale funding which was running off quickly at European banks. The
European banks didn’t want to raise capital which would be very expensive, but they were
losing their funding base. The ECB solved the funding base for a cost of 1% annually for three
years. Buffett joked that he would like to receive money at a cost of 1%, but he can’t get it
because he is not in trouble. Overall, U.S. policy was very sound during the financial crisis when
the government told banks they needed to raise capital even if they didn’t need it. The Fed and
the U.S. Treasury handled the situation quite sensibly. The world would have been different
otherwise.

Charlie added that Europe does not have a full federal union so it is very difficult for them to
handle stresses. He matter-of-factly said, “I am more comfortable with the U.S.”

Buffett agreed, saying it is a night and day difference between the U.S. and European banking
system, since the Fed, the President and Congress all had the ability to address the financial
crisis. He quoted Kissinger who once said, “If I want to call Europe, what number do I dial?” It is
difficult to get 17 countries to agree on policies.

COAL AND NATURAL GAS PRICES

Buffett was asked if Berkshire’s investments in BNSF and MidAmerican were an elegant hedge
for coal prices as MidAmerican’s utilities would benefit from lower coal prices while BNSF
would be hurt due to lower shipments of coal when prices were low and vice versa. Buffett didn’t
agree as he said that MidAmerican passes on the changes in coal prices to its customers and
doesn’t really benefit from cheap coal. Because it is a regulated business, lower coal prices
don’t affect MidAmerican but do affect their customers who will enjoy lower utility bills. Coal
traffic is down at BNSF because of low natural gas prices. Buffett exclaimed that if someone
had told him that natural gas prices would trade under $2 per MMBTU at the same time that oil
prices were trading over $100 per bbl, he would have asked them what they were drinking. He
would not have thought that A 50 to 1 ratio between the prices would be possible. He said it will
be interesting to see how the oil/gas ratio works out.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie added that we should use all our thermal coal first for energy purposes and save our
precious natural gas resources. Gas is worth more than coal, and we should save our gas for
future generations. It is crazy to use up natural gas at these prices.

TELEMATICS AND GEICO

When asked if GEICO would use telematics (putting devices in cars to track personal driving) to
set insurance prices, Buffett said they haven’t done it at GEICO although he knows Progressive
is experimenting with telematics. At GEICO they ask potential policyholders 51 questions (which
he said is too many) to determine their propensity of being in an accident. Right now, he doesn’t
see telematics being important in determining the probability of an individual being in an
accident, but if that changes, he would consider it. He said there are certain attributes such as a
16-year old male trying to impress his girlfriend which significantly increases accident rates.
Credit scores also reveal the probability of an increase in accident rates although they are not
always allowed to be used. GEICO’s marketing, retention and risk-profiles of policyholders are
all good. GEICO is carried on Berkshire’s book at $1 billion over tangible book value, but the
business is worth a whole lot more. It is probably worth $15 billion over the carrying value.

BUSINESS SCHOOL TRAINING

Buffett commented that business schools have taught a lot of nonsense about investing. Charlie
chimed in that business school training has been a considerable sin, but it is improving. Buffett
said investing has been the silliest stuff taught and that it is astounding how business schools
have focused on one fad after another. Many of these fads are math-based so when they
become popular, it is hard for the schools to resist teaching them as it appears that they are
going against the current wisdom.

Buffett said investing is not complicated. Two courses are all that is needed:

1) How to Value a Business

2) How to Think About Markets

These courses would be much better than modern portfolio theory or option pricing. In valuing a
business, if you buy the business for less than it is worth, you will make money. Business
schools try to make it more difficult than that.

Charlie added that folly creeps into accounting. With option pricing, accountants wanted a
standard model, so they didn’t have to think too hard…”and now they have one!”

BUFFETT RULE

When asked about the Buffett Rule, Buffett said it has been interpreted in different ways by
folks. Some find it more fun to attack what they think it says rather than the actual rule. The
Buffett Rule was designed so that people who make very large incomes pay tax rates at least
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

commensurate with the two-thirds of the people who get taxed, which only seems fair when
asking for shared sacrifice. Currently the 400 largest incomes in the U.S. average $270 million
per person with 131 of the 400 paying tax rates less than 15% even with payroll taxes included
and 41 of the 400 pay tax rates less than 10%. The Buffett Rule would be required only for
these large earners. It would affect very few people but would raise a lot of money. People who
have huge incomes have seen the tax laws changed over time in their favor.

When asked if the Buffett Rule might be adversely impacting Berkshire’s stock price, Buffett
said he didn’t think any employee of Berkshire should have their citizenship restricted. He
proclaimed, “When Charlie and I took this job, we did not put our citizenship in a blind trust.” He
added he does not know the politics or religion of other CEO’s for the companies he invests in
for Berkshire. He doesn’t want to know their politics or religion. He just wants to know how they
run their businesses.

Charlie grunted that investors should own Fox if they make their investment decision based on
politics while joking that “Warren’s views on taxes for the rich reduced my popularity around the
country club, but I’m willing to accept it.”

LARGE CATASTROPHES AND REINSURANCE PRICING

Buffett said the random nature of catastrophes make it difficult to predict trends. At Berkshire
they tend to assume the worst when pricing their reinsurance. In the last few months, Berkshire
has written far more business in Asia than a few years ago since rates were inadequate back
then. In the last year, there have been 2-3 earthquakes in New Zealand with the second costing
$12 billion for a country with 4-5 million people. That was the equivalent to 10 Hurricane
Katrinas. The floods in Thailand were also similar. Berkshire will take on big limits if they get the
right price—up to $10 billion if it is not correlated with other risks on their reinsurance books.
The reinsurance market is better than it was.

WIND AND SOLAR POWER SUBSIDIES

Buffett said MidAmerican has been engaged in wind power for some time and receives a
Federal subsidy of 2.2 cents per kilowatt hour, which makes the wind projects work. They would
not work without the subsidy. Berkshire has recently entered into two solar deals and received a
commitment from Pacific Gas & Electric for long contracts on these deals. Neither the solar nor
wind projects would work without the subsidies.

However, you can’t count on wind for your base load if the wind doesn’t blow. Wind power has
to be supplemental to other power sources.

Charlie added that eventually we will need to count on power from renewable sources such as
wind and solar so it is very wise for the government to subsidize these industries.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Greg Able, the CEO of MidAmerican, added that with their solar business they also receive tax
incentives which enable them to recover 30% of construction costs. Since Berkshire is a big
taxpayer, they can use the tax credits.

Buffett agreed, saying that Berkshire has a distinct competitive advantage in this regard as
Berkshire pays lots of taxes and can use the tax credits which others can’t use. Perhaps 80% of
utilities can’t reap the benefits of the tax credits as they use bonus depreciation which wipes out
their taxable income, so they don’t have the appetite for wind and solar projects. MidAmerican
thus has the advantage.

LARGE ACQUISITIONS

When asked if Berkshire would consider acquisitions greater than $20 billion, Buffett noted that
a month ago he did consider a large acquisition worth about $22 billion, but they couldn’t agree
on terms. He won’t use Berkshire’s stock at all right now to make an acquisition. (He said it was
a mistake to use Berkshire stock to pay for 30% of Burlington Northern Santa Fe.) He said the
proposed deal would have stretched Berkshire as he would have had to sell securities to fund
the deal, but he would have retained $20 billion in cash. While he doesn’t think he could
currently do a $40 billion deal right now as he would have to sell about $25 billion of securities,
he did joke that if anyone has any $20 billion deals, he does have an 800 number to call.

BRINGING BACK JOBS TO THE U.S.

When asked if Berkshire would consider bringing back jobs to the U.S., Buffett said that
Berkshire currently provides 270,858 jobs and probably no more than 15,000 of those jobs are
outside of the U.S. Iscar, the Israeli company Berkshire acquired, has global operations which
employ about 11,000. Berkshire also has a U.K. utility operation and a Marmon unit does
business in Australia. Berkshire’s CTB unit also just made an acquisition in the Netherlands.
Berkshire is investing more than $8 billion in capital expenditures this year with 95% of those
investments being made in the U.S. Ten years from now Berkshire expects that they will have
many more employees outside of the U.S. However, there remain plenty of opportunities in the
U.S., which is a real land of opportunity.

Charlie grumbled, “You can’t bring back jobs to the U.S. if they never left.”

HOW ARE YOU FEELING?

Given the recent news of Buffett’s prostate cancer, he was asked how he was feeling. He
replied, “I feel terrific! I love what I do. I have more fun every day, a good immune system, and a
great diet,” as he munched on See’s peanut brittle and chugged cherry Cokes throughout the
meeting. He noted that he has four doctors, which include some who own Berkshire stock. He
said he, his wife and his daughter met with the doctors to discuss the alternative treatments. His
radiation treatment will not involve hospitalization and the survival rate is 99.5%.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Eighty-eight year old Charlie joked that he resented all the attention and sympathy Buffett was
receiving as he believed that he had more prostate cancer than Buffett, but he just doesn’t get
tested for it.

Both see the prostate cancer as a non-event for Berkshire.

FOUNTAIN OF YOUTH

A 26-year old asked what areas Buffett would invest in if he were 26 again. Buffett said there
are all types of investment opportunities, and he would likely do the same as he did in the past.
Although he might have started out with an audited record of his performance to gain capital
quicker so he could buy entire businesses. At Berkshire, they buy businesses to keep while
private equity firms buy businesses to sell.

WHY IS BERKSHIRE STOCK UNDERVALUED?

When asked why Berkshire’s stock is undervalued, Buffett said there have been four or five
times during Berkshire’s history that he thought the stock was significantly undervalued. Any
business will be overvalued at times and undervalued at times. During the 2000-2001 periods,
Berkshire stock was selling at a very low valuation. The beauty of stocks is that they do sell at
undervalued prices at times, which is how he and Charlie got rich. He noted that this comes
right out of “The Intelligent Investor” and pointed shareholders to Chapter 8 and 20. Mr. Market
is a psychotic drunk who will do weird things over time. You should make sure Mr. Market
serves you and not advises you. Mr. Market makes lots of mistakes. Oblige him. It is built into
the system that stocks get mispriced. Generally speaking, Berkshire has sold on average close
to its intrinsic value over the last 47 years. In the next 20 years, the stock will get significantly
overvalued at times and undervalued. This is true of other stocks as well. Investors should make
an investment decision based on what they think the business is worth. The stock market is the
most obliging way to make money as you don’t need to do anything most days. You can’t do
this with alternative investments like farms. When it comes to stock investing, the rules are
stacked in your favor if you don’t act like Mr. Market.

Charlie advised the crowd, “The faster you work yourself into our position, the better off you will
be.”

SYSTEMIC FEARS

Buffett said in 53 years of buying businesses or stocks, he has never considered macro fears
when making his investment decisions. It doesn’t matter to him what the headlines are or the
fears that are in the market. If he likes a business and its valuation, he buys the business. In
Oct. 2008, during the financial panic, he wrote a NY Times editorial discussing why he was
buying stocks. It is important to look at value and not the headlines.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie added that you do want to have liquid reserves at the bottom of panics so you can take
advantage of the opportunities. Buffett agreed that the first rule of investing is not to go broke,
so that you can always play tomorrow. Buffett noted that Charlie, who manages The Daily
Journal, held cash for years and then during the stock panic purchased stocks as that was the
time to use the money and not sit on it. Buffett joked that Charlie won’t tell him the names of the
stocks he bought.

COMPETITIVE ADVANTAGE IMPROVEMENTS

Buffett was asked which of Berkshire’s businesses have increased their competitive positions
the most over the last five years. Buffett responded that the railroad business has improved its
competitive position dramatically over the last 15-20 years. The rail business is efficient and an
asset which can’t be duplicated for six times what it is selling for. Burlington Northern Santa Fe
is worth billions more than what Berkshire paid for it. GEICO is another business that is a much
better business than it was 5-10 years ago. In 1995, GEICO had 2% of the auto insurance
market and now has 10% of the market. Tony Nicely, GEICO’s CEO, has maximized the
business. MidAmerican is a business that Berkshire paid $34 a share for in 1999 with the
business now appraised at $250 per share. Iscar is another business doing extremely well.

Charlie wryly noted, “Berkshire is not suffering at all.”

Buffett added that Berkshire is batting 80% when it comes to buying businesses. The mistakes
occurred when the future of the industry was assessed inappropriately. Berkshire’s big deals,
however, have worked out very well. Even General Re is now working. Ajit Jain created a
business now worth more than $10 billion from his brains alone.

Charlie succinctly summarized, “The good fortune for Berkshire won’t go away even if Buffett
dies.”

DERIVATIVES

Asked who would run the derivatives after Buffett is gone, Buffett said there won’t be much of a
derivatives book after he is gone. The utility business will need derivatives to run their
operations but not on a huge scope. It is unlikely that Berkshire’s other investment managers,
Ted Weschler and Todd Combs, will do anything in derivatives. As a side note, Buffett said
Berkshire hit a homerun when they hired Ted and Todd. Buffett said Berkshire will do quite well
with its existing derivative positions. However, collateral rules have changed regarding
derivatives, so it is unlikely Berkshire will do more derivative investments. Buffett always wants
to think about the worst case situation when it comes to investments.

Charlie added that Berkshire will likely make $10 billion or more on its derivatives, and that
Berkshire is lucky they did those derivatives.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

INTRINSIC VALUE OF INSURANCE BUSINESS AND REASONABLE MULTIPLES ON

OPERATING BUSINESSES

Buffett said one should value GEICO and General Re differently. GEICO’s intrinsic value is
significantly greater than its book value plus float as the business generates significant
underwriting profits and significant growth.

When Buffett was asked what a reasonable multiple would be for Berkshire's non-insurance
businesses, he didn't answer directly but said he would love to buy operating businesses with
similar attributes to his existing businesses if he could buy them at 9-10 times pre-tax earnings.

Charlie said other companies use EBITDA to value operating businesses, and he doesn’t even
like to hear that term, as it just means earnings before what really counts.

BERKSHIRE VS GOLD

Asked why gold has outperformed Berkshire since 1999, Buffett said you can always pick
different starting periods for comparison. When Buffett took over Berkshire, the stock was
trading for $15 a share and gold was trading for $20 an ounce. Today, Berkshire shares are
worth $120,000 per share and gold is worth $1,600 per ounce. Over a 50 year period, Berkshire
will do much better than gold as will other stocks. After 50 years, 1 oz of gold will still be 1 oz of
gold. However, if you invest in 100 acres of farmland, you will have sold crops each year
earning income annually and still have 100 acres of farmland. It is hard for an unproductive
investment like gold to beat a productive investment like stocks or farmland over the long term.
Buffett joked that if you say anything bad about gold, it arouses passion. He acknowledged that
his Dad loved gold.

Charlie muttered that he never had the slightest interest in owning gold as he can’t imagine a
worst situation.

J.P. MORGAN VS WELLS FARGO

When asked why he owns J.P. Morgan in his personal account and not for Berkshire, Buffett
said that he likes Wells Fargo more, and his best ideas always go to Berkshire. With 98.5% of
his personal wealth in Berkshire Hathaway stock, he always thinks of Berkshire more. He knows
Wells Fargo and finds it easier to understand than J.P. Morgan so he bought more shares of
Wells Fargo last year for Berkshire and also during the first quarter of this year. If he wasn’t
managing money for Berkshire, he would have lots of money in Wells Fargo and J.P. Morgan,
too.

Charlie added that he has no interest in diversification except for when it happens naturally at
Berkshire as they acquire businesses. Charlie prefers buy and hold investing.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

CAPITAL EFFICIENCY

When asked where Berkshire prefers to hold its cash among its various units, Buffett said the
best place to have the money is in the holding company as it provides him with the most
flexibility. Berkshire currently has $10 billion of its $20 billion in cash in the holding company.
Money held in the life insurance companies is restricted, so it is better to hold cash in the
property and casualty insurance businesses. The $20 billion in cash is considerably more cash
than Berkshire needs to hold. However, this cash allows Berkshire to do things aggressively
while still having its downside protected. Berkshire’s railroad business is held within its National
Indemnity insurance business unit as he thought the rating companies would like having a cash-
generating business tied to the insurance business. He wants to be sure that he always leaves
all business units adequately capitalized.

Charlie added that the insurance business has surplus capital which is a huge advantage and a
wonderful position to be in. “Nobody else has it.”

USING STOCK FOR AN ACQUISTION

When asked if it wouldn’t be better for Berkshire’s stock to trade at intrinsic value so it could be
used to fund future acquisitions, Buffett said he would like to see Berkshire’s stock trading at its
intrinsic value, which will very likely occur in the future. However, even without a dividend, the
stock has sold at or above intrinsic value as much as it has sold below intrinsic value. His goal is
to have the stock sell as close to intrinsic value as it can, but it will bob over and below intrinsic
value over time. When it trades at intrinsic value, Berkshire may use the stock for acquisitions,
but Buffett still prefers to use cash for acquisitions. He doesn’t like to trade the companies he
already owns for a new company.

Charlie grumbled that what was suggested was the conventional approach, but he thinks it is
better for Berkshire to do it their own way.

Buffett added that he would like to see the stock selling close to intrinsic value as he is giving
away his shares to charity, and it would do more good if the stock trades at a fair value. If
Berkshire performs well, over time, it will trade at a fair value.

NEWSPAPERS

Buffett was asked why he purchased the Omaha-Herald newspaper when he had said in the
past that the newspaper business was not a good business. Buffett responded that the
newspaper industry was once the primary source of information 50 years ago. Today, that
advantage has gone to the Internet, which is more timely and cost-free. Newspapers have to be
primary to some group to be relevant. While newspapers have lost primacy in many areas, they
are still primary for local news. Newspapers are expensive to distribute, and their business
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

model won’t work if they give the information away for free by putting it on the Internet. The
future for newspapers is for areas where there is a sense of community such as in Omaha. It
won’t be a bullet-proof business, but folks will still buy their local papers for the obituaries. The
Buffalo News continues to make reasonable money for Berkshire. Berkshire may buy other local
newspapers, but it won’t be like the old days.

Charlie added that the newspaper industry is similar to when World Book encyclopedias was
destroyed by Bill Gates. However, Berkshire still sells encyclopedias and makes reasonable
money, but it won’t be a great lollapalooza.

TECHNOLOGY IMPACT ON BUSINESSES

After asked how technology companies like Amazon may impact other Berkshire businesses,
Buffett noted that Amazon is a powerhouse, which would not have an impact on Nebraska
Furniture Mart (NFM) but could hurt Berkshire’s other retailers. As a side note, Buffett noted that
NFM was racking up record sales during the shareholder week with business already up 11%
over last year with NFM generating $6 million in volume on one day alone. NFM will be
expanding into Dallas and will have a store which is poised to set further records.

Buffett noted that GEICO was a business that was impacted by the Internet. Initially GEICO
missed marketing on the Internet, but their business model changed dramatically due to the
Internet.

Buffett concluded that Amazon has been a huge success with millions of happy customers.

Charlie agreed that Amazon has hurt a lot of businesses and has been terrible for most
retailers, but said he won’t be shopping on Amazon because “I hardly buy anything.”

COMPETITIVE ADVANTAGE

It was noted that Berkshire’s key competitive advantage has been its insurance business model
with its negative cost of float.

Charlie said it is hard for others to get the same result by copying Berkshire’s business model.

Buffett added that it took a long time for large private companies to recognize that if they want to
sell their company, they should think of Berkshire first. Berkshire now gets the calls that others
won’t. It is a significant competitive advantage.

VOTING PROXIES

When voting proxies on Berkshire’s publicly-traded investments, Buffett said he virtually never
votes against management. There have been occasional times when he did vote against an
issue such as when stock option grants have been egregious or a dumb merger was proposed.
However, generally he likes the business and the management of the companies he invests in
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

and votes with management. Berkshire is not in the business of trying to change the business.
Like a marriage, it is not easy to change your spouse or children.

Charlie agreed exclaiming, “You said it all!”

COMMERCIAL INSURANCE

When asked if he would expand his commercial insurance business, Buffett said that he would
do it if he could significantly expand into the business. He did that with a medical liability
business 5-6 years ago. However, it is hard to think of many commercial insurance businesses
that he would like to buy, but he would do it if he could find a quality business.

WAL-MART’S MEXICAN BRIBERY

When asked if Wal-Mart’s Mexican bribery investigation would cause Buffett to change his
position in the stock, he said, “No.” He said Wal-Mart may have made a mistake in how they
handled the situation, which could result in a significant fine. However, it doesn’t change the
company’s underlying earning power five years from now. It will be a huge diversion of
management’s time.

Charlie added that he is not aware of any place where there isn’t some slippage in a company
as big as Wal-Mart. There will be glitches. However, there is nothing fundamentally wrong with
Wal-Mart.

Buffett added that with 270,000 employees at Berkshire, they will have some people doing
something wrong. They need to act fast when something wrong has been identified. Buffett is
sympathetic to people running organizations with hundreds of thousands of employees.

HEDGE FUND BET

Buffett provided an update on his bet that the S&P 500 index would outperform a group of
hedge funds. After four years, the cumulative loss of the S&P 500 index is -6.27% versus the
hedge fund performance of -5.89% with six years to go. The loser of the bet will contribute $1
million to the winner’s charity. At the time of the bet, the funds to pay off the bet had been
placed in a zero coupon bond, which has significantly outperformed both the S&P 500 and the
hedge funds.

GENERAL RE

After being asked a question on General Re, Buffett responded, “General Re was off the track
when I bought it, and I didn’t spot it.” They got concerned about growth over profitability. Then
Joe Brandon took over and focused on underwriting profit instead of premium volume. He got
rid of a lot of accommodative business, which led to a drop off of volume. General Re is right-
sized now in terms of business and will grow at a reasonable rate in the future. It is a terrific
asset now. Their life and P&C business will grow but only if profitable.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie added that General Re was a major fix-up operation and Berkshire got it done.

POST-BUFFETT BERKSHIRE

Buffett was asked if employees might leave or a hedge fund might try to take over Berkshire
once Buffett is no longer there. Buffett said his successor will not turn off existing managers. He
doesn’t expect that they will leave for more lucrative jobs as they love the environment they
operate in. Most of Berkshire’s manager could retire now, but they continue to work as they are
having fun. Buffett said, “I’m 81, and I have a lot of fun. Our managers work for the same
reason. My successor understands that.” Buffett also didn’t think a takeover was likely because
Berkshire’s size is a huge factor. His estate will still own 20% of the votes in 10 years and will
have ten times the voting rights. A takeover of Berkshire is, therefore, highly unlikely. Buffett
added that shareholders do not need to worry about his successor, who will be better than
Buffett in many ways.

Charlie added that the first $200 billion (in market capitalization) was hard for Berkshire to
create, but the second $200 billion with the momentum Berkshire has will be pretty easy given
Berkshire’s culture. No one will want to change the culture.

Buffett agreed that Berkshire has the businesses in place to take Berkshire’s market
capitalization to $400 billion.

RETURNS ON CAPITAL-INTENSIVE BUSINESSES

Buffett said capital-intensive businesses will be unattractive unless an investor gets a

respectable return. For the utility businesses, a 12% regulated return is satisfactory--the same
thing with the railroad business which also earns reasonable returns. If Berkshire were able to
earn 20% returns with the large sums they have, then the 12% returns wouldn’t be as attractive.
However, Buffett said they will be happy if they can earn 12% with no-cost float from their
capital-intensive businesses.

Charlie grunted in agreement, “I think it will work very well. Don’t listen to the siren song.”

SLOWING FLOAT GROWTH

Buffett said Berkshire’s float could shrink as large retroactive insurance contracts run off.
Berkshire’s small insurance companies will continue to enjoy net growth; however, Ajit’s
retroactive business is a melting ice cube. With $70 billion in float, Berkshire will look for
intelligent ways to grow it. Berkshire has the smartest guys in the business, but there will be a
natural run-off. Investors should not extrapolate the previous growth of float. The float will
dwindle down but not at a fast rate, which is why Buffett alerted shareholders to this in the
annual report. Ajit said it has now become a challenge to him to grow the float. Buffett
acknowledged that five years from now, the float could be slightly higher.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie added that the casualty insurance business by its nature is a great business. Berkshire
has the best large-scale casualty business in the world. It won’t grow wildly in the future, but that
is not the end of the world. Buffett agreed, saying that Berkshire’s insurance business has “done
wonders for us.” Charlie said, “Ajit has worked wonders. If Matt Rose (CEO of BNSF) has to
carry some of the weight, that is good, too.”

HOW TO VALUE DECLINING BUSINESSES

When asked how to value declining businesses, Charlie jumped in and retorted, “They aren’t
worth nearly as much as growing businesses.”

Buffett said it generally pays to stay away from declining businesses. If he thinks a business is
going to decline, he avoids it. In buying newspapers, he will buy the business for a price, but this
isn’t an area where Berkshire is going to make their money. It is not worth Berkshire spending
its time on cigar-butt stocks, where there is one free puff left in the business. It works out better
to invest in growing businesses, although Buffett admitted that they are playing out some
declining businesses. He said Berkshire actually started out investing in declining businesses
like textiles, department stores and shoes.

Charlie agreed, “We are specialists. Blue Chip Stamps was another declining business.
However, with what came out of these declining businesses, Berkshire made a fortune. But we
are not looking to repeat the process. ”

Buffett agreed, recalling the $6 million they invested in Diversified Retailing, which he joked only
had one store despite its name. Even though the business failed that $6 million investment is
now worth $30 billion. Buffett concluded, “We were sort of masochistic in the early days.”
Charlie chimed in, “Ignorant, too!”

FOLLIES AND FADS

When asked what businesses today appear to be follies, fads, unsustainable or dumb, Charlie
snorted, “A lot!”

Buffett said Berkshire stays away from businesses they don’t understand. He wants to invest in
businesses where he has a reasonable idea of what the earnings and competitive position will
look like in 10 years. If the price is crazy, that will eliminate many other companies from
consideration. There is a small universe of businesses Berkshire will buy. In 30 years, Berkshire
has not purchased a new issue. The seller has the choice of when to bring the company to the
market. Charlie noted that the 7% commission on initial public offerings (IPOs) makes them
unattractive. Buffett added that with initial public offerings, they would have to be the best deal
out of thousands of other opportunities that aren’t being promoted. Buffett said he doesn’t spend
five seconds on IPOs. Buffett has a number of filters before he will even think about a business.
He often cuts off someone who it promoting a business to him within minutes since it doesn’t
pass his filters. He joked they probably think he is rude, but Charlie is more so. Buffett said
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

investors don’t have to do many things to be successful. That is the beauty of the business. You
need to avoid big disasters. You never want to lose a big percentage of your net worth.

Charlie agreed and said that any investment with a large commission should be avoided. He
also advised looking at investments that other smart people are buying which isn’t a crazy
search process.

INVESTMENT COMPANY ACT OF 1940

When asked if Berkshire might be subject to the regulations of the Investment Company Act of
1940, Charlie retorted, “That is too remote. It won’t happen.”

Buffett agreed noting that Berkshire won’t come close to becoming an investment company
subject to the regulations of the 1940 Act. He pointed out that Berkshire owns eight companies
that on a standalone basis each would be in the Fortune 500.

TECHNOLOGY COMPANIES

When asked if Google and Apple might be entrenched leaders in technology like IBM, a recent
Berkshire purchase, Buffett said that Google and Apple are extraordinary companies. He said
both companies will make lots of money and will be tough to dislodge. Given their high returns
on invested capital, it would not be surprising to see them both worth more in 10 years.
However, he said he wouldn’t buy either of the companies, although he wouldn’t short them
either.

Charlie added, “Others will always understand technology better than us. We have the reverse
of an edge.”

Buffett said IBM is easier to understand, although that is not to say that Google and Apple could
do much better than IBM. It is hard to predict which companies can change the world like Apple.

BURLINGTON NORTHERN SANTA FE AND POLITICS

Buffett said Burlington Northern Santa Fe (BNSF) runs its own business, and that he talks to
Matt Rose, the CEO, once every three months on the phone. Railroads and utilities are
impacted by the political process, but they have economics on their side. Railroads are more
efficient than trucks in moving goods. That won’t change no matter what the politics. There will
always be struggles with competitors and customers, so the railroads will be involved in the
political process. Buffett said he likes Berkshire’s position and thinks it would be dumb for the
country to discourage railroads to take care of the transportation needs of the country. There
should be a strong interest in having railroads invest in their infrastructure and pay their own
way.

Charlie added that it is the nature of things for businesses to have waves of good and bad
breaks. BNSF was helped by higher tunnels and stronger bridges. They were also helped when
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

oil was discovered in the Dakotas with no pipelines to transport it. He concluded that BNSF is a
terrific business with terrific management.

Buffett noted that after World War II, the rail industry employed 1.7 million workers and now
employs 200,000, which shows how much more efficient the business is. The railroads are good
ways to move heavy stuff a long way.

PRESENTATION OF BERKSHIRE’S PERFORMANCE

When asked if Berkshire’s presentation of its book value performance against the S&P 500
index performance wasn’t misleading as displayed in the annual report, Buffett said if he
compared the market value of Berkshire’s stock performance against the S&P 500 index,
Berkshire’s advantage would be much larger. The gain would be 35% higher in aggregate than
the book value comparison. He could also compare the S&P’s book value performance against
Berkshire’s book value performance, but it would be a wash with the current presentation. He
concluded that he could make comparisons that were more favorable but none that were worse
than the current presentation.

Charlie noted that Berkshire’s long-term stock value tracks its book value. He grumbled, “You
have been criticized for making yourself look worse. That’s alright, you can bear it.”

SHARING INFORMATION ACROSS BUSINESS UNITS

When asked if businesses share information across their business units, Buffett said there is
nothing organized across the various business units to share information. Berkshire wants their
various businesses to run autonomously. Buffett doesn’t tell the folks at Clayton Homes to buy
their carpet from Shaw or paint from Benjamin Moore. Any incremental sales from centrally
directing those decisions would be offset from managers who prefer to run their own
businesses.

Charlie grunted, “We are trying to fail at what you want us to succeed at.”

FOREST PRODUCTS

A professional forester asked if Buffett had any thoughts of investing in a forest products firm
given the synergies with many of Berkshire’s other businesses. Buffett responded that he would
not look at how other subsidiaries would benefit from a Berkshire acquisition. He says he has
looked at forest product companies, but “The math has escaped us for a successful
investment.”

Charlie added that most forest product companies have profits that flow through partnerships,
which would be a disadvantage to Berkshire. Buffett agreed it would be a structural
disadvantage.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

IS $20 BILLION IN CASH A MAGIC NUMBER IN TERMS OF RISK MANAGEMENT?

Buffett said his decision to hold $20 billion in cash is not a magic number. He said there are no
magic numbers in risk management, especially if expressed in terms of sigmas as other
companies try to do. At Berkshire, Buffett tries to think of the worst-case situation and adds a
huge margin of safety. He doesn’t ever want to have to go back to “Go” again. While he may be
ultraconservative, he has to consider 6000 shareholders. He won’t risk what Berkshire has and
needs for what Berkshire doesn’t have and doesn’t need. In recent times, we have been through
9/11 and Sept. 2008, and we will see similar episodes in the future. Buffett wants to sleep at
night during those periods and have the liquidity to be able to invest during those times so
Berkshire will remain excessively conservative.

Charlie questioned, “How do super smart people do dumb things?” He answered, “To a man
with a hammer, every problem looks like a nail.”

Buffett said that when it comes to risk management, many folks have a lack of financial history.
When Buffett started in 1962, he spent $7 on an art budget so he could line up photos of
financial history in his office, including the May 1901 corner of Northern Pacific stock which led
to a market collapse. He told the story of Northern Pacific and how margin calls resulted in one
fellow committing suicide by jumping into a vat of hot beer. Buffett joked he doesn’t want to end
up in a vat of hot beer. He concluded that life in financial markets has no relationship to sigmas.

Charlie agreed that a lot of false confidence is created from risk models. They should throw
away the Gaussian curve and use curves with fat tails, but the problem is we still don’t know
how fat to make the tails.

LOSS OF SWISS RE CONTRACT

When asked about the loss of a Swiss Re insurance contract that will end in 2012, Buffett said
that they always hope to gain more volume, but that has no relationship to expirations of
contracts they already have. Berkshire has the capacity to take on more business.

Charlie added that there is no other insurance business as cheerful as Berkshire in terms of
losing business. He said they don’t measure their insurance business by size.

FANNIE MAE AND FREDDIE MAC

After a shareholder asked a zillion questions about the solution for Fannie Mae and Freddie
Mac, Buffett joked that he got through college answering fewer questions than that. He
acknowledged that Fannie Mae and Freddie Mac are still a mess. Congress can’t agree on a
structure to finance mortgages. The government guarantee program brought down mortgage
rates. There are 50 million residential mortgages that total $10 trillion. While it is important to
have programs to minimize costs, Buffett expects that Fannie Mae and Freddie Mac will stay in
conservatorship for a long time.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie noted that Canada had no trouble with their mortgages. In the U.S., we departed
completely from sound lending policies and the government participated in the folly. Charlie
exclaimed, “Alan Greenspan overdosed on Ayn Rand when he was young! This caused
enormous damage to our economy. Greenspan was really wrong.” It was a disgraceful period in
our history to have to nationalize Fannie Mae and Freddie Mac.

COMPENSATION OF INVESTMENT MANAGERS

Buffett said the investment managers Berkshire hired last year, Todd Combs and Ted Weschler,
have a strong performance track record, intellectual integrity, quality of character and a lifetime
of commitment to Berkshire. Berkshire will pay them a salary of $1 million each plus 10% of the
amount the portfolio they manage beats the S&P 500 over a rolling three year period. Each is
paid 80% based on their own efforts and 20% based on the other’s efforts. This was the same
compensation structure Berkshire had with Lou Simpson. It is up to each manager if they want
to employ folks underneath them. They each will be managing $2.75 billion this year, which is
an increased amount over last year. If they are considering investing in a new position, they
don’t discuss the decision with Buffett, they just need to tell Buffett the name to ensure there is
no conflict of interest with other activities Buffett may have with the firm. Both investment
managers are able to operate in different stocks than Buffett can as the size of their portfolio
allows them to invest in a larger universe of companies. They will both do a good job for
Berkshire. Todd did substantially better than the S&P 500 index last year.

Charlie noted that 90% of the investment management business would starve to death on our
compensation formula. He noted both investment managers could earn more elsewhere but
would be operating in a less desirable environment. At Berkshire they get to enjoy free Coke
machines.

GEICO’S COMBINED RATIO

When asked about GEICO’s combined ratio exceeding 100% in the first quarter, Buffett pointed
to the 10-Q discussion on the accounting change GEICO had to make which impacted their
combined ratio. Buffett said GEICO’s underlying business is good. GEICO is a terrific asset for
Berkshire and will be worth a lot more the future.

HOW TO IDENTIFY ENVIRONMENTALLY FRIENDLY BUSINESSES?

When asked how Berkshire identifies environmentally-friendly businesses like Burlington, Buffett
says he looks at every aspect of the business and the industry to see how they will develop in
the next 5-20 years. He said there are no magazines that will point you to that. You need to look
at the industry dynamics. He mentioned the environmental thing related to railroads because it
takes fewer resources to move items by rail than by truck. He has high confidence in how a
business like Coke will develop over time but less confidence in retailers.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie answered more directly, “Even though Warren is an unseasoned young man, he was
able to figure out that railroads generate less pollution.”

MOTIVATING MANAGEMENT

When asked how he motivates management, Buffett said he gets to paint his own painting
every day in managing Berkshire. If someone came along and told him to use more red in his
painting, he might tell them what to do with the paintbrush. He also says he likes applause at
which point the audience applauded loudly. He said he does the same thing for Berkshire’s
managers. He gives them the paintbrush to paint their own painting and doesn’t tell them what
to do. He compensates them fairly and applauds them.

Charlie added that there is no standard compensation formula at Berkshire. He snorted that for
most compensation consultants, “Prostitution would be a step up for them.”

GDP GROWTH

When asked what it would take to get U.S. GDP growth of 4% again, Charlie said, “It won’t be
easy.” Buffett said it would be nice to have 4% GDP growth in real terms, but that 2.5% growth,
while slower, would still be a remarkable rate of growth for the U.S. economy, which would
result in a higher standard of living. During Buffett’s lifetime, the standard of living has increased
six-fold. The U.S. is very rich with $48,000 per capita. The U.S. has huge abundance and all
kinds of strength. The U.S. has been a utopia. Our country is not a mess, although our politics
may be.

Charlie added that a very mature economy with lots of social safety nets and lots of competition
which increases GDP at a 1% annual rate will see the standard of living increase 25% in 25
years. If we set our expectations too high, then we get into trouble trying to reach unattainable
goals.

Buffett agreed and said that the U.S. system still works with business profits as a percentage of
GDP at high levels.

SUPER POLITICAL ACTION COMMITTEES (PACS)

When Buffett was asked if he will contribute to super PACs, he emphatically said, “NO!” He
thinks the whole idea of super PACs is wrong. He doesn’t want to see democracy go in that
direction.

Charlie said he also doesn’t like super PAC’s although he would contribute to one if it could
reduce legalized gambling. He said we were lucky to have two Presidential candidates as good
as we have this election.
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

SHORT-TERM PRICE MOVEMENTS

A shareholder asked if Mr. Market was manic about Berkshire, since the stock hasn’t budged
since the beginning of last year even through the portfolio has grown. Charlie retorted, “The
market is not going to do what you want, when you want it. If short-term orientation is what turns
you on, then you are not welcome in this room. You should feel better about the margin of
safety in Berkshire.”

DIVIDENDS

Buffett repeated Berkshire’s long-time policy that dividends will not be paid as long as they feel
they can create more than $1 of value for each dollar retained in the business. If shareholders
want a dividend, Buffett suggests that they sell a bit of their stock. Buffett said if Berkshire had
paid dividends, the net worth of Berkshire would be worth less than it is today.

Charlie responded that dividends will come in due course, but “We hope that evil day is
delayed.”

Buffett added that the last few years have been better than expected in terms of the ability to
deploy capital. Charlie chimed in that MidAmerican could put to work $100 billion. He joked, “We
will think about dividends when we are older.”

INVESTING SMALL SUMS

When asked if they were younger and only had $1 million to invest, could they generate higher
returns. Charlie said, “There are lots of things I could do better when I was younger.” Buffett
said in the past 50 years they have learned more so if they were starting over, they could look at
more areas. Charlie agreed and said, “Berkshire’s record would have been terrible if Warren
hadn’t kept learning, which is pretty much the human condition.”

MISTAKE MINIMIZATION

When asked how Berkshire minimizes mistakes, Buffett quickly said, “We will make more
mistakes.” However, they always think about worst-case situations so they don’t expect to
make big mistakes. A constant study of other people’s disasters helps to minimize mistakes
along with reading financial history. Understanding how humans behave is more helpful than a
180 IQ.

BARRIERS OF ENTRY

When asked how Berkshire builds barriers of entry, Charlie quickly responded, “We buy
barriers, we don’t build them.”

Buffett added that some industries don’t have barriers of entry into the business, and you need
to run fast from those businesses. A great barrier of entry is a business like Coke. Buffett said if
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

he was given $10-$20 billion to compete against Coke, he couldn’t do it He noted how Richard
Branson tried to compete against Coca-Cola with Virgin Cola, but you no longer hear about that
brand, as it was hard to know what that brand promised. Buffett noted that railroads also have
huge barriers to entry as no one is going to build another railroad.

Charlie added that some businesses just need one competitor to ruin the business.

BYD ELECTRIC CAR

Charlie said the car market in China is huge. The first electric cars in the U.S. will likely be for
fleets and require subsidies. When Buffett asked what percentage of cars in 2030 will be
electric, Charlie responded, “Not many.”

ECONOMIC GOODWILL OF INSURANCE BUSINESSES

Buffett said GEICO’s economic value comes from using float at bargain rates. GEICO will have
fairly substantial underwriting profits and growth as far as the eye can see. This very attractive
combination results from GEICO being the low-cost producer and its economies of scale. It is
always good to own low-cost producers. GEICO has 10 million policies producing good results
aided by its statistical business model. Tony Nicely, GEICO’s CEO, has quintupled GEICO’s
market share and done it with good underwriting results. In contrast, Aji has to be smart on each
deal. His economic goodwill is due to skilled pricing for each transaction and his ability to find
people who want to do the large deals.

The insurance businesses provide Berkshire with large float at a negative cost. People are
paying Berkshire to hold $70 billion, which is “quite fun.”

Charlie added that we are currently in a low-return environment. Previously, Ajit was able to
generate a large float, and Buffett would earn 20% on the float before they had to give the
money back. Buffett also lamented the low interest rate environment we now are in as the $20
billion being held in cash is not earning anything. Berkshire’s normal earning power is being
suppressed by Bernanke.

ENERGY INDEPENDENCE

Buffett said it would be a net positive if the U.S. became energy independent. While he doesn’t
see the U.S. becoming self-sufficient in oil, natural gas will help. The energy picture has
improved over the last three years.

Charlie grumbles that we would be better using someone else’s oil than our own. He says our
energy sources are our most precious reserves. He believes we should conserve our natural
resources for future generations. He joked, “I also think I’m right to save up sex for old age.”
2012 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

EXCESSIVE EXECUTIVE COMPENSATION

When asked about excessive executive compensation at a mutual insurance company, Charlie
responded that most mutual companies don’t have that kind of egregious compensation. Buffett
added that CEO compensation compared to average employee pay has widened. The tax code
has favored the rich over the poor. Trickle down economics has not worked. These types of
trends will push a democracy to a plutocracy.

SOVEREIGN DEBT LEVELS

Buffett joked that the nice thing about sovereign debt is if they don’t pay you back, you can’t
take anything. Sovereign debts have defaulted many times over history. This results in a big
reallocation of wealth. Buffett admitted he doesn’t know how it plays out in Europe. It might have
a bad ending. He prefers a world that keeps its fiscal house in order. When in a recession,
sovereign debt feeds on itself. When a government like the U.S. is operating at a deficit of 8%-
9% of GDP, this is a huge fiscal stimulus. We need to wean ourselves off of it soon. We need
revenue of 19% of GDP and expenses of 21% of GDP, and then the economy will work fine.
Government leaders should negotiate in private to reach that goal. Meanwhile, investors should
avoid medium to long-term government bonds from the U.S. and other countries.

Charlie added that it is very hard to know if Keynesian economics will work. We have lost all
fiscal virtue. It is a terrible problem, and we could get a mediocre result. Charlie added everyone
wants fiscal responsibility but not quite yet. He said it is like St. Augustine, who as a youth
prayed to give up sex “but not yet.” Charlie said the government should spend sensibly on
infrastructure. “We need more sacrifice, more patriotism and more civilized politics.”

CORPORATE TAX RATES

Buffett said the actual tax rate paid by U.S. corporations last year was 13% of profits. This is
much lower than the 35% standard rate due to the write-off of depreciation. Corporate profits
are not the problem as U.S. corporations have good balance sheet and high liquidity. They will
push forward with opportunities, including at Berkshire. It is not a lack of capital or tax rates that
are holding back investments. In the 1950’s, corporate tax rates were 52% and corporations
actually paid those rates. Corporate taxes represent 1.2% of GDP, while healthcare costs are
17.5% of GDP, which is a huge tapeworm, especially as compared to the rest of the world’s
healthcare costs.

Charlie added that he used to expect to live long enough to see a value-added tax (VAT), but
now he is not so sure. “We should tax consumption.”
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

BERKSHIRE HATHAWAY 2013 ANNUAL MEETING NOTES

BY INGRID R. HENDERSHOT, CFA

We attended the Berkshire Hathaway annual meeting held on May 4, 2013 in Omaha along with
about 40,000 other folks from around the globe who gathered once again for the Woodstock for
Capitalists. Warren Buffett, Chairman of Berkshire Hathaway, and Charlie Munger, Vice-
Chairman, answered questions from shareholders, analysts and the media. Here are my notes
from the meeting.

FIRST QUARTER RESULTS

Warren Buffett began the meeting with a brief recap of Berkshire Hathaway’s strong first quarter
financial results with revenues up 15% and operating earnings up 42% (see our detailed first
quarter analysis for Berkshire Hathaway on our website). Book value increased 5.5% from year
end to $120,525 per A share. It was a good quarter as all of the businesses did very well. It was
a benign quarter for the insurance companies in terms of catastrophe losses. Operating
earnings from Berkshire’s other big businesses were quite satisfactory.

In the insurance business, Berkshire Hathaway Reinsurance Group benefited from favorable
foreign currency changes and an amendment to a life insurance contract with Swiss Re. The
high point was the gain in closure rates and persistency at GEICO with policies in force
significantly increasing to 473,910 in the first four months of the year. Buffett is hopeful that
GEICO will increase its policies-in-force by one million policies this year. With each GEICO
policy adding $1,500 in value to Berkshire, the little gecko's speedy start to the new year may
add more than $1 billion to the value of Berkshire in 2013. Buffett encouraged the shareholders
to go to the exhibit hall to get a GEICO quote to see if they could save money. He joked they
should go anytime during the meeting, but preferably when Charlie was speaking.

Berkshire’s railroad business, Burlington Northern Santa Fe (BNSF), also is doing very well with
first quarter revenue up 6% to $5.3 billion and pre-tax earnings chugging 16% higher to $1.3
billion. Car loadings were up 4% in the first 17 weeks of the year compared to just a .4% gain for
all of the company's rail competitors combined. It has helped that oil has been found near
BNSF's railroad tracks. Buffett quipped at the annual meeting, "What better place to find oil?"
BNSF will be moving more cargo in the decades ahead.

Berkshire Hathaway is now the fifth most valuable company in the country behind Apple,
ExxonMobil, Microsoft and Google.

Berkshire acquired the remaining 20% of Iscar that Berkshire did not already own for $2.05
billion on April 29, 2013. Buffett said the business is doing terrific.

BOOK VALUE GROWTH

In response to a question about Berkshire’s book value growing at a lower rate than the S&P
500 Index over the last several years, Buffett said if the stock market continues to do well in
2013, this will be the first period where Berkshire’s book value growth has fallen short of the
S&P 500’s growth. He said, “It won’t be a happy day, but it also won’t discourage us.”
Berkshire’s results do better in down years on a relative basis to the S&P and lag during strong
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

up years for the S&P 500. While book value is a reasonable proxy for intrinsic value at
Berkshire, there are significant gaps between book value and intrinsic value. For example, if
GEICO adds 1 million policyholders this year, it will add $1 billion to Berkshire’s intrinsic value
and not a dime to book value. Accounting distortions also create gaps between book value and
intrinsic value especially with large acquisitions like Iscar. Over time, Berkshire still needs to
increase its book value at a rate better than the S&P 500 or investors would be better off in
index funds.

Charlie added that Berkshire will do quite well over time, and he doesn’t pay much attention to
3-5 year periods. Berkshire’s businesses still have momentum, but won’t do as well as in the
past given the size of the company. Berkshire is slowing down, but the growth is still quite
pleasant. Charlie, who is a young 89, chortled, “I’m trying to take care of my old age, which
might come about at any time.”

ISCAR COMPETITIVE ADVANTAGES

Buffett said Iscar’s competitive advantages are brains and an incredible passion for the
business. In 1951, Seth Wertheimer started the company in Israel at age 25. His raw material
came from China, and he was selling his products to heavy industry like GM and Boeing. He
had no great location advantage with the business in Israel. His competitive advantage was the
incredibly talented people of the company who never stop trying to make customers happy.
Buffett concluded, “Iscar is one of the great companies of the world, and we are fortunate to be
associated with them.” Charlie marveled at the robots and computers the company uses in its
operations.

PRESERVING BERKSHIRE CULTURE

(Before the shareholder asked his question, he thanked Buffett for opening the doors early to
the CenturyLink Center given the cold and rainy day. Buffett joked, “If we had a company that
sold coats, we would have left you out there.”)

Buffett said he does not worry that Berkshire’s culture will be preserved as his successor will
have more brains and passion for the business than Buffett. Succession is the number one topic
at each Board of Director’s meeting. The Board is in solid agreement on who will be Buffett’s
successor. Berkshire’s culture has become more solidified each year. All Berkshire managers
buy into the company’s special culture. The culture is one of a kind and will remain one of a
kind. People have self-selected into the company, and the wrong person will be rejected like a
foreign tissue. Charlie warned the many Mungers in the audience that after he and Buffett were
gone “Don’t be so stupid to sell these shares!” Buffett chimed in, “That goes for the Buffetts,
too!”

HEINZ DEAL

When asked if the structure of the Heinz deal meant that Buffett had low expectations for the
stock market and that the common stock acquired would be dead money, Buffett said that was a
totally inaccurate statement. He said the deal was formulated at an airport where he met Jorge
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Paulo Lemann from 3G Capital. He and Lemann were both directors at Gillette and knew each
other well. When Lemann sent him the proposed term sheet for the structure of the deal, Buffett
felt it was an absolutely fair deal and didn’t change a word on the term sheet. Berkshire paid a
bit more than if Berkshire had done the deal alone, but felt the 3G Capital management team
was unusually good and classy. Buffett liked Heinz’s business and the design of the deal.
Berkshire will earn lower returns on the common equity than the preferred stock, but Berkshire
has a less leveraged position. Berkshire currently has more money than operating ability, so
they are happy to have 3G Capital run the operations. Charlie just grunted that the assumptions
in the question were totally wrong. Buffett laughed, “That will teach them!”

EXPANDING INSURANCE OPERATIONS WITH FORMER AIG EXECUTIVES

Buffett said Berkshire’s goal is to take a greater share of the insurance market. Berkshire has a
7.5% participation rate in the Llyod’s market with the prospects reasonable to give Berkshire a
good cross section of the London market. In addition, four former AIG executives will write
commercial insurance for Berkshire. They reached out to Berkshire in the past, and the time
now seemed right for Berkshire to become a significant factor in the commercial world. This new
business could generate a fair number of billions of dollars of business over time. With the right
people and capital, Berkshire is ideally situated to grow the business. Charlie added that
reinsurance is generally not a good business for most people, but the Berkshire business is very
peculiar and profitable under Ajit Jain. Buffett added that the commercial business will be
primary insurance that takes on large commercial risks.

GEICO VS PROGRESSIVE

Buffett was asked why GEICO does not use technology like Progressive’s use of Snapshot, a
technology that monitors a driver to set insurance policy rates. Buffett noted that successful
insurance underwriting is evaluating the propensity of a driver having an accident. For auto
insurance, GEICO assesses a number of variables in setting its pricing. For example, GEICO
knows from statistics that a 16-year old male is more likely to have an accident than someone
Buffett’s age. Buffett joked that the 16-year old is more likely to have an accident by trying to
impress the girl sitting next to him and laughed, “That doesn’t work for me anymore!” While
GEICO is watching how Progressive’s Snapshot technology is working, their own variables
continue to be useful with their selection process of new insured drivers working quite well.
GEICO is able to sell its insurance at prices less than competitors, and Buffett is happy with
GEICO’s underwriting. Charlie grunted, “I have nothing to add.”

Another question arose on Progressive’s Snapshot, which claims the technology can provide
30% rate cuts to its best customers. Buffett said again he did not believe that Progessive’s
selection method of customers was better than GEICO’s selection metrics. He then recounted
the story how Peter Lewis, the founder of Progressive, said his first loss came from a redheaded
fellow, so he refused to insure anyone with red hair for awhile. GEICO looks at a lot of variables
and uses a different approach than Progressive. GEICO is obtaining a disproportionate number
of new policyholders and their rates of underwriting are attractive. Charlie snorted, “We aren’t
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

going to copy every oddball thing a competitor does!” Buffett concluded, “If I were going to start
a new insurance business, I would copy GEICO.” He said GEICO hopes to gain 1 million new
policyholders this year, which would represent two-thirds of all the growth in the industry, while
saving people money. Buffett said he couldn’t say enough good things about Tony Nicely,
GEICO’s CEO.

BUSINESS WIRE

Buffett said he thinks it is a mistake for the SEC to allow companies to disclose corporate
information on social media. The key to fair disclosure is that the information is released
accurately and at the same time for everyone. For example, he said he didn’t want to have to
keep going to Wells Fargo’s website repeatedly to find out if they had released any new
information and then have someone else beat him to the information by ten seconds. He said
Berkshire will continue to do very well with Business Wire, and they will not consider selling the
business. He said he wished he could clone Cathy Tamraz, Business Wire’s CEO. Berkshire will
continue to put out all their information on Business Wire to ensure it is accurate and released
simultaneously to all investors. Charlie muttered, “I am avoiding Twitter like the plague.”

BERKSHIRE’S SIZE

Doug Kass, the short seller of Berkshire stock who was invited to ask questions, noted that he
sees Berkshire buying larger businesses which are relatively high-priced. He said Berkshire
used to hunt gazelles and now is hunting elephants. As a result, he sees Berkshire morphing
into a stock that resembles the market index.

Buffett said that there is no question that Berkshire can’t perform as well as they have in the
past given the size of the company. Although in bad markets like in 2008, size can be an
advantage. Buffett took exception to the comment that Berkshire is paying fancier prices for
businesses than they have in the past. Buffett said Berkshire does pay “up” for good
businesses. He acknowledged that it is tougher as Berkshire gets bigger to earn as high of
returns as they have in the past. Even with the diminution of returns compared to the past,
Berkshire’s performance will still be satisfactory. Charlie retorted that Berkshire cannot do as
well on a percentage term as they did in the early days due to the company’s size. He added
that if you look at big companies of the past, their record is not so swell. However, he believes
Berkshire can do well despite getting big because Berkshire has a better system of managing
the company. Buffett said that he feels good about the acquisitions Berkshire has added over
the last five years, including the Heinz deal. Berkshire currently owns eight businesses that
each would be Fortune 500 companies on their own.

THE U.S. DOLLAR AS A RESERVE CURRENCY

Buffett said he didn’t know if the U.S. dollar would lose its status as the world’s reserve
currency, but if it does, it likely won’t happen over many decades, if ever. Charlie added that
there are advantages for countries to have the reserve currency. England used to have the
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

advantage and now the U.S. does. He does not think it would be all that significant if the U.S.
eventually loses the reserve currency. He quoted Keynes, “In the long run, we are all dead.” He
added every great civilization eventually passes it on.

CORPORATE PROFITS AS A PERCENTAGE OF GDP

Buffett was asked about the sustainability of corporate profits as a percentage of GDP, which
are currently in the 10% range, when he had previously said in a 1999 Fortune article that
corporate profits greater than 6% of GDP were wildly optimistic. Buffett said today’s corporate
profits as a percentage of GDP are pretty unusual especially given the economic background
and are quite extraordinary based on U.S. history. He said this shows that America’s corporate
tax rates do not make us uncompetitive in the world. American business has done very well
since the economic downturn. He said it will be interesting to see if current corporate profit
levels can be maintained. Buffett said while corporate profits have come back strong since
2008, employment has not. This will lead to much public discourse. While corporate profits
levels will likely trend down, this does not have to be all bad as GDP will grow. Charlie said he
would not be surprised if corporate profits as a percentage of GDP in the 6% range are on the
low side. He wryly observed, “Just because Warren Buffett wrote something many years ago
does not make it a law of nature.” Charlie also believes that U.S. corporate tax rates are
disadvantageous to U.S. business with the rest of the world bringing down their corporate tax
rates. He said he would be glad to have a lower corporate tax rate. Buffett laughed, “He is the
Republican, and I am the Democrat.”

IS BERKSHIRE BECOMING UNWIELDY?

Buffett was asked if Berkshire is becoming too unwieldy to manage for Berkshire’s successor
given many of the small businesses being acquired like the local newspapers and small
companies like Oriental Express. Buffett said his successor will likely modestly organize things
in a different way for reporting purposes. He said his successor understands the major
Berkshire units very well. He added that a little change in reporting will take care of things for
the smaller businesses which may be only generating $5-$10 million in earnings.

Charlie said it would be unwieldy for Berkshire to have so many businesses if they were
imperial. However, at Berkshire they have “decentralization to the point of abdication.” He
grunted, “So what difference does it make on how many subsidiaries we have?” Buffett added
that Berkshire is looking to buy businesses that have at least $75 million in net earnings. He
said the best acquisitions were the bolt-on acquisitions done by the various Berkshire business
units. He also noted that when Berkshire can buy an additional $2 billion of Iscar or $1 billion of
Marmon, the company obtains more earning power without any more work. Berkshire just ends
up with more of a good thing. Charlie stated, “What we are doing with a small corporate staff is
impossible, but it isn’t because it works.”
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

CONSEQUENCES OF FED’S $85 BILLION MONTHLY SECURITY PURCHASES

When asked what the consequences will be of the Federal Reserve’s $85 billion monthly
security purchases, Buffett quickly handed the question to Charlie. Charlie bluntly answered, “I
don’t know.” Buffett rapidly responded, “I have nothing to add.” Charlie noted it will be difficult to
unwind all of the monetary stimulus. Buffett said we are in uncharted territory with the Fed’s
balance sheet ballooning to $3.4 trillion. He added that it is always harder to sell securities than
to buy them. While all this liquidity has been created, the banks are just letting the liquidity sit
there. Wells Fargo is not happy as they are unable to make loans due to insufficient demand
from creditworthy borrowers. Buffett said he has a lot of faith in Ben Bernanke, but he is running
a risk. However, he may be handing off the risk to the next guy as he may not be at the Fed
when the unwinding takes place. The monetary stimulus has the potential to be very inflationary,
although it hasn’t been yet. The Federal Reserve probably wishes their monetary policies had
been a bit more inflationary with some Fed members disappointed that we haven’t seen more
inflation. When the market gets the signal that the Fed is starting to curtail its monetary easing
policies, it will be the shot heard around the world. All assets will then be re-evaluated. Charlie
added that macroeconomists have been surprised that interest rates have been kept so low. In
Japan, low rates have led to 20 years of stasis. Economists should be cautious about printing
money in massive amounts. There should be more worry about inflation. Charlie suspects it will
be harder than easier to unwind the stimulus, and that the world will have more trouble.

THE IMPACT OF ZERO INTEREST RATES ON BERKSHIRE

When asked about the impact of zero interest rates on Berkshire’s business, Buffett said,
“Interest rates are to asset prices like apples are to gravity.” The zero interest rates have helped
Berkshire as people make different decisions when they can borrow at zero rates. Interest rates
power everything in the universe. Borrowings on the Heinz deal were done at lower rates than
they could have been. If the Fed wants to inflate asset prices, they will keep interest rates low
for a long time. With the 30-year bond at 2.8%, it makes houses more attractive to purchase
which may be a smart policy, but unwinding the monetary stimulus will be difficult. Buffett said
he doesn’t know what will happen if the Fed said they wanted to sell $85 billion a month. He
said watching the Fed is like watching a good movie, as you can’t predict what the end will be
once monetary stimulus is curtailed. Charlie added that he doesn’t expect interest rates to stay
this low. He said the low interest rates hurt Berkshire’s float and cash holdings. Buffett said
Berkshire at the end of the first quarter had $48-$49 billion in cash, which did not earn anything
as he keeps the funds in U.S. Treasuries since he never stretches for yield. He said if interest
rates were to get back to the 5% range, Berkshire’s cash could earn $1-$2 billion. While our
country has benefited significantly from the Fed policies following the financial meltdown, the
question remains on whether they can reverse their monetary policies successfully.

COMMERCIAL INSURANCE ACQUISITIONS

When asked if Berkshire would consider acquiring commercial insurance operations, Buffett
said there are not many big commercial insurers to acquire. The price to acquire a commercial
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

insurer is far higher than what Berkshire can pay to develop its own large commercial insurance
operation. In addition, Berkshire will then not pick up the bad habits of the other company. He
believes it is better to build a commercial insurance operation, if he can find the right people
such as the former AIG executives who recently joined Berkshire. He believes that Berkshire will
have a good and significant commercial insurance operation in a short time.

UNREGULATED DIGITAL CURRENCIES LIKE BITCOINS

When asked about Bitcoins, Buffett said he doesn’t know a thing about them. Charlie grumbled,
“I have no confidence at all in Bitcoins as a universal currency.” Buffett joked, “Of the $49 billion
in cash we hold at Berkshire, I haven’t moved any into Bitcoins.”

MULTI-LEVEL MARKETING COMPANIES

When asked if Pampered Chefs is a multi-level marketing company like Herbal Life which has
been in the news, Buffett said he doesn’t know a thing about Herbal Life. He said multi-level
marketing companies often just sell products to distributors, which then require Level A
distributors to sell to Level B distributors. He said Pampered Chefs is a million miles away from
that type of structure as the company sells its products to end users. They hold thousands of
parties each week, where people use the products they buy. Buffett did note that the SEC
should investigate companies which prey on the hopes and dreams of folks through pyramid
schemes. Charlie succinctly summarized, “There is more likely to be flim-flam in selling magic
potions than in selling pots and pans.”

BERKSHIRE’S RETURNS BASED ON BUFFETT’S REPUTATION

When asked if Berkshire’s returns may be impacted when Buffett is no longer around to
negotiate deals based on his reputation, Buffett said his successor will have more capital to
work with especially when markets are in distress. He said there is no question that his
successor will have unusual capital in turbulent times. With this capital, his successor will have
the ability to say “Yes” quickly to attractive deals. Berkshire is the “800” number to call when
there is panic in the market and a company needs significant capital. This happened in 2008
when Goldman Sachs and GE called, and Berkshire was able to negotiate favorable deals. It
will happen again. When the tide goes out and you can see who is swimming naked, the naked
swimmer will call Berkshire. Buffett believes the Berkshire brand will continue to generate
attractive returns without Buffett having to be at the helm.

Charlie noted that in the early days Berkshire earned attractive returns because Buffett was a
value investor who had little competition. Today, Berkshire earns attractive returns because
Berkshire is a good home for good companies, again with little competition. Charlie stated, “It is
ridiculous to think the past is what we should have stayed in.”
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

SELLING TO BERKSHIRE

When asked what was the key to a company like See’s Candies selling their company to
Berkshire, Buffett noted that there was a death in the family, which put See’s up for sale. Charlie
also persuaded Buffett to buy See’s Candies. Charlie added, “We do not buy companies from
unwilling sellers.”

BERKSHIRE COMPETITIVE ADVANTAGES

Charlie said that Berkshire ability to stay sane when others like to go crazy is a competitive
advantage. He said that as Berkshire gets bigger, they continue to use the Golden Rule with
subsidiaries, which is rare in corporate America. This also provides Berkshire with a competitive
advantage. Being a good partner with shareholders is a competitive advantage. Charlie
chuckled, “All of this is a good idea. I wish we had done it on purpose!” Buffett recounted a story
of a fellow who wanted to sell his company but did not want to sell it to competitors or private
equity firms, who he did no think would treat his employees fairly when he was gone. He called
Berkshire as the “default” buyer, which is a competitive advantage for Berkshire as they have no
competitors and can provide a permanent home to valued employees.

BURLINGTON NORTHERN SANTA FE (BNSF)

When asked if BNSF’s coal tracks could be redeployed given the slowdown in coal shipments,
Buffett said if no coal is moving, BNSF will lose some tracks. Much of coal usage will depend on
the price of natural gas. When asked if crude oil moving by rail still has room to grow, Buffett
said he initially thought that oil rail transport was just going to be a blip. However, he now thinks
there will be much rail usage for oil shipments for a long time. Buffett noted that oil can move
faster by rail than by pipeline. With different market prices, there will be lots of flexibility in
moving oil by rail. Matt Rose, the CEO of BNSF, said he expects the coal rail franchise to
stabilize. BNSF currently has 10 loading stations for crude transport with 30 destinations now
and another 30 destinations in negotiation. BNSF currently transports 650,000 barrels per day
and expects that to increase to 750,000 barrels by year end with the BNSF railroad on the
pathway to ship 1.2-1.4 million barrels per day.

HARLEY-DAVIDSON NOTE

Buffett joked that he would like not to answer his mail when the Harley-Davidson 15% note
comes due in 2014. Berkshire was able to negotiate this transaction when the corporate bond
market was frozen in 2008. So with the note coming due, it is now a time-depleting asset.
Buffett said we won’t see anything like that deal again for awhile, but we will see some deals like
that in the future. Buffett said when he negotiated the deal, he did not think that Harley-
Davidson would go broke. He joked any company that can get its customers to tattoo their
brand on their chest can’t be bad.
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

TODD COMBS AND TED WESCHLER

Berkshire’s investment managers, Todd Combs and Ted Weschler, each received another $1
billion to manage on 3/31/13. Buffett only sees what investments they make after they have
already made them. They are in charge of their own investment decisions with some
restrictions, such as not investing in American Express due to Berkshire’s already substantial
position in the company and overall restriction on acquiring more shares. Buffett said Ted and
Todd buy things he wouldn’t buy. However, they can manage their portion of Berkshire’s money
by determining what positions to acquire and the position sizing, as they feel appropriate. Buffett
said he wouldn’t have a problem if they decided to put all the funds they manage in one stock.
Charlie said, “I have nothing to add.”

DECISION MAKING

When a shareholder said he heard Buffett made a list each day of 20 things and then focused
on the top five things on the list, Buffett just laughed. He said he doesn’t think he has ever made
a list and doesn’t prioritize decision items daily. He said he and Charlie like to live simple lives,
and they know what they like. For example, both of them like to read a lot each day. Charlie
added that making lots of decisions each day is tiring. They live on autopilot and don’t waste
time on decision making. Their operating method is to ingest a great deal of caffeine (Coca-
Cola) and sugar (See’s Candies). Charlie chuckled, “When we write a book on nutrition, it will be
a big seller.” With all the caffeine and sugar, Buffett is never tired when he does make a
decision.

NEWSPAPERS

A shareholder questioned the purchase of the Omaha-Herald asking if there weren’t

investments with higher rates of return than newspapers. Buffett said Berkshire will get a decent
rate of return with their newspaper investments, especially since they get to write off the
intangible assets with the acquisitions for accounting purposes. Buffett said he expects the
after-tax returns will meet or beat 10%, even though he expects earnings to decline for the
newspapers over time. He said the newspaper investments won’t move the needle at Berkshire
with their combined $100 million of pre-tax earnings power, but they also don’t require an extra
ounce of attention. He is buying the newspapers at very low prices, which he must do given the
declining earnings. Charlie said to Buffett about the newspaper purchases, “It is an exception,
and you like doing it!”

BREAKING UP IS HARD TO DO

Buffett was asked if it might make sense for his successor to break up Berkshire Hathaway after
he was gone as Henry Singleton did with Teledyne prior to his death. Buffett said Berkshire is
probably the easiest company to manage overall due to its decentralization and given the
talented managers running each business. He said he does not anticipate any major change in
Berkshire, as breaking up Berkshire would deliver a poor result. Charlie said Singleton was a
genius. He built Teledyne up as a conglomerate and then managed it very logically on the way
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

down. However, Singleton managed Teledyne on a much more centralized basis than
Berkshire is managed. At the end, Singleton wanted to sell his remaining companies to
Berkshire, but he wanted Berkshire shares in exchange, which Buffett was unwilling to part with.
Charlie concluded, “Just because Singleton was a genius, he didn’t perform better than
Berkshire’s business.” Buffett added that Singleton “played the market” beautifully, which is not
the way Berkshire operates. Singleton issued shares when his stock was overpriced and bought
them back when the shares were underpriced. Charlie growled, “I like our system better.”

U.S. COMPETITIVENESS

A shareholder asked what the biggest threats to U.S. competitiveness were. Buffett said U.S.
healthcare costs represent 17.5% of GDP while healthcare costs for most other countries
represent 9.5%-11.5% of GDP. This is a major problem for U.S. competitiveness with the rest of
the world…a big disadvantage for the U.S. At General Motors, healthcare costs added $1,500 to
each car, which provided them with a disadvantage to Toyota. Overall, though, the U.S. has
done very well compared to most countries in terms of competitiveness. Charlie said the grossly
swollen security and derivatives markets represent a challenge to U.S. competitiveness. He said
it is “perfectly crazy and revolting” to have so much talent go into the derivatives business.

HEALTHCARE COSTS

Asked about the impact of the Affordable Care Act (ACA) on Berkshire’s 300,000 employees,
Buffett said he really didn’t know. Berkshire has 70+ subsidiaries, and he couldn’t think of any
units that did not provide healthcare coverage although perhaps some of the smaller
newspapers recently acquired did not. He said healthcare costs are huge for Berkshire with
costs up 10%-12% for some units. Healthcare is one area that Berkshire might consider
centralizing. Whatever happens with ACA will also happen to Berkshire’s competitors. Currently,
Berkshire does not try to control healthcare costs at headquarters. Charlie chimed in, “We like
the decisions to be made near the firing line.”

SOLAR POWER

A question was asked about Berkshire’s capital spending in its regulated utilities given
competition from solar power. Charlie said he could confidently predict that more solar power
will be generated in deserts (where Berkshire has been investing in solar projects) than on
rooftops in rainy places. Charlie suspects that there is “twaddle” in the talk that utilities will be
run from rooftops in cloudy areas. Berkshire will do fine with its investments in solar power.
Greg Able, the CEO of MidAmerican Energy, said that their utilities are still competitive with
rooftop costs with lots of protection. He is confident that MidAmerican systems are valuable to
customers and Berkshire shareholders.

IS BERKSHIRE’S SUCCESS DUE TO TIMING?

Bill Gross from PIMCO had written an article that said his investment success and Berkshire’s
might be attributable to the favorable timing of their past investment horizons. Buffett
acknowledged that being born a male in the U.S. was a huge advantage. The timing could not
have been better. He said his Dad was a security salesman and when stocks declined
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

dramatically in 1929, there wasn’t much business for his father. There also wasn’t any TV, so
“Here I am, “Buffett joked. He chuckled that he was very lucky that the Crash of 1929 came
along. For decades after the Crash, people were turned off by stocks, similar to what has
happened since the Tech-Wreck of 2000 and the financial meltdown of 2008. However, Buffett
said he envies the baby that is born in the U.S. today as it is the luckiest baby in the world.
There is the opportunity to do very well in the investment field. A person that has the passion for
investing will do very well. We live far better today than we have in the past. Charlie added that
Buffett’s competition in the early days was weak, and it is not as weak today. Buffett did have an
advantage in his success from timing. However, in 2008-2009, there were many high IQ
professional investors that sat out of the investment opportunities that arose, while Buffett took
advantage of the opportunities. Charlie said to Buffett, “You were drowning in investment
opportunities when I first met you. Now we have to wait for them.” Buffett laughed, “Now we
have the money and no ideas!”

ADVICE FOR YOUNG INVESTORS

A young shareholder asked with hindsight what advice Charlie and Warren would have given
themselves when they were younger. Charlie stated, “Stay rational!” Buffett added, “Work where
you are turned on.” Charlie joked that they both started working in the Buffett grocery store, but
they couldn’t get promoted there even with the family name on the door. Buffett added that
luckily they then found things they really liked to do. He said he and Charlie have had so much
fun running Berkshire that it is almost sinful. Charlie noted that they are atoning for their sins of
having so much fun by giving all of the money they made back to charity.

RATIONAL INSURANCE OPERATIONS

Buffett stated that Berkshire is an unusually rational place. Berkshire has the benefit of
managing for the very long run without outside influences pushing them to make irrational
decisions. Insurance operations should be conducted rationally. Other insurance companies
often are pushed by Wall Street to increase their volume to meet short-term earning targets
when it doesn’t make sense to do so. Berkshire has in the past contracted its insurance volume
by up to 80% when pricing wasn’t favorable. With no external pressures, it is a great way to
operate. Berkshire never wants to do anything stupid in insurance. Pricing has to be right for
major catastrophe insurance. It is hard not to be rational at Berkshire. Charlie added that it is
very hard to shrink an insurance operation by 80%, but it is required when people go crazy.
Buffett noted how irrationality during the Internet craze in the late 1990’s was also hard to resist
for folks who wanted to jump on the bandwagon. Berkshire doesn’t have the pressure to do
what others do. Charlie added that they don’t covet their neighbor’s ass asking, “How much fun
can you have being envious?”

NEW COMPETITORS IN INSURANCE

When asked about new capacity being added to the insurance business by hedge funds, Buffett
said, “We hate dumb competition.” Hedge funds have entered the insurance business in the last
few years. By operating in Bermuda, they are able to avoid U.S. taxes. With the new capacity,
hedge funds can bring down insurance prices in the short term. It has happened before.
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Berkshire does business where they can earn an underwriting profit. Berkshire cannot afford to
go along with the crowd when it comes to insurance or investments. “It is irritating to have dumb
competitors.” In insurance, the standby costs are not huge. It is not like idling a steel mill, so
Berkshire will wait out cycles of inappropriate pricing. Charlie added, “With our cranky methods,
we have built the best insurance operation in the world, so why should we change?” Berkshire
has the best people in the world in their insurance businesses. Buffett said, “We hit the jackpot!”

WOMEN ARE THE KEY TO AMERICA’S PROSPERITY

Buffett recently wrote an article available on Fortune.com on his views that women have not had
the same shot as men in the world. Over the years, a lot of improvement has occurred. He
recalled how Katherine Graham, the CEO of The Washington Post, was very intelligent but still
had self-doubts about her abilities. Society had imprinted on her that women could not run a
business as well as men, even though The Washington Post’s stock had risen forty-fold under
her leadership. Women have had to deal with both interior and exterior obstacles, although
these obstacles are beginning to crumble. The country is moving in the right direction in utilizing
the talent of women. Women are the key to America’s prosperity.

DODD-FRANK REGULATIONS

When asked if Dodd-Frank regulations are impacting Berkshire’s insurance operations, Buffett
said, “No, as the insurance businesses were already highly regulated.” Dodd-Frank regulations
are impacting the capital ratios for larger banks more than small banks. This will impact the
return on equity for the banks Berkshire has invested in. With these higher capital ratios, the
U.S. banking system is stronger than anytime in the last 25 years. Many of the troublesome
loans are gone, and U.S. banks are now dramatically stronger. Buffett said he does not worry
about the U.S. banking system being the cause of the next bubble. It will be something else.
Buffett feels very good about Berkshire’s bank investments, even though they won’t earn as
high returns as years ago. Charlie muttered, “I’m less optimistic about the banking system over
the long term. The more bankers want to be like investment bankers, the worse our life will be.”

HEDGE FUND BET

Prior to the lunch break, Buffett updated his $1 million bet for charity with a hedge fund that the
S&P 500 Index could beat a group of carefully chosen hedge funds over a 10-year period due to
the high fees imposed by hedge funds. Halfway through the bet, the S&P 500 Index has a
cumulative gain of 8.6% vs the hedge funds .1% return. More information on the bet can be
found at longbets.org.

INVESTMENT INTENSITY

Buffett said you have to love something to do well at it. He said, “I love to think about Berkshire
and its managers. It is part of me.” You can’t change the game from its scorecard. Proceeds
come with the scorecard. He said none of his intensity or passion about making investments for
Berkshire has been lost. Charlie said in the early days, Buffett did not know as much about
American Express as he does now. As a result, his initial research in the company was more
intensive. However, knowledge becomes cumulative. Buffett agreed, noting that what he
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

learned about GEICO in 1951 he still finds useful. On accumulating knowledge about American
Express, he recalled a golf outing with the CEO of Hertz, who complained that there was no way
he could get rid of American Express or their fees as his business relied on people using the
American Express cards to rent cars. After hearing that, Buffett knew American Express was his
kind of company.

QUANTITATIVE INVESTMENT FACTORS

When asked what his top five quantitative investment factors are that he uses to analyze a
stock, Buffett said he always looks at the business over the stock. Helping the evaluation is
having cumulative knowledge about many businesses. The variables he looks at will vary
depending on the type of business he is evaluating. He said, “Certain things will shout out at us
to look further.” He said if you were recruiting a basketball team, you would look at the seven
foot player before the 5 foot 4 inch fellow. While he came up with the idea of investing in Bank of
America when he was in his bathtub, the bathtub was not the critical factor. He has been
following banks for 50 years. In evaluating a bank, he looks at different metrics than when
evaluating an industrial company. Not one size fits all when looking at investment criteria. For
example, some brands travel well like Coca-Cola, and others do not like See’s Candies. In
2011, Bank of America was subject to lots of rumors, which were driving the stock price down.
Buffett thought an investment by Berkshire in Bank of America might be helpful to Bank of
America, and it would be a good investment for Berkshire. So Buffett gave Brian Moynihan a
call even though he had never met him. When making investments, investors should have a
good idea of what a business might look like in 5-10 years, and Buffett felt that he had a good
idea of what Bank of America’s business would look like in the future.

Charlie added that he doesn’t know how to buy stocks based on ratios. He said you need to
know how a company functions. Buffett agreed that he doesn’t know how to use a computer to
screen things for investment purposes. He said when they make a stock investment, they look
at the business as if they were going to buy the entire company. He wants to first know what the
business will look like in 5-10 years and how sure he is of it. Then he looks at the price versus
the value he is receiving to be sure he has an adequate margin of safety. Charlie added that he
knows what Burlington Northern Santa Fe’s competitive advantages will be 15 years from now,
but Apple’s competitive advantages 15 years from now are too hard to know. Buffett agreed that
they are 100% confident in the competitive advantages of BNSF and GEICO. Charlie said that
competitive advantages are not often disclosed by math. Buffett agreed, saying he didn’t know
how well he would do managing money just by numbers. Charlie retorted, “You would do it
poorly!”

NEW NORMAL?

When asked if they believe in the “New Normal” as espoused by Bill Gross at PIMCO whereby
future market returns will be much less than in the past, Buffett said he doesn’t pay any
attention to macro forecasts. He doesn’t make investment decision on information that no one
really knows. Why spend time talking about things you don’t know anything about? Buffett said,
“I like Bill Gross, but I don’t pay attention to his forecasts.” Buffett maintains his general feeling
that America will continue to work well. He does know that BNSF will carry more carloads 5-10
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

years from now and that Berkshire will have an asset with incredible replacement value. To
ignore what you do know versus what you don’t know in forecasts doesn’t make much sense.
What Buffett does know is that people will do very well owning good businesses if they buy
them at the right price. Charlie said if the questioner was worried about the New Normal, he
should just plan on working a few years longer. If the New Normal resembles the last decade,
then things could be worse.

FRUIT OF THE LOOM

A question was asked about Fruit of the Loom’s increased competition from Gildan. Buffett said
Fruit of the Loom must keep their costs down and focus on brand building. They need to keep
their customers happy with their price points. Over the last 10 years, non-branded underwear
has been hurt by competition. However, Fruit of the Loom has strong brand recognition. Their
products are also hard to beat on costs. Over the next 5-10 years, Buffett expects their men’s
and boy’s underwear to hold up. It is not a business that can coast, but Buffett expects it to do
reasonably well. Charlie commented, “With the number of products Berkshire sells, we won’t
win every skirmish with market share.”

GOOD INVESTMENT BOOKS

A shareholder asked if Buffett would consider publishing his letters to his partners from his early
investment days and if other good investment books could be recommended. Charlie said
during Berkshire’s early partnership, they ran a concentrated portfolio and investors would no
longer recognize most of the names of the positions held at the time. Buffett said over time, he
probably has held 400-500 names, but only made real money on ten of them. By the age of 11,
Buffett had read every investment book in the Omaha library. Ben Graham’s “Intelligent
Investor” was the book that provided him with his bedrock investment philosophy as it teaches
how to think about stocks and the stock market. Graham said investors should look at stocks as
pieces of a business, and that the stock market is there to serve you and not instruct you. Phil
Fisher’s book, “Common Stocks and Uncommon Profits,” also provided good instruction on
seeking to invest in businesses that you could ride for decades, instead of trying to invest by
going from flower to flower. Buffett said he reads for enjoyment, but his life would have been
different if he hadn’t read the two books mentioned.

AIRLINE INVESTMENTS

Bill Miller from Legg Mason sent in a question asking about Buffett’s thoughts on the airline
industry now that the industry has concentrated into four top carriers, which are now generating
high returns and free cash flow. He also asked if there would be a benefit to NetJets associating
with a major airline. Buffett said he did not believe there would be any benefit to pair NetJets
with the airlines. Buffett said just because there is consolidation in an industry does not preclude
the remaining players from doing stupid things, citing Freddie Mac and Fannie Mae. Even Coca-
Cola and PepsiCo, the only two real cola players, sometimes price their products at ridiculous
prices. However, there are certain industries where consolidation will result in the remaining
players doing very well. However, the airline industry has low incremental costs per seat and
high fixed costs. It is a labor-intensive, capital-intensive business offering a commodity product.
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Since the airline industry was started, it has been a death trap for investors. Capitalists should
have shot Orville Wright down when he took his first flight and saved investors significant
money. If there is only one airline remaining and no regulations, then it might become a
wonderful business. Buffett remains skeptical that it is a good business now. Charlie said that
when the railroad industry consolidated, it became a wonderful business, although he and
Warren proved to be slow learners in recognizing that fact. He said Bill Miller might be right
about the airline industry, but he would put it into the “too hard’ pile. Buffett added, “We like
things where change is not rapid and where competition will not take away the business.”
Charlie agreed, “You cannot create another railroad, but it is easy to create another airline.”
Buffett said over the years they have seen dozens of proposals to get into the airline industry.
For some reason, it is an industry that attracts people, but the record has been dismal with a
number of bankruptcies, including U.S. Airways which has gone bankrupt twice.

SHARE REPURCHASE

Buffett said a company’s intrinsic value should be the deciding factor on share repurchases. At
Berkshire, book value provides a reasonable tracking of intrinsic value, so that is why Berkshire
set the policy of repurchasing shares at 1.2 times book value or less. Berkshire always wants to
hold a substantial cash balance, approximating $20 billion currently. Then, they want to reinvest
cash to take care of existing business needs. Berkshire will then look to allocate capital to
acquisitions that create value per share. After that, share repurchases done at a significant
discount to intrinsic value would make sure money for Berkshire. Charlie added that if
cheapskates like them are willing to pay 1.2 times book value for Berkshire, then that represents
good value. Buffett said they haven’t done much in share repurchases as the stock price has
traded in a reasonable range to intrinsic value in recent years. However, he said “If Berkshire’s
stock price does sell at a significant discount to intrinsic value, we will buy it.”

CHARLIE IS NOT MOVING TO OMAHA

When Charlie was asked if he would consider moving back to Omaha to be closer to
headquarter, he said, “No, the phone works quite well.” Buffett joked, “We know how the other
guy thinks. We don’t even need the phone.” Charlie added that he feels like Rip Van Winkle
when he comes back to Omaha for the meetings given all the changes in Omaha.

CLIMATE CHANGE

Buffett said he believes that the climate is getting a lot warmer, and that there is a reasonable
chance that the global warming people may be right. He said he doesn’t know the answer, but
he doesn’t think it makes a real difference in assessing their insurance rates from year to year.
Berkshire has a general bias to be pessimistic in pricing catastrophes and natural disasters.
However, global warming is not a real factor in setting current insurance pricing. Charlie said as
a Cal-Tech trained meteorologist, he thinks carbon pricing is pretty unpractical. To change
habits, carbon taxes would work better. Europe puts high taxes on motor fuels and stumbled on
the right policy. “The U.S. should have higher taxes on motor fuels,” Charlie proclaimed.
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

SHORT- SELLING

Doug Kass said that short-selling could be a value-added investment tool for Berkshire and
pointed out that Todd Combs had done short-selling in the past. Charlie interrupted, “Todd
Combs had so much success, he stopped doing it!” When Kass suggested that Berkshire give
him $100 million to demonstrate his short-selling skills with profits going to charity, Charlie
emphatically said, “The answer to your question is NO!!” Buffett added, “We are no stranger to
short-selling. We failed at it.” While a lot of money can be made by short-selling, Berkshire does
not like “trading agony for money.”

FAIR PRICE FOR HEINZ DEAL

When asked about the price paid for the Heinz deal, Buffett laughed, “We usually feel we pay
too much. However, if the business is compelling, we gag and get there on price. Generally, if
we buy a wonderful business that stays a wonderful business, we have found that we could
have paid substantially more.” A wonderful business is one that earns high returns over time
and is able to deploy more capital at high returns. Those types of businesses are relatively
unusual but the best businesses of all. In those cases, investors should probably stretch to buy
the business. See’s Candies is a good example of a business Berkshire stretched to buy.

Buffett noted that the stock market will offer you more opportunities to purchase wonderful
businesses than negotiated purchases of entire businesses. In the stock market, a Flash Crash
can happen to give you an opportunity that would not occur in the business market. Buffett said,
“We like to buy great businesses to hold forever.” Charlie chimed in that if you want to win you
have to keep learning all the time.

$16 TRILLION IN DEBT

An 86-year old veteran pleaded with Buffett to quit eating hamburgers for health purposes. He
then asked with Buffett’s thriftiness, how he could support President Obama with big
government’s $16 trillion in debt. Buffett joked, “You have to give Bush some of the credit for the
$16 trillion, too.” Buffett then said he has found over the years that it is totally unproductive to
discuss politics as half of the people in the room will agree with you and the other half won’t.

However, he said the amount of deficit spending and stimulus was appropriate given the threat
of the greatest panic of our lifetime. He knew things were bad when GE called Berkshire as their
last stop, and Fannie Mae and Freddie Mac failed. How we get off the stimulus is a problem, but
less of a problem than the austerity that would have ensued without the stimulus. Charlie said
he agreed completely. Buffett said George Bush issued the 10 greatest words to describe the
panic at the time, “If money doesn’t loosen up, this sucker is going down.” Buffett said leaders
of both parties came up with policies that were useful during the panic. After World War II, our
country faced a higher ratio of debt to GDP than it does today, and the country has done
satisfactorily since then. “We have encountered far worse than now, “Buffett added. We will do
fine, but with lots of bickering. However, 10-20 years from now things will look better than today.
Charlie added that the current stimulus programs are very confusing. He grumbled, “If you aren’t
confused, then you don’t understand.” He also lamented the focus on the debt/GDP ratio saying
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

that no one ratio is in the stars as far as forecasting ability. He also noted that the off- the- book
debt is worse than the debt that is on the books. Charlie said the great problems will go away if
GDP were to grow at 2% per annum, but that we need policies to enable us to grow at that rate.

BENJAMIN MOORE

When questioned if Benjamin Moore is losing its competitiveness and market share, Buffett said
the paint company is not losing market share in the high-end of the paint business, which is a
relatively small percentage of the overall paint industry. Benjamin Moore uses a dealer system.
The Big Box stores approached Berkshire about distributing Benjamin Moore in their stores, but
Buffett felt that would have double-crossed their dealer policy. He said the dealer policy works
with Benjamin Moore. Management was changed at Benjamin Moore when former management
was looking to gut the dealer system. Charlie agreed that the dealer system has worked well.
Buffett does not expect Benjamin Moore to gain a much higher market share, but the company
will still provide Berkshire with good profitability. Charlie exclaimed, “I wish we could buy five
more businesses tomorrow like Benjamin Moore!”

INDEX FUNDS

When asked it the top 20 companies in America could outperform an index fund, Buffett said the
20 best stocks would probably match index funds. He said investors should become experts on
businesses or buy equities. Equities will do well over time, but amateur investors often get
excited at the wrong time. There is nothing wrong with being an amateur investor and just
buying an index fund. Charlie agreed, noting that it is important to know one’s circle of
competency. He said, “If you think you know more, it becomes dangerous.”

MULTI-BILLION DOLLAR GIFTS OF BERKSHIRE STOCK

Buffett said he gives away 4 ¾% of his stock each year to charity. This represents less than 1%
of the market value of Berkshire’s stock, so he said his gifts were “peanuts” in comparison to
Berkshire’s market cap. He said his multi-billion dollar gifts of Berkshire stock will not impact
Berkshire’s stock price when the shares are sold by the charities. Berkshire’s average trading
volume is $400-$500 million a day, so $2 billion sold over a year won’t impact Berkshire’s stock
price. Charlie added, “There is nothing more insignificant than $2 billion to an old man.” Buffett
agreed, noting that the $2 billion has a lot more utility to other people than it does in his safe
deposit box.

READING THE TEA LEAVES ON THE ECONOMY

Buffett said Berkshire is willing to go any place where they can make money. However, he
thinks Berkshire will find most of it opportunities in the U.S. because of the huge number of
businesses here. Over the last four years, Buffett has seen a gradual improvement in the
economy. It has been slow progress in the U.S. economy. While the economy has not come
roaring back, it has not faltered. The overhang in housing ended about a year ago with some
improvement in housing prices. He expects the economy to continue to move forward slowly.
He does not see a surge, but also not a stall for the economy. There may be four to five times in
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

a lifetime that investors see incredible opportunities in the equity markets. At those times,
investors need to be able to act fast both with financial ability and mental fortitude.

ATTRACTING INVESTORS WITHOUT A TRACK RECORD

A young fellow asked Buffett for advice on how to get people to invest with him without an
investment track record. Buffett recommended that he develop an audited track record as early
as he can. Buffett said he looked at Berkshire’s other investment manager’s track records that
he could believe and understand. Buffett added, “To attract money, you should deserve money.
You should be able to explain that your record is based on sound thinking.” Charlie said that
most people start investing money with their family and friends. Fees charged should also be
reasonable. Buffett noted that if Todd and Ted charged the normal 2% and 20% fees of hedge
funds at Berkshire, they each would earn $120 million even if they just put Berkshire’s money in
the ground. Charlie complained that the arithmetic of hedge fund fees attract the wrong people.

AJIT JAIN

Buffett was asked about the special skills of Ajit Jain, who heads several reinsurance
businesses at Berkshire, and whether he was Buffett’s successor. Buffett dodged the last part of
the question and noted that Ajit’s business won’t be without him for a long time. Charlie said, “If
Ajit wasn’t with us, we would not be as good.” Buffett noted that was the same with a number of
other Berkshire managers, too. Berkshire operated for 20 years without Ajit, and Buffett joked,
“If Ajit had come along in 1965 instead of 1985, we would own the world!”

HOWARD BUFFETT AS FUTURE NON-EXECUTIVE CHAIRMAN

When questioned about the operational and investment experience of Howard Buffett, who is
slated to become Berkshire’s non-executive chairman when Warren Buffett is no longer around,
Buffett said Howard is taking the role in case a mistake is made in choosing Berkshire’s next
CEO. Howard’s job will not be to run operations or make investments, but to be the protector of
Berkshire’s culture, which is an enormous responsibility. If the Board of Directors need to make
a change in the CEO, it is good to have a non-executive chairman in position to help make that
change. There has been an enormous improvement in corporate governance with the
requirement that the board meet at least once a year without the CEO attending the meeting.
The Board is a social group, and it is sometimes difficult to discuss a CEO’s shortcomings if he
or she is present. Charlie added, “The Mungers are much safer with Howard there.” Howard will
feel the responsibility of his role as the Board owns enormous amounts of Berkshire stock and
much of the stock will go to help others in the world. Charlie noted that CEOs can perform well
in 9 of 10 aspects, but still have deep flaws. Buffett joked, “The meek shall inherit the earth, but
will they remain meek?” Charlie recounted a story of a California CEO who took over a company
and described him as the only man who could strut while sitting down.

LOW INTEREST RATE ENVIRONMENT

Buffett acknowledged that the problem faced by people invested in cash is brutal given the low
interest rate environment. The loss of purchasing power is staggering. Savers are huge victims
of the Fed’s low interest rate policy. Buffett said he feels sorry for folks who have clung to short-
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

term investments as ¼% rates on a $1 million portfolio only generates $2,500 in income, not
what they would have anticipated for retirement income. Buffett believes owning businesses
through stock investments makes more sense than fixed-dollar investments. This made
dramatically more sense a few years ago when the stock market was down and the Fed said it
would keep fixed rates low for a long time. The fallout of low interest rates has hit people in a
hard way. Low interest rates make a good argument for owning productive assets. Charlie
grumbled, “The Fed’s policies (following the financial crisis) had to hurt someone, and savers
were convenient.”

IBM’S MOAT

When asked about IBM’s moat (competitive advantages), Buffett acknowledged that he does
not understand IBM’s moat as well as he does companies like Coca-Cola, Wrigley or Heinz.
However, he feels good about his investment in IBM. There is nothing to preclude companies
like IBM or Microsoft from being successful. He likes IBM’s financial policy and believes the
business will do well over time. He did note that IBM has large pension obligations, which he
would prefer that they not have. He said pension liabilities are always more certain than pension
assets. Charlie agreed, citing the case of Japanese life insurance companies which had agreed
to pay 3% interest rates and now find they can’t pay them. He noted that Berkshire’s life
insurance operations are pretty small. Buffett stated, “You always want to be in a position to
accept an option, not to give one.” With that in mind, 30-year mortgages currently look like a
good deal for home buyers. However, life insurance companies are facing some big problems.

INVESTING SMALL AMOUNTS

A shareholder noted that Buffett had said that his investment philosophy was 85% Ben Graham
and 15% Phil Fisher and that if he were investing small amounts, he could earn 50% returns.
Buffett said if you only have $1 million to invest, you can look at very small things with
opportunities out there to earn high returns. However, given that Berkshire has $12-$14 billion in
cash coming in annually, he doesn’t even think about those types of small investments. Charlie
chuckled, “I am glad that I am through with that problem.” He noted that he now can make big
returns on the float of his income tax.

EMERGING MARKETS AND CHINA

When asked about how he looks for investments in emerging markets or China, Buffett said he
doesn’t start out looking for investments in emerging markets or specific countries. It also is not
his strength to invest in emerging markets. He said if he could only invest in the United States, it
would be no great hardship. Charlie added that dividing up the world by countries or regions to
sell investments is a good way to generate commissions but not much else. Buffett concluded
investors should just look for good businesses at attractive prices.

HOUSING BUBBLE

When asked if another housing bubble might be appearing, Buffett said we are not remotely
near a housing bubble now. The whole country went crazy before on housing. Legislation
encouraged Fannie Mae and Freddie Mac to do things they shouldn’t have been doing. At the
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

time, skeptics looked like idiots while speculators made money. Folks jumped on the
bandwagon as they saw their neighbors making money on housing. Overwhelmingly, people got
caught up in a grand illusion, which will happen again but not now in housing. Given the low
interest rate environment, Buffett would still recommend people buy a home to live in at the
current time. Charlie explained that the main problem during the past housing bubble was that
as things got crazier and crazier, the government did not pull way the punch bowl before
everyone got drunk, but instead they increased the proof. Buffett added that humans will make
the same mistake again. While the housing bubble contributed to the financial crisis, the real
problem was when people got fearful all at the same time and began pulling money out of even
their money market funds. Confidence came back slowly, one person at a time. When folks get
greedy, they tend to get greedy in mass, too. Buffett stated, “Charlie and I don’t get caught up in
what others do. When we see falling prices, we see it as an opportunity to buy, but we don’t go
on margin.” Leverage in housing was the underlying problem of the housing bubble.

INVESTMENT OPPORTUNITIES IN THE EUROZONE

Buffett said he is willing to look for investment opportunities in the Eurozone. Last year one of
Berkshire’s subsidiaries did make a bolt-on farm equipment acquisition in Europe for about $100
million. The current Eurozone woes may create further opportunities for Berkshire to buy
businesses there as Europe is not going away. The major flaw occurred when the Euro was
designed. While the currency was synchronized, not much else was synchronized among the
European economies. Charlie derisively exclaimed, “Letting Greece into the European Union
was like using rat poison as whipping cream! It was an exceptionally stupid idea!” He further
explained that Greece used “extreme fraud” in their financial reporting to get into the European
Union. He concluded that Europe will muddle through its current problems in the next 10 years.
Buffett added, “We would be delighted to buy a big business in Europe.” Charlie quickly replied,
“I hope you will call me first if it is in Greece.”

SOCIAL MEDIA

When asked about social media’s impact on Berkshire’s business, Buffett said half of the people
in the audience could answer the question better than him. He then explained that the Internet
has greatly changed GEICO’s business. He said they need to listen to their customers, and if
customers want to buy insurance over the Internet, Berkshire has to be prepared to sell it to
them that way. Buffett noted, though, that he was amazed at how fast the business changed. He
then joked that it would be a terrible mistake for Berkshire to put Charlie and him in charge of
social media. Charlie added that he hates the idea of teenagers using social media to
immortalize forever the dumbest things they do. He warned, “There is a time when ignorance
and folly should be hidden!” He also grumbled that when people multi-task like crazy, none of
the tasks are likely to be well done. Buffett jokingly concluded, “Is there anyone we have
forgotten to offend?”

FINANCIAL STATEMENT FRAUDS

When asked how to identify fraud when reading financial statements, Buffett said he has seen
frauds in insurance businesses when financial statements show insurance reserves going down
2013 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

suspiciously right before the company sells new stock. Financial statements can reveal how
people play with numbers when they are promoting a stock. Buffett said there are so many ways
to cheat with accounting, especially with financial institutions. Charlie agreed saying that some
of the folks are not trying to be deliberately fraudulent, because they are deluded into believing
the accounting. Buffett said he is not sure that he finds financial statements today as useful as
they were 20-30 years ago. Charlie agreed saying that big bank financial statements are hard to
understand because they have so many footnotes and gobbledygook. Assets often are only
good until they are reached for in the banks. Buffett then recounted the story of Salomon
Brothers, which had on its balance sheet a “plug number” that had grown to $180 million on its
$4 billion capital base. The $180 million was just plugged in to make the balance sheet balance,
which Arthur Andersen somehow seemed to overlook when auditing the balance sheet. Charlie
grumbled that funny things can happen in accounting. He likened accounting to what happened
in Italy when too much mail piled up in the post office…they just threw it away in carloads.
Buffett warned Charlie that he should not name countries, but Charlie chortled, “It happened in
Italy!”

SOUTH AFRICA

When asked if he would make investments in South Africa, Buffett said if he understood the
nature of a business there, he wouldn’t preclude it. Charlie noted that someone had bought a
basket of all the small banks in South Africa and had made money. However, Buffett said it
wasn’t their specialty.

TRANSFER OF WEALTH

With the greatest transfer of wealth occurring now between generations, Buffett was asked
about his comment that you should leave your children enough money to do anything they want
but not so much that they do nothing. Buffett said that more kids are ruined by the behavior of
their parents than by the amount of their inheritance. He said the amount of money is not the
determining factor, but how parents behave. He said he has loosened up on how much his
children will receive. He thought it was crazy for kids to have to read the will after the parents
are dead to find out what they inherit. He thinks parents should have the kids read and
understand the will before the parents die. Buffett believes his money has more utility to society
than leaving it all to the kids. Charlie quickly added that you don’t want to discuss the will with
the children before you die if you are going to treat them unequally.

STOCK SPLIT

When asked if Berkshire would split the A shares, Buffett said the creation of the Berkshire
Hathaway B shares effectively created a stock split in the stock. Then after the BNSF purchase,
the B shares were split 1500 for one. Buffett added that the Berkshire Hathaway A shareholders
can split their shares anytime by converting the A shares to the B shares. Charlie growled, “I
would not hold your breath for us to change.”

With that answer to the last question, what did not change was another great Berkshire
Hathaway annual meeting!
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

BERKSHIRE HATHAWAY 2014 ANNUAL MEETING NOTES

BY INGRID R. HENDERSHOT, CFA

We attended the Berkshire Hathaway annual meeting held on May 3, 2014 in Omaha along with
a record crowd of about 40,000 other folks from around the globe who gathered once again for
the Woodstock for Capitalists. Warren Buffett, Chairman of Berkshire Hathaway, and Charlie
Munger, Vice-Chairman, answered questions from shareholders, analysts and the media. The
meeting opened once again with an entertaining movie that provided a preview to the future in
2034 with Berkshire trading for $19 million a share (tongue-in-cheek) and a 103-year old Warren
Buffett promising to retire in five years. Here are my notes from the meeting.

FIRST QUARTER RESULTS

Warren Buffett began the meeting with a brief recap of Berkshire Hathaway’s first quarter
financial results with operating earnings down 7% and net income down 4% (see our detailed
first quarter analysis for Berkshire Hathaway on our website). Book value increased 2.6% from
year end to $138,426 per A share. Insurance float as of 3/31/14 was approximately $78 billion.
Operating profits were down a bit due to a drop in insurance earnings, which was impacted by
the run-off of a large Swiss RE quota contract and changes in foreign exchange, which doesn’t
mean much quarter to quarter. Buffett noted that the $78 billion in float was his to invest and
that the underwriting profits were satisfactory in the first quarter. He exclaimed, “The insurance
business is marvelous!” While the $78 billion in float shows up as a liability on the balance
sheet, it really is as valuable as equity since Berkshire has the use of the float cost-free. Buffett
advised shareholders that they don’t need to pay much attention to realized
investment/derivative gains during any specific quarter as he doesn’t try to time the markets by
recognizing gains from quarter to quarter.

DIVIDEND PROPOSAL

The proxy this year included a shareholder proposal for Berkshire to pay a “meaningful”
dividend. "Whereas the corporation has more money than it needs, and since the owners [unlike
Warren Buffett] are not multibillionaires, the board shall consider paying a meaningful annual
dividend on the shares," the proposal stated. The proposal was soundly defeated by
shareholders with only 1.1% of the Class A shareholders voting for a dividend with 97.1% voting
against it and 1.8% abstaining. If Buffett excluded himself from the voting, only 2.5% of Class A
shareholders voted for the proposal with 93.4% voting against it and 4.2% abstaining. Buffett
joked that he didn’t want folks to think he “stuffed the ballot box.” In addition, only 2.0% of the
Class B shareholders voted for the dividend, while 97% voted against it and 1.1% abstained.
Buffett marveled that by a vote of 45 to 1, Berkshire shareholders said, “Don’t pay us a
dividend.” Shareholders apparently believe Buffett can create much more value by reinvesting
the bountiful cash Berkshire generates than by distributing it as a dividend. For shareholders
that “need” a dividend, Buffett has written in past annual reports on how they can “create” one
by partially selling some of their shares. Buffett also joked that 3% of shareholders voted against
reelecting him as a Director of Berkshire, noting that more shareholders did not want him as a
Director than wanted a dividend.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

COCA-COLA COMPENSATION

Berkshire Hathaway is one of Coca-Cola’s largest shareholders, owning 9% of the shares, and
Buffett had noted that the new stock option program Coca-Cola had proposed appeared to be
“excessive” compensation. Buffett was questioned why he only abstained from voting for
Coke’s compensation program rather than voting against the plan as it appeared to be strange
and “un-Buffett-like” behavior.

Buffett chuckled that “strange” is frequently Buffett-like. He then discussed that the 16% dilution
calculation used by David Winters, a mutual fund manager who publicly criticized Buffett for not
voting against the plan, was “widely-off” the mark.

Buffett noted that he privately spoke with Muhtar Kent, the CEO of Coca-Cola, and told him he
would be abstaining from the vote as he believed the compensation was excessive. Buffett
believes this was the most effective way for Berkshire to make a statement on the excessive
plan and the effects of compensation practices at Coke.

Buffett said he “did not want to go to war” with Coke or endorse wildly inaccurate calculations of
the potential dilution, although he did note that Winters had taken some of the potential dilution
numbers directly from the proxy. However, Coke repurchases shares on a regular basis which
offsets much of the dilution. Buffett went through a detailed analysis of the potential dilution of
the current plan taking into consideration potential share repurchases and tax savings, which
would result in dilution of 2.5% versus 16.0% that Winters quoted. He said Coca-Cola could
help reduce the dilution by stretching the compensation plan over more years than the four
years specified in the proxy.

Charlie dryly remarked that he thought Buffett handled the whole situation very well.

In response, Buffett exclaimed, “Charlie Munger remains Vice Chairman!” Buffett then noted
that he had discussed the matter with Charlie, and they both agreed on Berkshire’s course of
action in regard to the vote.

DIFFERENCE IN ACQUISITON STRATEGY OF BERKSHIRE AND 3G

Berkshire went into partnership with 3G in their joint acquisition of Heinz last year. Berkshire
basically provided the financing, and 3G took over the management of the company, which
included significant layoffs as 3G restructured the company. In contrast, Berkshire’s strategy on
wholly-owned acquisitions is basically hands-off, allowing management to continue to run their
own businesses as they had before. Buffett proclaimed Berkshires strategy was a “large
corporate asset” as it attracted good business to want to sell their firms to Berkshire.

Buffett replied that the two strategies do not blend very well. He remarked that “3G does a
magnificent job of running businesses.” However, he noted that they used a different style than
Berkshire, and it would not pay to try and blend the two strategies. Buffett noted that there was
a good opportunity for Berkshire to do more deals with 3G in the future and called them
“marvelous partners.” He added that it was very likely that Berkshire would partner with them
again on “things very large.”
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie added that Berkshire never has had a policy that “loved overstaffing.” Buffett quipped,
“Especially not at the home office!” Buffett then added that Berkshire does not enforce a
discipline on subsidiaries to cut people. Instead Berkshire encourages by example, not by edict,
for lean operations. Charlie concurred, “We don’t need the last nickel out of staffing costs.”

DIRECTION OF THE ECONOMY

A shareholder noted that Buffett has the ear of the President and asked him to communicate
with the President on the direction of the economy, which he described as a “train going in the
wrong direction.”

Buffett responded, “I will let you communicate with President Obama directly.” At the same time,
Buffett said he did not agree with the shareholder about the direction of the economy. Buffett
noted that American business is doing “exceedingly well.” “Just look at corporate profits,” he
pointed out if you do not think the economy is doing well. He added that U.S. earnings on
tangible net assets are the envy of the world with extraordinary returns. Corporate taxes, as a
percentage of GDP, have come down from 4% to 2%. The corporate tax rate is far lower than it
has been in the past, when it topped 50%.

In response to the question, Charlie muttered, “I’m going to avoid this one.”

BERKSHIRE’S BOOK VALUE PERFORMANCE COMPARED TO THE S&P 500 OVER THE
LAST FIVE YEARS

Buffett was asked about Berkshire’s book value growth lagging the S&P 500 index over the last
five years. Buffett responded that he did not change the yardstick in measuring Berkshire’s
performance and had noted in the 2012 annual report that if the market continued to be strong
the following year that 2013 would likely be the first time that Berkshire’s book value
performance would lag the S&P 500’s performance over a rolling five-year period, which it did.
Berkshire Hathaway will do worse in relative performance during strong stock market years and
will do better in down years for the stock market. If there is a period when the stock market is
strong five years in a row, Berkshire will not beat the S&P 500 index. Buffett repeated that
Berkshire will likely underperform in very strong years for the stock market, match the S&P 500
in moderate years and will outperform in down years. Over any market cycle, Buffett expects
Berkshire will continue to outperform the S&P 500 index.

Charlie noted that Berkshire’s book value performance is after full corporate taxes while the
S&P 500 index performance is without taxes. He said Buffett has set a “ridiculously difficult
standard” and still beat it over time. Charlie concluded, “If this is failure, I want more of it!”

NARROWING THE GAP BETWEEN BOOK VALUE AND INTRINSIC VALUE

A shareholder asked if Buffett would consider spinning off units to help narrow the discount
between Berkshire’s intrinsic value and stock price. Buffett said the simple answer is an
emphatic “NO!”

Buffett admitted that there is a significant discrepancy between the company’s intrinsic value
and book value. As a specific example, he noted that GEICO is carried on their books at
approximately $1 billion when he believes the intrinsic value is closer to $20 billion, which will
grow larger in the future. Buffett said one way to narrow the gap is to buy back shares when
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

they are trading at 1.2 time book value or less, which he considers a “bargain.” He added that
calculating intrinsic value is not a science and said that he and Charlie would likely come up
with different answers that would be within 5% of each other, but not 1%. Buffett will continue to
provide shareholders with information on the important units in the company so that they can
determine their own estimates of intrinsic value. He noted that the smaller units do not have a
big impact on intrinsic value. The big difference in book value and intrinsic value comes from the
insurance, railroad and utility operations. When Berkshire trades at 1.2 times book value or less,
it is trading significantly below the intrinsic value of the company, according to Buffett. On the
other hand, he noted that when other companies like Coca-Cola buy back stock just to offset
stock option dilution, that may not be a good reason to buy back the stock if they are buying
$1.00 for $1.10.

Charlie commented that they never have wanted to get Berkshire’s stock to trade way over
intrinsic value, so that they had an advantage over other shareholders to balloon their assets.
He added that folks that want the stock to trade over intrinsic value want “egg in their beer.” He
remarked that “Berkshire’s stock will trade above intrinsic value over the long term whether we
like it or not.”

Buffett noted that he has seen other companies talk their stock up as high as possible so they
could use the overpriced stock to acquire other companies. However, he noted that
managements that cheat on that game will often also cheat on their earnings. Buffett said he
does not want to play that game. He then joked, “We better quickly move on to the next
question before Charlie starts naming names. “

TRUST

Buffett was asked how Berkshire gains the trust of managers of companies that they acquire.

Buffett simply said, “We keep our word to them!” When he acquires a company, he promises the
management team that he will not sell their business down the road as long as the business
does not have significant losses or labor problems. He said he has put that promise into
Berkshire’s Owner Principles so owners know they can count on it. While Berkshire cannot
make a promise that they will never change employment at the firm, they can promise that they
will keep the business. Over the decades, Berkshire has only had to get rid of a few businesses,
including their original textile business.

Berkshire has been gaining trust of managers for 49 years and is in a class that few others can
compete with, especially private equity firms which are different. If a management team cares
where their business is going, they don’t want others (MBA’s at a private equity firm) to tear it
apart. Trust that Berkshire will maintain and/or grow the business is a unique asset that provides
Berkshire with a competitive advantage when it comes to doing deals. Buffett concluded,
“Frankly, this is the way we want to operate, and it will continue to work well.”

Charlie succinctly agreed, “It has worked well and is unlikely to stop.” Buffett chuckled, “He
doesn’t get paid by the word.”
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

HOWARD BUFFETT SUPPORTING BERKSHIRE’S CULTURE

A shareholder noted that Howard Buffett served on Coca-Cola’s Board of Directors and
supported the excessive compensation plan. Given that, it was asked how shareholders could
count on Howard to support Berkshire’s culture when Warren Buffett was no longer there.

Warren Buffett recounted how he had served on various Boards of Directors over the years,
where he also voted for compensation plans and acquisitions that he did not agree with. He said
Boards are part social structures and part business, so sometimes it is difficult for Directors to
vote against management. The Compensation Committee reports to the full Board of Directors,
with the Board delegating the compensation activity to the committee. As a result, the full Board
almost never votes against the committee. With Board members often getting paid $200,000 a
year for working 4-6 times a year with pleasant company and the prestige of the position, they
really are not independent. Of the 19 Boards Buffett served on, he observed that they are not
looking for Dobermans but instead seek out Cocker Spaniels with wagging tails. The social
dynamics are important on the Board. Warren Buffett noted that Howard will be a non-executive
chairman of Berkshire and will not set compensation or select the CEO of Berkshire. He will be
there to facilitate change in the CEO if the Board of Directors determines that it is necessary. In
essence, Howard will provide the “extra safety belt” the Board needs, and Buffett predicted,
“Howie will be perfect!”

Charlie recounted how Warren Buffett had been totally voted down at Salomon, Inc. over
compensation when he served on that Board for “shouting disapproval all day.” Charlie advised
shareholders they need not worry about Howie.

Buffett chimed in by saying that if you are always belching at the dinner table, you will soon find
yourself eating alone in the kitchen. Charlie added, “I offend more people than you do, and I’m
satisfied with the level of disapproval.”

COST OF CAPITAL

Buffett was asked what Berkshire’s cost of capital is, especially now that they have capital-
intensive businesses.

With Berkshire’s market capitalization north of $300 billion, Buffett acknowledged that there is
no question that size is an anchor to performance. Berkshire cannot earn as high a return on
capital as they have in the past. Buffett said the way they look at cost of capital is what can be
produced by their second best idea, and then the first idea has to beat it in terms of
performance.

Charlie grumbled that he has never heard an intelligent cost of capital discussion.

Buffett said the real test over time is whether the capital Berkshire retains will produce more
than $1 of market value. He noted that if Berkshire puts billions of dollars to work, and it is worth
more than what they put in over time, then they will keep doing it. He discussed how they
recently put $3 billion to work by acquiring a Canadian transmission company, which was the
best opportunity that they had available at the time. He believes the company will be worth more
financially in the future. He added that cost of capital calculations are a game for most CEO’s.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie added that cost of capital often means silly things to business school professors. He
bluntly said, “We are right, and they are wrong.” Buffett chuckled, “I look good next to him.”

NEBRASKA FURNITURE MART

A shareholder asked Buffett to comment on the wonderful price (2 times earnings and 85% of
book value) that he paid for a wonderful business, the Nebraska Furniture Mart (NFM).

Buffett said he wished he had bought the company that cheap, but it was not purchased at a
discount to book value, and he paid more like 11-12 times after-tax earnings for NFM. He said
he initially paid $60 million for 80% of NFM, which was not a bargain purchase, but it was a
great business run by one of the finest families he has ever met. He said at the time, another
company from Germany was also trying to buy NFM. He summarized the successful story of
NFM, run by Mrs. B, who did not know how to read. When he purchased the company, Buffett
did not have to ask for an audit because he trusted her implicitly.

Buffett urged shareholders looking for a bargain purchase to go shop at the NFM during the
weekend to take advantage of shareholder discounts. Last year’s annual meeting sales were up
7% to a record $40 million, which is larger than most furniture store’s monthly sales. The NFM
will be opening a new store in Dallas which will be 1.8 million square feet in size and sit on 40
acres. Buffett expects the Dallas NFM to do more volume than other furniture stores around the
world by a factor of two times.

INDEX FUNDS VERSUS BERKSHIRE HATHAWAY

Buffett was asked why he has advised the Trustees of his wife to invest her inheritance 10% in
short-term bonds and 90% in a Vanguard S&P 500 index fund after his death. Did Buffett expect
the index fund to outperform Berkshire’s stock in the future?

Buffett said all of his shares of Berkshire Hathaway will go to charitable foundations over a 12-
year period after his death. His advice to the Trustees of the foundations is not to sell any
Berkshire shares unless they have to in order to maximize returns for the foundations. This is a
sign that Buffett is bullish on Berkshire for at least 12 years after his death. On the other hand,
the instructions to his wife’s Trustees were not designed to maximize her returns but to provide
her with 100% peace of mind.

Charlie added that “Warren is peculiar on how he distributes his money. He is entitled to do
what he damn well pleases.” Charlie noted that Warren is a “meritocrat” in that he wants to let
his money go back to civilization where it was earned. Charlie chuckled, “I like being associated
with him.”

BURLINGTON NORTHERN SANTA FE VERSUS UNION PACIFIC

Buffett was asked about Union Pacific performing better than Burlington Northern Santa Fe
(BNSF), noting BNSF’s recent service challenges.

Buffett said BNSF has handled more volume lately, but there was no question that they
experienced service problems. BNSF is spending more on capital expenditures than Union
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Pacific in order to anticipate future service challenges. BNSF experienced a large increase in
volume due to Baaken shale oil.

Buffett asked Matt Rose, the CEO of BNSF, to address the problems related to the severe
winter. Mr. Rose said he had never seen a winter like the past with all the snow and extremely
cold temperatures, which created service challenges. In addition, given the geographic
coverage of BNSF, they had to deal with increased oil volume as the oil came in faster than
anyone expected. The industry grew 820,000 units last year with BNSF handling 53% of that
growth. Rose said they handled more than 206,000 units in April with the railroad traffic now
steaming ahead.

Buffett added that Berkshire will spend $5 billion on BNSF this year, which is an amount that no
railroad has spent before in a year. Buffett noted that BNSF is now functioning better and that
earnings will be, too. BNSF handled 22,000 miles of track, which were impacted by the cold
weather and floods. Buffett expects BNSF’s financial results to get better over the balance of the
year.

NATURAL GAS AND WIND POWER

With Berkshire using large supplies of natural gas to generate electricity at its utilities, Buffett
was asked about having adequate supplies of natural gas and whether a satisfactory return
could be earned if natural gas prices rose.

Buffett said Berkshire is the largest alternative energy provider. By the end of 2015, 40% of
energy needs in Iowa will be provided by wind power. Buffett asked Greg Abel, the CEO of
Berkshire Energy, to address the question. Abel said given the very cold weather in the Midwest
this past winter, he was very proud of how resources were handled. He said Berkshire has
adequate natural gas supplies to keep the furnaces and lights on for customer. He added that
Berkshire’s renewable energy by wind power will only get larger in the future and meet the
needs of customers in a cost-effective manner. If gas prices rise, Berkshire Energy has a clear
path with regulators to pass on higher prices. Abel reassured shareholders that Berkshire
Energy was well positioned to serve customers over the long term while also meeting the
financial needs of the company.

Buffett said that Berkshire Energy is a point of pride. When Berkshire acquired a pipeline from
Enron, the pipeline was ranked 42nd out of 42 pipelines. Today, the same pipeline is ranked
number one. The pipeline went from “worse to first” under Greg Abel’s able leadership.

SUCCESSION PLANNING FOR CHARLIE MUNGER

Charlie Munger is a young 90-years old, and Buffett was asked if there was a replacement for
Charlie as part of succession planning.

Buffett quipped, “Charlie is my canary in the coal mine! Since he turned 90, I am very
encouraged by how he is handling middle age.” Buffett noted that whoever replaces Buffett will
likely develop someone that works closely with them. However, there is no other Charlie
Munger! Berkshire has been better off with two of them working together than either of them
alone. Berkshire has two incredible people who are complementary, which is a great way to
operate. But Buffett said that no one has brought up a successor question for Charlie before.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie rebuked, “The world does not have much to worry about. Most 90-year old men are
gone soon enough!”

Buffett laughed, “The canary has spoken!”

SUCCESSION PLANNING FOR AJIT JAIN

Buffett was asked about succession planning for Ajit Jain, the CEO in charge of Berkshire’s
reinsurance operations. Buffett quipped, “Reincarnation!” He then added that Ajit cannot be
recreated, but Berkshire will not have to worry about it for a long time given Ajit’s relatively
young age of 62. Buffett added that he has letters from each manager of each business unit on
who they would recommend as their own successor.

Charlie declared that he is not the least amount worried about succession planning at Berkshire
as the company is in very good shape.

INVESTING ENTIRE NEW WORTH IN ONE COMPANY

During the financial crisis, Buffett had told college students in 2009, if he had to invest his entire
net worth in one company, it would be Wells Fargo when the price had tumbled significantly
below book value. A shareholder asked what company it would be in 2014.

Buffett responded, “That is a great question, but it won’t get an answer.”

Charlie concurred, “You gave him the right answer.”

COMPENSATION DISCLOSURE

Most companies are required to list the compensation of the five highest-paid executive officers
in their proxy. However, Berkshire only lists three officers given the holding company nature of
the company. (Buffett’s $100,000 salary, which has not changed in years, is often highlighted for
its frugalness compared to other CEO’s exorbitant salaries.) In the spirit of transparency, a
shareholder asked if Buffett would be willing to disclose the compensation of other highly-paid
executives in Berkshire’s subsidiaries.

Buffett said Berkshire’s next CEO should be entitled to receive a lot in compensation. However,
Berkshire is following the SEC’s rules on disclosing compensation in its proxy. He indicated that
disclosing more than is required might have a negative impact on negotiating salaries of other
executives at subsidiaries, which is a good reason not to publish the salaries of the top 10
managers at the company.

Buffett added that when he was temporarily at Salomon, everyone was dissatisfied with their
salary…not on the absolute amount, but on the comparative amount. He said it drove people
crazy, which made compensation a terrible problem due to jealousy. Buffett noted that it is very
seldom that publishing compensation benefits shareholders. He added that corporate CEO’s
would be paid less if we did not have salaries published in the proxies, as consultant’s point to
other CEO salaries to ratchet up salaries in a never-ending cycle. Shareholders are paying the
price.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie added that despite a spirit of transparency, publishing compensation is not good for
shareholders. It won’t happen at Berkshire unless the SEC requires it.

Buffett concluded, “No CEO looks at a proxy and says, ‘I should be paid less.’” Charlie agreed,
noting that envy does the country much harm.

EXCESS CASH AT UTILITIES AND RAILROAD

A question was asked on why MidAmerican (now renamed Berkshire Energy) gets to keep its
excess cash while Burlington Northern sends excess cash back to Berkshire Hathaway.

Buffett answered that Berkshire Energy will have multiple opportunities to acquire other large
businesses, such as its recent acquisition of the utility in Nevada and the transmission business
in Canada. That is not the case with BNSF, but the railroad will invest significantly in capital
expenditures and can easily handle the debt associated with those investments.

Berkshire Energy will need more money in the future for acquisitions. Berkshire Hathaway is a
90% owner of Berkshire Energy with Greg Abel and Walter Scott owning the balance. Buffett
hopes that there will be opportunities to invest many more billions of dollars in energy
acquisitions. Last year, Berkshire Energy spent $5 billion on the NV Energy acquisition and $2.8
billion on capital expenditures.

Berkshire is finding things to do to “sop up their cash.” However, Berkshire Hathaway will
always keep $20 billion in cash as they don’t want to rely on the kindness of strangers when
challenges arise in credit markets like in 2008. Berkshire does not want to have to count on
bank lines of credit to keep the company operating. Buffett has spent too long building Berkshire
to ever want to worry about not having enough cash to meet the company’s needs.

Buffett recounted how Berkshire was tapped to help other fine companies during the credit crisis
because they had money to lend to companies desperate for funding during those tough times.
Berkshire lent money to Harley-Davidson at 15% rates during the crisis along with lending
money to Goldman Sachs and General Electric. Cash is like oxygen. You don’t notice it 99% of
the time, but if you don’t have it, then it is the only thing you notice. Buffett expects to spend a
lot more cash later this year.

Charlie responded to the question by saying that Berkshire is very lucky to have businesses that
can employ lots of capital at attractive rates. “It’s a blessing. I love to invest more capital
intelligently, especially when interest rates are so low.”

Buffett concluded, “Compound interest will catch up with us eventually, but not yet.”

ALLOCATION OF CAPITAL

Buffett was asked if he ever argues with Charlie over how to allocate Berkshire’s capital.

Buffett responded, “Charlie and I have never had an argument in 55 years. We have disagreed
on many things, but it has never led to an argument.” He laughed, “We have argued with
others.”
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie said, “Most of the time we think alike. That is a problem. If one misses it, the other does,
too.”

Buffett has affectionately called Charlie, “The Abominable No Man,” when they discuss deals.

Buffett said with interest rates currently so low, every Berkshire company now is holding more
cash at the operating company level than pushing it up to the parent company. Buffett said he
knows where the cash is and where to get it, if he needs it. In the future, it might make sense to
institute a sweep account so that excess cash is swept from the subsidiaries to the parent.
However, Buffett chuckled, “When we really need the money, I grab it!”

Charlie concluded, “That is fine.”

WEAK POINTS AT BERKSHIRE

When asked what the weak points are at Berkshire, Buffett said, “We point them out, like the
lack of a sweep account.” Buffett added that Berkshire is sloppy in certain ways, such as being
slow in making personnel changes. He mentioned how they were slow in moving a good friend
from the executive chair of a subsidiary to the Alzheimer’s home, as it was a sensitive topic.

Buffett added that there are times when the lack of supervision over subsidiaries may lead to
them missing something. However, by giving managers freedom to manage their own
businesses, the businesses have accomplished more. Much more has been created on the
positive side than missed on the negative side. At Berkshire, they do not have a General
Counsel or Human Resources department, which would be unthinkable for most companies.

Charlie concluded, “By the standards of the rest of the world, we over trust, but our results are
way better.” Berkshire Hathaway works better with a culture of “deserved trust. “

SEES’S CANDIES

Buffett was asked why See’s Candies business appears to be stagnating after strong growth
between 1972 and 1992.

Buffett noted that the boxed chocolate industry is not growing overall. 100 years ago, there were
many candy shops. The predecessor of Pepsi had the most candy shops in New York City.
However, boxed chocolates have lost market position, especially to salty snacks. Despite this,
See’s Candies has done remarkably well. However, they can’t do much to increase the overall
size of the market. They have tried to move out of their strong geographic presence on the West
Coast, but their candy doesn’t “travel well.” Folks on the East Coast tend to prefer dark
chocolates. See’s Candies has provided earnings for Buffett to redeploy into other companies.
See’s also opened Buffett’s eyes to the power of brands. Berkshire has made a great deal of
money on Coca-Cola, which would not have happened if not for the See’s investment. In 1972,
Berkshire acquired See’s, which gave Buffett the confidence to make a significant investment in
Coca-Cola in 1988.

Charlie said that the main contribution of See’s Candies to Berkshire was “ignorance removal.”
He grumbled, “We were pretty damn stupid when we bought See’s.” He added, “The good thing
is we still have lots of ignorance to remove.”
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

BANK OF AMERICA

The questioner asked about Bank of America’s Tier 1 capital and recent accounting problems.

Buffett explained that Brian Moynihan, CEO of Bank of America, called and asked Buffett if he
was willing to change his BAC preferred stock holding from cumulative to non-cumulative in
exchange for making the preferred stock non-callable for five years. The change would help
Bank of America’s calculation of Tier 1 capital. In a world of 5 basis point money, Buffett was
willing to do that so that he could hold 6% preferred stock for five more years.

The exchange was done before Bank of America disclosed that they had made an accounting
error in their calculation of capital. An error which Buffett said did not bother him as it did not
impact BAC’s GAAP earnings, even though they will pay a penalty in having to reduce the
amount of capital they return to shareholders.

Charlie nodded, “I agree with you.”

NETJETS

What are the current prospects for NetJets?

Buffett answered that NetJets is not a big grower, but it is a perfectly decent business. The
business peaked with the stock market in 2007/2008, as hedge fund managers and others were
affected by the stock market decline. Net ownership had been declining since that time, but it
has recently started growing again within the last 6-8 months. NetJets offers a premier product,
but Buffett doesn’t see the market being double or triple its current size. The Chinese market for
NetJets will be a very long play, while units sold in Europe are still declining. Buffett said he was
glad Berkshire owns NetJets, but he doesn’t expect much growth from the business.

Charlie said he expressed his optimism for NetJets by buying 25 more hours.

SOURCE OF FUNDS FOR LARGE ACQUISITIONS

Buffett was asked if he would consider selling positions in Wells Fargo, Coca-Cola or IBM if a
large acquisition became available.

Buffett said those investments could become a source of funds, although it was unlikely. He
would likely sell some of his smaller investment positions first, if needed. He added that
Berkshire’s goal is to buy really big businesses with the objective of building the company’s
earnings power every day. However, big acquisition opportunities don’t come along that often. If
Buffett needed the money to do a big deal, he could dip into his marketable securities to fund it,
although with $40 billion in cash, it has not come to that. Berkshire would have the capacity
today to do a $50 billion acquisition without issuing equity.

Charlie added that acquisitions are irregular, but Berkshire will get the opportunity to intelligently
redeploy capital.

Buffett concluded, “What really turns us on is buying businesses that will grow earnings for us
10-20 years from now.”
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

INCREASING LEVERAGE

Buffett was asked why Berkshire did not increase its leverage by raising billions of dollars from
bond sales given today’s currently low interest rates.

Buffett said the question made a great deal of sense, while also noting that Berkshire has a
good way to generate funds through cost-free float. Buffett likes operating a conservatively
financed company, and if he were to increase the company’s leverage, it could impact the
current bonds Berkshire has issued.

When Berkshire acquired BNSF, they did borrow money and issued equity to finance the deal.
The issuance of equity helped the deal get done. Buffett said he should have repurchased the
shares issued.

Buffett noted that issuing another $30-$40 billion of debt would not cost the company much, but
they don’t have plans to do so currently, as Buffett remains reluctant to leverage up the
company. However, he said if they see a good $50 billion acquisition opportunity, they might do
it.

Charlie concurred, “Even though the suggestion is intelligent, we won’t do it in advance of a

deal.”

ENVIRONMENTAL ISSUES AND CLIMATE CHANGE

Buffett noted that BNSF does carry coal and will carry it for a long time, but at some point, they
will be carrying less. As a common carrier, BNSF is required to carry freight that is offered to
them.

The probability of climate change does not impact the pricing of catastrophe insurance in any
material way in Buffett’s discussions with Ajit Jain. Alternative energy sources will increase in
the future.

In making investment decisions, climate change is not a factor.

Charlie cautioned that climate change forecasters tend to “over claim” the impact of climate
changes. Most are” talking through their hats.” At Berkshire, he said, “We are agnostic.” He
added that Berkshire is not looking to structure its investment portfolio on climate changes. He
did acknowledge that the world needs to produce more electricity from solar and wind power.
Berkshire will make a lot of money from its solar and wind power investments. However, they
don’t deserve any credit for that as they “stumbled” into it.

INVESTMENT MANAGER ROLES

While Ted Weschler and Todd Combs each manage $7 billion in investments for Berkshire, it
still represents less than 10% of Berkshire’s investment portfolio. They will inherit Buffett’s big
legacy portfolio, and Buffett was asked about their roles in managing the investments.

Buffett acknowledged that each of them was managing $7 billion now, and that they would be
managing more in the future. They both see that it gets more difficult managing the investments
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

the larger the sum becomes. Buffett stated both Ted and Todd were terrific additions to
Berkshire beyond their investment skills. They both know a lot about business and management
and have added significant value to Berkshire as they take on additional responsibilities. Buffett
concluded, “It has been a big plus to bring them on.”

Charlie said, “I have nothing to add.”

LOW INTEREST RATES AND BUBBLES

A shareholder commented that low interest rates led to a housing bubble and today, potentially
a bond bubble. Should interest rates be raised?

Buffett asked, “Who would have guessed five years ago that interest rates would be this low for
so long?” However, he said he would not have done much differently if he were at the Federal
Reserve. He expressed surprise at how well it has worked. Ben Bernanke was the hero of the
crash and the subsequent actions taken. Buffett said the situation is still like a good movie in
that he does not know how it will end with interest rates kept so low for so long. He said many at
the Fed did not get what was happening during the financial crisis, but Ben Bernanke did.
Buffett thinks Janet Yellen does, too. Buffett noted that the Fed is tapering, but still buying
bonds.

Charlie responded that in Japan no one thought interest rates would be low for 20 years with
common stocks declining. “Strange things happen.” He added, “If you are not confused, you
probably don’t understand very well.” At Berkshire, not many long term bonds are being bought.

Buffett concluded a zero interest rate policy will have a huge effect on asset prices and in
rejuvenating the economy. It is not a bubble situation, but an unusual situation. Charlie retorted,
“I am as confused as you are.”

CONGLOMERATE BUSINESS MODEL

Buffett was questioned about Berkshire’s business model, given that it has more than 70
unrelated businesses selling everything from bricks to chocolate.

Buffett said the business model has worked well for America if you took a look at the Dow with
its changing group of companies over the last 100 years. During that time, the Dow rose from 66
to more than 11,000. Buffett explained that owning a group of good businesses is not a terrible
business plan. In the past, many conglomerates were put together to do “financial magic.” There
were companies that were serial acquirers, which would issue stock at a 20 P/E ratio and then
buy companies with a 10 P/E ratio. This was the equivalent to a chain letter scheme, but not
building a business.

In contrast, Berkshire owns diversified and great businesses, which are conservatively
capitalized and run by great management teams. By having Berkshire’s various businesses
under one umbrella, Buffett is able to allocate capital to the businesses without tax
consequences. For example, Buffett can move cash generated by See’s Candies to other
businesses which can more usefully employ the capital. This is what capitalism is all about.
Berkshire’s business model is applied by following business principles rather than stock
promotion principles like Tyco used by continuously issuing stock. Chain letters always come to
a bad end.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie said Berkshire has alternatives for its cash. If they cannot find businesses to acquire,
they can buy marketable securities. While others are hell-bent to buy, Berkshire is patient. He
concluded, “Berkshire is not a standard conglomerate and will likely continue to do well.”

FOREST RIVER

Buffett noted that Berkshire bought Forest River 10 years ago. The company had previously
gone through bankruptcy under a private equity group. Buffett has never been to see their
operations and has probably only had 3-4 phone calls from them over the years. Buffett noted
that Forest River will do $4 billion in business this year and will do more business over time as a
market leader in the recreational vehicle industry. Buffett noted it was tough to compete with
Forest River’s management as they know what is going on in their business and operate on slim
margins. Buffett wished he had 20 more businesses just like them.

OIL SANDS

Buffett was asked about his view on Canadian oil sands and their impact on Berkshire.

Buffett responded that Berkshire has a crane business through Marmon that does oil
development. In addition, they just acquired 8,000 miles of transmission lines near the oil sands.
Berkshire also owns an investment in ExxonMobil that participates in the Canadian oil sands.
Berkshire also moves 700,000 barrels of oil per day on its railroad. Buffett noted that there is a
significant advantage to moving oil via rail based on where it can be taken. Rail is twice as fast
at moving oil as compared to moving it in pipelines. Berkshire also recently bought a specialty
chemical additive company, whose products will help oil move faster through pipelines. Buffett
declared that the oil sands are an important asset for mankind, but they will not dramatically
change things at Berkshire.

Charlie commented that oil sands production requires the use of natural gas to produce heavy
oil. The process is only economic if oil prices rise and natural gas prices decline. He described it
as a “peculiar situation.”

HEDGE FUND BET UPDATE

Buffett made a $1 million dollar wager, with the proceeds going to charity, with a hedge fund
manager that the S&P 500 index would outperform a group of hedge funds chosen by Protégé
Partners over a 10-year period. Buffett updated the results, showing that in the past six years
the S&P 500 index’s cumulative return was 43.8% versus the hedge fund’s 12.5% cumulative
return.

ENERGY FUTURE HOLDINGS AND THE IMPACT OF DISRUPTIVE CHANGES

Buffett was asked about how disruptive change led to Energy Future Holdings bankruptcy and
whether other disruptive changes could impact other Berkshire investments.

Buffett responded that the Energy Future Holdings investment “was all my decision and a
significant mistake.” He said all businesses should think about what could mess up their
business models. With Energy Future Holdings, the assumption was that gas prices would stay
where they were or rise. Instead gas prices went much lower.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

In 1936, GEICO operated at a low cost and passed on the savings to customers in the form of
low prices for a necessity, car insurance. The insurance was initially only provided to
government employees. Over time, GEICO had to adapt their business model to widen the
classification of their customers along with their selling techniques from direct mail to telephone
to the Internet and social media. At one point in history, GEICO became too aggressive and
went broke. Buffett wants his managers to think all of the time on how change may impact their
business models. As an example, he noted how BNSF is looking at using liquefied natural gas
to fuel their locomotives, which is a new change. Most of Berkshire’s businesses are not subject
to rapid change, which can lull management to sleep.

Buffett added, “I will make mistakes in the future.” However, he does not make “bet the
company “decisions that could cause real anguish. He noted that some mistakes work out;
recounting how Berkshire bought a department store in 1966 in Baltimore that went broke. Yet
the $6 million in that store became $45 billion in Berkshire stock over time.

Charlie added that it is desirable to remove ignorance and to be able to scramble out of
mistakes. In the early years, Berkshire did that with textile mills, trading stamps, and department
stores. He chortled, “Think what we could have done if we had a better start!”

HEINZ

Buffett was asked about Heinz’s normalized earnings power after the acquisition.

Buffett responded that Heinz will file their own 10-Q, adding that Heinz is a reasonably-run food
company with 15% pre-tax margins. Buffett expects the margins will be significantly improved
over the next few years as 3G restructures the business model. Heinz’s brands are as strong as
ever, and the cost structure will be significantly improved.

INVESTMENT DECISIONS DURING 2008/2009 FINANCIAL CRISIS

A shareholder noted that Berkshire had the opportunity to buy additional shares in companies
like Coca-Cola and Moody’s at low prices during the financial crisis but didn’t. Buffett was asked
about his investment decisions during that time period.

Buffett said Berkshire’s cash was spent too early during the panic with the low in the market
being set in March 2009. He had already committed $6 billion to Mars to help finance Wrigley
and then spent another $16 billion in Sept. /Oct. 2008 with other deals like Goldman Sachs and
GE. He noted, “We did not do as remotely well with these investments as we would have if we
had spent all the dollars at the bottom, but we don’t know how to time the market. We did buy
BNSF during the period so we did do reasonably well. ” Berkshire’s goal is to buy big
businesses with good management at reasonable prices and build them over the long term. A
bonus is not to issue any Berkshire shares in the process. This game is still viable.

Charlie commented that private businesses have become a bigger percentage of Berkshire’s
overall business. In the early days, Berkshire had more common stock investments than private
businesses.

Buffett chimed in that private businesses now will continue to comprise significantly more of
Berkshire’s net worth than common stock investments. When Berkshire is right about the private
businesses it acquires, it will show up in Berkshire’s earnings power over the long term, which is
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

more enduring in increasing Berkshire’s intrinsic value. However, with common stock
investments, it is easier to see the investment gains.

Charlie communicated that when Berkshire buys businesses, they can put huge chunks of cash
to work. They cannot invest that much in common stocks. Charlie chortled, “I love it when we
buy transmission lines in Alberta. Nothing will happen to Alberta!”

Change at Berkshire is inevitable. How Berkshire adapts to it is all important.

Buffett did note that Berkshire bought a fair amount of Wells Fargo over the last few years, while
acknowledging that more money was made in banks of lesser quality over that same time
period as the economy recovered. However, Buffett is 100% confident with Wells Fargo and
only 50% comfortable with the lesser banks that had a greater recovery.

GEICO AND SELF-DRIVING CARS

Buffett was asked how usage-based pricing and self-driving cars might impact GEICO’s moat
and whether he would ever sell GEICO.

Buffett stated emphatically that he would never sell GEICO. He noted that Progressive has done
the most in the industry in utilizing usage-based pricing with their Snapshot product. Buffett said
insurance is all about computing the propensity of loss to establish proper premiums. For
example, he said someone who is aged 90, like Charlie, is more likely to die than someone who
is 20. There are all kinds of variables in setting insurance prices. A usage-based factor is just
one variable. GEICO has a pretty good system. Buffett feels “very, very good about GEICO’s
management and their ability to assess risk. There is no one better than GEICO!”

Self-driving autos may become a real threat to auto insurers. They would be good for society
but bad for auto insurers if they reduce accidents.

Charlie grunted, “Some things happen more slowly than you expect.” Self-driving cars will likely
take awhile.

Buffett agreed by saying, “If we are wrong, we are wrong together. GEICO will do a lot more
business 5-10 years from now. Thirty years from now, I will go away peacefully without knowing
[the impact of self-driving cars on GEICO].”

INVESTMENTS OUTSIDE OF U.S.

A shareholder asked why Berkshire employed very little capital outside of the United States.

Buffett responded that he never turned down a chance to do a deal outside of the U.S. He cited
the recent Alberta deal. However, he noted that Berkshire has not had as much luck as he
would have liked in getting on the radar screen of families outside of the U.S. Many founders of
companies know Berkshire Hathaway in the U.S. Buffett is disappointed that he hasn’t had
better luck outside of the U.S.

He did point to one successful investment Berkshire made in Israel with Iscar, which set new
record financial results in April. Their results are an indication of how business is improving
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

around the world. Global business is beginning to show strength in the industrial world. Buffett
wished he could find more Iscar’s.

CIRCLE OF COMPETENCE

A shareholder asked how one finds their circle of competence.

Buffett said that was a good question. An important way is to be self-realistic in your talents and
short-comings. Buffett felt he was reasonably good in assessing the perimeters of his circle of
competence. However, he did point out that he has strayed from his circle of competence more
often in making retail investments than in other cases. He thought he understood the retail
business, but his department store investments proved him wrong. He also was out of his circle
of competence in making his initial textile mill investment. These were “dumb decisions” that
ended up working out.

Buffett said he knows CEO’s that have no idea where their circle of competence begins and
ends, but Berkshire has managers that do know. The ultimate manager who understood her
circle of competence was Mrs. B, who founded The Nebraska Furniture Mart. When she sold
the business to Berkshire, she said she did not want Berkshire stock in exchange because she
knew nothing about stock. Buffett concluded that it is a huge asset to know what your circle of
competence is

Charlie said it is not that difficult to define your circle of competence. He cited numerous
examples: if you are 5 foot 2 inches tall, do not try to play basketball in the NBA; if you are 95-
years old, do not try to become the romantic lead in a Hollywood film; if you weigh 350 pounds,
do not try to become the lead in the Bolshoi ballet; if you can’t count cards, don’t play poker.
Competency is a relative concept. Charlie said there are a “large supply of idiots, and that’s
what I needed to compete.”

ANNUAL PERFORMANCE STANDARD

A shareholder asked what the logic was of Berkshire comparing its book value performance
annually against the S&P 500 index’s performance.

Charlie jumped in and said he wanted to answer that question. He said, “You are totally right
that it is a ridiculous comparison. It is insane! You are right [that it is not a rational comparison
as it makes it hard for Berkshire to look good], but Warren likes to make difficult challenges!"

PRICE PAID FOR REMAINING PURCHASES OF MARMON AND ISCAR

Buffett was asked about the higher multiples he paid for the remaining stakes of Iscar and
Marmon compared to the original price paid for the majority of the stakes in the companies.

Buffett responded that on the Iscar purchase, he used the same formula as the initial purchase,
providing a put option for the family and a call option for Berkshire for the remaining 20%
purchase of the company. There was no variation from the original purchase formula. The family
elected to put the remaining 20% of the company to Berkshire.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

The Marmon deal was structured as an installment sale. Berkshire initially acquired 64% of the
business and had a formula set to acquire the remaining shares of the business. If the business
improved, Berkshire would pay more for the remaining stake.

Charlie succinctly summarized, “The price went up because the value went up.”

Buffett added, “Everyone felt good about the transactions.” Charlie noted that they have
enormous respect for both families. Buffett said the carrying value of both companies is well
below their intrinsic values. Charlie pointed out that Union Tank, a unit of Marmon, was John D.
Rockefeller’s first business. “It is amazing how good businesses last!”

ENTREPRENURSHIP

A young shareholder asked Buffett if he were 23, what non-technology business would be start
up and why.

Buffett said, “I would do what I did at 23 and go into the investment business and look at lots of
businesses and visit with CEO’s.” Ask lots of questions of the CEO’s, such as the following. “If
you could put all your money into any company except your own, what company would it be for
the next 10 years?” “Which business would you sell short and why?” Through these questions,
you can learn lots about the economics of business. You must have real curiosity. If you keep
learning things, you will find a business that interests you.

Charlie said he should follow the “Larry Bird trick.” Larry Bird asked every agent that wanted to
represent him, why he should select that agent and which agent would be recommended as the
second best agent to represent him. Every agent mentioned the same “second best” agent.
That is who Larry Bird hired, and this agent negotiated the best contract for Bird in history.

Buffett said when they went in to manage Salomon, they needed someone to run that place.
Buffett asked the senior leaders, “Who would be the ideal person to run Salomon and why?” He
said you learn a lot by asking questions. People like to talk.

Charlie noted that if it is a competitive business and you lack the qualities for that type of
business, you should avoid it. “I immediately decided that I was not going to be a
thermodynamics professor at Caltech. I did that over and over again, and there were only a few
choices left.” Buffett joked, “I did the same with athletics.”

OMAHA HOTELS

Omaha hotels significantly increase their room rates during the shareholder weekend as 40,000
folks flood into the city. Buffett had expressed his unhappiness with the situation but was asked
if that just wasn’t a function of supply and demand and capitalism at work.

Buffett said that was right, and he is trying to increase the supply of rooms during the weekend
by inviting Airbnb, a website that allows folks to rent out lodging in their homes, to have a
presence in Omaha. Buffett noted that Omaha cannot size its hotel supply to accommodate the
Berkshire Hathaway meeting. What really bothered Buffett was that hotels were requiring 3-day
minimums to book hotel rooms. He said Berkshire was not going to move the meeting to Dallas,
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

which would offer more hotel supply, as the meeting is an economic boom for Omaha. Airbnb
will offer flex-supply, but the Omaha hotels will still do well.

Charlie said he had nothing to add.

GEICO’S MARKET SHARE

A shareholder noted that GEICO has the largest advertising budget in the auto insurance
industry and has increased its market share to 10% with State Farm maintaining a 19% market
share. Buffett was asked if GEICO would overtake State Farm.

Buffett responded that GEICO passed Allstate this year in terms of market share. State Farm
has a great history as it was a company started by farmer with no insurance business
background. In 1920, State Farm had the better business model. However, once GEICO arrived
in 1936, they had the better business model with the goal to become the number two player in
the industry. Buffett said, “If I live to be 100, projections are for GEICO to be number one in the
industry.” Buffett joked that he has told GEICO employees that he will do his best to live up to
his part of the deal. Buffett added that Tony Nicely, GEICO’s CEO, deserves to be in the Hall of
Fame. He has taken GEICO’s market share from 1%-2% in 1993 up to 10% today, and the
market share will continue to increase despite State Farm having a net worth of $60-$70 billion
and lots of satisfied customers.

Charlie noted that GEICO is like Costco. They both feel they have a “holy duty” to have great
products at great prices. They then tend to do well and take market share. It is easy to talk this
game, but difficult to live this game.

Buffett concluded that people don’t come and go from GEICO. It is a “very reinforced” culture.

FRUGALITY

A shareholder asked who was more frugal, Buffett or Munger, and its impact on Berkshire.

Charlie said that Buffett was more frugal on personal consumption, noting that Buffett still lives
in the same house he bought in 1958.

Buffett said, “I have everything in life that I want.” Standard of living does not equate to cost of
living. “My life would not be happier if I had 6-8 homes. It would be worse.”

Charlie noted that frugality has helped Berkshire. “I see a bunch of frugal people at Berkshire,
including in this crowd. We collect these people.”

Buffett admonished, “Forget it, though, this weekend. The more you buy, the more you save!”

BERKSHIRE TAXES

When asked if Berkshire would consider moving overseas to save taxes, Buffett said, “No, we
could not have done what we have with Berkshire in any other country.”
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie added, “I think it would be crazy to try and take our taxes to zero when we are this
prosperous.”

Buffett noted, “We don’t pay anything more than we need to with our 20,000-page tax return.
We don’t add a 20% tip!” He stated that Berkshire’s wind and solar deals are tax-driven, as they
take advantage of the tax credits. Otherwise, it would not make sense to do the deals. Buffett
declared, “We do not begrudge the taxes we pay.”

MEXICAN FREIGHT MARKET

A shareholder noted that Union Pacific serves the growing Mexican freight market and asked
whether BNSF might acquire Kansas Southern to participate in that market.

Buffett said Union Pacific does have a great advantage in Mexico, but it does not make sense to
have BNSF go into Mexico as the math right now does not work. BNSF has other good
prospects.

Charlie said it is awfully easy to imagine combinations, however, when a business gets to a
certain size, they can’t make acquisitions. Charlie concluded, “BNSF will have to get along on its
own.”

INTRINSIC VALUE and BERKSHIRE BUSINESS MODEL

Buffett was asked how his calculation of intrinsic value differed from Ben Graham’s in Security
Analysis. He was also asked which company he feared the most as a competitor and why more
companies don’t copy Berkshire’s business model.

Buffett said Graham had not been specific on his calculation of intrinsic value. Intrinsic value is
equated with private business value, which may be determined by calculating the present value
of all cash that will be distributed from a business over its lifetime. Aesop had it right when he
said “A bird in the hand is worth two in the bush.” However, investors need to determine how
sure they are that there are two birds in the bush and how far away is the bush. Philip Fisher
looked at the qualitative factors in determining the number of birds in the bush. Graham focused
on quantitative factors. Buffett started out more quantitative, and Charlie is more qualitative.
Intrinsic value basically is calculated by determining the cash you put into an investment versus
the cash you take out, while considering interest rates.

In terms of having a silver bullet to shoot Berkshire’s biggest competitor, Buffett said Berkshire
has no real competition. Private equity is similar to Berkshire in acquiring companies, but they
generally leverage up businesses to do so. With leverage currently cheap, they are providing
competition to Berkshire on deals.

However, no one has the same business model as Berkshire in terms of buying wonderful
businesses. Charlie emphasized that Berkshire’s business model “has legs” and will go on for a
long time. It is a credible business model with enough advantages to last a long time. He said all
of the great businesses of yesteryear are no longer still here, except Standard Oil. However, he
said Berkshire will “keep doing what we are doing and learn from our mistakes.” The momentum
and ecosystem are in place. He advised young folks, “Do not be too eager to sell Berkshire
stock.” There are not more copycats of Berkshire’s business model because there is nothing in
business school that teaches them about the business model. Buffett added that it also is a slow
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

process that takes patience, which deters people from copying the model. Charlie chuckled,
“The problem with being slow is that you are dead before it is finished.”

INFLATION

A shareholder asked about future inflation and higher interest rates and its impact on Berkshire.

Buffett answered that inflation “will hurt us and most businesses.” As an example, he said
assumer that a drone drops $1 million on each household. Berkshire would be worse off as this
would be highly inflationary. Wealth is not created from inflation. Although Berkshire’s EPS
would increase and intrinsic value measured in dollars would increase, the value per share in
real terms would decline.

Charlie noted that the German hyperinflation created so much misery that the result was ending
up with someone like Hitler. Charlie said he does not like to see the U.S. printing so much
money. He said the economy can handle subpar growth, but it would be “crazy to let the whole
thing blow up because of politicians printing money.”

ACQUISITIONS

A question was asked about the after-tax returns resulting from acquisitions in the corporate
world.

Charlie said the sum of all acquisitions has been lousy. It is the nature of companies to do dumb
deals. The history of acquisitions has not been prosperous.

Buffett added, “When companies, we own but do not control, announce acquisitions, we are
more likely to cry than smile.” Charlie agreed.

Buffett described how successful GEICO had been until they embarked on acquisitions in the
1970’s. While the acquisitions were not disasters, they also were not successes. Accounting
costs of the acquisitions were poor but not disastrous. However, the secondary effects were
huge, as management took their eye off the gains that could have been made. This turned out
to be good for Berkshire as it presented them with the opportunity to buy GEICO at a great
price.

Buffett noted that CEO’s are not shrinking violets, and they like to do deals. With investment
bankers calling them on a daily basis, CEO’s often are pushed to do deals…most of which are
dumb deals.

Charlie chuckled, “Notice how much more tactful he is.” Buffett laughed, “The comparison is not
tough.”

INVESTMENT BANKERS

A shareholder noted that confidence is again waning about investment banks with new criminal
charges being brought on money laundering, LIBOR rate fixing, etc. He asked if a new financial
crisis might erupt because of this or are investment banks too big to fail and their bankers too
big to jail?
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie noted that behavior on Wall Street has enormously improved after the financial crisis.
However, there will never be perfect behavior. Nothing changes behavior more than regulators
going after individuals.

Buffett added that based on the experience at Salomon, they learned that prosecution of
individuals is better than prosecution of corporations. Otherwise, a few bad apples can destroy
thousands of lives. However, prosecutors find it way easier to prosecute corporations rather
than individuals, as the corporations pay the penalties with other people’s money.

Charlie emphasized that they should go after individuals. When the regulators went after
individuals, it changed price-fixing issues in antitrust cases.

Buffett said they have 300,000 people working at Berkshire, and it is likely that somebody is
doing something wrong. If it reflects badly on the whole corporation that worries him. He added,
when they find something wrong, they hope they find it early and take care of it. The way to
change behavior is to have the fear that wrong doing will hit the individual hard.

INSURANCE FOR RAILROAD ACCIDENTS

Buffett was asked if there was a lack of insurance for a worst-case railroad accident.

Buffett responded that Ajit Jain has offered the rail industry very high limits on railroad
accidents, but they don’t like his prices. The four major railroads have the capacity to pay a
worst-case scenario award. They must carry hazmat insurance. The railroads do carry
insurance, but they don’t discuss the limits because it becomes a honey pot for lawyers. For any
nuclear or terrorist threat, the government would cover those amounts.

Charlie discussed the British Petroleum disaster in the Gulf of Mexico. He said no one in their
wildest dreams would have thought billions of dollars of losses from one well was possible.

Buffett noted the biggest railroad accident cost $200 million. However, railroads are not getting
paid enough for carrying products like chlorine, but they have to do it as common carriers.
Buffett added that he does not stay awake worrying about the financial impact from a railroad
accident. However, he acknowledged that a terrorist act could create damages like we have
never seen. Charlie agreed, noting that we live in a world where unusual events will occur.

COMMERCIAL CASUALTY INSURANCE

Buffett was asked why Berkshire was expanding into commercial casualty insurance when
pricing has peaked.

Buffett said Berkshire entered the commercial insurance business last year with great talent
joining the company. This talent can underwrite more intelligently than most in the industry. Ajit
is overseeing the operations, and it presents a terrific opportunity for Berkshire as they build a
significant commercial insurance operation over time.

Charlie added, “It is a very logical thing for us to do.” Berkshire does not hold back because of
the business cycle. It is a long-term play.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

PROFESSIONAL SPORTS TEAM

Buffett was asked if he would purchase a professional sports team.

He answered that he already personally owns one-quarter of a minor league baseball team, but
that he will not buy a professional sports team for Berkshire. He joked, “If we do, start looking for
our successors!” Sports equipment manufacturing is not a great business, although Berkshire
does own Spalding and Russell.

Buffett asked Charlie if he was thinking about buying the L.A. Clippers. Charlie just shook his
head. Buffett laughed and said, “Now, I am thinking he is!” Charlie then retorted, “Whatever
Warren thinks about sports ownership, I like it less!”

ACTIVISM

Buffett was asked if Bill Ackman’s covert tactic to establish a position in Allergan and then work
with Valeant to acquire the company was similar to Buffett establishing a position in Coca-Cola.

Buffett said he did not see any parallels as he purchased his Coca-Cola position on the open
market and did not try to take over the company. Buffett added that activism “scares the hell out
of a lot of managers” and the activists will not go away. Activism is attracting more hedge fund
money.

Charlie added that activism is stirring up corporate management. No one feels immune. 20%-
30% of company stock can change quickly. Activists make a lot of money. They are having an
effect. Activism is like fox-hunting,” the pursuit of the uneatable by the unspeakable.” Charlie
said he did not think it was good for America, but it will be bigger three years from now.

SMALL COMPANIES VERSUS ELEPHANTS

Buffett was asked whether it was better to buy a collection of smaller companies that would
provide growth or elephant-sized companies that are near maturity.

Buffett said he is not precluded from acquiring small companies and that he would be delighted
to buy a $2-$3 billion company. Berkshire’s subsidiaries made 25 tuck-in acquisitions last year.
However, Buffett noted that one $30 billion acquisition is equal to ten $3 billion deals. Berkshire
can obtain more earnings power with bigger deals.

Charlie agreed saying that the idea of buying hundreds of small companies does not make
sense for Berkshire.

Buffett concluded by saying that he doesn’t feel envious of private equity.

MIDAMERICAN (BERKSHIRE ENERGY)

A shareholder noted MidAmerican’s minimal operating cash flow over the last 5 years and
asked Buffett why he is allocating capital to a business that is earnings less than 1% on its
tangible assets.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Buffett told the questioner he was doing great until he got to the return on tangible assets part of
his question. He needs to look at operating earnings less depreciation. MidAmerican gets
appropriate returns from regulators. Net investment in utilities is required, and Berkshire will do
so if they can earn reasonable returns. Berkshire delivers electricity at lower rates than most
utilities. Berkshire has a “deserved good reputation” with regulators, while improving the
operations and safety at the utilities they own. Buffett noted, “We will get returns that are
appropriate.” While Berkshire Energy may experience negative free cash flow for a substantial
period as they invest in their utilities, they will get good returns over the long term.

Charlie added that if the shareholders’ numbers that he cited came from a department store,
“we would hate it.” However, when the numbers come from growing a utility, we like it because
we will do exceptionally well.”

Greg Abel, the CEO of Berkshire Energy, also pointed out that they were the low-cost provider.
Their last rate increase in Iowa had been in 1998, prior to a recent increase. They do not see
another rate increase for some time. Berkshire Energy is currently investing $1.9 billion in a
project that will earn an 11.6% return. Berkshire Energy tries to keep capital expenditures close
to depreciation. However, the lion share of capital spent is growth capital.

Berkshire Energy services Google data centers, which they are talking about increasing to 1000
megawatts in Iowa. Berkshire Energy provides Google with exceptionally low rates from their
renewable energy. Google wants those tax credits and to be associated with green power.

EDUCATION IN CHINA VERSUS U.S.

When asked about the difference in education in China versus the U.S., Charlie said, “America
made a huge mistake when they let public schools go to hell.” The Asian culture is less likely to
do so. He concluded, “Wish we were more like them.”

REFORMING FANNIE MAE AND FREDDIE MAC

A shareholder asked if America should change the way it finances homes and whether there
would be a role for Berkshire in that process.

Buffett said that 30-year fixed-rate mortgages have been a boon to home ownership.
Government guarantees have helped to keep the costs down. This is something private industry
cannot do. The problem is that politics get into the picture. Buffett wrote an op-ed in The
Washington Post 30 years ago about FSLIC when the savings and loan industry fell apart.
Berkshire will not likely be a player in setting insurance rates for housing.

Charlie said when private industry took over mortgage loans; the biggest bunch of “thieves and
idiots” almost took the financial system down. At the moment, Fannie Mae and Freddie Mac are
being conservative. Charlie said he is not anxious to have investment banks get back “into a
race to the bottom with phony securities.”

Buffett noted that Fannie Mae and Freddie Mac were led astray by trying to serve two masters.
In effect, they became the biggest hedge funds in the country.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie said that Fannie Mae and Freddie Mac no longer need portfolio activity. They should just
provide insurance. Their experiment in privatization was a total failure.

3G AND THE BUFFETT STAMP OF APPROVAL

A shareholder asked what the “secret sauce” was behind 3G’s deals. 3G is Berkshire’s partner
in the Heinz acquisition. Also, what will happen to deal making at Berkshire without Buffett’s
long-term relationships with people or the Buffett stamp of approval on deals?

Buffett said when he is no longer around, it will become the Berkshire Stamp of Approval on
deals. His successor will have the Berkshire brand and ability to do the same things as Buffett
does, including writing big checks. He added that the folks at 3G are very smart and never
satisfied. They are very hard-working and don’t overreach or overpromise on deals. Buffett said
Berkshire is very fortunate to be associated with them. It takes being a good partner to attract
good partners. Lots of people have given Berkshire a good reputation and are part of the
Berkshire brand.

Charlie agreed, saying that the way to get a good spouse is to deserve one. The same thing
applies to business partners if you behave properly. 3G is very good at removing unnecessary
costs, which is a service to civilization. It should be done with sensitivity. “We are learning from
them,” Buffett concluded.

$1.2 TRILLION MARKET CAP IN 20 YEARS?

A shareholder asked if Berkshire might achieve a $1.2 trillion market cap in the next 20 years.

Buffett said that at some point, Berkshire will have more cash than they can intelligently deploy.
While he hopes that it is not soon, it also is not on the distant horizon. At that time, if the stock
can be repurchased at an attractive valuation, Berkshire will buy back their shares aggressively.
Whatever is done at that time will be done in the best interest of shareholders.

Charlie said, “It is not a tragedy to succeed so much that future returns go down. That is
success!”

NEW TECHNOLOGIES

Buffett was asked about companies like Uber and Airbnb and how new technologies are
changing the economy.

Buffett said these companies will be disruptive. The taxicab and hotel industry is fighting back in
competitive ways and using regulators to help. Back in 1920, State Farm’s agent system in the
insurance industry was sacrosanct. Then GEICO came along with direct selling. In the end, the
better mousetrap wins. Buffett said, “We stay away from companies with lots of change, since
we don’t know who the winners will be.” Most of Berkshire’s businesses will be winners and be
around a long time, such as the railroad and energy companies.

Charlie added that new technologies will be quite disruptive especially in retail. He referred back
to Greg Abel’s comments on serving Google’s growing server farms. Charlie said when you get
computer capacity on this scale, “it is changing the world.” It will hurt a bunch of people.
2014 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

FINANCIAL LITERACY

Buffett was asked whether financial literacy should become part of the standard curriculum of
schools and when should it begin?

Buffett responded, “The earlier, the better!” He added that habits are powerful forces. He said
digging out of a financial hole is difficult. Buffett participates in “The Secret Millionaires Club” as
a way to teach young children about financial literacy. He noted that when he was young, he
was lucky because he learned good financial habits at home. He noted that the big problem is
with adult financial literacy. He emphasized again that it is really important to have strong
financial habits.

Charlie commented, “I place most of the fault with parents. It is very hard to fix people with the
wrong parents.” The main problem with education in finance is in college. Universities teach
asinine topics, even in economics. Buffett noted that major universities are getting better.
Charlie grumbled, “They were teaching students very dumb things.”

BREAK UP BERKSHIRE?

A shareholder said he thought Berkshire was so large that its valuation was being penalized by
folks who could not evaluate it and by old shareholders waiting to get dividends. He asked if
Berkshire would be better off if it was broken up into four companies.

Buffett responded that it would not create value if he broke Berkshire up into four companies
due to the tax situation and allocation of capital. Berkshire is worth more now in the way that it is
structured. Berkshire did have a vote on paying a dividend this year, and the vast majority of
shareholders do not want a dividend. Shareholders can sell part of their stock if they want to
create a dividend, as Buffett described in the annual report. There is no advantage to break up
Berkshire. It would be a terrible mistake.
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

BERKSHIRE HATHAWAY 2015 ANNUAL MEETING NOTES

BY INGRID R. HENDERSHOT, CFA

We attended the Golden Anniversary Berkshire Hathaway annual meeting held on May 2, 2015,
in Omaha, along with a record crowd of more than 40,000 other folks from around the globe
who gathered once again for the Woodstock for Capitalists. Warren Buffett, Chairman of
Berkshire Hathaway, and Charlie Munger, Vice-Chairman, answered questions from
shareholders, analysts and the media. The meeting opened once again with an entertaining
movie produced by John Landis of Trading Places that included humorous clips with Buffett and
Munger acting with celebrities in skits featuring their brands, and ended with Warren Buffett, as
the Berkshire Bomber, in the ring with Floyd Mayweather, welterweight boxing champion, in a
parody of Mayweather’s fight which was scheduled later that evening with Manny Pacquiao.

Here are my notes from the annual meeting.

FIRST QUARTER RESULTS

Warren Buffett began the meeting with a brief recap of Berkshire Hathaway’s first quarter
financial results (see our detailed first quarter analysis for Berkshire Hathaway on our website).
Book value increased .5% from year end to $146,963 per A share. Insurance float as of
3/31/15 was approximately $83.5 billion. Operating earnings increased 20% to $4.2 billion
during the first quarter. Burlington Northern Santa Fe (BNSF) did dramatically better in many
measures as Berkshire spent more money on the railroad. BNSF gained market share during
the quarter. The trains are running again the way they should with huge improvement over last
year.

BUSINESS PRACTICES OF CLAYTON HOMES AND 3G CAPITAL

Warren Buffett responded to the long-term shareholder with heartburn over “predatory lending
practices” described in The Seattle Times article on Clayton Homes and the moral practices of
3G Capital, which gutted jobs at Tim Horton and Heinz when they took over the companies in
partnership with Berkshire. The shareholder wondered what happened to capitalism with
compassion historically practiced by Berkshire.

Buffett noted there were important mistakes in the Clayton Homes article. Clayton follows an
exemplary pattern and is extraordinary in home building and the mortgage business. The
greatest cause of the housing bubble of 2008 occurred when the mortgage holder became
totally divorced from the mortgage originator. The mortgage originator sold mortgages around
the world and suffered no loss if loans went bad. At Clayton, unlike other builders, mortgages
are offered to all buyers of their homes. Berkshire retains roughly $12 billion of mortgages on
300,000 homes. When a mortgage goes bad, the person who bought it loses and the person
that owns the mortgage loses. Since Berkshire retains 100% of the mortgages, they have the
same interest as the buyer. Berkshire has no interest in selling anyone a house where the
mortgage will default. There has been much talk in terms of possible changes in mortgage rules
- not making mortgage loans to people who will get in trouble on the loans. Most Clayton home
buyers are lower income buyers who would not be able to have a home without Clayton
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

financing. At Clayton, they lend intelligently to people who can make payments and keep the
house. Clayton is exemplary in doing that. However, about 3% default, which may be due to
death, divorce or the loss of a job. In those cases, Clayton loses money, and the person who
bought the home loses money. However, 97% of Clayton homebuyers don’t default. Buffett
advised folks to take a look at the 1200 square foot Clayton house on display at the meeting.
For $69,500, the house, complete with appliances, will be transported and ready to go. The
home buyer only needs land, which may cost another $25,000. This represents a decent value
with Clayton putting their own money at risk to help the homeowner finance the home.

Buffett read The Seattle Times article, which said Berkshire was making a 20% profit on the
homes which he knew was “nonsense.” The statement in the affidavit mentioned in the article
discussed a gross profit of 20%. The report confused the difference between gross profit and
net profit. Net profit includes operating expenses and taxes. Clayton’s gross margin is 20%,
however, the pre-tax margin is 3% and the net profit margin is just 2%. Clayton always provides
buyers the lending terms available from a variety of lenders. Buffett displayed a copy of the one-
page document with no small print on it with a list of four or five lenders. Buffett exclaimed that
he makes no apologies about Clayton’s lending terms, noting that he has not received one call
from any party in connection with a Clayton home complaint in the last three years.

Buffett noted that Clayton Homes is regulated in almost every state. During the last three years,
they have had 91 examinations by various states to make sure they conform to state laws. The
largest fine from all the exams has been $5,500 with $110,000 issued in refunds. Most
borrowers have FICO scores below 620, with the average principal and interest payment
approximating $600 a month. Buffett concluded that he is proud that Clayton Homes’
management has put 30,000 people into homes at a low cost. A high percentage of those folks
will have their homes paid off probably in 20 years or less. Clayton Homes have been a real
bargain.

Charlie added that he did not know much about the lending practices of Clayton Homes. He did
acknowledge that they sold an enormous amount of homes and had 50% market share among
manufactured homes, which is a very efficient way to create houses. He also noted that Clayton
is a very productive part of the economy. He stated, “You can't make lending to poor people
buying houses 100% successful.”

Buffett agreed as death, divorce, and loss of a job impacts the financial ability to make mortgage
payments –noting it happens with high-priced houses, too. It happens to people living on the
edge. During the 2008/2009 recession, the default rate on regular homes in all kinds of
securitized deals was many times more than what happened at Clayton Homes.

Turning to 3G management practices, Buffett said 3G people are successful in building

marvelous businesses. They entered into purchases where there were more people running the
business than needed. After a reduction of people needed, the companies did well. Burger
King outgrew its competitors by a significant margin. Buffett stated, “I don't know any company
that has a policy that says we will have a lot more people than we need. I hope our Berkshire
Hathaway companies are not being run with more people than we need.”
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie agreed that businesses need to be right-sized. He explained what happened in Russia.
Some workers said, “They pretend to pay us, and we pretend to work.” With that approach, an
economy does not work. Charlie concluded, “Of course, we want the right number of people in
the right number of jobs.”

Buffett recounted that in the past, 1.6 million people worked in the railroad business which was
a lousy business. Today, less than 200,000 folks work in the railroad business, which is now
carrying more freight, covering more distance and doing it in dramatically safer conditions.
Buffett concluded, “Efficiency is required over time in capitalism. I tip my hat to the 3G people.”

In another question on whether 3G management methods were congruent with Berkshire’s

methods, and whether 3G management would cut jobs at Berkshire if they managed Berkshire’s
business, Buffett commented that GEICO, with 33,000 employees, is run just as efficiently as
3G. They don’t believe in having extra people around. Buffett noted that Berkshire newspapers
had to cut back employees, and that Berkshire cut back employees in the textile business in the
early days of the company. Buffett acknowledged that some Berkshire businesses may have
more people than needed, but they do not believe in running fat operations. Berkshire’s owner
manual never endorses running a business at a loss to have excess people around. Buffett
boasted, “Our corporate office has 25 people!”

Charlie grumbled, “We've almost exhausted this topic. Waves of layoffs frighten people. What
would our country do if we kept everyone on the farm?” Businesses need to be right-sized.

VAN TUYL ACQUISITION

Buffett was asked whether Van Tuyl will need to adapt to a new mode of selling cars versus the
traditional dealership model of selling cars.

Buffett responded, “If change is required, it will be made.” The one-price selling method has
been experimented with before with no negotiating and no haggling. When you implement that
system for some reason it breaks down. Negotiation is going on in a lot of businesses. Van
Tuyl will adapt to what the customer wants. There is no problem at all if the world goes in that
direction. However, Buffett noted he wouldn’t be surprised if the system remains the same for
the next 5-10 years. He thinks Berkshire Hathaway Automotive, the new name for Van Tuyl, will
be quite profitable and important to Berkshire Hathaway. Buffett noted that people want to
negotiate when dealing with a big ticket item, whether it is cars, jewelry or real estate. He
concluded, “We will do fine, whatever direction it goes.”

Answering another question on the synergies of acquiring more dealerships, Buffett said there
are not huge advantages in owning lots of dealerships. Running dealerships well is a good
business. Dealerships are local businesses with 17,000 dealers in the country. Berkshire will be
buying more dealerships but on a local basis. You don't widen profit margins by having 1,000
dealers vs. having 100 dealers or having just one. While Berkshire is able to borrow money at a
low price, they do not plan to be in the auto finance business. Wells Fargo has a huge
advantage as the largest provider of auto loans. Berkshire can’t come up with money as cheaply
as the banks. They just hope that they run the local auto dealer operations very well.
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie added that Van Tuyl has a system of meritocracy--getting the right people into power
and ownership. He said Van Tuyl and Omaha-based Kiewit are “kissing cousins” in terms of
culture. They both have a very good thing going for them with the right people prospering.

***

In a related question on whether there may be national synergies between Van Tuyl and
GEICO, Buffett said he didn’t think so. Most of the time synergies do not work especially with
auto dealers and insurance. If Berkshire were to try and create synergies, they would probably
have to compensate people that made the insurance sales. GEICO is a wonderful low-cost
business model with its success dependent on delivering low costs and first-class service. The
two companies will do better operating independently.

Charlie said. “I agree it's a dumb idea and we are not going to do it.”

CHARACTERISITCS OF A GOOD COMPANY

A shareholder asked if there were five characteristics of a company that gives one confidence to
predict its earnings 10 years out in the future?

Charlie responded, “We don't have a one-size fits all. Every industry is different. We keep
learning. What we did 10 years ago, we hope we are doing better now. We can't give you a
formula.”

Buffett added that many items are considered before making a purchase. Most of their filters
stop them from buying a business. Very different filters apply to different business, but they try
to get a reasonable fix on what the business will look like in 5-10 years. It's not the same five
questions. However, one question is, “Do we really want to be in a partnership with the
management of this business?” If not, that will stop any further consideration. Buffett laughed,
“We don't have a list of five. If we do, Charlie has kept it from me.”

***

In response to a similar question, Buffett said he looked for companies where he thought he
could understand what their future was like. He added, “We had to know our limitations. We
stayed away from a lot of things.” At the time, prices were different. It was a much easier
decision than it is now. During the early years, Buffett said, “We kept reading and thinking,
looking at things that came along, and in those days we were capital constrained. We usually
had to sell something if we were to buy something else. We probably leaned toward things that
we were certain to get a decent result than hopeful of getting a billion dollar result.”

With regard to the GEICO acquisition, Charlie added, “We had some good fortune. Not every
20-year old was going to buildings in Washington. We made some of our luck.” “Getting your
own nose whacked hard also helps,” he chuckled.

Buffett agreed noting that they thought they knew more than they did about the Baltimore
department store business that did not work out well for them. He stated, “We've had a lot of
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

experience with bad businesses which sharpens your ability to make a distinction between good
and bad ones. If you enjoy what you're doing, you're likely to get better results.”

Charlie concluded, “We owe a considerable amount to the families we were raised in.”

CONVINCING EARLY INVESTORS

A similar question asked, “How were you able to persuade your early investors besides family
and friends to overcome doubts and fears and believe in what you're doing?”

Buffett joked, “We didn't do very well prior to getting a winning record. I started selling stocks
when I was 20. I looked like I was 16 and behaved like I was 12.” People joining Buffett early on
as investors were family and friends. They had faith in him. His father-in-law was a dean at the
University of Omaha and gave Buffett everything he had to manage. They knew he had done
reasonably well by 1956. He had about $175,000 at a young age so they figured he was doing
something right, and they gave him their money. Ben Graham was winding up his partnership
and recommended Buffett to his investors. A year or two later, a doctor family friend called and
introduced Buffett to Charlie. At the time, Charlie was practicing law. Buffett told him law was all
right for a hobby, but a lousy business.

Charlie stated matter-of-factly, “Of course, that's the way you start [with family and friends]!”
The people that avoided being “perfect idiots” and followed the Graham & Dodd investment
path have all done well.

IBM

Charlie was asked if he tried to talk Buffett out of buying IBM.

Charlie emphatically said, “No!” He added that Berkshire has owned lots of companies with
temporary reversals, and that IBM is a very interesting company. It’s very rare when technology
changes comes along that people adapt as well as IBM. Personal computers have been a
mixed bag. However, IBM is an enormous enterprise and admirable.

Buffett said, “When we bought IBM, it was a 2-0 vote.” Buffett noted that they get asked
questions about investments we own. However, they have no interest in encouraging other
people to buy what they buy. He asked, “Why would we want the stock to go up if we're going
to be buying more in a year or so?” He joked, “If we were talking our book, we would say
pessimistic things about our Big Four investments as they all are buying back their shares.”

In classic Charlie fashion, Charlie chimed in with this zinger, “If people weren't often wrong, we
wouldn't be so rich. “

INSURANCE SUCCESS AT BERKSHIRE

Buffett noted he had three pieces of extraordinary luck in establishing a successful insurance
business at Berkshire:
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

1) When he was 20 years old, he traveled to Washington DC on a Saturday morning and

banged on GEICO’s door until a janitor opened the door. The only fellow working there
was Lorimer Davidson, the CEO, who was willing to spend four hours with a 20-year old
kid, explaining the insurance business to him. Buffett said he couldn't have gotten better
lessons than that in business school.
2) In 1967, Jack Ringwald got mad about something and wanted to sell his company. That
is how Buffett bought National Indemnity. He said he couldn't have done it an hour later
as Ringwald would have likely changed his mind as he had done in the past.
3) In the mid-1980s, on a Saturday, a guy came in the Berkshire office looking for a job,
who had never worked in the insurance business. Buffett hired Ajit Jain and asked how
lucky can you get?

Buffett asked what are the odds of pulling off a trifecta like that? The insurance business was in
a sweet spot of a business Buffett could understand. He said it is important to keep yourself
open to good business ideas as they come along.

Charlie added that Berkshire created its reinsurance business in Omaha, and it has turned into
a huge business.

BERKSHIRE CULTURE

When a German investor asked how Berkshire’s culture will be maintained, Buffett simply
stated, “You will be pleased with Berkshire’s culture after we are gone.” Berkshire’s culture runs
as deep as could be in any large company. Buffett explained how Berkshire recently closed on a
German transaction in which the family lovingly built a business over 35 years that owned retail
shops, dealing with motorcycle owners. After the husband died a couple years ago, the wife
wanted to sell to Berkshire Hathaway because of its culture. That wouldn’t have been the case
30-40 years ago because Europeans would have been unaware of Berkshire’s culture.

It is a vital part of Berkshire Hathaway to have a deeply embedded culture. It is even reflected in
Berkshire shareholders, where 97% of them voted against a dividend. Berkshire directors also
reflect the culture as they see their role as a great opportunity for stewardship, rather than
serving as directors for the money. People who join Berkshire believe in the culture. People
that shun Berkshire don't believe in it. Buffett is “virtually certain” that Berkshire’s culture will
continue and become stronger as it has become self-reinforcing over the years. It's
institutionalized. No one will doubt that it will last for decades.

Charlie added that Berkshire has had a hard time buying companies in Europe. Traditions are
different in Europe than in the U.S. and some other countries. Germany has a long tradition of
being good at technology and capitalism. Charlie stated, “We admire the way Germans have
performed. They work fewer hours and produce a lot more. Of course, Warren and I are pretty
good at that. We admire the Germans, particularly the engineers.”

Buffett agreed but said that he thinks Berkshire is now more on the European radar screen as a
potential acquirer than they were a few years ago. He said he’d be surprised if Berkshire
doesn’t make more deals in Germany within the next five years. He said Berkshire needs a
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

business they understand. Berkshire has the money, and European prices may be a little more
attractive. There's a reasonable chance something might get Buffett’s attention in Europe given
comparatively more attractive valuations than in the U.S.

Charlie added, “Berkshire will do fine after we are gone. In fact, it will do better in dollar terms.
We will never gain as much in percentage terms as we did in the beginning years. There is a
worse tragedy than having Berkshire’s growth slow a little.”

Buffett laughed, “Name one!”

****

Buffett responded to another question on culture, by saying culture is everything at Berkshire.

He added, “Berkshire isn’t a monastery, but I can guarantee that Charlie and I and the other
managers are more concerned about getting a good job done for Berkshire than what they get
out of it themselves.” Culture has to come from the top. It has to be rewarded when followed
and punished when not. It has to be reinforced over the years. It takes a long time to become
solid. It is like a grain of sand over time, just like a child following a parent’s behavior. It’s much
easier to do it if you inherit a culture you like. It is also easier to establish a culture in smaller
companies.

Buffett noted that they have over 340,000 people working for Berkshire. There's some 12, 15,
maybe 100 folks that are doing something they shouldn't be doing. As soon as a manager finds
out about it, they have to do something about it. He recounted how when Berkshire bought Kirby
vacuum cleaners, there were sales practices they didn't like, particularly with older people.
They changed the policies so that if you were over 65 and you bought a Kirby, and for any
reason you didn't like it, you’d get all of your money back.

GEICO will settle millions of claims. When two people are in an auto accident, they don't agree
100% of the time on whose faults it is. Buffett noted that Berkshire is far from perfect, but in all
activities they try to behave as if their roles were reversed.

Charlie added that they always are dissatisfied with what they do. The ability to keep learning is
what makes the culture work. He concluded, “If we stayed frozen in time, particularly Warren, it
would have been a terrible place.”

SUGAR CONSUMPTION

With society attuned to greater sugar consumption in rising health costs, Buffett was asked
whether this was narrowing the moat around Coke, Heinz and Kraft.

Buffett answered that Coke has an enormously wide moat, despite current trends. Buffett said
1.98 billion 8 oz. servings of Coke products were consumed in the world today. All food and
beverage companies will adjust to expressed preferences of consumers as they go along. No
company does well ignoring consumers. Twenty years from now, there will be more Coke cases
consumed than there are now. In the 1940’s, folks also said Coke’s growth was over. In 1988,
when Berkshire bought its Coke shares, people again were not enthused over the company’s
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

profitability. Buffett noted that a quarter of the calories he consumes each day come from Coke.
He joked, “If I’d been eating broccoli and Brussels sprouts, I wouldn't have lived as long. It
would be like going to jail when I approached meals.”

Charlie said sugar is an enormously helpful substance that prevents premature softening of the
arteries. He dryly added, “If it shortens my life, I’ve avoided a few months dribbling at a nursing
home.”

Buffett remarked, “I have enjoyed every meal I had except at my grandfather's when he made
me eat those damn green vegetables.” Buffett noted while there have been shifts in
preferences for food; it is remarkable how durable some foods are. Berkshire Hathaway was the
largest shareholder of General Foods 30-plus years ago. Those same terrific brands are at
Kraft today. Heinz brands go back to 1869. Ketchup came out in the 1870s. Coke brands go
back to 1886. It's a pretty good bet a lot of people will like the same things decades from now.
Buffett joked, “When I compare drinking Coke to something that someone would sell me from
Whole Foods, I don't see smiles on the people at Whole Foods.” Buffett concluded, “I like the
brands we are buying.”

STOCK MARKET VALUATION

A shareholder noted that several valuation metrics Buffett has mentioned before such as market
capitalization as a percentage of GDP and corporate profits as a percentage of GDP are at high
levels. He asked if Buffett thought overall stock market valuations were too high?

While profits/GDP might be a concern for segments of society, Buffett remarked that American
business has done well in recent years, despite the “terrible” disadvantage of U.S. tax rates
claimed by many companies. The fact is American business has prospered incredibly. The
stock market capitalization/GDP is very much affected by the fact we live in an interest rate
environment that many would have thought was impossible with extremely low interest rates in
the U.S. and negative interest rates in Europe. Profits are worth a whole lot more if the
Government bond yield is 1% than if the yield were 5%. The opportunity cost is owning bonds
earning practically nothing or stocks. Investors need to look at stock values in the context of a
world with incredibly low interest rates and determine how long low interest rates will likely
prevail. If interest rates remain low for decades like they did in Japan, stocks will look cheap. If
interest rates revert to normal levels, stock valuations would appear high.

Charlie asked, “Since we failed to predict what did happen, why would anyone ask us what our
prediction is for the future?”

Buffett said they don’t make deals based on macro factors. He can't recall a time ever where
Berkshire turned down an acquisition due to macro factors. He said, “We know we don't know
what the next 12 or 24 months will look like.” It really doesn't make a difference if Berkshire is
holding a good business. The important consideration in making acquisitions is determining
how strong the competitive moat of the business is and what will be the profitability over time.
He joked, “We think any company that has an economist has one employee too many.”
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

RAILWAY SAFETY

Buffett was asked about new government regulations on transporting crude oil by train and
improving the safety of tank cars.

Buffett responded that the rules came out two days ago, and he had not read the 300 pages yet.
He said Berkshire has an interest in developing safer cars. As a common carrier, BNSF is
required to carry things they may not like to carry as these products have to be transported. The
most dangerous kinds of things BNSF carries include chlorine and ammonia, which are more
dangerous products to carry than oil. Buffett said that probably everyone will be somewhat
unhappy with the new rules, but it is up to the government to develop rules for transportation.
Transporting by pipeline has problems and transporting by rail has problems. BNSF’s safety
figures get better year after year and lead the industry. Derailments will still occur as nothing
will be perfect.

Charlie added that Burlington Northern, Exxon and Chevron have a lot of engineers that know
how to make things safer. Safety will be improved consistently and should be. Buffett added
that Berkshire Energy has an extraordinary safety record.

Charlie recounted how after Berkshire bought the Omaha pipeline, they watched Berkshire
employees work day and night improving safety. Buffett exclaimed, “We went from last to first or
second!”

INSURANCE COVERAGE FOR RAILROADS

Given concerns over rail accidents in urban areas, Buffett was asked if Berkshire offers
insurance coverage to the railroads.

Buffett said Berkshire’s reinsurance unit went to four major railroads offering high limits,
something like $5-$6 billion, in excess insurance coverage. There's no question, if you have the
exact wrong circumstances, the possibility exists that a worst-case scenario can happen. To
minimize risks, regulations require that trains run slower in urban areas with speed limits
brought down to 35 miles an hour. While the industry is always working to be safer, it will never
be perfectly safe. While BNSF has some insurance, Berkshire has the capability to handle any
loss that comes along. Berkshire is more likely to offer insurance to other railroads. However,
the other railroads did not like the rates Berkshire offered and have not bought it.

Buffett said Berkshire will not be buying 5,000 rail cars. The Marmon operation has taken on
new facilities. They will be working three shifts on retrofitting rail cars and manufacturing new
cars. The industry has been waiting to see what the new regulations will require. During the first
quarter of 2015, practically no tank cars were ordered. Historically, the railroads have never
owned tank cars, but instead leased them. This will likely continue.

SUBSIDIARY COMPANIES

Buffett was asked about the recent movement of subsidiary companies within Berkshire
insurance units.
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Buffett responded that they have a huge chunk of capital at National Indemnity. Berkshire
moved certain subsidiaries up to the parent company as an extra layer of capital there makes it
simpler in keeping all money invested.

GENERAL ADVICE TO YOUNG INVESTORS

When asked by a young investor what advice would you give to someone trying to network with
influential people, Charlie curtly said, “Do the best you can.”

When asked how to go about building a good reputation, Charlie said it takes a long period of
time to build a good reputation. Most of us have to acquire it slowly. There is hardly anything
more important than behaving well as you go through life.

Buffett said when you get old, you'll have the reputation you deserve. For a while you can fool
people. The same applies to companies. A good reputation has helped Berkshire a whole lot.
Berkshire has earned the reputation to be a somewhat different company. It has worked out
that way.

When asked by a young investor how do you make lots of friends and get people to like you and
work with you, Charlie laughed, “I was pretty obnoxious when I was your age and asked
impertinent questions. The only way I could get people to like me was to get very rich and very
generous.”

Buffett joked, “Both Charlie and I were on the obnoxious side early on. I had some pretty good
teachers. They were people I admired. If you want to be admired, take on some qualities of
those you admire. Look around you at the people you like in your school, write down those
qualities. Decide to be like a person that you like. If you don't like things in other people, get rid
of that in yourself.”

Buffett added when picking a marriage partner, the most important thing is not to look for
intelligence or humor, but look for someone with low expectations.

With household formations below par, a shareholder asked if this was a secular change or a
cyclical change. Will the U.S. become more like Europe where young folks live with their
parents?

Buffett said it was more likely a cyclical change. Household formations have turned up. They
always turn down during recession.

Charlie chuckled, “I have some grandchildren that I wish would marry someone suitable
promptly.”

When asked a question on saving, Charlie retorted, “If you don't know how to save, I can't help
you.”

Buffett said you need to develop good saving habits early on. They make an enormous
difference in your life. Berkshire’s goal is to present good saving habits in an entertaining way
to young kids through a cartoon series, and he think it's actually having a good effect.
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Encouraging good habits in your children early on with respect to money can change their lives.
You can't start young enough on working on good money habits.

ASIAN INFRASTRUCTURE INVESTMENT BANK

A shareholder noted that currently the U.S. is not a member of the Asian Infrastructure
Investment Bank while many European countries are. The shareholder wanted to know how
that will impact U.S. multinational companies.

Buffett said he knew nothing on the subject and added, “Let's hope Charlie knows something
about that.”

Charlie grunted, “I know less that you do.”

DOLLAR AS A RESERVE CURRENCY

Buffett said he thinks the U.S. dollar will be the world's reserve currency over the next 50 years.

Charlie said he is more nervous than many about the U.S. printing so much money and
spreading it around in a helicopter.

BERKSHIRE HATHAWAY BRAND

Berkshire Hathaway has been rebranding many units like their energy, home services and auto
units using Berkshire Hathaway in the name. Buffett was asked whether this could lead to
reputational risk and whether Fruit of the Loom would be next and become Berkshire Hathaway
undergarments?

Buffett acknowledged that they did create a Berkshire Hathaway home service operation, which
is a franchise operation. Two years ago, they acquired 2/3 of the Prudential real estate
operations with a contract to buy the remaining 1/3 of the operation. Since Berkshire was going
to lose the right to use the Prudential name over time, they rebranded the operations with the
Berkshire Hathaway name. Greg Abel asked about using the Berkshire Hathaway name for the
diverse energy operations. With the Van Tuyl auto dealerships also being franchise operations
around the country, it made sense to rebrand that operation using the Berkshire Hathaway
name. Buffett said if they started hearing abuses from individual franchises, they would yank the
Berkshire name from them to avoid any reputational risk. He had no ideas to make Berkshire
Hathaway a household name. He added many of their companies use the tag line, a Berkshire
Hathaway company. He said the Berkshire name will not turn into a huge asset.

Charlie added that brand names are worth a lot of money, but they would be crazy to try and
sell Berkshire Hathaway peanut brittle instead of See’s Candies, which has great value in their
brand.

Buffett noted there will always be fights between retailers and brands. The brand has to stand
for something in the consumer's mind. Private label has been around forever. Buffett recalled
when Sam Walton sent him the first six-pack of Sam's cola. A brand needs to be nourished.
RC Cola came up with the first diet product in the ‘60s. Despite private brands, Gillette ends up
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

with 70% of the dollar value of razors thanks to their strong brand. It is important to protect the
brand in all ways. The great brands will survive.

RENEWABLE ENERGY

Asked whether distributed energy will be a threat to Berkshire’s utilities, Buffett said distributed
energy is something Berkshire pays a lot of attention to. The best defense is to have very low
cost energy. MidAmerican has done a very good job of that. The figures in terms of people who
converted to solar energy are minuscule. Huge improvements in solar storage would make a
difference.

Charlie said we will use a lot more renewable energy. Fossil fuels won't last forever. Berkshire
is aggressive and very well located in terms of renewable energy. To have 20% of power in
Iowa coming from the wind is very desirable. Farmers like the extra income they get from wind
power. While we need better storage, the technology has been improving. Renewable energy
is not a threat but a huge benefit to humanity and to Berkshire. Charlie asked, “What the hell
would we do when the fossil fuels are gone if we didn't have this?” There will be some
disruption but more opportunity.

Buffett asked Greg Abel, the head of Berkshire Hathaway Energy (BHE), to comment on the
topic.

Greg said Berkshire Hathaway Energy recently announced their 10th wind project in Iowa, with
58% of the energy that they provide to Iowa customers coming from wind in 2016. BHE now has
more than $18 billion committed to renewable energy capital expenditures. At NV Energy, they
are committed to retiring 76% of their coal by 2019 and replacing it with renewable energy.
Distributed generation will bring great opportunities to Berkshire which will embrace it.

Buffett explained that wind and solar power at present are dependent on tax credits. The
market system would not produce solar or wind under today's economics. Because Berkshire
Hathaway Energy is part of Berkshire Hathaway’s consolidated tax return, it has been able to
invest far more money in renewable energy than other utilities to take advantage of the tax
credits. Among electric utilities in the U.S, MidAmerican Energy is very well situated.

MOST MEMORABLE FAILURE

Buffett was asked to reflect on the last 50 years and describe Berkshire’s most memorable
failure?

Buffett explained that he has discussed it many times in the annual report. Back in the mid-
1990s, he acquired Dexter shoe business for $400 million. The business value eventually went
to zero due to competition. Even worse, Buffett paid for Dexter with Berkshire stock that would
be worth $6-$7 billion today. He joked that he now likes to see Berkshire stock go down due to
his stupidity. He said nobody at Dexter misled him in any way. He simply came up with the
wrong answer. He added, “Any time we issued shares, it has been a mistake, right Charlie?”

Charlie agreed and said that is why they don’t do it much anymore.
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Buffett said another failure was that they probably could have pushed harder in earlier years.
However, they had all of their own net worth and their families’ and friends’ net worth in the
company. He said they have been very cautious in what they have done. They could have
stretched a little. However, he said he would rather be 100 times too cautious and miss
opportunities rather than take a 1% chance of wiping out his family’s net worth. People looking
at Berkshire’s past will say they missed some big opportunities.

Charlie agreed by saying, “If we had used leverage, Berkshire would be a lot bigger. But we
would have been sweating at night. It's crazy to sweat at night.”

Buffett quickly quipped, “Over financial things!”

INFLATION

When asked about inflation, Buffett said he has been very wrong about interest rates. He would
not have predicted that we could have 5 or 6 years with such low interest rates and/or negative
rates. He added that 2%-3% deficits are sustainable, which is where we are now. However, the
Federal Reserve has expanded its balance sheet from $1 trillion to $4 trillion since the financial
crisis. So far nothing bad has happened other than savers have been killed by low interest
rates.

He said, “We are operating in a world that Charlie and I don't understand. Berkshire will do
better than most companies. We are prepared for anything. If we see unusual opportunity, we
are prepared to act. We are sitting with over $60 billion in cash now. We will be very willing to
act if economic turbulence of any kind occurs.”

Charlie said, “We have made very little progress in life trying to outguess macroeconomic
factors.” He added that the trouble with making economic pronouncements is that people think
they know something. He snorted that it is better to say, “I’m ignorant.”

Buffett concluded that Berkshire is prepared psychologically and financially no matter what
happens.

***

A related question asked which businesses are the best to own in an inflationary environment.
Buffett responded the best business is one that you buy once and subsequently do not have to
keep making capital investments. Real estate in general is a good example. If you built your
own house or bought one 55 years ago, it was a one-time outlay. You then get an inflationary
expansion in value. At businesses such as utilities or railroads, they keep eating up more
money with depreciation charges inadequate during inflationary times. Any business with a
heavy capital investment tends to be a poor business generally. A brand is a wonderful thing to
own during inflation. See’s Candies built their brand years ago. The value of a brand increases
during inflation, as do any strongly branded goods. Gillette bought the entire radio rights to the
World Series in 1939 for $100,000 when they broadcast the Yankees vs. Reds. Impressions of
Gillette products were made during the Series that lasted for decades. A great investment that
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

was made in 1939 dollars paid off in 1960-1980 dollars. Similar impressions on millions of minds
now would cost a fortune.

Charlie agreed but said if inflation ever gets completely out of control, we have no idea how it
would end up. The twosome of great inflation followed by the Depression brought us Hitler. He
stated, “We don't want inflation because it’s good for See’s Candies.”

DEFERRED TAXES

Buffett was asked if Berkshire’s $37 billion in deferred taxes should be viewed as permanent
float. Buffett said that Berkshire’s unrealized appreciation of securities is part of the deferred
taxes. These gains could be realized over time. Accelerated depreciation has been around a
long time in the utility business. Because of deferred taxes, less money goes out the door so
Berkshire does not have to borrow as much. However, Buffett doesn’t think Berkshire benefits
enormously from deferred taxes. It is not a hidden form of equity.

Charlie added that if corporate tax rates change, it would be a book entry and not mean much.

Buffett concluded that the float from the insurance business is a terrific asset but deferred taxes
not so.

TELEDYNE AND HIDDEN INCENTIVES

Buffett was asked what he learned from the unwinding of the Teledyne conglomerate. Buffett
said he learned a lot from watching Henry Singleton, the CEO of Teledyne.

Charlie added that Singleton was a lot smarter than either of them. He played chess blindfolded.
However, Buffett did better than Singleton in investing as Buffett was always thinking about
securities. Charlie laughed, “Warren was able to get by with his horrible deficit in IQ to
Singleton.” Singleton had very clever incentives for key executives. In the end, he had three
different departments get into scandals. They went too far in dealing with the government due to
the wrong incentives being put into place.

Buffett added that they believe in the power of incentives. However, they try to avoid hidden
incentives that make people misbehave. He noted that they have seen more than once really
decent people misbehave because they felt there was a loyalty to their CEO to deliver certain
numbers. At Berkshire, they try to eliminate incentives that would cause people to misbehave
for financial rewards or ego satisfaction.

Charlie noted at the end, Henry wanted to sell Teledyne to Berkshire for Berkshire stock. He
chuckled, “He was smart to the end.”

Buffett recounted a story about Jack Ringwald of National Indemnity, who was a marvelous
man. Ringwald’s good friend and tennis partner at the firm was in charge of processing claims.
When his friend would come into Jack’s office to tell him he had received an insurance claim of
$25,000, Jack would start berating the fellow by telling him the claims were killing him. Jack
was joking, but the fellow started hiding the claims because he didn’t want to face the tirades
they caused. This caused the company to misreport its results. The fellow had no financial
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

interest to misbehave, but he just didn't like Jack kidding him about failing him. Managers need
to be careful about the messages they send employees. If you tell your managers you never
want to disappoint Wall Street, they start fudging figures. Berkshire tries to avoid all that.

***

In a related question on setting incentives to encourage long-term thinking, Buffett said they run
Berkshire by thinking of the next 100 years. The managers know they are making decisions for
the long term. While they don’t ignore the short tem, they know what really counts is where the
company will be in the next 3-10 years and not where it is now.

IS BERKSHIRE TOO BIG TO FAIL?

Buffett noted that European regulators are looking at insurers generally in terms of whether
they are systematically important financial institutions (SIFI), or in other words too big to fail.
Nine or so insurance companies deserve special attention. The Financial Stability Oversight
board is looking at large banks in the U.S. and companies like GE and Met Life. No one sees
other large companies like ExxonMobil, Apple or WalMart as SIFI. The definition of a non-bank
SIFI would be that 85% of revenue comes from financial matters. At Berkshire, only 20% of
revenues do. The real question is whether problems at Berkshire could destabilize the financial
system in the country. Berkshire has not been approached about being a SIFI, and there is no
reason in logical terms to think Berkshire would be designated as a SIFII. Berkshire will always
conduct their business in a way that the problems of others can't hurt them in a significant way.
During the financial crisis, Berkshire was the only party supplying help to the financial system
with their investments in Goldman Sachs and GE during the heat of the crisis. Berkshire is
unique in terms of the safety they have built into their operations in terms of cash and everything
else. It's a moot question. Buffett said, “I don’t think Berkshire Hathaway comes within miles of
qualifying as a SIFI.”

Charlie added that there is still too much risk in much of high finance. Trading derivatives is a
lot like running a bucket shop or gambling parlor. It is nonsense that derivatives help spread
risk. There is still danger in the financial system. He said, “Our competitors don't like it that
they deserve regulation, and we don't.” There is danger in that, too.

Buffett added that the new Dodd and Frank regulations actually weaken the power of the Fed
and Treasury in terms of the actions they took in 2008. Those powers were needed to keep our
system from going into utter chaos. It was important that folks believed the central banks when
they said whatever needs to be done will be done. The fact that people believed Hank Paulson
when he said money market funds wouldn’t break the buck due to government guarantees is
what kept the financial system from going down in a panic. You need someone to believe or
panics will accelerate like you wouldn't believe. Bernanke and Paulson kept the panic from
accelerating during the financial crisis. In the old days, banks would have to pile up gold outside
of the bank to prevent panic and runs on the bank. Dodd and Frank regulations weaken the
government guarantees terribly.
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

ONLINE WORKERS’ COMPENSATION INSURANCE

When asked about online workers’ compensation insurance, Buffett said they will find out what
the consumers want. Berkshire is experimenting with online workers’ compensation insurance.
He doesn’t think the channel conflict is a big problem. GEICO has done well with online auto
insurance. Berkshire also writes commercial auto insurance through GEICO. Selling insurance
changes over time. With GEICO, they went from selling auto insurance through direct mail to TV
and the phone and then to the Internet. The world moves on. The key in selling insurance is to
save people money and provide good service. Whatever method does that in the most effective
way will be what wins.

VALUE INVESTING IN CHINA

When asked if value investing applies to China where markets have doubled, Buffett said
investment principles don’t' stop at borders. The same investment principles should be applied
to investing in China or anywhere else. Investors should focus on looking at a stock as a
business and seek to own high quality businesses with competitive advantages over the next 5-
10 years. Investors should also look at volatility in the stock market as opportunities.

Charlie noted there is history of great volatility in the Chinese stock market. When things get
bouncy, China looks a lot like Silicon Valley. The more China copies the way Berkshire invests,
the better it will be for China.

Buffett advised young Chinese investors to stand back and value stocks as businesses. It's an
easy game if you can control your emotions. Invest when stocks are cheap and sell when others
become enthused. The Chinese market may be more speculative than the U.S. which lends
itself to greater extremes but this should produce greater opportunities.

Charlie said he thinks China would be wise to dampen the speculative booms. He added that
value investing will never go out of style. He asked, “Who in the hell doesn't want value when
you buy something? “ It looks easier, but it's harder.

Buffett said that investors should buy based on a long-term perspective. No one buys a farm
thinking they are going to make money on it the next week.

OPTIMISM ON THE U.S.A.

A shareholder asked Buffett how he remained optimistic on the U.S. with the risk of chemical,
nuclear, biological and cyber security problems, a term Buffett has sometimes dubbed as
CNBC.

Buffett admitted there are great threats to the U.S. but also noted that we have a terrific
economic system that unleashes the brains of the American people. People get upset because
we are just having 2% growth with 1% population growth. This country has a wonderful future.
However, It can all be nullified by mad men, sociopaths and religious fanatics who wish to have
access to weapons of mass destruction. We already have a huge number of people that wish
harm on the U.S. who will look for more ingenious ways to hurt our system. They will not go
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

away. We need an extremely vigilant security operation in the U.S. That's something we live
with. The luckiest person in the world is still the baby being born in the U.S. today. We live in a
country that will do successfully well if we ward off the threats.

Charlie noted that the U.S. is a favored nation and that we have lived in an ideal era. But we
should not get too smug, as China has come up faster than any nation. He cannot think of
anything more important than future collaboration between the U.S. and China. It's very
important that we have good relations, trust and work together to avoid bad consequences that
come from other people's mistakes. We'd be crazy not to collaborate for our general safety and
the benefit of the world.

MANAGEMENT SKILLS OF THE CHIEF INVESTMENT AND CHIEF EXECUTIVE OFFICERS

Buffett said a chief investment officer should have an array of skills. However, he would not vote
to put someone in charge of Berkshire whose sole experience is in investments. It is very
unlikely that the Chief Investment Officer will be the next CEO of Berkshire. The chief executive
officer also needs significant operating manager experience. Buffett said he has been a better
investment manager due to also being an operating manager and vice versa. If he had done
investments all his life, he would not have done as well.

Charlie added that the operating companies have become more important at Berkshire. It is
better to have a CEO with operational experience but also with a good investment
understanding.

TODD COMBS AND TED WESCHLER

Todd Combs and Ted Weschler are investment managers at Berkshire, and Buffett was asked
about their investment process. Buffett responded that both Ted and Todd are very smart about
business and investments. They understand reality and know competitive strengths. On top of
that, they have qualities of character that are important. Buffett has seen dozens of investment
managers with good track records. He cited Bill Ruane at the Sequoia fund, where a $10,000
investment grew into more than $4 million. He was a great investment manager and also a
terrific human being. You want people that do more than their share and don't claim credit for
things they don't do. Ted and Todd fit that bill.

Charlie added that Ted and Todd are already helping in the acquisition of businesses for
Berkshire and helping to oversee them.

Buffett said they both know the right way to deal with people. Todd was involved in the Phillips
66 deal and Ted with the recent German acquisition. Buffett stated he has run into other high
IQ people who are dysfunctional. They self-destruct in trying to make money they do not need.
Todd and Ted are trustworthy and identify more with Berkshire than themselves.

HEDGE FUND BET

As is customary before the lunch break, Buffett provided an update on the 10-year bet he had
with Protégé Partners, a hedge fund manager. The bet was that the S&P 500 Index could beat a
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

group of hedge funds carefully chosen for the bet, as Buffett did not expect their high fees would
be overcome by managerial brilliance. For the seven years ended 12-31-14, Buffett is winning
the bet as the S&P 500 has provided a cumulative 63.5% gain vs the 19.6% gain of the hedge
funds. Buffett noted that the hedge fund managers have not done badly, but their investors have
paid a big price.

INSURANCE ACQUISITIONS

When asked if Berkshire would make commercial insurance acquisitions, Buffett said Berkshire
will not take over a large commercial insurance company. They already have the ideal
commercial insurance business in Berkshire Specialty which has more capital than anyone else.
It can be a very big operation in 5-10 year.

Charlie added, “I certainly agree with you.” Buffett laughed, “That’s how he keeps his job!”

GLOBAL WARMING

Buffett was asked whether global warming is a risk factor for Berkshire’s insurance operations.
Travelers has cited climate change as a risk factor in their regulatory filings.

Buffett said the SEC requires companies to put risk factors in their regulatory filings. Lawyers
tell you to put in everything so that it all is covered in case of litigation. Berkshire prices their
property-casualty (PC) insurance every year. It is not like a life insurance company. If you buy
whole life insurance, you set a price for the future. PC insurance is set one year at a time.
Buffett sees nothing that tells him on a yearly basis that global warming is something to cause a
price change. It isn’t that global warming isn’t very important. It just does not change the
situation in anyway in a one-year period of time. If Berkshire were writing a 50-year wind storm
policy in Florida, then they would think about global warming in terms of potential hurricanes,
but it has no material effect on the next year. It's not something Berkshire would put in the 10K
as a threat.

Charlie added that he doesn’t think it's totally clear what global warming will be. There's a lot of
guesswork. It's not that global warming isn't happening. We can make all kind of crazy
extrapolations that are not necessarily true.

Buffett said, “I do not want our underwriters to be thinking about global warming, but who owns
the property. If you insure Marvin the Torch, the building is going to go regardless of global
warming.”

ENERGY INVESTMENTS

A shareholder noted that Berkshire has lost money on several energy investments such as
ConocoPhillips and ExxonMobil. These are cyclical businesses. The shareholder asked whether
future energy investments should be done by Greg Abel, CEO of Berkshire Hathaway Energy
(BHE).

Buffett said BHE has energy in their name, but they are really in a different business than
ConocoPhillips or Exxon. BHE is looking for an opportunity to spend big money on energy and
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

will do so in the future. When Buffett offered to buy MidAmerican in 1995 for $35 per share, he
told them he didn’t change his offer prices. They continued to negotiate hard and said you have
to give us something. Buffett agreed to pay $35.05 per share and told them they could say they
got the last nickel out of him. Today, BHE earns $30 per share, and it will earn $35.05 per
share before too long.

BHE is not at all analogous to the other two energy investments. Berkshire wrote the
ConocoPhillips investment down, because auditing rules required them to do so. Berkshire
actually made a little money on the investment as well as on ExxonMobil. Berkshire will not
very often buy oil and gas stocks and has not distinguished themselves on oil and gas stock
investments. Buffett will look at available opportunities and make decisions on buying
something and sometimes he will change his mind. Berkshire has made a little money on oil
and gas stocks and has passed up one or two other opportunities where they could have made
a lot of money.

Charlie added that the ExxonMobil investment was not a bad cash substitute with interest rates
so low.

TAX CODE

When asked if the U.S. needs a simpler tax code, Buffett said it takes 218 members of the
House and 51 US Senators to make the change and the President to sign the legislation.
Despite current tax rates that all the corporate chieftains complain about, the share of corporate
profits to GDP is at a record. Corporate taxes 40 years ago were 4% of GDP and today they
are now running about 2%. Buffett thinks Congress is capable of working out something to
make the tax code more rational. If spending is 21%-22% of GDP, we should raise 19% of GDP
in taxes. We can run a 2%-3% deficit. However, if you take 19% of a $17.5 trillion economy,
you're talking real money. How much you get from where is a fight up the line.

In terms of cash parked abroad, companies can bring it back to the U.S., but they will have to
pay the corporate tax rate on it. Buffett thinks there can be a much more equitable tax code in
terms of corporate tax. However, he would not shed tears on the current corporate tax rate as
American businesses are still prospering. Paying 2% of GDP is not an onerous number, when
corporations are earning 15% on tangible equity. Equity holders are being treated well,
especially in comparison to savers who are only getting ¼% or ½% on CDs.

Charlie added that he lives in California, where there's a 13.5% tax on capital gains. He thinks
that’s ridiculous as it is driving rich people out of California. Hawaii and Florida have enough
sense to know that rich people don't commit a lot of crimes, they make a lot of medical
expenditures and they don’t burden the public school systems. He asked, “Who the hell doesn’t
want rich people coming into their state and spending money?” He concluded that California
has a stupid tax policy, but he doesn’t think the federal tax policy is bad at all.

Buffett said he thinks there is a good chance for corporate tax reform within a year.
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

WEALTH OF NATIONS

When asked what he learned from reading Wealth of Nations, Buffett said he learned
economics from it. Bill Gates gave Buffett an original copy of the book. Buffett said if you read
Adam Smith, Keynes, Ricardo, and “Where Are the Customers’ Yachts,” you will have a lot of
wisdom.

Charlie added that Adam Smith has really worn well. He is one of the wisest people that ever
came along. He demonstrated the productive power of the capital system. The lesson was
really learned when communism failed so spectacularly.

Buffett agreed saying the power of capitalism has improved productivity. The idea is that you let
other people do what they do best at and stick to what you're best at. You should work in the
field that is most productive for you.

Charlie agreed by noting that Buffett did not do his own bowel surgery.

GEICO

When asked questions about the actuarial models used at GEICO, Buffett said GEICO can beat
other insurance quotes 40% of the time. No company will be the lowest in all cases. Berkshire
has their own underwriting variables. Age is one of them. Competitors use different variables
or use different underwriting weightings. When evaluating drivers, GEICO knows 16-year-old
boys are as bad as you will get to insure. 16-year-old girls don't tend to show off. GEICO will
come up with different rates than competitors. GEICO gives out quotes on the phone every
week and provides the lowest quote most often. Since GEICO has only 11% of the market, they
have lots of future policyholders to gather. Buffett proclaimed, “It is definitely worth 15 minutes
to call GEICO. “

ALTERNATIVE INVESTMENTS

An investor noted that reinsurance has changed over the years and is now considered an
alternative investment and asked Buffett what he was planning to change or to do to take
advantage of the situation?

Buffett joked, “Wouldn't our competitors like to know?!” He admitted that there's a lot of capital
that has come into reinsurance, and as a result, the reinsurance business is not as good as it
was due to less attractive pricing. It's a fashionable asset class. It’s something you can sell
people. It has become a non-correlated asset that has been sold to pension funds. You can go
to Bermuda and run a hedge fund and sell reinsurance. The reinsurance business in the next 10
years will not be as good as it has been over the past 30 years. The business prospects have
turned for the worse, but there is not much Berkshire can do about it. However, there are
certain deals that only Berkshire can do. There have been eight $1 billion reinsurance deals
over time, and they all have been done by Berkshire.

Charlie added that competition is getting more advanced with promotional finance searching for
a robust narrative.
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Buffett agreed, saying Berkshire could have the opportunity to go out and be promotional with
their reinsurance since they have the best reputation in the field. However, that is not
Berkshire’s game.

NETJETS

Buffett was asked to comment on the lengthy dispute with the NetJet pilots who were picketing
outside.

Buffett said NetJets is a good business. The pilots have a good job. NetJets sells planes to
owners. The investment is held in large part by the owners themselves. At Berkshire they have
had hundreds of labor unions over the years. In 50 years, Berkshire has had three strikes that
he could remember: one in the textile business, one at the Buffalo News and one at See’s
Candies. He said Berkshire has no anti-union agenda whatsoever. NetJets has sensational
pilots. Buffett has flown NetJets for 20 years. It's human nature to have differences in opinions
on salaries. The average NetJets pilot makes $145,000 a year working seven days on and
seven days off. They also are paid for their time to get to their bases. They get paid well
compared to competitors. It's understandable that employers/employees will have differences
from time to time. NetJets’ volume is up in terms of flying. It's a first class operation that is
focused on safety with their pilots getting more training than others. Buffett said the contract will
get settled.

Charlie added that NetJets pilots are wonderful, dutiful and no one ever indicated that he was
dissatisfied with his life. Charlie said, “I’m not sure the union is fairly representing the pilots.”

DURACELL ACQUISITION

A shareholder noted that the core Duracell battery business has been in decline. Buffett was
asked whether he would have done the deal without the tax considerations in swapping Procter
& Gamble-PG stock for Duracell.

Buffett said both PG and Berkshire Hathaway had tax advantages in doing the deal. Berkshire
held stock in PG for over five years. The exchange is somewhat similar to a real estate
exchange. However, Berkshire will not get a new tax basis on Duracell like in a 1031 real
estate exchange. Berkshire will keep the lower tax basis on Duracell. There wouldn't have been
a transaction if it wasn't for the fact of the exchange arrangement. The battery business will be
around for a long time, even though it is a declining business. Buffett expects Berkshire to do
fine with the Duracell business. The deal probably won't be completed until the fourth quarter of
2015. P&G couldn't be better to work with on the deal.

ESTATE PLANNING

When Buffett was asked about his prior comment of leaving kids enough so they can do
anything, but not enough so they can do nothing, Buffett said he promised to give over 99% of
his wealth to charity. The estate tax exemption has been moved up. He said estate planning is a
very individual thing, and he might have a different feeling if he were a small business owner.
When you get to figuring out what to do with your money, options are limited. As Charlie has
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

said, “There's no Forbes 400 in the graveyard.” Buffett said a bunch of stock certificates put in
a safe deposit box can't do anything for him in life as he has everything in the world he wants.
However, they have enormous utility to other people in the world. He asked, “Why should they
sit there for me or some fourth generation when they can do a lot of good now?” Everybody has
to develop their own feelings about it. Ask yourself where will your money do the most good? It
can be pretty dramatic for what it could do for millions of people. Buffet said he and Charlie like
their fairly simple lives.

Charlie said when the politicians changed the rules to increase the estate tax exemption to $5
million; it was a very constructive change in the law. We should not assume our politicians are
always crazy.

DISTRIBUTE EQUITY INVESTMENTS

A shareholder asked if it would be legally permissible for Berkshire Hathaway to distribute the
long-term equity investments to shareholders in the future.

Buffett said under the IRS Code, there’s no way a company can distribute appreciated securities
to shareholders. They can spin off business to shareholders.

CORPORATE PHILANTHROPY

When asked how corporations can increase their philanthropy, Buffett said shareholders should
determine their own philanthropic activities. He said individuals can determine how to give their
money to charity better than companies. While Buffett encourages all Berkshire companies to
continue their philanthropic work, he does not think it's his business to write a check to his alma
mater through company funds. Berkshire is a partnership. They had a system some years
back where shareholders could designate an amount to be given to the charity of their choice.
Berkshire had to give up the program when it adversely impacted some of their businesses.

Charlie added, “My case for giving away someone else's money is also quite restrained.”

EURO

When asked if the Euro has been positive or negative for Europe and whether France should
quit the Euro, Charlie said Europe had a noble goal in establishing the Euro, but it’s a flawed
system to put countries so different together. They have countries in there that shouldn't be
there. France is not the problem. The big strains are in Greece and Portugal. He wryly said,
“You can't form a business partnership with your frivolous, drunken brother-in-law.”

Buffett said European monetary policy was a good idea that still needs a lot of work. If there are
flaws, they need to face them. We wrote a Constitution that took a few Amendments. Buffett
said he doesn’t think the fact that the Euro wasn't perfectly designed should condemn it to being
abandoned. We could have had a common currency with Canada. We would have worked it
out. However, we couldn't have had a hemisphere-wide currency. Buffett actually thinks it is
desirable to have a Euro currency with rules applied consistently. There were rules on the Euro
originally that were broken early on by the Germans and French, not the Greeks.
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie noted that it was investment banker aided fraud that permitted some countries to come
up with the balance sheets to join the Euro.

Buffett said he thinks the Euro can survive, if they can figure out a way to conduct monetary
policy with more cohesion. In its present form, it will not work.

Charlie concluded the topic with “I think I've offended enough people.”

SILVER

When asked about the value in silver, Buffett said he does not follow the silver market much
anymore. At one time Berkshire owned silver, and Buffett knew about silver’s supply and
demand, but he hasn’t paid much attention to it for a long time. It is a small market.

Charlie chided, “It's a good thing. We didn’t do too well in it.”

ACTIVISTS BREAKING UP BERKSHIRE

When asked if activists would try to break up Berkshire in the future, Buffett said if Berkshire is
run right, there won't be a premium in breaking it up. Buffett does not think the value of the parts
is greater than the whole. There are a lot of benefits in terms of having the companies file the
same tax return. The best defense against activism is good performance. There has been so
much money pouring into activist funds in the last few years, that people are really reaching as
to the kind of companies they are talking about breaking up. Buffett’s shares will get dispensed
after his estate is settled. By that time, Berkshire’s market value will be so great, all the activists
combined won't be able to do much about breaking up Berkshire. Berkshire should be a place
where firms can dump their activists.

Charlie said there is more stupid stuff written and done by activists on urging companies to
repurchase their shares when the price is greater than the value. If you have a partnership, and
the partner wants to sell out to you at 120% of what it's worth, you wouldn't do it. However if
you look at the history of share repurchases, the activity falls off when stocks are cheap. Share
repurchase activity has become very contorted.

Buffett agreed. He said companies should use their capital to take care of their business needs
and only repurchase their stock when the price is trading substantially below intrinsic value. If
Berkshire were to trade at 1.2 times book value, Berkshire will buy back bushel baskets of
Berkshire stock, but not at 2.0 times book value, as it would not be worth that price.

Charlie ended the discussion. “It's hard to think of any activists that I want to marry into the
family.”

AMERICAN EXPRESS

When asked how American Express will protect its competitive moat given the impact of mobile
payments and the loss of Costco as a customer, Buffett said American Express will be subject
to lots of innovation and various modes of attack. It's a very special company. Ken Chenault,
the CEO, has anticipated changes and guided the company into different markets. There's a lot
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

of loyalty with American Express cardholders. Buffett is very happy with American Express. He
is happy when the stock price goes down, so American Express can buy back shares more
cheaply.

Charlie added, “I liked American Express a little better when they had less competition, but that
is life.”

Buffett described Berkshire’s history in owning American Express, noting they did wonders for
Berkshire back in the 1960s. American Express has an incredible history of adapting to change.
They established a better image for cardholders. They are very nimble and very smart in terms
of meeting challenges. Buffett concluded, “I’m delighted we own 15% of the company.”

UNWINDING DERIVATIVES

When asked whether he would consider unwinding his derivative investments early or paying
down debt with the vast amount of cash on the balance sheet, Buffett said he expects that he
will get calls that will put the cash on the balance sheet to work. The calls, however, occur
infrequently. If Berkshire could unwind the derivatives, they would do so, but he expects that the
contracts will unwind naturally. Berkshire has virtually no debt to pay down, and logically, they
should take on additional debt at these low interest rates.

Charlie said they would love to feel capital constrained, but that has not happened in a long,
long time. It would be glorious.

CHINESE CAR DEALERSHIPS

When asked to compare Chinese car dealerships with U.S. auto dealerships, Buffett said he
didn’t know the dealership situation in China. He also said he did not think Berkshire would get
significant benefits of scale as they buy more auto dealerships. He said what Berkshire needs
are managers in those individual dealerships to run first class businesses independently.

Charlie said he did not think Berkshire would be very good at running dealerships in China.

Buffett said there are 17,000 auto dealerships in the U.S. and Berkshire owns 81 of them. He
said Berkshire paid a full but fair price for Van Tuyl, which he thinks is the best there is. In the
future, Berkshire may buy a lot or very few more auto dealers, depending on price
developments. If Berkshire is going to be in the car business, auto dealers will have good and
bad years.

INTERNET USAGE

When asked about Internet usage, Buffett said, “I love the Internet!” He uses the Internet to
search and to play bridge. He said it has been a huge change in his life. He added that if he
had to give up his plane which cost $1 million a year or the Internet which cost $100 a year, he
would give up his plane.
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie added that everyone will do more on the Internet, although he does not like multi-
tasking. He chuckled, “I am so stupid I have to think hard for a long time on one thing.” The
Internet is here, like it or not.

Buffett noted how the Internet has changed GEICO’s business dramatically. It affects all their
businesses to one degree or another. People get pessimistic about America. The game is not
over yet. There will be all kinds of things that will make life better.

INEQUALITY OF INCOME

Buffett said it is extraordinary in the U.S. to see how far we've gone in terms of income. He was
born in 1930, and the average income /GDP in the U.S. has gone up sixfold. Someone making
$9,000 is now making $54,000 per year. Buffett believes that everybody that is willing to work
should have a reasonable opportunity for a decent livelihood in a country like the U.S. He said
he has nothing against raising the minimum wage. There are such things as supply and
demand. If you were to move the minimum wage up dramatically as a form of price fixing, you
would change the opportunity of people very dramatically as it would likely reduce the number of
jobs. He thinks reforming the earned income tax credit would work better.

Charlie chuckled that you just heard the Democrat’s version of addressing the inequality of
income, and Charlie was one Republican that agreed. He added that if you raise the minimum
wage a lot, it would hurt the poor.

RISING COLLEGE COSTS

When asked about the affordability of college given rising college costs, Charlie said the
average American family affords it by going to less expensive schools and getting subsidies. It
is a big problem to have colleges raising prices to what they can get.

Buffett said most people have to struggle through it. When the Great Recession came along, all
the colleges were overstaffed and laid off people. Without the right incentives, colleges will keep
raising prices.

Charlie said there's a big tendency to have prices rise. People rationalize that the service is
worth it. He thinks there’s a lot wrong in our higher education system. Right-sizing is not all
bad. There's not a college in America that wants to go back to their old habits. He advised
students to figure out their best option. Fordham and Villanova will do what they do. As long as
it works, they will keep raising their prices without the right incentive.

STRUCTURAL CHANGES IN CHINA

When asked about structural changes needed in China, Buffett said, “I think China will do fine
over time.”

Charlie added, “I’m a big fan for what is happening in China. One of the things they did in
China is to stop corruption, which was the smartest damn thing I've seen a big country do in a
long time. You don't want to be run by a den of thieves. China is widely copying Singapore....it's
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

a wonderful thing. I'm very high on what's going on in China. They've actually shot a few
people. That really gets people's attention.”

Buffett said it’s totally miraculous what has happened in China over the last 40 years in terms of
having moved so far so fast.

Charlie added that it has never happened before in history that a country so big has come so
far. 80% of China was illiterate when I was a young boy. A few people made an extreme
contribution to it, including the politicians in Singapore. Berkshire also copies bright people.

Buffett noted that for close to 200 years China didn't go any place. The last 40 years show the
human potential when you find a system that unleashes it. When you see that, it has to have a
powerful effect of what happens in the future. It's amazing that you can have people go
nowhere for centuries and then it explodes. China and the U.S. are going to be the super
powers for as far as he can see. It's good that the Chinese have found a way to unlock their
potential. It's imperative to see each other’s virtues rather than flaws. We need to remember
that we are both better off if the other one is doing well.

REASON FOR SUCCESS

When asked what the most important reason for their success was, Buffett attributed it to a
great teacher and exceptional focus. He also enjoyed the game which was enormously fun.
Investing is actually a pretty easy game, but it does require a certain emotional stability. Buffett
went through stock manuals when he was young searching for investments. Between ages 7
and 19, he had enthusiasm for investing but not guiding principles. Then he read The Intelligent
investor by Ben Graham, which described an investment philosophy that made total sense. It
wasn't more complicated than that.

Charlie agreed that investing is an easy game if someone has the temperament for it. If you
amass a fortune in life by being shrewder than others, it's not enough in life.

Buffett agreed and said running Berkshire has been far more fun than just an investment.
Managing Berkshire is incredibly more satisfying.

Charlie said, “If you're good at investing your own money, I hope you move on and do more.”

Charlie said he had an unfortunate channeling device into the investment world when he
realized he was never going to succeed as a movie star or actor. His grandfather provided him
with the idea that your main duty is to become as rational as you can be. Since he was good at
that and no good at anything else, he was steered into something that worked well for him.
Confucius said we owe a moral duty to rationality, which is why Charlie likes Confucius. He had
the same idea years ago. Berkshire is a temple of rationality.

Charlie said, “If you have ignorance and keep it, it's dishonorable to stay stupider than you have
to be. You have to be generous where it's crazy not to be.”
2015 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Buffett said what matters the most to him now is that Berkshire does well for their million
shareholders. It's enormously enjoyable to Buffett to be building a company that gets bigger
and better each year. He wouldn’t be happy if Berkshire were doing poorly.

Charlie agreed. He said, “It’s easy to lose a little of our own money, but we hate losing
somebody else's. That's a very desirable attitude.”

Buffett said what bothers him is something that actually costs Berkshire long-term value.

Charlie added, “A good doctor doesn’t like it when a patient dies on the table either.”

WALL STREET JOURNAL

When asked about the Wall Street Journal, Buffett said Dow Jones owned the Wall Street
Journal (WSJ). In the early years, the WSJ had competitive advantages with their newspapers
and they also owned the news ticker. However, they totally missed an opportunity to dominate
financial news with Michael Bloomberg taking financial information away from them with his
Bloomberg machines. The WSJ was family-owned but lawyer-controlled. The lawyers had no
imagination on what to do with financial information, so Dow Jones let the world pass them by.
The family did end up with $6-$7 billion when they sold out to Rupert Murdoch, so they did not
destroy their fortune.

Charlie added that the fortune could have been $100 billion with Tom Murphy, the former CEO
of Capital Cities/ABC, in charge.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

BERKSHIRE HATHAWAY 2016 ANNUAL MEETING NOTES

BY INGRID R. HENDERSHOT, CFA

We tuned into the first webcast of Berkshire Hathaway’s annual meeting held on April 30, 2016,
in Omaha. For the first time in about 20 years, we skipped the crowd of more than 40,000 folks
from around the globe who gathered for the Woodstock for Capitalists and listened from our
comfy chair to Warren Buffett, Chairman of Berkshire Hathaway, and Charlie Munger, Vice-
Chairman, answer questions from shareholders, analysts and the media.

Here are our notes from the six hour Q & A session.

INTRODUCTION

Warren Buffett: Good morning. I’m Warren Buffett. This is Charlie Munger. I’m the young one.
You may have noticed in the movie, incidentally, that Charlie is always the one that gets the girl.
He has one explanation for that, but I think mine is more accurate. As you know, every mother
in this country tells her daughter at an early age, if you’re choosing between two very old and
very rich guys, pick the one that’s older.

We are webcasting this for the first time. I’d like to welcome our visitors from all over the world.
We are having this meeting simultaneously translated into Mandarin. That poses certain
problems for me and Charlie because I’m not sure how sensible all our comments will come out
once translated into Mandarin, but I’m not so sure how sensibly they come out initially
sometimes. We are delighted to have people around the world joining us.

Kerry Soba puts this whole meeting together. There she is - Wonder Woman. Kerry joined us
as a receptionist about six years ago. She put together the 50th anniversary book which we
actually expanded further this year. We have a revised edition. Charlie and I autographed 100
of them. Kerry also had a young baby girl, her second baby, late in January. She has gone
ahead to put on this whole annual meeting. I really want to thank her. It has been terrific.

We have one surprise guest. I think my youngest great-grandchild, who is about 7 months old,
is also here today. If he happens to break out crying a lot, don’t let it bother you. It’s just his
mother explaining to him my views on inherited wealth.

We also have our directors with us. Warren Buffett introduced the Board of Directors.

FIRST QUARTER RESULTS

I have two slides to show you now. The first one is preliminary summary figures for the 1st
quarter.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Berkshire Hathaway Inc.

Preliminary First Quarter After-Tax Earnings
(in millions)

2016 2015
Insurance – underwriting $ 213 $ 480
Insurance – investment income 919 875
Total insurance 1,132 1,355
Railroad, utilities and energy 1,225 1,466
Manufacturing, service & retailing 1,266 1,123
Finance 311 289
Other (197) 11
Operating earnings 3,737 4,244
Investment and derivative gains/losses 1,852 920
Net earnings $ 5,589 $ 5,164

You will notice that insurance underwriting- these are after-tax figures by category – are down
somewhat. The basic underwriting at Geico is actually improving. We had some important
hailstorms in Texas toward the end of the quarter, and we have had some since the end of the
quarter, too. There were more catastrophic losses in the first quarter than there were last year.
Railroad earnings are down significantly. All of the major railroads were down significantly in the
1st quarter, probably will continue to be down - almost certainly going to continue to be down the
balance of the year.

We had two companies which we added to the manufacturing, service and retailing segment –
Precision Castparts and Duracell, but they were added during the quarter. Full earnings aren’t
showing in the figures.

In the other category, and I don’t like to get too technical here – you should read the 10-Q when
it comes out next weekend – but when we borrowed money in other currencies, and the only
currency we’ve done that with is the Euro, but we have a fair amount of money that we
borrowed in Euros. The nature of accounting is that the foreign exchange value each quarter is
actually shown in interest expense. If the Euro goes up, we have a lot of extra interest expense.
It’s not a realized factor. It moves from quarter to quarter. If the Euro goes down, it offsets
interest expense. It’s a technicality to some extent because we have lots of assets in Europe,
and they are expressed in Euros. When they go up, it does not go through the income account.
It goes directly to other comprehensive income. That figure which looks a little unusual – that’s
the reason for it.

We always urge you to pay no attention to the figures below operating earnings. They will
bounce around from quarter to quarter. We make no attempt to manage earnings in any way.
We could do that very easily, but that would be ridiculous. We make investment decisions
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

solely on the basis of what we think the best investment decision is, not on the basis of how it
affects earnings in any quarter or in any year.

In the 1st quarter, we completed a transaction that was begun over a year ago whereby we
exchanged our Procter & Gamble stock for cash and for Duracell. That largely accounts for the
large capital gain in the quarter. Those are the figures for the 1st quarter.

I put up a second slide. I started the slide in 1999. The reason being at the end of 1998, we
effected a large merger with Gen Re. At that point, we sort of entered a different era. We had a
little over 1.5 million A equivalent shares outstanding. Since that time, we have only increased
the number of shares outstanding over the next 17 years by 8.2%. These figures represent a
fairly unchanged share account since that point. In terms of operations, I told you our goal at
Berkshire is to increase the normalized operating earnings every year. Sometimes it will turn
out to be only a little bit, and sometimes we can get some fairly decent jumps. Earnings will not
increase every year because there’s such a thing as a business cycle. In times of a recession,
we will earn less money obviously than in times when things are much better overall. On top of
that, we are heavily into the insurance business. Earnings there can be quite volatile because
of catastrophes. This chart shows you what happened to the operating earnings since that time
– again, pointing out that shares outstanding have gone up very little during that period. In 2001,
when we suffered significant insurance losses through 9-11, we actually were in the red in terms
of operating earnings. The figures are very irregular, but over time–- by adding new
subsidiaries, by further developing the businesses we have, by bolt-on acquisitions, by
reinvestment of retained earnings,– the earnings have moved up in a very irregular fashion quite
substantially. I put in also the capital gains we’ve achieved through investments and derivatives,
and they total some $32 billion after tax. Those numbers can go all over the place. The main
advantage from my standpoint in the $32 billion is it gives us money to buy other businesses.
We hope the bigger operations will grow 5, 10 or 20 years from now substantially. We don’t
manage to try to get any given number from quarter to quarter. We never make a forecast on
earnings. We don’t give out earnings guidance. We think it’s silly. We do not have budgets at
the parent company level. Most of our subsidiaries have budgets, but they are not required to
submit them to headquarters. We just focus day after day, year after year, decade after decade
on trying to add earning power – sustainable and growing earning power to Berkshire.

I ask the audience that you limit your question to one question. Multiple questions have a way
of sneaking in occasionally. Let’s keep them to a single question.

CAPITAL INTENSIVE BUSINESSES

Q: You commented on the kinds of companies that Berkshire Hathaway liked to buy, those that
required a small amount of capital. Today, the company invests in companies that need tons of
capital expenditures, are overregulated and earn lower returns on equity capital. Why did this
happen?

Warren Buffett: – It’s one of the problems of prosperity. The ideal business is one that takes no
capital, but yet grows. There are a few businesses like that. We own some, but we’d love to find
one we could buy for $10, $20, or $30 billion that is not capital intensive in any way. We may,
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

but it’s harder, and that does hurt us in terms of compounding earnings growth. Obviously, if you
have a business that grows and gives you a lot of money every year and doesn’t take it, it isn’t
required in its growth, you get a double-barrel effect. See’s Candy was a good example of that.
Back when the newspaper business was good, Buffalo Newspaper was making $40 million a
year and had no capital requirements. We could take that whole $40 million and go buy
something else with it. Increasing capital acts as an anchor on returns in many ways. One is it
drives us into businesses that are much more capital intensive. We have a $3.6 billion
investment coming up in wind generation. We pledged, overall, to have $30 billion in
renewables. Anything that Berkshire Hathaway Energy does, anything that BNSF does takes
lots of money. We get decent returns on capital, but we don’t get the extraordinary returns on
capital that we’ve been able to get in the businesses that are not capital intensive. We have a
few businesses that earn actually 100% a year on true invested capital. Clearly that’s a different
sort of operation. Berkshire Hathaway Energy may earn 11% or 12% on capital, and that’s a
very decent return, but it’s a different animal than the businesses that are very low capital
intensity. Charlie?

Charlie Munger: – When our circumstances changed, we changed our minds.

Warren Buffett: – Slowly and reluctantly.

Charlie Munger: – In the early days, quite a few times we bought a business that was soon
producing 100% per annum. If we could have continued to do that, we would have loved to do
it. When we couldn’t, we went to plan B. Plan B is working pretty well, and in many ways I’ve
gotten so I sort of prefer it. How about you, Warren?

Warren Buffett: – That’s true. When something is forced on you, you might as well prefer it.
We knew that was going to happen. The question is, does it lead you from what was a
sensational result to a satisfactory result? We are quite happy with a satisfactory result. The
alternative would be to going back to working with very tiny sums of money. That really hasn’t
gotten a lot of serious discussion between Charlie and me.

PRECISION CASTPARTS ACQUISITION

Q – Precision Castparts, besides confidence in CEO Mark Donegan, what do you like about
their business that made you pay an extraordinarily high multiple?

Warren Buffett: – We completed the acquisition of Precision Castparts at the end of January this
year. We made the deal last August. You covered the most important asset in your question,
Mark Donegan, who runs Precision Castparts is an extraordinary manager. We’ve seen a lot of
managers over the years. I would almost rank Mark as one of a kind. He is doing extremely
important work in primarily making aircraft parts. I would say there are certainly no
disadvantages to him to be working for the company, being a subsidiary of Berkshire, and not
being a public company. I think he would say over time there could be some significant
advantages. For one thing, he can spend 100% of his time now on figuring out better things to
do with aircraft engines. It was always his first love to be thinking about that, and he did spend
some time thinking about that, but he also had to explain quarterly earnings to analysts and
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

perhaps negotiating bank lines. His time can be spent exactly on what makes the most sense
to him. Mark doesn’t have to come ever to Omaha to put on some show for me in terms of
justifying a billion dollar acquisition. He doesn’t have to waste his time on anything that isn’t
productive. Running a public company, you do waste your time on quite a bit of stuff that isn’t
productive. We’ve taken the main asset of Precision Castparts and made him in this case even
more valuable to the company. Precision Castparts has always made a number of acquisitions,
but being part of Berkshire, there’s really no limitation on what can be done. His canvas has
been broadened with the acquisition by Berkshire. I see no downside whatsoever. I have an
800 number if he needs capital. He wasn’t paying much of a dividend before, but he doesn’t
have to pay any dividend now. Precision Castparts will do better under Berkshire than it would
have independently although it would have done very, very well independently.

Charlie Munger: – In the early days, we used to make wise-ass remarks. Warren used to say
we buy a business that an idiot can manage, because sooner or later an idiot will. We did buy
some businesses like that in the early days. They were widely available. Of course, we’d prefer
to do that, but the world has gotten harder, and we had to learn new and more powerful ways of
operating. A business like Precision Castparts requires a very superior management that’s
going to stay superior for a long time. We gradually have done more and more of that. It’s
simply amazing how well it works. I think to some extent we’ve gotten almost as good at picking
superior managers as we were in the old days of picking the no- brainer businesses.

Warren Buffett: – We would love to be able to find, but we won’t be able to find them because
they are very rare birds – we’d love to find another 3 or 4 of a similar type business as Precision
Castparts where forever they are going to be producing something where quality is enormously
important, where the customer depends very heavily on them and where the contract extends
over many years. People don’t simply accept the low bid in order to get the gadget of one sort
or another. It’s very important that you have somebody there with enormous skill running this
business, and their reputation among aircraft and engine manufacturers is absolutely
unparalleled.

HAPPINESS

Question from London – Looking backwards, what would you have done differently in life in your
search for happiness?

Warren Buffett: – Well, I’m 85, and I can’t imagine anybody any happier than I am. By accident
or whatever, I’m sitting here eating exactly what I like to eat, doing in life exactly what I love to do
with people I love. It really doesn’t get any better than that. I did decide fairly early in my life that
my favorite employer was myself. I think that presented – I managed to avoid really aggravation
of almost any sort. If you or those around you that you love have health problems, then that is a
real tragedy. There’s not much you can do about it but accept it. Charlie and I have really been
blessed. Charlie is 92; he’s doing every day something that he finds fascinating. He probably
finds what he is doing at 92 as interesting, as fascinating, as rewarding, and socially productive,
as any period you can pick in his life. We’ve been extraordinarily lucky. We are lucky it’s a
partnership; it’s more fun doing things as a partnership. I don’t have any complaints. I would
say if you’re talking about business life, I wouldn’t have started with a textile company.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: Looking back, I don’t regret that I didn’t make more money or become better
known or any of those things. I do regret that I didn’t wise up as fast as I could have. There’s a
blessing in that, too. Now that I’m 92, I still have a lot of ignorance left to work on.

REINSURANCE

Question from Germany: – Why did Berkshire sell down its holdings in Munich Re while sticking
with reinsurance operations within Berkshire?

Warren Buffett: – I said in the annual report that I thought it was very likely that the reinsurance
business would not be as good in the next 10 years as it has been in the last 10 years. I may be
wrong on that. That’s a judgment based on seeing the competitive dynamics of the reinsurance
business now versus ten years ago. We sold our entire holdings, which were substantial, of
Munich RE and Swiss RE. They are fine companies, well managed companies. We like the
people that run them. The business of reinsurance companies generally is less attractive for the
next 10 years than it has been for the last 10 years in part because of what happened to interest
rates. A significant portion of what you earn in insurance comes from investment of the float.
Almost all of the reinsurance industry is somewhat more restricted in what they can do with their
float because they don’t have the huge capital cushion that Berkshire has. They also don’t have
the great earning power that Berkshire has. So it was not a negative judgment in any way on
those two companies or their management, but it was at least a mildly negative judgment on the
reinsurance business. We have the ability at Berkshire to arrange to a degree, we have more
flexibility to modify business models and we have operated that way over the years in insurance
generally and reinsurance. Munich Re, Swiss Re, and all the major reinsurance companies,
except for us, are pretty much tied to a given type of business model. They don’t really have as
many options in terms of how capital gets deployed. I think they will do fine but not as fine in the
next ten years as they have in the last ten years. I think if we played the same game as we
were playing the last ten, we wouldn’t do as well. But we’re more flexible in how we conduct our
insurance operations. We have an extra string to our bow that the rest of the industry doesn’t
have. The amount of capital that has come into the reinsurance business, it’s no fun running a
traditional reinsurance company and have money coming in, particularly in Europe, and look
around for investment choices and find out many of the things you were investing in years ago
now have negative yields. It looks like it will be unattractive, if not terrible, for a considerable
period.

Charlie Munger: – There’s a lot of new capacity in reinsurance and a lot of very heavy
competition. A lot of people from finance have come over into reinsurance and all the old
competitors remain, too. That’s different from Precision Castparts because most of the
customers would be totally crazy to hire some other supplier because Precision Castparts is so
much more reliable and so much better. We like the place with more competitive advantage.
We are learning.

Warren Buffett: – To put it into terms of Economics 101, basically reinsurance supply has gone
up but demand has not gone up. Some of the supply is driven by Investment managers who
would like to establish something offshore where they don’t have to pay taxes. Reinsurance is
sort of what you might call the beard behind which to actually engage in money management in
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

a friendly tax jurisdiction, and you can set up a reinsurance operation with very few people by
taking large chunks of what brokers may offer. It’s a very easy way to have a disguised
investment operation in a friendly tax jurisdiction, but that becomes supply in the reinsurance
field. Couple that with poor returns on float, it’s not as good of a business as it was.

PROGRESSIVE VS GEICO

Q –Geico got whooped by Progressive Direct last year. Why is Geico suddenly losing to
Progressive Direct?

Warren Buffett: – I forget what year it was we passed Allstate and Progressive, but Geico’s
growth rate in the 1st quarter was not as high as it was in the past couple of quarters, but it was
quite satisfactory. Last year, both frequencies, how often people had accidents, and severity,
which is the cost per accident, both those went up quite suddenly and substantially.
Progressive’s figures show they were hit by that less than Allstate and Geico. I don’t think you
necessarily will see the same trends this year. Last year for the first time in I don’t know how
many years, the number of deaths and auto accidents per hundred million miles went up. If you
go back to the mid 1930s, there were almost 15 people killed per hundred million miles driven.
It got down to just slightly over 1 – from 15 to 1. Cars have gotten far, far, far safer. It’s a good
thing. If we had the same rate of deaths from auto accidents as we had in the 1930s, we would
have had a half million people die instead of 40,000. Last year there was more driving, more
distracted driving, you really had this uptick in frequency and more important in severity. Geico
adjusted its rates. My own prediction would be that the underwriting margins at Geico will be
better this year than last year. March and April had a lot of activity. I made a bet a long time
ago, a mental one, on the Geico model versus the Progressive model. They were significantly
ahead of us in volume a few years back. We passed them and Allstate. I hope on my 100th
birthday that the Geico people announce to me that they passed State Farm. I have to do my
share on that by getting to 100.

Charlie Munger: – I don’t think that it’s a tragedy that some competitor got a little better ratio for
one period. Geico quadrupled its market share since we bought it.

Warren Buffett: – Quintupled.

Charlie Munger: – I don’t think we should worry about the fact that someone else had a good
quarter.

Warren Buffett: – I’m far surer that Geico will pass State Farm some day than I will make it to
100.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

AMAZON’S COMPETITIVE THREAT

Q – Warren, you have always demonstrated a heart for direct selling. In the midst of a tornado
in a barbershop, you immediately offered to write an insurance policy for us.

Warren Buffett: – They were all huddled down there in the barbershop. There wasn’t going to
be any tornado so I told them if they gave me a dollar, they could go upstairs, and if anything
happened to them – I think it was a million dollars I’d give them.

Q – With the rise of Amazon.com, we see a shift from push marketing to pull marketing. How
will this affect Berkshire Hathaway?

Warren Buffett: – The development you refer to is huge. It’s not just Amazon. Amazon is a
huge part of it. What they have accomplished is remarkable. We don’t make any decision,
involving even the manufacturing of goods or retailing, before thinking long and hard about what
the world will look like in 5, 10, 20 years–looking at the powerful trend you just described. We
will not try to beat them at their own game. They are better than we are at that. Charlie and I
are not going to outbezo Bezos by a long shot. We are going to think about that. It does not
worry us with Precision Castparts. It does not worry us in terms of the overwhelming majority of
our businesses, but it’s a huge economic trend that 20 years ago was not on anybody’s radar
screen and lately has been on everybody’s radar screen. Many of them, and including us in a
few areas, have not figured a way to participate in it or counter it. Geico is a good example of a
company in an industry that had to adjust to change. We were slow on the Internet. The phone
had worked so well for us in traditional advertising that there’s always a resistance to think
about new possibilities. When we saw what was happening on the Internet, we jumped in with
both feet. The nature of capitalism is if you’ve got a good business, somebody is always trying
to figure out a way to take it away from you and improve on it. The full effect on the industry is
far from having been seen. It is a big, big force, and it already has disrupted plenty of people. I
think Berkshire is quite well situated. One big advantage is we didn’t see ourselves starting as
one industry. We didn’t think of ourselves as department store guys or tire guys or steel guys.
We thought of ourselves as having capital to allocate. If you start with a given industry focus and
spend your whole time working on how to make a better tire, whatever it may be, I think it’s hard
to have the flexibility of mind that you have if you just have hopefully a large and growing pile of
capital and figure out what is the next best move you can make with that capital. I think Amazon
has a real advantage, too, this intense focus on having hundreds of millions of generally very
happy customers getting very quick delivery on something they want promptly and shop the way
they want to shop. If I owned a bunch of shopping malls, I’d be thinking very hard on what they
might look like 10 or 20 years from now.

Charlie Munger: – We failed so thoroughly in retailing when we were young that we pretty well
avoided the worst troubles when we were old. Our biggest retailers are so strong they will be
among the last people that have troubles from Amazon.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

COKE AND HEALTH

Q – With the health problems it causes, why should shareholders be proud to own Coke?

Warren Buffett: – I happen to like to consume about 700 calories a day from Coca Cola so I’m
about one-quarter Coca Cola. But I think if you decide that sugar generally is something that the
human race should not have… I elect to get my calories from things that make me feel good
when I eat them. That is my sole test. It wasn’t a test that my mother necessarily thought was
great or my grandfather, but there are over 1.9 billion 8 ounce servings of some Coca Cola
drinks consumed daily. They have an enormous range of products, 1.9 billion daily servings –
693 billion 500 million of 8 ounce servings a year, except it’s a leap year–that’s almost 100 8
ounce servings per capita for 7 billion people in the world every year, and it’s been going on
since 1886. I would find quite spurious the fact that you eat 3500 calories a day or you’re
consuming 2700 or 2800 and some of it is Coca Cola, and blame the obesity-related illness on
the Coke you drink. You have the choice of consuming more than you use, and I make a choice
to get 700 calories from this. I like fudge a lot, peanut brittle. I think if you were happy every
day, it may be hard to measure, but I think you’re going to live longer as well. I’m a very, very
happy guy, and I’m serious. If you were happy every day, you’d live longer as well. So it may be
a compensating factor. I wish I had a twin and that twin had eaten broccoli his entire life, and we
both consumed the same calories. I know I would have been happier and probably would have
lived longer. I think Coke is a marvelous product. Something is going to go wrong with your
body at some point. Balance out the calories so that you don’t become obese. I’m not seeing
evidence that convinces me that I’d reach 100 if I suddenly switched to broccoli and water. A
friend of mine, RJ Miller, a remarkable man, the president of Ford Motor Co., had his 100th
birthday on March 4 of this year. I saw him for his birthday, and RJ told me that there were
10,000 men in the US that live to be 100 or better and 45,000 women. I checked the Internet,
the census figures, and sure enough, that is the ratio. If you really want to improve your
longevity prospects, have a sex change. You are four and a half more times more likely to get to
be 100. It’s just a matter of fact, folks. I think I’ll have Charlie go first on that one.

Charlie Munger: – I like the peanut brittle better than the Coke. I drink a lot of Diet Coke. I
think people that ask questions like that one always make one ghastly error that’s inexcusable.
They measure the detriment without considering the advantage. That’s really stupid. 100
people die a year in air crashes. The benefit is worth the risk. If every person has to have 8, 10
glasses a day of water to stay alive and it’s pretty cheap and sensible and adds to life to add a
little extra sugar, add a little stimulation and calories, there are huge benefits to humanity. We
ought to have almost a law, now I’m sounding like Donald Trump, these people shouldn’t be
allowed to cite the defects without citing the advantages. It’s immature and stupid.

BERKSHIRE ENERGY

Q – Does Berkshire Energy have the capacity to produce 100% renewable energy from solar
and wind production?

Warren Buffett: – Any decision we make, including the one we just showed during the movie,
any decision about changes in generation has to go through what is usually called the Public
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Utility Commission. We cannot make changes that are not approved by the PUC. We’ve had
more problems in bringing in renewables in PacifiCorp because it’s regulated by six states.
They don’t necessarily agree on how costs and benefits should be divided. We have to follow
their instructions. Iowa has been marvelous about encouraging it at every level. Consumer
groups and the governor have seen benefits. We have one major competitor called Alliant.
They have not pursued renewables the way we have. Our rates are considerably lower than
theirs. They may well need a rate increase within a year. We will not need a rate increase for
13 years. It is a determination that is made at the state level. We would not have the
renewable generation that we have if it wasn’t for the building of those projects being subsidized
by the federal government with tax credits. Benefits of reducing carbon emissions are
worldwide, and therefore, it’s deemed proper the citizenry as whole should participate in the
cost. That is allowed in Iowa as well, but the degree to which the renewables replace primarily
coal, but there are plenty of emissions connected with natural gas, will depend on Governmental
policy and so far I think it’s been quite sensible in having the cost borne by society as a whole in
terms of reduced tax revenues through subsidies. Less emissions into the atmosphere is not
limited to the people of Iowa when we build wind generation. You will see a benefit that accrues
to the world. You will see continued change. It will vary by jurisdiction. We have the capital.
We’ve got lots of taxes, federal taxes paid, in our consolidated return to take advantage of the
tax credits. We are in a position to be a very big player.

Charlie Munger: – I think we are doing way more than our share of shifting to renewable
energy. We are charging lower prices to our utility customers. When the whole rest of the world
is behaving as we are, it will be a much better world. I think the people that worry about climate
changes don’t have my view. I like all of the shifting to renewables, but I have a different reason
– I want to conserve the hydrocarbons for chemical feedstocks. I’m in their camp, but I have a
different reason.

Warren Buffett: – Nebraska has not done much with wind power. Maybe two miles from where
we are sitting, people are buying their electricity cheaper than in Omaha. Wind blowing does
not start at the Missouri River. It blows across Nebraska, too. Nebraska is entirely a public
power state. The bonds are issued on a tax-exempt basis yet electricity is cheaper across the
river. The real irony is because our electricity is so much cheaper in Iowa, it’s become a tech
haven for these operations that gobble up electricity. Iowa has gotten plant after plant, job after
job, and gotten more property tax revenues. The massive Google server farm is located in Iowa
because we have cheap wind-generated electricity, and it’s creating jobs. Nebraska has prided
itself on public power, originated back in the ‘30s. It has been a source of pride, but lately it has
been a source of cost, too.

DERIVATIVES

Q – How do you analyze and value companies like Bank of America and Merrill Lynch and other
commercial banks that Berkshire has investments in relative to their derivative exposures.

Warren Buffett: – Derivatives do complicate the problem very dramatically. They are moving
away to being collateralized which helps. The great danger in derivatives is if there is
discontinuity. If the system stops for awhile – it stopped after 9-11 for three or four days – it
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

stopped during World War I for many months. They debated closing the stock exchange very
seriously the day after October 19, 1997. There were a lot of people that wanted to close it, but
it continued. If you have a major cyber, nuclear, chemical or biological attack on the country,
which will certainly happen at some point, you will have a lot of problems. When things reopen,
you will find there can be enormous gaps in things you thought were totally protected by
collateral or netting arrangements and that type of thing. I regard large derivative positions as
dangerous. Berkshire lost $400 million in unwinding General Re derivative positions in benign
conditions.

Charlie found one position when he was on the audit committee at Solomon that was
mismarked by $20 million. By happenstance, I do know of one incredibly mismarked position. It
almost staggers the mind how it was marked. Some trader got influenced or did it himself.
Some of the things get so complicated they are very hard to evaluate. They can be
extraordinarily hard to mark. Auditors are not capable of holding that behavior in check. Now
there are four really big auditing firms. They are auditing Company A that’s on one side of the
transaction and auditing Company B that’s on the other side, the same auditor. There are
plenty of times that the marks that they are attesting to are significantly different which would be
an interesting exercise to pursue in terms of checking the numbers out. Derivatives are still
dangerous in large quantities. We would not do them on a collateralized basis because if there
was discontinuity, I don’t know where we would end up. I would never get us in a position where
we would have money demanded of us and not be able to fill it. We have some derivatives in
runoff. It’s been very attractive for us. It’s still a potential time bomb in the system. Kuwait went
into a delayed system on settlement of stock purchases. It caused all kinds of problems. You
have an IOU from someone for six months. If you have a zillion of those, a lot of trouble can
ensue. I’m not in the least troubled by Bank of America or Wells Fargo as investments. There
are a great number of banks in the world. Take the 50 largest banks in the world, we wouldn’t
even think of touching 45 of them.

Charlie Munger: – We are in the awkward position where we will make about $20 billion out of
derivatives in just those few contracts that we did years ago. We would prefer it if those
derivatives would have been illegal for us to buy. It would have been better for our country.

FLOAT AND NEGATIVE INTEREST RATES

Q – What happens to float investment income if the U.S. has negative interest rates?

Warren Buffett: – Some of our float actually exists in Europe where we have the problem of
negative interest rates on high grade and even medium term bonds. Anything that reduces that
value of money will affect Berkshire because we will always have a lot of money. Because we
have so much capital and so many sources of earning power, we have the ability to use our
float to a certain degree in ways that most insurance companies can’t think about. We can find
things to do. We’ve got $50 odd billion of short term government securities now and another
$8.3 billion in all likelihood coming in June from Kraft Heinz preferred stock. We will be back
over $60 billion again very soon. The difference between a ¼ percent and minus ¼ a percent is
not that great, so it will not be that painful if interest rates become negative. Float is not worth
as much to insurance companies with lower interest rates as it was 10, 15 years ago. It’s worth
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

considerably more to us than it is to typical insurance companies. Having lots of money around
now is not just a problem for insurance companies. It’s a problem for retirees. It’s a problem
for anyone stuck with fixed-dollar investments and finds their income now is a pittance or in
Europe possibly a negative rate. We love the idea of increasing our float. That money has
been very useful to us over time. It’s likely to be very useful to us in the future. It’s shown as a
liability on our balance sheet, but it’s actually a huge asset.

Charlie Munger: – I’ve got nothing to add.

Warren Buffett: – He’s now in full swing.

RAILROAD INDUSTRY AND BNSF

Q – The railroad industry seems to be suffering with volume down. How much of the weakness
is cyclical versus secular and how does it impact the value of BNSF?

Warren Buffett: – Certainly the decline in coal, 20% of revenue, is secular. Other factors cause
volume trends to jiggle around. We had a mild winter with utilities carrying unusual amounts of
coal. Part of the reason for that is service got bad, and we got low on coal. The utilities
compensated by bringing in more than they needed just to catch up. Weather was mild and the
electricity use was poor in the wintertime. Utilities continue at this point to have more coal on
hand than they would like. They are trying to under order what they will be using. The decline
in coal is secular. It’s true that the market generally got very enthused about railroad stocks a
year ago. Equity valuations have come down in the railroad industry with market capitalizations
down 30%. We love the fact that we own BNSF. We think we bought it at an attractive
valuation. We don’t mark up and down our wholly-owned businesses based on stock market
valuations. Obviously, stock market valuations are some factor in our thinking. We regard
BNSF as a good business, and we will hold them forever. But BNSF will lose coal volume, and
they will lose in some other areas and gain in other areas. BNSF will earn a lot of money this
year but not as much as last year.

Charlie Munger: – I’ve got nothing to add.

HOGWARTS AND VALUE INVESTING

Q – A long-winded question began by comparing Berkshire with Hogwarts in Harry Potter,

noting that the rest of the world does not believe in value investing. How should children look at
companies when every day they see in the media IPOs and the business cycle getting shorter
and shorter?

Warren Buffett joked: – Would you mind repeating the whole thing? Buffett gave credit to Andy
Haywood, the creator of “The Secret Millionaires Club,” a children’s program on money. I know
it’s helped thousands of children. It grows in strength. Having young children learn good
lessons in terms of handling money and making friendships and behaving as better citizens, it’s
a great objective.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

You don’t really have to worry about what’s going on in IPOs. People win lotteries every day.
You don’t have to be jealous. If they want to do mathematical unsound things, that’s nothing to
worry about. They put the one winner on television, and the other million that contributed to it –
with the big slice taken out for the state – don’t get on. All you have to do is figure out what
makes sense. When you buy a stock, get yourself in a mental frame of mind that you’re buying
a business. Don’t get a quote on it for five years. You don’t get a quote every day on your farm
or apartment house or McDonald’s franchise. You want to look at stocks as businesses and
think about performance as a business. Think about what you pay as if buying a business. Let
the rest of the world go its own way. Don’t get into a stupid game just because it’s available.

Charlie Munger: – I think that your children are right to look for people they can trust in dealing
with stocks and bonds. Unfortunately more than half of the time they will fail.

Warren Buffett: – They really have an easy problem. American businesses as a whole will do
fine over time.

Charlie Munger: – But not clients of stockbrokers.

Warren Buffett: – As Charlie would say, a lot of problems are caused by envy. You have to
figure out what makes sense and follow your own course.

SOLAR ENERGY

Q – Solar energy in Nevada. Why are there new rules in Nevada on solar energy?

Warren Buffett: – The public utility and pricing policy is everything in Nevada as well as other
places. There are three commissioners that decide what’s proper. The situation in Nevada in
terms of rooftop power was that for the last few years, if you had a solar project on your roof,
you could sell back excess power you generated to the grid at a price that was far, far above
what we, as a utility, could buy it for elsewhere. They were being subsidized by the federal
government. The people who had the 17,000 rooftop installations were selling back to the grid
at roughly 10 cents a kilowatt hour energy that we could purchase elsewhere for 3.5 cents or
thereabouts. Ninety-nine percent of our consumers were being asked to subsidize the 1% that
had solar units by paying triple the market price at what we could otherwise buy electricity and
sell it to the other 99%. It’s a question if you wish to have the 99% subsidize the 1%. The PUC
in Nevada originally let this small group experiment by giving them this 10 cent rebate. They
then decided the 99% should not be subsidizing the 1%. For solar to be competitive, it needs
subsidization. Who pays for the subsidy gets to be a real question. I personally think if society
is the one benefitting, then society should pick up the tab. I don’t think someone sitting in a
house in Nevada should be picking up the subsidy for their neighbor. It is not right for 1 million
customers in Nevada to subsidize 17,000 customers. The PUC agrees with that. Greg?

Greg Abel, president of NV Energy – One, as you’ve touched on earlier, we absolutely support
renewables. We are for solar. We want to purchase renewable energy at the market rate – not
where 1% of the customers will benefit and the other 99% will not. A working family in Nevada
who cannot afford the rooftop unit, and you ask them if they want to subsidize their neighbor,
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

the answer is no. By 2019, we will be replacing 76% of our coal units and replacing it with solar
energy.

Warren Buffett: – Put up Slide 7, it will give you a view of what the situation is. This accounts
for all of our Berkshire Hathaway energy operations. In a 20 year period, we will have a 57%
reduction in our coal usage. It’s moving at a fast pace. You want to be sure that you treat fairly
the people involved in this. Someone pays the cost of electric generation. If you are doing
something to benefit the planet, and it’s important that it be done, you should not have the costs
assessed for that on a specific person who’s having trouble making ends meet in their job.
They are not the ones to subsidize the person who can afford to put the solar unit in.

OIL PRICES

Q – Berkshire is more influenced by oil markets than many thought. Is Berkshire making a long
term statement about the price of oil with recent oil investments?

Warren Buffett: – We haven’t the faintest idea of what the long term price of oil is. There’s
always a better system available. You can buy oil for delivery a year from now or two years
from now. We actually did that once. We made money, but we don’t think we can predict
commodity prices. We do some forward buying. Basically, we are not two fellows who think
that we can predict the price of corn or soybeans or anything else. Some of the securities you
mentioned were bought by Todd or Ted and one by me, but neither they nor I bought those, or if
we sell them, based on commodity price predictions. We are thinking about other things when
we make those decisions.

Charlie Munger: – I’m even more ignorant than you are [about predicting commodity prices] and
that might be hard to be.

Warren Buffett: – I think that’s the first time I heard him say that. It has a nice ring to it.

STUDENT LOANS AND RISING EDUCATION COSTS

Q – Rising college education costs.

Charlie Munger: – I think if you expect a lot of financial efficiency in American higher education,
you are howling at the wind.

Warren Buffett: – He’s also saying that more philanthropy ought to be devoted to financing
college costs.

Charlie Munger: – I do a lot more than Warren does in this field. Monopoly and bureaucracy
are everywhere and universities are not exempt from it. If people want to give more to it, I’m all
for it.

Warren Buffett: – You have the option of very good state schools. We spend a lot of money on
education in this country. We spend $600 billion educating 50 million kids from kindergarten to
12th grade. People talk about entitlements for Social Security. We have entitlements for the
young. Nobody ever seems to bring that up. The people in their working ages, generally
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

speaking, have an obligation to both the young and the old. Based on the amount we spend, if
we have problems with our school system, it’s not because we are cheap. There are other
problems that contribute to it. I was a trustee at a college that saw the endowment go from $8
million to over $1 billion. I did not see the tuition come down or the number of students go up.

Charlie Munger: – Nothing went up except the president’s salary.

Warren Buffett: – When you read the figures on the endowments at the big schools, some
have gotten up to the big numbers. The main objective is to have the endowment grow larger.

Charlie Munger: – No further comment. I’ve created all the enemies I can afford at the
moment.

Warren Buffett: – That’s never slowed him down in the past.

DONALD TRUMP

Q – What specific risks are there for Berkshire if Donald Trump becomes the President of the
United States?

Warren Buffett: – That won’t be the main problem. The government is a very big factor in our
business and all businesses. I will predict that if either Donald Trump or Hillary Clinton
becomes President, and one of them is very likely to be, I think Berkshire will continue to do
fine.

Charlie Munger: – I’m afraid to get into this area.

Warren Buffett: – We’ve operated under price controls. We’ve had 52% federal taxes applied
to our earnings for many years and higher at other times. We’ve had regulations come along.
In the end, business in this country has done extraordinarily well for a couple hundred years. It
has adapted to society, and society has adapted to business. This is a remarkable place to
operate a business. Owners of businesses, look at returns on tangible equity, they have not
suffered even as people that own fixed-investment instruments have suffered. Farmer’s income
has fallen off in the last few years. Business manages to take care of itself. In my lifetime, the
GDP per capita has gone up six for one. Overall, people have six times the real output they had
at the beginning. It will keep working. Twenty years from now there will be far more output per
capita in the United States. The quality will get better. No presidential candidate or President is
going to end that. They can shape it in ways that are good or bad, but they can’t end it. Now
Charlie, give us something pessimistic.

Charlie Munger: – I want to say something optimistic. I think the GDP figures greatly
understate the real advantage that our system has given our citizens. The real achievements
over the last century are way higher than indicated by the GDP figures, and the GDP figures are
good. I don’t think it’s necessarily going to be quite as good as the past, but it doesn’t have to
be.

Warren Buffett: – There’s no one that says with my same talents, I wished I was born 50 years
earlier. The majority of the American public thinks it’s a bad time to be born today compared to
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

when they were born. They are wrong. The pace of innovation has never been better – just
think how differently you are living. But you’re making free choices that were not available to
you 20 years ago. I’m still staying with the landline, but you people are way ahead of me.

RAIL MERGERS

Q – Mergers among railroads?

Warren Buffett: – Directed the question to Matt Rose, president of BNSF.

Matt: – Back in 1999, we had a failed merger with Canadian National Railway which was
blocked due to new regulations. The public litmus test for the next merger would have to be
different. Didn’t think a large merger would be possible currently, when we think of our four
constituencies – those four are customers, labor groups, communities in which we serve and
the shareholders. We didn’t see any interest outside of the shareholders. We believe if a final
round of mergers occurs, there will be great efficiencies made between shippers and
communities. Right now we don’t see the dynamics in place. When the population grows from
315 million people in the U.S. to 350 million and transportation becomes scarcer, then mergers
may occur.

INVESTMENT BANKS AND WELLS FARGO

Q – How do you feel about investment banking given higher regulation?

Warren Buffett: – The public policy since 2008 and 2009 has been to toughen up capital
requirements in a variety of ways for banks, but specifically it’s the design to make very large
banks less profitable relative to smaller banks. You can change the math of banking totally by
capital requirements. If you said every bank had to have a 100% capital ratio, that would be
terrible, and you wouldn’t make any money. If you let people operate with 1% capital ratios, they
can make a lot of money, and they will cause the system all kind of trouble. The rules are tilted
against the larger banks with returns on equity going down. It’s a less attractive business than
earlier. Some of the investment banks operate as bank holding companies.

Warren Buffett: – Wells Fargo has an investment banking aspect that primarily came in through
Wachovia. It’s our largest marketable security – not counting Kraft Heinz. In that situation we
are in the control situation. I like Wells Fargo extremely well compared to other securities. It
does not have the most upside of our other securities except on a weighted basis.

Charlie Munger: – It’s not the investment banking. It’s the general banking of Wells Fargo.

Warren Buffett: – We think Wells Fargo is a very well run bank. We didn’t make any decision to
buy a single share because of the investment banking business. They have a huge base of
very cheap money. We think it’s a very well run bank. Charlie and I are probably a little
affected by the experience we have. We made a major investment in preferred shares of
Goldman Sachs. We continue to hold some shares from when we made the investment in
2008. I can’t recall us making an investment banking purchase – a marketable security
involving an investment bank.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: – Generally, we fear investment banks more than we love them.

BREAKING UP BERKSHIRE HATHAWAY

Q – What corporate defenses are in place to prevent activist from trying to break up Berkshire
Hathaway in the future?

Warren Buffett: – I used to worry more about that than I do now. Size is one factor now.
Berkshire will always be in a position to repurchase very significant amounts of stock. As long
as it’s willing to buy back the stock close to intrinsic value, there should not be a large discount
to intrinsic value, so there would be no advantage to breaking up Berkshire. There would be
money lost by breaking it up. Mid-American Energy could not have done what it has in terms of
renewables without Berkshire being the parent. I don’t think there will be a spread that will be
enticing to anyone. The numbers involved would be staggering. I think it’s very unlikely, but
there have been periods in business history where stocks sold at dramatic discounts from what
you may call intrinsic value. In ’73-‘74, there were really good companies, one of which was
Cap Cities that was selling at a huge discount. People did not come along to take advantage of
the discount, because when discounts are huge, money is usually scarce. It’s not a huge worry
with me. In my own case, because the way my stock will be distributed after I die; it’s very likely
that my estate for some years would be by far the largest shareholder of Berkshire in terms of
votes. It’s not something I worry about now.

Charlie Munger: – I think we have almost no worries at all on this subject. Other people have
justifiable worry, and I think that helps us. I look forward to this subject with optimism.

Warren Buffett: – Do you want to explain how it helps us?

Charlie Munger: – If you’re being attacked by people you regard as evil [activists], you want a
strong ally. How many people would you pick in preference to Berkshire?

Warren Buffett: – My name is Warren Buffett, and I approve that message.

LEASING BUSINESS

Q – Talk about Berkshire Hathaway’s competitive advantages of its leasing business.

Warren Buffett: – We’ve got a very good truck leasing business. We’ve got a good tank car
leasing business. We expanded it by a billion dollars when we bought the GE fleet recently.
Leasing generally isn’t something – we have to bring something to the party – there are
important service advantages. Leasing of new cars, which is a huge business, the math is not
that attractive for us. Banks have an advantage because their costs are lower. Wells Fargo’s
cost is around 10 basis points. When someone has a trillion dollars or so, that they are paying
ten basis points for it, I don’t feel very competitive. Pure money type leasing is not an attractive
business for us. They’ve got the edge. We’ve got rail car leasing which is more attractive and
involves a lot more than a financial transaction. Those cars require servicing. Aircraft leasing
doesn’t interest me in the least. That is a scary business. Some people have done well in it.
That isn’t for us.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

SILVER BULLET

Q – If you had a silver bullet, which competitor would you take out and why?

Charlie Munger: – I don’t think we have to answer this one, which competitor would you kill if
you could?

Warren Buffett: – Charlie is a lawyer. We have lots of tough competitors. In many areas we
are a pretty tough competitor ourselves. We want our managers to think every day about how
to achieve a stronger competitive position; we call it widening the moat. We want better
products, cost to a minimum, and know what our customers want from us a month or year or ten
years from now. If you take care of the customer, the customer will take care of you. There are
cases where a force comes along and you may not have the answers for it, and you need to get
out of the business. We had the department store in Baltimore. If we kept it, we would have
gone out of business. Recognizing the reality is also important. Don’t try to fix something that is
unfixable.

We really hope to be the ones that the other guy wants to use the silver bullet on.

SEQUOIA FUND AND VALEANT

Q – Mr. Munger has said the Valeant business model is highly immoral. Has your view changed
of Sequoia, which had a highly concentrated position in Valeant of more than 30% of the fund’s
portfolio?

Warren Buffett: – In a sense, I’m the father of the Sequoia Fund. I was closing up my
partnership in 1969. I was giving back a lot of money back to partners. They wanted to know
what they should do with their money. We helped out those who wanted to put their investments
in municipal bonds. Most were equity-oriented type investors. There were two people we
admired in the investment business enormously. Those two were, Sandy Gottesman, our
director, and Bill Ruane. They were friends themselves. Sandy took on a number of people.
Some are still clients to this day. A lot of them went with both of them. We had a lot of people
whose total funds were not of a size that made them economic individual clients. Bill said, “I will
set up a fund.” They had an office in Omaha. John Harding became the employer here. A
number of my ex-partners joined Sequoia Fund as a way to find an outstanding investment
manger both for ability and integrity and could deploy small sums with him. Bill ran Sequoia
roughly until 2005 when he died, and he did a fantastic job.

I don’t know if there’s a mutual fund that has a better record – there probably is one or two – but
it’s far better than the S&P. Bill did a great job for people. Bill died in 2005. The record
continued to be good until a year or so ago. At that time, the manager took an unusually large
position in Valeant, despite the objection of some people on the board. He not only maintained
that position, but then increased it. The record to date still is significantly better than average
even with the recent problems. The manager who made the decision on Valeant is no longer
running the fund. It was a very unfortunate period as that manager got overly entrenched with
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

the Valeant business model. They are very smart, decent people who are probably way better
than average analysts in terms of Wall Street.

I watched the Senate hearings a couple of days ago when three people were interrogated from
Valeant. It was not a pretty picture. It was enormously flawed – the business model. It
illustrated a principle: that if you’re looking for a manager, find someone that is intelligent,
energetic and has integrity. If they don’t have the last attribute, make sure they don’t have the
first two. If they don’t have integrity, you want them to be dumb and lazy. You can get into a lot
of trouble with management that lacks integrity.

Charlie and I have seen – we are not remotely perfect. We’ve seen patterns – we have pattern
recognition – it gets very important in evaluating humans and businesses. None of the patterns
exactly repeat themselves. There are certain things in business that we’ve seen over and over
and frequently come to a bad end but frequently look extremely good in the short run. One
which I talked about last year was the chain letter scheme. No one calls them that because that
has a connotation that will scare you off, but they are disguised chain letters. There were
patterns at Valeant certainly if you go and watch the Senate hearings, you will see there are
patterns that should have been picked up on. It was very painful to the people of Sequoia.
Sequoia has good people now.

Charlie Munger: – I totally agree with you that Sequoia has reconstituted – it’s a reputable
investment fund. The manager is a reputable investment advisor. I have quite a few friends
and clients that I’ve advised them to stay with the place as they have reconstituted.

Valeant, of course, was a sewer. Those that created it deserve all the opprobrium that they got.

HEDGE FUND BET

Warren Buffett: – Put slide 3 up, which showed that over the last eight years, the Vanguard
S&P 500 Index fund was up 65.7% versus five hedge funds that were up 21.9% over the same
period. Some years ago I made a wager. I promised to report before lunch how the wager was
coming out. I’ve been doing that regularly. It seems appropriate since it has developed this far
to point out a rather obvious lesson which is what I hoped to drive home to some degree by
offering to make the wager originally. Incidentally, when I offered to make the wager, namely,
someone could pick out five hedge funds, and I would take the unmanaged S&P Index used by
the Vanguard Fund. I would bet that over a ten year period, the unmanaged index would beat
these five funds that were all being managed by people charging incredible sums to people
because of their supposed knowledge. Put in Longbets.org – it’s a terribly interesting website –
people take the opposite side of various propositions that have a long tail to them and make
bets as to the outcome. Each side gives their reasons. You can go to that website, and you
can find bets about all kinds of things. Our bet became quite famous. A fellow I like bet that he
could pick out five hedge funds – funds of funds. In other words, there was one hedge fund at
the top, and then that manager picked out who he felt was the best managers underneath. Five
funds of funds represent maybe 100 or 200 hedge funds underneath. The fellow making the bet
was picking out funds where the manager on top was getting paid perhaps .5% a year, plus a
cut of the profits, for merely picking out who he felt were the best managers underneath who
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

were in turn getting paid perhaps 1.5% to 2%. The guy at the top was incentivized to pick great
funds. The result after eight years, and several hundred hedge fund managers being involved,
the totally unmanaged fund by Vanguard with very minimal cost is now 40 some points ahead of
the group of hedge funds. It might be a terrible result for the hedge fund investor, but it’s not a
terrible result for these hedge fund managers. You have a top manager charging perhaps .5%
and down below you have managers charging 1.5 to 2%, a couple percentage points sliced off
every year, that’s a lot of money.

We have two managers at Berkshire. They manage $9 billion for us. If they had a 2 and 20
arrangement with Berkshire, which is not uncommon, they would be getting $180 million each
merely for breathing annually. It’s a compensation scheme that’s unbelievable to me. That’s
one reason I made this bet. What I’d like you to do – imagine in this room, you people own all of
America. You are the 18,000 that somehow managed to accumulate all the wealth in the
country. Let’s assume we divide the room down the middle. On this side, we put half of all the
investment capital in the world. That capital is what a certain presidential candidate might call
low energy. In fact, they have no energy at all. They buy 50% of everything that exists in the
investment world. Half of it is owned by these no energy people. They don’t look at stock
prices; they don’t turn on the business channel or read the Wall Street Journal. They are a
slovenly group that just sits, year after year, owning half of America’s business. What is the
result going to be? The result will be average. No expenses, nothing.

What’s going to happen to the other half? The other half is hyperactive investors. Their gross
result is also going to be half. The whole has to be the sum of the parts here. This group can’t
change from its half. The half will have the same gross results as the low energy. This half will
have huge expenses hiring consultants and paying commissions. That hyperactive half, as a
group, has to do worse than this low energy half.

I hoped through making this bet to create a little example of it. I felt it was very probable that
index funds would outperform the hedge funds over any 10-year period. I would make the same
offer now. The ten years to collect gets a little problematic. It seemed so elementary. I will
guarantee you no endowment fund, no public pension fund, no extremely rich person wants to
sit in that low energy part of the auditorium. They can’t believe because they have billions of
dollars to invest that they can’t go out and hire somebody who will do better than average. This
group – sophisticated people, generally richer people – hires consultants. No consultant in the
world is going to tell you to buy an S&P fund and sit still for the next 50 years. You don’t get to
be a consultant that way. You certainly don’t get an annual fee that way. The consultant will talk
for hours. You pay them a large fee, and they will tell you anything, but they always suggest
something other than sitting on your rear-end. They will tell you to go to this person that
charges fees. It demonstrates so dramatically – I’ve talked to huge pension funds and taken
them through the math – when I leave, they go out and hire a bunch of consultants and pay
them a lot of money. The consultants tweak the funds from year to year. They have lots of
charts and PowerPoint presentations. The flow of money from the hyperactive to the helpers is
dramatic. I hope you realize, for the population as a whole, American business has done
wonderfully. You should just sit back and enjoy American business. The net result of hiring
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

professional management is a huge minus. All the commercial push is to think about doing
something different today than you did yesterday.

Charlie Munger: – You’re talking to a bunch of people that solved their problem by buying
Berkshire Hathaway and have done better than the S&P index. There are a few managers that
are really good. It’s a tiny group of people. It’s like finding a needle in a haystack.

Warren Buffett – The people that went with Sequoia fund have been well served if they stayed
for the whole period. There’s been far, far more money made by people in Wall Street through
salesmanship abilities than investment abilities. There are a few people out there who are
going to have an outstanding investment record. The people you pay to identify them don’t know
how to identify them. They do know how to sell to you. That’s my message.

COMMERCIAL INSURANCE

Q – Berkshire Hathaway has an online portal for commercial insurance business –

coveryourbusiness.com. Is there an opportunity to go direct?

Warren Buffett: – We will find out. We have actually two online arrangements. I’m not sure
whether they are both up yet. One is called – I believe it’s called BIG – I believe we got that
domain name – and that will be run by Applied Underwriters which is a subsidiary of ours that
writes workers’ comp. We do commercial auto through GEICO as well. We have been a little
bit and will be exploring more with various insurance lines. When you look at what has
happened with Amazon, you want to try a lot of things. It amazed me how fast the inquiries on
personal auto migrated from phone to the Internet, and I would have thought that the younger
people would do it, but the people like myself would be slow to do it. The adaptation by the
American people has been incredible and shows no sign of slowing down. The answer is we
will try various things, make some mistakes and my guess is 10, 20, 30 years from now it will be
a lot different.

SUCCESSION

Q – What is the plan for how Berkshire will maintain its culture when Howard Buffett no longer
fills the role and what should shareholders watch for to make sure the culture is being
maintained decades from now?

Warren Buffett: – Although I hope that Howard is made chairman just for the reason that if a
mistake is made in selecting a successor, it’s easier to correct it if you have a non-executive
chairman. It’s maybe a 1 in 100 or 1 in 500 probability. It’s not a key factor. The main, by far,
factor in keeping Berkshire culture is you will have a board, successor board members,
managers and successor managers, and you have shareholders that clearly recognize the
special nature of the culture, have embraced the culture. When managers sold the business to
us, they wanted to join the culture. It embraces those who enjoy and appreciate it. I think to
some extent we don’t have a lot of competition on it. It works. I think the chances of us going
off the rails in terms of culture are very slight regardless if there’s a non-executive chairman or
not. I think the main problem Berkshire will have will be size. I thought that when I first started
managing money. Size is the enemy to performance to a significant degree. I do think that the
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

culture of Berkshire adds significantly to the value of the individual components viewed. I don’t
see any evidence of any board member or managers that will move away from what we have
now for many, many decades.

Charlie Munger: – I’m even more optimistic than you are.

Warren Buffett: – I never noticed it.

Charlie Munger: – I really think the culture will surprise everyone in how it lasts. They never
made any fuss over us in the first place. It is going to work very well.

Warren Buffett: – We have so many good ingredients in place in terms of the businesses and
the people that are already here.

Charlie Munger: – There’s so much power in place.

Warren Buffett: – Another thing that’s interesting is how little turnover we get. The number of
managers we’ve had to replace in the last ten years is very few. Without a retirement age – and
I tend to bring that up at every meeting to kind of reinforce the idea – people are working
because they love their jobs. They like the money as well, but their primary motive is they like
accomplishing what they do in their jobs. The turnover is low. The directors are not here for the
money. We have great tenure among the directors. I would argue that’s a huge plus. It’s going
to go on a very long time.

DIVERSITY

Q – Two dozen men and women work with you at headquarters. There’s a lack of diversity
among staff and board members. Does that need to change? Do you consider diversity in a
company?

Warren Buffett: – It’s a multiple part question. We will select board members. We lay it out and
have done so for years. We’ve been much more explicit than most companies. We are looking
for people who are business savvy, shareholder oriented and have a special interest in
Berkshire. We found people like that. As a result, I think we’ve got the best board that we can
have. They are clearly not in it for the money. I get called by consulting firms who’ve been told
to get candidates for directors for other companies. By the questions they ask, it’s clear they’ve
got something other than the three questions we ask in terms of directors in mind. They want
somebody whose name will reflect credit on the institution, which means a big name like at one
organization, Theranos, – the one that did blood samples with small pricks – they have some
very big names on their board. The names are great. We are not interested in people that want
to be on the board because they want to make $200,000 or $300,000 a year for ten percent of
their time, and we are not interested in the ones who it is a prestige item or ones that want to go
and check boxes or that sort of thing. We will continue to apply that test: business savvy,
shareholder oriented and with a strong personal interest in Berkshire. Every share of Berkshire
that our directors own, they bought them like everyone else in the room. Our directors walk in
the shoes of shareholders. I’ve been on boards where they have given me stock – I get it for
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

breathing basically – there’s maybe three or four that I’ve been on the board of. We want our
board to be smart enough that they know what they should and should not get involved in.

The people on our corporate staff – I’m hoping when we take the Christmas picture this year,
they are exactly the same 25 that we had last year. It’s a remarkable group of people. Just
take this meeting, virtually every one of the 25, they’ve been doing job after job connected with
making this meeting a success and a pleasant outing for our shareholders. It’s a cooperative
effort. The idea you would have some annual meeting department, you would have a person in
charge of it, and he or she would have assistants and they would go to various conferences and
then they’d hire consultants to help them. We just don’t operate that way. It’s a place where
everybody helps each other. My job is extraordinarily easy, but the people around me really
make my job easy. Part of the reason is we don’t have any committees, but maybe we have
some that I don’t know about, but I’ve never been invited to any committees at Berkshire. We
may have a PowerPoint some place. I haven’t seen it, and I wouldn’t know how to use it
anyway. We just don’t make work activities. We might go to a baseball game together or
something like that. I’ve seen the other kind of operations, and I like ours better.

Charlie Munger: – Years ago I did some work for the Roman Catholic Archbishop of Los
Angeles, and my senior partner pompously said, “You don’t need to hire us to do this. There
are plenty of good Catholic tax lawyers.” The Archbishop looked at him like he was an idiot and
said, “Mr. Pieler, last year I had some very serious surgery, and I did not look around for the
leading Catholic surgeon.” That’s the way I feel about board members.

SHARE REPURCHASES

Q – Intrinsic value continues to exceed book value, yet Berkshire has done very little share
repurchases in the last four year even in January and February when the stock price dipped
below 1.2 times book value (the valuation Berkshire has set for repurchasing shares). Are we at
a point to consider buying back shares?

Warren Buffett: – Berkshire’s stock price has come fairly close to 1.2 times book value, but I
can almost guarantee you that it hasn’t hit 1.2 times book value, or we would have done it
[repurchased shares]. I will be happy to send you figures on it any day that you might feel that it
did hit the 1.2 times book value mark. Clearly in my view and Charlie’s view and the board, the
stock is worth significantly more than 1.2 times book value. It should be worth significantly more
or we wouldn’t have it at that level. We did move it up from 1.1 to 1.2 because we had acquired
more businesses over time where the differential between our carrying value and the intrinsic
value really had widened from when we set the 1.1 times book value threshold.

I have mixed emotions on the whole thing. From strictly a financial standpoint, and from the
standpoint of the continuing shareholders, I love the idea of buying it at 1.2 times book value,
which means I would probably love the idea of buying it a little higher than 1.2 times book value.
It’s the surest way of making money per share there is. If you can buy dollar bills for anything
less than a dollar, there’s no more certain way of making money. On the other hand, I don’t
enjoy the actual act of buying out people who are my partners at a price that is well below what I
think the stock is worth. The odds are extremely high that we would buy a lot of stock at 1.2
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

times book value or less, but we would do it in the manner where we were not propping the
stock at any given level. If it happens, it will be very good for the continuing stockholders. If it’s
true that we will and are eager even from a financial standpoint to buy it at that price, it’s really
like having a savings account. If you take your money out as a dividend or interest payment,
you get a dollar, but if you leave it in, you are almost guaranteed that we will pay you $1.20.
Why would anyone want to take money out of a savings account if they could cash it in at
120%? It acts as a backstop for insuring that a no-dividend policy results in greater returns than
if we paid out a dollar and people got a dollar. If they leave it in, they will get at least $1.20. It’s
not a total guarantee, but it’s a pretty strong probability. Would we increase that number?
Perhaps. If we run out of ideas, and it really becomes apparent that we can’t use capital
effectively within the company in quantities in which it is being generated, then at some point the
threshold might be moved up a little. You don’t want to keep accumulating so much money that
it burns a hole in your pocket. It’s been said actually that a full wallet is like a full bladder. You
may get an urge very quickly to pee it away. We don’t want that to happen. If we have $100-
$120 billion in cash, we may consider increasing the multiple we pay for share repurchases.
Anytime you can buy stock for less than it’s worth, it’s advantageous to the continuing
shareholders. Intrinsic value can’t be that finely calculated that you can figure it out to four
decimal places.

Charlie Munger: – You will notice elsewhere in corporate America these buyback plans get a
life of their own. It’s gotten very common to buy back stock at very high prices. It doesn’t really
do the shareholders any good at all. I don’t know why people are exactly doing it. I think it gets
to be fashionable.

Warren Buffett: – It’s fashionable, and they get sold on it by advisors. Can you imagine
somebody going out and saying we are going to buy a business, and we don’t care what the
price is? That’s what companies do when they don’t attach some kind of metric on their
buybacks. They should say we are going to buy back $5 billion of stock if it’s advantageous to
buy it back. We should buy it at this price, but we won’t buy it at 120% of the price. I’ve sat on
board of directors, one after the other, where they voted buybacks, and basically they are
saying that we are doing it to prevent dilution. Dilution by itself is a negative. Buying back stock
at too high of a price is another negative. It has to be related to valuation. You will not find a lot
of press releases that say a word about valuation. Jamie Dimon is one of the few CEO’s who
says he will only do a buyback if it is advantageous to J.P. Morgan to do so.

Charlie Munger: – We are always behaving a lot like what some might call the Episcopal
prayer. We prayerfully thank the Lord that we are not like these other religions that are inferior.

NEBRASKA FURNITURE MART

Q – Nebraska Furniture Mart has been opened a year in Dallas. How have the sales been?

Warren Buffett: – It’s our largest store in volume, but we had a problem there like we had in
Kansas City. We generated so much initial volume that we had a delivery problem. It was
worse in Kansas City. That was the first one we opened. We had to take our foot off the gas
pedal. The last thing we want to do is make first impressions accompanied by delivery
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

problems. So it’s our largest store in volume. The deliveries have gotten far better – they are
actually meeting our company’s standards that we have in Omaha. We opened up the largest
home furniture store in the US. We thought we trained the drivers as well as we could. Delivery
problems occurred with 100 plus units out there in the new operation, taking in carpet, people
getting lost and routing being bad. There was plenty of work to be done, and it has been done.
I think it will be a billion dollar annual store before very long – it’s a terrific area. We have 20
plus auto dealerships there in the Dallas/Fort Worth area. We probably have three or four of
them in the area where our furniture mart is. They can’t build fast enough down there. It already
is a great store, but it will be something far beyond that. They are doing terrific volume. I’m
staring to sound like Donald Trump—“Tremendous, terrific, fantastic, I’ve never seen anything
like it!” Wait until next year. It’ll come back, and it will really be in shape them. It’s doing well.
We have over 400 acres. We were very fortunate in corralling a whole bunch of land. We are
bringing prices and variety like nobody has seen. Now we just have to bring delivery like
nobody has ever seen.

CNBC-CYBER, NUCLEAR, BIOLOGICAL, and CHEMICAL THREATS

Q – You have expressed concern about cyber, biological, nuclear and chemical attacks.
Preventing catastrophe is not getting enough attention. The bill got bottled up in the Senate. Is
it a good idea to fund a campaign and counteract industry lobbyists?

Warren Buffett: – In my view, there is no problem remotely like the problem of what I call CNBC
– cyber, nuclear, biological, and chemical attacks – that either by rogue organizations, even
possibly individuals or rogue states. You can think about a lot of things, and it will happen. I
think we have been both lucky, and frankly, the people have done a very good job in the
Government because Government is the real protection on this in not having anything since
1945. We came very close during the Cuban missile crisis. I can think of many people if they
were in place of either Kennedy or Khrushchev, we would have had a very different result. It’s
the only real threat to Berkshire – external threat to Berkshire’s economic well being over time. I
hope when it happens, that it is minimized. The desire of psychotics, and megalomaniacs and
religious fanatics and whatever to do harm on others is a lot more when you have seven billion
people on earth than when you had three billion or so which is the case when I was born, less
than three billion. Unfortunately, their means of doing it – if you were a psychotic back far
enough; you threw a stone at the guy in the next cave. There was sort of a linear relationship of
damage to psychosis. That went along through bows and arrows and spears and cannons and
various things. In 1945, we unleashed the nuclear threat, something like the world had never
seen. That’s a popgun compared to what can be done now. There are plenty of people that
would like to cause us huge damage. I came to that view when I was in my 20s in terms of my
philanthropic efforts. I decided that was one of two issues that should be the main issue. I got
involved with all kinds of things.

Charlie Munger: – You supported the Pugwash conference year after year after year all by
yourself.

Warren Buffett: – I’ve given some money to the nuclear threat initiative that was created – sort
of a Federal Reserve System that will take away some of the excuse for countries to develop
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

their own highly enriched uranium. It’s overwhelmingly a governmental problem, and I think it
actually has been the top priority for president after president. They don’t want to scare the hell
out of everybody or tip people’s hands as to what they are doing, but being in the insurance
business – you don’t have to be in the insurance business to know someday, somebody will pull
off something on a very, very big scale that will be harmful. The United States is probably the
most likely place it will happen. It could happen in a lot of other places. That’s one huge
disadvantage to innovation.

Charlie Munger: – I think he also asked why we don’t spend more time telling the Government
what they should be doing.

Warren Buffett: – It seems sort of hopeless. They don’t know what to do beyond what they are
doing. Incidentally, they’ve done a lot of things. It all doesn’t get publicized. Khrushchev
shouldn’t have been sending it over to Cuba. At least he had enough sense when he knew
Kennedy meant business to turn the ships around. You can’t count on there being Kennedys
and Krushchevs all the time in charge of things. I see the mistakes being made in business with
human behavior where people act so contrary to their own long range self-interests. There are
a lot of frailties. You can argue if Hitler hadn’t been so anti-Semitic, he could have gotten to the
Atomic bomb before we did, but he drove out the best of the scientific minds.

Charlie Munger: – Imagine a guy stupid enough to think the way to improve science is to kick
out all of the Jews.

Warren Buffett: – The hero of the 20th Century may have been Leo Szilard. Leo is the guy that
got Einstein to co-sign a letter to Roosevelt – one side or the other is going to get it, and we got
it first. Post 9-11, people started getting a few envelopes with Anthrax. When you have a mind
that is going to send Anthrax to people, how that decision is made is just totally beyond
comprehension. The capability for damage is absolutely incredible. If I knew how to reduce the
probabilities of the CNBC type mass attack by 5%, all of my money would go to that. No
question about that.

Charlie Munger: – Hasn’t it been true that we haven’t been very good at getting the
Government to follow our advice?

Warren Buffett: – But this one is important. Nobody argues with you about it. Some people
work for a while on it and just get discouraged and quit. I was involved for a while – I forget the
name of it – a bunch of nuclear scientists, their idea was to affect elections in small states,
government was the main instrument and you would have the maximum impact. People got
discouraged. I think our leaders are good on this. I do not worry about the fact that either
Clinton or Trump would regard that as the paramount problem of their presidency. I just don’t
know if the offense can be ahead of the defense. You can win the game 99.99% of the time.
Eventually, anything that has any probability of happening will happen. I wish I could give you a
better answer.

Charlie Munger: – I have no hope of giving a better answer.

Warren Buffett: – That’s what they all say to me.

2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

LUBRIZOL

Q – Lubrizol, how has the core business done? Talk about the performance of one or two of
their acquisitions,

Warren Buffett: – The additive business, there’s four companies in it basically. It’s a no growth
but very good business. We are the leader. It has performed almost exactly as you would
anticipate. Lubrizol made one large acquisition which was a big mistake. That was in the oil
field specialty business. It was made right at the peak of oil prices. Afterwards, oil took a
nosedive. The biggest acquisition should not have been made. We still have the fundamental
earning power of the additives business. That has not disappointed us in any way. It’s not a
growth operation.

MICROECONOMICS AND MACROECONOMICS

Q – Berkshire Hathaway does not make investment decisions based on macroeconomic factors,
but do you have good microeconomic indicators from Berkshire’s many businesses?

Warren Buffett: – Charlie and I read a lot. We are interested in economic matters and political
matters. We are familiar a lot with almost all the macroeconomic factors. We don’t know where
zero interest rates are going to lead. We do know what’s going on.

Charlie Munger: – There’s confusion here. It says microeconomic factors. We pay a lot of
attention to those.

Warren Buffett: – In terms of the businesses we buy and when we buy stocks, we look at it as
buying businesses, so they are very similar decisions. We try to know as many as we can know
of the microeconomic factors. I like looking at the details of a business whether we buy it or not.
I find it interesting to study the species. I don’t think there’s any lack of interest in those factors
or denying the importance of them.

Charlie Munger: – There could hardly be anything more important than the microeconomic
factors. That is business. Business and microeconomics is sort of the same term.
Microeconomics is what we do and macroeconomics is what we put up with.

ANCHORING BIAS

Q – The anchoring effect, how do you deal with that?

Warren Buffett: – We are not anchored, we are ignoring. Charlie and I find it interesting in every
business. We like to look at micro factors. When we buy a See’s Candy in 1972, there may
have been 140 shops. We look at the numbers on each one and watch them over time. We
really like understanding businesses. It is interesting to us. Some of the information is useful.
Some of it may look like it’s not helpful. Who knows when some little fact does pop up and
makes a difference? We love doing this. It is like watching baseball games. Every pitch is
interesting, whatever it may be. That’s what our activity is.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: – We try to avoid the worst anchoring effect which is always your previous
conclusion. We really try to destroy our previous ideas.

Warren Buffett: – Charlie says if you disagree with somebody, you ought to be able to state their
case better than they can. At that point, you’ve earned the right to disagree with them.

Charlie Munger: – Otherwise, you should just keep quiet. It would do wonders for our politics if
everybody followed my system.

PERSONAL INVESTMENTS VS BERKSHIRE INVESMENTS

Q – How do you determine which investments you will make personally like Seritage Growth
Properties and Phillips 66 as disclosed on Form 13-G’s versus the investments you make for
Berkshire?

Warren Buffett: – I have never owned a share of Phillips 66. Maybe there’s some way when
the form is filled out that because I’m CEO of Berkshire, on some line, it imputes ownership to
me. I’ve never owned a share of Phillips. Seritage is a real estate investment trust that had a
total market value of under $2 billion when I bought it. I have about 1% of my net worth outside
of Berkshire and 99% in it. I can’t be doing things that Berkshire does. Seritage is not
something of Berkshire size, and we’ve never owned a real estate investment trust in Berkshire
at all. I could buy that and not worry about a conflict. My best ideas are off limits for me
because they go to Berkshire if they are sizable enough. We will not be making investments,
unless it’s something very odd, in companies with a total capital market value of a couple of
billion. So, every now and then, I see something that is sub-sized for Berkshire that I will put
that 1% of my own net worth in. I own some wells that I bought a long, long time ago. I try to
stay away from anything that could conflict with Berkshire.

Charlie Munger: – Part of being in a position like that is you really don’t want a conflict of
interest or even the appearance of it. Both of us practically have nothing of significance in the
total picture outside of Berkshire. I have some Costco stock because I’m a director. Berkshire
has some Costco stock. There are two or three little overlaps like that, but basically Berkshire
stockholders have more to worry about than some conflict Warren and I are going to give it. We
are not going to do it.

Warren Buffett: – It may sound a little crazy, and it’s only because I can afford to say this, but I
would much rather make money for Berkshire than for myself. It’s not going to make any
difference to me anyway. I have all the money I can possibly need and way more. Everything is
more wound up in how Berkshire does because I’m going to give it all away. I know my end
result is going to be zero, and I don’t want Berkshire’s end result to be zero. I’m on Berkshire’s
side.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

FREE CASH FLOW

Q – Berkshire is generating about $10-$12 billion in free cash flow or $20 billion with changes
in deferred taxes. What is the outlook for free cash flow? Expect similar dynamics going
forward?

Warren Buffett: – There’s a lot of deferred tax that is attributable to unrealized appreciation of
securities. I don’t have the figure, but let’s just assume its $60 billion of unrealized appreciation
of securities and $21 billion of deferred tax. Some arises through bonus depreciation. The
railroad will have depreciation for tax purposes that’s a fair amount higher than for book
purposes. Deferred taxes do not provide cash available for use but avoided to have to pay out.
Overall, I think primarily of the cash flow of Berkshire relating to our net income plus our
increase in float, assuming we have an increase. Over the years, float has added $80 billion
plus to make available for investment beyond what our earnings allowed for. We are going to
spend more than our depreciation in our businesses – the railroad and Berkshire Energy – for a
long, long time. The other businesses, unless we get into inflationary conditions, it won’t be a
huge swing. Our earnings, not counting capital gains, of around $17 billion, plus our change in
float is the net new available cash for Berkshire to invest. But, of course, we can always sell
securities and create additional cash or we can borrow money. People didn’t appreciate the
value of float. What Charlie and I think about, we want to add every year something to the
normalized earning power per share of the company. We have retained earnings to work with
every year. Sometimes it doesn’t look like we have accomplished much and in other years
something big happens. It will be lumpy.

Charlie Munger: – There are very few companies who have ever been similarly advantaged. In
the whole history of Berkshire Hathaway, we lived with a torrent of money and constantly
deployed it. We were rising up as we went along. That’s a pretty good system. We are not
going to change it.

Warren Buffett: – It’s allowed for a lot of mistakes. American business has been good enough
that you don’t have to really be smart to have a decent result. If you can bring a little bit of
intellect, you should get a pretty good result.

Charlie Munger: – You have to be adverse to the standards of stupidity. Just keep those out.
You don’t have to be smart.

THINKING AHEAD OF THE CROWD

Q –. What elusive truth has allowed you to think ahead of the crowd?

Warren Buffett: – I think I got the question. I owe a great deal to Ben Graham in terms of
investing, and I owe a great deal to Charlie in terms of learning a lot about business. I spent a
lifetime looking at businesses and why some work and why some don’t work…pattern
recognition. As Yogi Berra said,”You can see a lot just by observing.” That’s pretty much what
Charlie and I have been doing for a long time. It is important to recognize what you can’t do.
We’ve generally tried only to swing at things in our particular strike zone. It’s really not much
more complicated than that. You don’t need the IQ in the investment business that you need at
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

certain activities in life. You do have to have emotional control. We’ve seen very smart people
do very stupid things with unnecessary risks. People do it time after time, self-destructive
behavior of one sort or another. It doesn’t take a genius to do it, but I think we sort of avoided
the self-destructive behavior.

Charlie Munger: – There are a few simple tricks that work well. Temperament that has a
combination of patience and opportunism in it is one. I think it’s largely inherited, but it can be
learned to some extent. Another factor that Berkshire has done so well is we really try to
behave well. I had a great-grandfather that when he died, the preacher gave the talk and said,
“None envy the man’s success won fairly and used wisely.” It’s exactly what Berkshire is trying
to do. There are a lot of people that made a lot of money, and everybody hates them. They
don’t admire the way they earned the money. I don’t believe in the gambling business. We’ve
turned down businesses, including a big tobacco business. I don’t think Berkshire Hathaway
would work so well if it were just terribly shrewd. We want to have people think of us as having
won fairly and used wisely. It works.

Warren Buffett: – We were very lucky to be born when we were and where we were.

Charlie Munger: – Think of how lucky you were to have your Uncle Fred. Warren had one of
the finest uncles. I used to work with him, too. A lot of people have terrible relatives.

Warren Buffett: – Just yesterday we had a meeting of all my cousins. There were probably 40
or 50 of us there. They were pointing out some old pictures. I had four great aunts in these
pictures. You were so lucky to have one like that, and I had four. In every way, they reinforced
a lot of things that needed some reinforcement in my case.

Charlie Munger: – I wish you had a couple more. We’d be doing even better. Warren is a
Democrat. I worked for his grandfather, Ernest, and he was earnest. When they passed Social
Security which he disapproved of, he thought it would reduce self-reliance. He paid me $2 for
ten hours work. There was no minimum wage in those days. At the end of the ten hours, and it
was a hard ten hours, he made me give him 2 pennies which was my contribution to Social
Security and then gave me a long lecture on social policies and told me about the evils of
Democrats and the lack of self-reliance and on and on.

Warren Buffett: The people that we were around when we were young, we were very lucky.

DUE DILIGENCE ON DEALS

Q – Does your due diligence process, which is speedy and usually done within days, an
advantage or risk on deals?

Warren Buffett: – I get that question often from lawyers. We would have paid them by the hour
for it. We’ve made plenty of mistakes in acquisitions and making mistakes in not making
acquisitions. Mistakes are always about making a proper assessment of economic conditions or
the future of the company. They are not the things on the checklist for every acquisition for
every major corporation. What counts is whether you really have a fix on the basic economics
or how the industry is going to develop or whether Amazon is likely to kill them in a few years.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

We’ve not found a due diligence list that gets at what we think are the real risks when we buy a
business. We have made at least half dozen mistakes and maybe more when you talk about
mistakes of omission. None of those would have been cured by a lot more due diligence, but
may have been cured by us being a little smarter. Assessing whether a manager who I’m going
to hand a billion dollars to for his business and he will hand me a stock certificate, assessing
whether he’s going to behave differently in running that business than he has in the past when
he owned it, that’s incredibly important. So, if we thought there were items of due diligence,
there are a few that get covered, but if we thought there were things that were missing that were
important in assessing the future economic prospects of the business, we would by all means
drill down on those. When we bought See’s, we probably had 150 leases. When we bought
Precision Castparts, there are 170 plants. There will be pollution problems at some place.
However, the individual plants were not important, but the business prospects 10-20 years from
now. I do think it probably facilitates things with at least certain people that our method of
operation does cut down the due diligence. You get into squabbles on small things – I’ve seen
deals fall apart because people start arguing about some unimportant point. Their egos get
involved. They draw lines in the sand. When we start to make a deal, it usually gets done.

Charlie Munger: – Business quality usually counts for something more than whether you
crossed the T on some old lease. The human quality of the management that are going to stay
are very important, how will you check that by due diligence? I don’t know anyone who has had
a better record than Berkshire in judging business quality and the human quality of people. I
don’t think it would have improved at all by using some different method. We are doing it the
way we should.

Warren Buffett: – Negotiations that drag out tend to blow up. People can get obstinate about
small points. It’s silly to get obstinate, but people get silly sometimes. I like to keep things
moving, and I like to show a certain amount of trust because usually trust comes back to you.
The truth is there are some bad apples out there. Spotting them will not come from looking at
documents. You really have to size up whether that person who is getting a lot of cash from
you, how they are going to behave in the future because we are counting on them. That
assessment is as important as anything involved. We know all the figures going in and what we
will pay. We don’t want things to get gummed up in negotiation. If I have the deal in the right
terms, I don’t believe in winning every point. Tom Murphy taught me not to try to win every point
in deal making. Make a decent deal. If you think its bad faith, it gives an indication of the
character you’re dealing with, then you have another problem. You’re lucky if you find that out
early.

Charlie Munger: – How many people in this room that are happily married carefully checked
their spouse’s birth certificate? My guess is our methods are not as uncommon as they appear.

Warren Buffett: – I’ll think about that.

2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

SUCCESSION PLANNING

Q – Has there been a change in succession planning with Ajit Jain taking over reinsurance from
Ted Montross?

Warren Buffett: – Ted has done a sensational job for Berkshire. Gen Re was a problem child
for a while as you know. I tried to get him to stay on longer. As you say, it makes sense to have
the reinsurance operation under Ajit. Ajit oversees a company called Guard. We bought it a few
years ago. It is based in Wilkes-Barre, PA. It’s doing a great job with small business policies.
It’s flourished under Ajit. He started the specialty operation a couple years ago. That’s going
gangbusters. I have found with really abled people, they can handle so much. If you have
some preconceived notion, at an annual meeting with 40,000 people, that you need to spend
millions of dollars with meetings and meetings, but really abled people can do anything. There’s
no limit to what talented people can accomplish. Anything on insurance, Ajit can handle.

In terms of my succession, we will have a board meeting on Monday. We will talk about it as we
always do. Our thoughts are as one on that, and everybody knows why it makes the most
sense. Five years from now, something else could make sense. Who knows what happens in
terms of the time when it happens? Maybe the person involved their situation changes. There
are no tea leaves to read in the fact that Ajit is supervising Gen Re from this point forward.

Charlie Munger: – Not only can the abled people usually do a lot more, but the unabled people
by and large you can’t fix. You are forced to use our system if you have your wits about you.

Warren Buffett: – We don’t feel the need to follow any kind of organizational common view. We
try to make the most logical decision. We don’t have a grand design in mind, like an Army
organization chart, and we never will.

Charlie Munger: – Warren and I once reached a decision that we wouldn’t pay more than X
dollars for something. A man who was subordinate to both of us said, “You’re out of your
minds. This is really stupid. This is a quality operation. You ought to pay up for it.” We looked
at one another and did it his way. We don’t pay any attention to titles.

Warren Buffett: – He was right.

Charlie Munger: – We did it his way. He was right.

Warren Buffett: – One time the woman that does clean my office came in. She was kind of
wondering what I did. Her name was Ruby. One day she decided to get to the heart of the
matter. She said, “Mr. Buffett, do you ever get any good horses?” That’s apparently where she
thought I was getting my money, at the track.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

BERKSHIRE’S CREDIT RATING

Q – Why doesn’t Berkshire have the highest credit bond rating?

Charlie Munger: – The rating agencies are wrong and set in their ways.

Warren Buffett: – We don’t fit their model very well. We don’t look like anything they see
otherwise. When they come in the door, I always say let’s talk AAAA. I never get any place.

3G AND COST CUTTING

Q – Berkshire formed a partnership with 3G in the Kraft Heinz deal. Why is 3G’s cost cutting
leading to reduced volume and revenues at Kraft Heinz?

Warren Buffett: – Sometimes you can cut costs that are a mistake to cut and sometimes you
can keep costs that are a mistake to keep. Tom Murphy had the best approach. He never hired
a person he didn’t need, and therefore, he didn’t have layoffs. At Berkshire headquarters, we
have a similar approach. If you don’t need them now, you didn’t need them in the first place. At
cyclical businesses like the railroads, you may have to cut back on people when volume goes
down.

There are all kind of American companies that are loaded with people that aren’t doing anything
or are dong the wrong thing. My impression from everything I’ve seen is that 3G in terms of the
cost cuts that they have made have been extremely intelligent about it and have not done things
that will cut volume. In the packaged good industry, it’s true that the volume trends are not good
right now. The test will be over time. Are the operations which have had their costs cut, do they
do poor in terms of volume that in my judgment look very fat? I see no evidence of that
whatsoever. I do think at Kraft Heinz there are certain lines that will decline in volume and other
lines will increase in volume. Overall, the packaged goods industry will not go anyplace in terms
of physical volume. It may decline a bit. I have never seen anyone run something more
sensibly than 3G in terms of taking over operations and getting the costs under control in a
hurry. I look at everybody else’s figures every month. I’m always looking for any signs of
underperformance. I’ve seen none.

Charlie Munger: – Sometimes when you reduce volume, it’s very intelligent because you are
losing money on the volume you’re discarding. It’s quite common for a company to have more
employees than it needs, but sometimes is has two or three customers that you would be better
off without. It’s hard to tell from the outside whether things are going good or bad just because
volume is going down a little. I think the leaner-staffed companies do better at everything than
the ones that are overstaffed. It’s not a plus.

Warren Buffett: – Sloppy thinking in one area probably indicates there may well be sloppy
thinking in other areas. As a director of 19 companies over time, I’ve seen operations that are
outstanding and some sloppy ones. There is a vast difference between the two. If you have a
wonderful business, you can get away with being sloppy. We could be wasting a billion dollars
a year at Berkshire, $650 million after tax, four percent of earnings, and maybe you wouldn’t
notice it.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: – I would.

Warren Buffett: – Charlie would notice it. It’s the really prosperous companies – a classic case
is the tobacco companies many years ago– they went off into this thing and that thing, and it
was practically play money because it was so easy to make. It didn’t require good
management, and they took advantage of that fact.

VAN TUYL ACQUISITION

Q – Are the economics of the $4 billion Van Tuyl deal better than it looks?

Warren Buffett: – You are right. It’s better than it looks. We have a billion dollars worth of
securities that came with the $4.1 billon deal. Those billion dollars are available to us. There’s
some very significant acquisition accounting charges that will continue for a couple years. The
economics of Van Tuyl have worked out almost exactly the way we anticipated. Van Tuyl has a
first class CEO. Take a billion dollars off the purchase price for openers; there are some
amortization charges of items that are allowable that make you correctly see a fairly low income
figure against what it appears the acquisition price was. So far, the acquisition is exactly on
schedule and producing perfectly satisfactory results. We haven’t had much luck in acquiring
other auto dealerships. People think we paid X. Therefore, they think they are entitled to X. We
didn’t pay X. We bought very little so far in terms of other auto dealerships. We are not going
to change our metrics as far as how we value auto dealerships.

ZERO AND NEGATIVE INTEREST RATES

Q – When interest rates go from zero to negative in a country, how does that affect valuation?

Warren Buffett: – Going from, which we haven’t done yet in this country yet, going from 0% to -
½%, it’s really no different than going from 4% to 3 ½%. It has a different feel to it if you have
to pay a half a point to somebody. If you have your base rate reduced by a ½ point, it’s of some
significance, but it’s not dramatic. What’s dramatic is the low interest environment generally.
We have been with a low interest rate situation for a long time and longer than I would have
anticipated. You will pay more for a business when interest rates are zero than when they are
15% when Volcker was around. Very cheap money makes me pay a little more for businesses
than when money was what we thought previously were very normal interest rates, and very
tight money would cause me to pay somewhat less. We had a rule for 2600 years – Aesop –
and it was that a bird in the hand is worth two in the bush. A bird in the hand now is worth about
9/10th of a bird in the bush in Europe. These are very unusual times. If you asked me if I paid a
little more for Precision Castparts because interest rates are around zero than if they had been
6%, then the answer is yes. I try not to pay too much more, but it has an effect. If interest rates
continue at this rate for a long time, that will have an enormous effect on asset value.

Charlie Munger: – I don’t think anyone knows much about negative interest rates. We never
had them before. We never had periods of stasis, except for the Great Depression. We didn’t
have things like what happened in Japan, great modern nation playing monetary tricks, stimulus
tricks, mired in stasis for 25 years. None of the great economists that studied this and taught it
to our children understand it either. We just do the best that we can.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: – They still don’t understand it.

Charlie Munger: – Our advantage is that we know we don’t understand it.

Warren Buffett: – It makes for an interesting movie. It does modestly affect what we pay for
businesses – I don’t think anyone expected it to last this long.

Charlie Munger: – If you are not confused by negative interest rates, you did not think about it
correctly.

IBM AND GEICO RELATIONSHIP

Q – GEICO is working with IBM’s Watson. Can you comment on whether they will sell data from
their relationship to other insurance companies?

Warren Buffett: – Both parties thought about that matter, very intensively and extensively.
Neither would be in a position to talk about it. I don’t like to not answer any questions, but there
are some things it doesn’t pay to answer. Am I right, Charlie?

Charlie Munger: – Of course you’re right.

Warren Buffett: – I like that.

AMERICAN EXPRESS

Q – American Express will need to reinvent itself overtime. Shouldn’t Berkshire reassess its
investment position in American Express?

Warren Buffett: – We reassess reasons for owning all investments on an almost continuing
basis. Usually we are in a general sense of agreement, but sometimes we are a fair distance
apart. Payments are an area of intense interest to a lot of smart people with a lot of resources.

Charlie Munger: – And rapid change.

Warren Buffett: – I still feel good about owning American Express. Their position and it has
been under attack for decades, more intensively lately, and will continue to be under attack. It’s
too big a business and too interesting and too attractive of a business for people to ignore it. It
plays to the talents of some very smart people.

Charlie Munger: – A lot of great businesses are not quite as great as they used to be. The
packaged good business, the Procter & Gamble and the General Mills, they are all weaker than
they used to be at their peak.

Warren Buffett: – Auto companies.

Charlie Munger: – When I think of the power of General Motors when I was young. They
loomed over the economy like a colossus. It looked totally invincible with torrents of cash, and
then it went bankrupt. So the world changes? We can’t make the portfolio change every time
something is a little less advantaged than it used to be.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: – You have to be thinking all the time to see if something has changed the
game in a big way. That’s not only true for American Express. It’s not that we are not cognizant
of price, but assessing the probability of those threats being a minor or major problem, or a life
threatening problem, it’s a tough game, but it’s interesting.

Charlie Munger: – Anyone in payments is facing threats today.

CATTLE INVESTING

Q – A cattle rancher asked about thoughts as it relates to an expanding global population and
an investment in cattle. Do you think it’s wise?

Charlie Munger: – I think it’s one of the worst businesses that I can imagine for somebody like
us. Not only is it a bad business, but we have no aptitude for it. It has one good year every 20
years.

Warren Buffett: – There’s nothing personal. Some people have done well in it.

Charlie Munger: – One out of every twenty.

Q – I know you guys like steak.

Warren Buffett: – Actually I know a few people that have done reasonably well in cattle. They
usually own banks on the side. I wish you the best in it. I’m in Kiewit Plaza if you want to send
anything along.

Charlie Munger: – Somebody has to occupy the tough niches in the economy.

Warren Buffett: – We need you.

COMPENSATION INCENTIVES

Q – The power of incentives – how will you compensate the next Berkshire CEO?

Charlie Munger: – I wouldn’t worry about the next CEO. Our incentive systems are different.
They try to adapt to the reality of each situation. Basic rule is you get what you’re rewarded for.
If you have a dumb incentive system, you get dumb outcomes. One of our really interesting
incentive systems is at GEICO. We don’t have a normal profit type of incentive for the people at
GEICO.

Warren Buffett: – At GEICO, we have two variables. They apply to well over 20,000 people.
You have to be there a year. Anyone that’s been there a year knows these two variables will
determine bonus compensation. As you go up the ladder, it has a multiplier effect. It gets to be
larger and larger in terms of bonus compensation as a percentage of your base. It’s always
significant.

I care about growing the business and I care about growing it into a profitable business. We
have a grid which consists of growth in policies in force, on one axis, and then on the other gird,
the profitability of the seasoned business. It costs a lot of money to put the business on the
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

books. We spend a lot of money on advertising. The first year we put any business on the
books, it’s going to reduce profits. I don’t want people to worry about profit that might be
impaired by growing the business fast. We’ve used it since 1995. We put a tiny new tweak in
for new business. Everybody understands it. It totally aligns the goals of the organization in
terms of compensation with the goals of the owner.

Charlie Munger: – Other people might reward something like just profits. They don’t take on
new business because it hurts profits. You need to think things through, and Warren is good at
designing incentive compensation plans.

Warren Buffett: – Do you reward profits? It would be the dumbest thing you could do. You quit
advertising and start shrinking the business a little. People know the very top person is getting
paid based on the same two variables. They don’t think the guys at the top have a cushy deal
compared to them. Interesting thing is if we brought in a compensation consultant, they would
come up with plans designed for all of Berkshire. The idea of having sort of a coordinated
arrangement for incentive compensation across 70 or 80 businesses is totally nuts. If we
brought in somebody, they would be thinking in terms of some master plan and subplans. We
try to figure out what makes sense in each business we are in. There are some businesses
where the top person is enormously important and some where the business itself dominates.
We try to design plans that make sense. One fellow, he wanted to sell his business, but he also
wanted to keep running it. I made a deal. I said, “Tell me what the compensation plan should
be.” He said, “I thought you told me.” I said, “No. I don’t want a guy working for me that has a
plan that he doesn’t think makes sense.” He told me what made sense, and we’ve been using it
ever since. We never changed a word. Some are very tough businesses, some are very easy,
some are capital intensive and some aren’t. To think you will have a simple formula that can be
stamped out for the whole place, you would be wasting a lot of money, and you would be
misdirecting incentives. In terms of the person that succeeds me, I sent two memos to the
board with thoughts on that. Maybe I will send a third one. I don’t think it would be wise to
disclose what exactly is in those letters.

Charlie Munger: – A lot of bad examples of incentives come from banking and investment
banking. If you reward someone with some share of the profits, and the profits are being
reported using accounting practices that cause profits to exist on paper that are not really
happening, then people are doing the wrong thing, and it’s endangering the bank and hurting
the country. That was a major part of the cause of the financial crisis. The banks were
reporting a lot of income they weren’t making. The accounting allowed a lender to use his
previous historical loss rate – an idiot could make money on giving loans with high interest,
accruing interest and saying, “I won’t lose money on these since I didn’t lose it in the past.” It’s
insane for the accountants to allow that. Nobody is ashamed of it.

Warren Buffett: – You get the very greedy cheap executive who wants an enormous payoff for
himself. He designs a pyramid so others get paid, and it doesn’t look like he’s all by himself in
terms of the fantastic payoff he arranged for himself. There’s a lot of misbehavior. You saw it in
pricing of stock options. I’d hear conversations in a board room. They were issuing options at a
terribly low price. You get enough people interested; they may occasionally do something that
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

might cause it. What could be dumber than a company looking to issue shares at a low price?
If you were a consultant, you would want to make people think that compensation is very
complicated.

Charlie Munger: – We want it simple and right. Those of you with children, if you constantly
rewarded every child for bad behavior, the house would be ungovernable in short order.

BNSF CAPITAL EXPENDITURES

Q – BNSF capital expenditures are about 20% of revenues. What are maintenance
expenditures?

Warren Buffett: – All railroads merely spending their depreciation expense will not keep them in
the same place. We spent a lot of money in 2015 to correct problems. That was when we
spent the $5.7 billion. I’d say that the true maintenance is higher than 60% of that number.
There is an additional expense at BNSF that is not reflected in the figures. We also have a lot
of intangible expenses that aren’t real expenses. Overall, I think Berkshire figures are on the
conservative side. That’s not true at any railroad. We also had something called positive train
control investments. I think we may be further along than most of them in paying for that, which
will be $2 billion in aggregate for the industry. It is a very capital intensive business. I’d say it’s
very likely that we will spend more than depreciation – quite a bit more to stay in the same place
for a long, long time as will other railroads. That’s a negative. We will always be looking for
ways for capital expenditure money to develop additional business. We did a lot of that in the
Bakken region, and we got benefits from it when oil prices rose – but not as much as we thought
we would. I hope we get the opportunity to do more.

Coal volume declining doesn’t really have anything to do with our overall capital budget. We
would be open to investing more in intermodal, but you have to see a fair amount of revenue
coming. We had a proposition we worked on for many years. We would have spent a whole lot
more money, if it had been approved. The court came out with a decision that was negative on
it.

Charlie Munger: – Our competitors pretend to be environmentalists. It’s a common practice

now. We were trying to do the right thing, and so far we’ve lost to the courts.

LOW CRUDE OIL PRICES

Q – A lot of people are losing their jobs due to sharp decline in crude oil. Will this influence
monetary policy decisions?

Charlie Munger: – Not much.

Warren Buffett: – It’s an important industry. The decline in the price of oil has had a lot of
effects. It’s very good for the consumer but very bad for some businesses like the one we
bought in Lubrizol and some others. It should be good for the United States overall. We are an
importer. It’s good for the US to have low prices for bananas so it is good to have low prices for
oil. Oil extends into so many areas that it also hurts plenty when the price of oil falls. It
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

particularly hurts capital investments. The consumer gets the benefit when they go to the filling
station every 2 or 3 weeks. The capital investment contraction is huge if you project out lower
price oil for a while. An oil field that was worth X may be worth ½ X or no X overnight. There
are certain big factors in terms of our chemical operation, people stopped ordering immediately.
The U.S. is better off and Saudi Arabia is worse off. Our economy has continued to make
progress despite the oil price decline. Different regions suffer disproportionately.

Charlie Munger: –That will do for this subject.

EXCESS CASH

Q – Why does Berkshire Hathaway have so much excess cash in its Manufacturing, Service
and Retailing section of the balance sheet?

Warren Buffett: – We have excess cash at every place at Berkshire. At present, it doesn’t
really make any difference if it’s at certain subsidiaries or other subsidiaries. We have excess
cash. We will never go below $20 billion in cash and actually stay comfortably above it. We will
have more than $60 billion in cash when the Kraft Heinz preferred matures. We don’t really
worry much about what pocket it’s in. It’s not making anything at these levels now. If rates
move higher, we’ve actually got the mechanics in process to do sweep accounts. I’d pay no
attention to the particular cash that is being held in that category there. The cash in Berkshire
Hathaway Energy and the railroad, we have independent levels that we don’t guarantee their
debt. They run with ample cash, and we would not look at sweeping that down to a minimum. If
we take about 40 or 50 of our miscellaneous subsidiaries, we will go to a sweep account when
rates make any difference to do it. When you’re getting zero, it doesn’t make much difference
where you get zero.

Charlie Munger: – One of his ideas is why don’t we imitate some of these other people and pay
our suppliers more slowly so we have more working capital?

Warren Buffett: – That’s a big thing in business now. Last year Wal-Mart went to all of their
suppliers, certainly the companies that we supply. They had a list of a half dozen things that
they wanted the present suppliers to agree to. One of those things was more extended terms.
Each of our companies made their own decisions. My guess is they got more extended terms
from most of their suppliers. I don’t remember the exact request, whether they went from 30
days to 60 days, but they got a meaningful extension. In a couple of years, you will see higher
payables relative to sales at Wal-Mart than you saw a year or two ago. They are under a lot of
pressure competing with Amazon and others. It’s conceivable that one of our subsidiaries might
deem it wise to do it, but I don’t think they will. I think the pressure for cash at Berkshire is not
that high. I think the desire for great relations with suppliers would probably overcome most of
our managers’ minds in the desire to start extending terms.

Charlie Munger: – I think it’s hard to do that brutally when you’re rich, and your supplier isn’t
and think your supplier is going to love you. There’s something to be said for leaning over
backward to have a win – win relationship with both suppliers and customers always.

Warren Buffett: – You can argue we have a pretty good thing going in float.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: – We don’t need it. Let someone else set the record on that one.

LACK OF RESTRUCTURING CHARGES

Q – Does Berkshire not incur much in restructuring costs because most of your acquisitions are
stand alone?

Charlie Munger: – That’s a question like asking, “Why don’t you kill your mother to get the
insurance money?” We don’t do it. We are not interested in manipulating those numbers. We
haven’t had a restructuring charge ever and we are not about to start.

Warren Buffett: – The numbers would not be huge. They are more conservatively stated than
most companies. I think our depreciation expense at our railroad is inadequate as a measure of
true operating earnings.

Charlie Munger: – We like to advertise our defects.

Warren Buffett: – Not all of them. I think we will have more amortization and certain intangibles
which reduce earnings and reported earnings which in reality are not expenses. I pointed that
out. We will have more of that than some companies. We do not report adjusted earnings.
Things are good enough at Berkshire that we don’t need to inflate the figures.

CREDIT DEFAULT SWAPS

Q – Fixed-income manager asked about premium on Berkshire’s credit default swaps (CDS).

Warren Buffett: – We have one position left over from six or seven years ago that involves us
selling protection on zero coupon municipal bonds with a nominal maturity value. I think $7.7
billion or something like that. We are sitting with the position because we like the position. Our
CDS – that’s an insurance premium against our debt that people buy. There is a fair amount of
activity in it from time to time. That’s partially caused by the fact that we neither collateralized
that municipal contract he refers to. I think the counterparties have to buy protection on
Berkshire credit through CDS. It’s probably an internal rule at some of the firms on the other
side of the contract. Back in 2008 and 2009, our CDS prices went up to a crazy level. I even
commented at the annual meeting I’d love to be selling them myself except I wasn’t allowed to.
What goes on in the CDS market isn’t really of any particular interest to us. It’s too bad for the
other guys that they didn’t get collateral from us. We wouldn’t have given it to them. They have
to buy these things. From our standpoint, they are wasting their money.

Charlie Munger: – The truth of the matter is we don’t pay much attention by trying to get an
extra two basis points by being gamey on our short term things. Credit default position is a weird
historical accident, and we don’t pay much attention to it either. It will go away in due course.

Warren Buffett: – All of our contracts are just going to expire. There are a couple of places they
do certain things. It is peanuts. The positions I instituted six or seven years ago are basically
all in a big runoff position.

Charlie Munger: – We don’t fool around with our own credit default swaps.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: – People were paying 5% in terms of betting that Berkshire would go broke. I
couldn’t take advantage of it. I wanted to.

AJIT JAIN

Q –Please comment on whether there’s another Ajit in the house.

Warren Buffett: – There’s not another Ajit in the house. It would be very significant if we lost
him…Tony Nicely, too, and many other managers who have made billions for Berkshire. It’s
quite dramatic with Ajit’s operations. There were a few years where we had 30 people, where
its earning potential under Ajit was fantastic. It probably won’t happen to that degree again.
Wish it would. He has done a tremendous amount for Berkshire. There have been a lot of
managers that created billions and billions of value for Berkshire, and maybe you can get to the
tens of billions. Having a fantastic manager that has a large potential business available to them
and who makes the most of it, it is huge over time. When you’re building capital value, think of
the value of Jeff Bezo to Amazon. It wouldn’t have happened without him. You are looking at
huge values. The value of Dan Burke and Tom Murphy – they didn’t invent television. They just
managed it so well. Really outstanding managers are invaluable. We want to align ourselves
with them. We want them to feel the way about Berkshire Hathaway that we do.

Charlie Munger: – Ajit has a longer shelf life than we do. He would be particularly missed.

Warren Buffett: – Let’s not give up here, Charlie. I reject such defeatism.

FLOAT

Q – With your retrocessional insurance business that is booked at a loss, you get to use the
float for a long time. Is that the underlying value?

Warren Buffett: – We take the loss with the probability that we will get to use the money for a
very long period of time. With today’s low interest rates, we couldn’t do much with that. For the
duration of the kind of contracts we have, we don’t expect these low rates to last indefinitely.
We do think occasionally, we will get chances, even with low interest rates, to do things that will
produce very reasonable returns. We are measuring the potential utility with the unusual
flexibility we have for the deployment of the funds at favorable rates. Over a long period, we will
have the opportunity perhaps to come up with one or two things where we can deploy the funds
at higher rates of returns than today’s low interest rates.

Charlie Munger: – We are willing to pay a little money now to have the certainty of having a lot
of money available in case something really attractive comes up – it’s an option cost.

Warren Buffett: – The option came in handy in 2008-2009.

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REAL ESTATE

Q – How do you feel about the real estate market today?

Warren Buffett: – It is not as attractive as it was in 2012. There are certainly – and it’s driven by
these low interest rates – and there are properties that being sold at very low cap rates that
strike me as having more potential for loss than gain. If you can buy for very little, 100 basis
points or 150 basis points, there’s a great temptation is to do it. I think it’s a mistake to do it, but
I could be wrong. I don’t see a nationwide bubble in residential real estate now. In a place like
Omaha, or most of the country, you are not paying bubble prices for residential real estate. It’s
quite different than it was in 2012. I don’t think the next time around the problem is going to be a
real estate bubble.

INVESTMENTS BY TODD AND TED

Q – What have been Todd and Ted’s biggest investment hits and failures?

Warren Buffett: – I’m trying to think of very big deals that we can do something in, whether is in
investments or acquiring a business. Their primary job is working on investments – each has a
$9 billion portfolio. One of them has 7 or 8 positions. The other has 13 or 14. They have a very
similar approach to investing. They’ve both been enormously helpful in doing several things for
which they don’t get paid a dime. They’re perfect cultural fits for Berkshire. They are smart at
what they do. They are a big addition to Berkshire.

I would say they have a bigger universe to work with. They can look at ideas in which they can
put $500 million to work. I’m trying to think of ways to invest sums in the billions. They certainly
have more extensive knowledge of activities in certain business and industry that have
developed in the last 10-15 years. Their approach to investing is similar. They are looking for
businesses that they understand, where they can buy the stocks at a sensible price, and where
they think the business will be earning significantly more money five or ten years from now.

Charlie Munger: – We don’t want to talk about specific hits and failures.

Warren Buffett: – We file reports every 90 days to show what Berkshire does in marketable
securities. We don’t get into identifying what they do individually.

CASH IN THE FINANCE SEGMENT

Q – Where did the additional $3.5 billion in cash come from in the finance segment of the
business?

Warren Buffett: – I can’t tell you where it came from. $3.5 billion, you think I would. We were
funneling money into the parent company and the finance company. That money was basically
dedicated to making the $22 billion portion of the Precision Castparts purchase. We actually
borrowed $12 billion. We pushed money from various sources into those two entities and
eventually into the parent company to take care of the $22 billion that was coming due. There’s
really no significance other than that.
2016 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

IBM MOAT

Q – How would you explain IBM’s moat?

Warren Buffett: – I’m not sure it’s a simple question. IBM has certain strengths and certain
weaknesses. We don’t want to get into giving an investment analysis of any of the portfolio
companies we own.

Charlie Munger: – Coping with considerable change in the computer world. It’s attempting
something that’s big and interesting. God knows whether it will work modestly or very well. I
don’t think Warren knows either.

Warren Buffett: – We will find out if it has the strengths.

Charlie Munger: – It’s a field that a lot of intelligent people are trying to get big in.

SENSE OF HUMOR

Q – In your annual shareholders letters and during interviews, your sense of humor always
shines through. Where does your sense of humor come from?

Warren Buffett: – It’s the way I see the world. It’s a very interesting and very humorous place. I
think Charlie has a better sense of humor than I do, and I will let him answer where he got his.

Charlie Munger: – I think if you see the world accurately, it’s bound to be humorous because it’s
ridiculous.

Warren Buffett: – Well, I think that’s a good note to close on.

 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

BERKSHIRE HATHAWAY 2017 ANNUAL MEETING NOTES

BY INGRID R. HENDERSHOT,CFA

We tuned into Berkshire Hathaway’s annual meeting webcast held on May 6, 2017, in Omaha.
Warren Buffett, Chairman of Berkshire Hathaway, and Charlie Munger, Vice-Chairman, answered
questions from shareholders, analysts and the media. Here are our notes from the annual
meeting:

INTRODUCTION

Warren Buffett: That’s Charlie and I’m Warren Buffett. You can tell us apart because he can hear
and I can see. We work well together. We each have our specialty. I’d like to welcome you to
Omaha. It’s a terrific city. Charlie has lived in California now for about 70 years, but he still has a
lot of Omaha in him. Both of us were born within 2 miles of this building that you’re in. Charlie
graduated from Central High which is about one mile from here, it’s a public school. My dad, my
first wife, three children and two of my grandchildren have all graduated from the same school,
and in fact, my grandchildren will say they have had the same teacher that my dad and I had. It’s
a great city. I hope you get to see a lot of it while you’re here.

FIRST QUARTER EARNINGS

Our earnings report was put out yesterday. The realized investment gains or losses over any
given period really mean nothing. We could take a lot of gains if we wanted to or we could take a
lot of losses, but we don’t really think about the timing of what we do at all except to the relation
of the intrinsic value of what we are buying. We do not make an earnings forecast. On March 31,
we have over $90 billion of net unrealized gains. We have a very, very slight preference this year,
if everything else were equal. It’s true any year, but a little more so this year, we’d rather take
losses than gains because of the tax effect if two securities were equally valued. We are taxed on
gains at 35% which means we also get the tax benefit of 35% of any losses we take. I would say
there’s some chance of that rate being lower meaning that losses would have less tax value to us
after this year than next year. That’s not a big deal. It would be a very slight preference, and it
may get to be more of a factor in deferring any gains and perhaps accelerating any losses as the
year gets closer to Dec 31st, assuming there were to be a Tax Act that had the effect of reducing
the earnings.

In the first quarter, insurance underwriting was the swing factor – there’s a lot more about this in
our 10-Q that you can look up on the Internet, if you’re seriously interested in evaluating our
earnings or businesses, because the summary report does not really get to the main points of
evaluation. I would just mention two factors with the insurance situation which I love - in the first
four months, Geico had a net gain of 700,000 policyholders, and that’s the highest number that I
can remember. Last year I believe that figure was 300,000. This has been a wonderful period for
us at Geico. Several of our major competitors decided – and they publicly stated this and one
reiterated this the other day – they intentionally cut back on new business because new business
carries with it a significant loss in the first year. There’s costs of acquiring a new business plus
the loss ratio, strangely enough, on first year business tends to run almost 10 points higher than
on renewal business. When you add a lot of new business, you will lose money on that portion of
the business that first year. We wrote a lot of new business. At least two of our competitors
announced they were lightening up for awhile on new business because they did not want to pay
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

the penalty of the first year loss. That’s made to order for us. We just put our foot to the floor and
tried to write as much good business as we can. There are costs to that.

An important event in the first quarter is that we increased our float. On the slide, it shows a year
over year increase of $16 billion –$14 billion of that came in the first quarter of the year. We had a
$14 billion increase in float. For some years I’ve been telling you it’s going to be hard to increase
the float at all. It is nice to have $14 billion or more which is one reason if you look at our 10-Q,
you will see that the cash equivalent including Treasury bills has come to well over $90 billion. I
feel very good about the first quarter even though our operating earnings were down a little bit.
One quarter means nothing over time. What really counts is whether we are building value of the
businesses we own. I’m always interested in the current figures, but I’m always dreaming about
the future figures.

JACK BOGLE

There’s one more person I’d like to introduce to you today, and I understood he was coming, and I
believe he made it today – Jack Bogle who I talked about in the annual report. Jack Bogle has
done more for the American investor than any man in the country. Jack Bogle many years ago
founded index funds, and he wasn’t the only one talking about an index fund. It wouldn’t have
happened without him. Paul Samuelson talked about it. Ben Graham even talked about it. The
truth is it was not in the interest of the investment industry of Wall Street – it was not in their
interest to have the development of the index fund because it brought down fees dramatically. As
we’ve talked about and other people have commented that index funds overall have delivered for
shareholders results that have been better than Wall Street professionals. Part of the reason for
that is it has brought down the costs very significantly. When Jack started, very few people and
Wall Street did not applaud him. He was the subject of some derision and a lot of attacks. Now
we’re talking trillions when we get into index funds and a few basis points when we talk about
investment fees in the case of index funds, and I estimate that Jack, at a minimum, has left in the
pockets of investors, without hurting them at all in terms of performance, he’s put tens and tens
of billions into their pockets. Those numbers will be hundreds and hundreds of billions over time.
It’s Jack’s 88th birthday on Monday. Happy birthday and thank you on behalf of American
investors.

I’ve got great news for you. In only two years, you will be eligible for an executive position at
Berkshire. Hang in there, buddy.

****

We have a panel of expert journalists on this side, expert analysts on that side and expert
shareholders in the middle. We will rotate starting with the analysts. We will do this through the
afternoon. After we get through 54 questions, then we will go strictly to the audience. Let’s start
off with Carol Loomis of Fortune magazine.

WELLS FARGO

Q. Wells Fargo is Berkshire’s largest holding. In the wake of the sales practices scandal, harsh
findings noted that a major part of the company’s problem were due to its decentralized structure
which gave too much autonomy to the bank’s leadership. How do you satisfy yourself Berkshire
is not subject to the same risk?
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: We at Berkshire probably – we certainly operate on a more decentralized plan than
any company remotely our size. We count very heavily on principles of behavior rather than
rules. That’s one reason at every annual meeting you see the Salomon clip in the movie. That’s
why I write very few communiques to our managers. I send them one once every two years that
basically says that we’ve got all the money we need. We’d like to have more, but it’s not a
necessity. We don’t have one ounce more of reputation than we need, and that our reputation at
Berkshire is in their hands. Charlie and I believe if you establish the right sort of culture, and that
culture to some extent self-selects who you hire as directors and managers, that you will get
better results that way in terms of behavior than a thousand-page guidebook. You’re going to
have problems regardless. We have 367,000 employees. You have a town with 367,000
households, which is what the Omaha metropolitan area is, people are doing something wrong as
we talk here today. The real question is whether the managers are thinking about finding and
correcting any bad behavior, and whether if they fail in that, whether the message gets to Omaha
and whether we do something about it.

At Wells Fargo there were three very significant mistakes. There was one that dwarfs all the
others. You’re going to have incentive systems at almost any business. There’s nothing wrong
with incentive systems. You have to be very careful about what you incentivize. You can’t
incentivize bad behavior. If so, you better have a system for recognizing it. Clearly, at Wells
Fargo there was an incentive system built around the idea of cross-selling a number of services
per customer, and the company in every quarterly investor presentation highlighted how many
services per customer. It was the focus of the organization – a major focus - and undoubtedly
people got paid and promoted based on that number, at least partly based on that number. It
turned out that was incentivizing the wrong kind of behavior.

We’ve made mistakes. Any company is going to make mistakes in designing a system. You’re
going to find out about it at some point. I will get to how we find out about it. I don’t know all of
the facts of how the information got passed up the line at Wells Fargo. At some point if there’s a
major problem, the CEO will get wind of it. At that moment, that’s the key to everything because
the CEO has to act. That Salomon situation that you saw happened because on -I think April 28,
the CEO of Salomon, the President of Salomon, the general counsel of Salomon, sat in a room,
and they had described to them by a fellow named John Meriwether some terrible practice that
was being conducted by a fellow named Paul Mozer who worked for them. Paul Mozer was
flimflamming the US Treasury, which is a very dumb thing to do. He was doing it partly out of
spite. He didn’t like the Treasury, and they didn’t like him. He put in phony bids for US Treasuries
and all of that.

On roughly April 28, the CEO and all these people knew they had something that had gone very
wrong, and they had to report it to the Federal Reserve Bank in New York. The CEO said he would
do it, and then he didn’t do it, and he undoubtedly put it off just because it was an unpleasant
thing to do. On May 15, another Treasury auction was held, and Paul Mozer put in a bunch of
phony bids again. At this point, it’s all over because top management knew that the pyromaniac
had lit another fire, and he lit it after they had been warned he was a pyromaniac. It all went
downhill from there. Bad behavior has to stop when the CEO learns about it.

Then they made a third mistake - again, it pales in comparison to the second mistake. They made
the third mistake when they totally underestimated the impact of what they had done once it
became uncovered. There was a $185 million penalty. In the banking business, people get fined
billions and billions for mortgage practices and all kinds of things. The total fines, $30 or $40
billion, whatever the number would be. They measured the seriousness of the problem by the
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

dimensions of the fine – they felt a $185 million fine signaled a less offensive practice than
something that involved $2 billion, and they were totally wrong on that.

The main problem is they didn’t act when they learned about it. It’s bad enough having a bad
system, but they didn’t act.

At Berkshire, the main source of information for me about anything that’s being done wrong at a
subsidiary is the hotline. We get 4,000 or so communications on the hotline a year, and most of
them are frivolous-the guy next to me has bad breath or something like that. There are a few
serious ones, and our internal audit team looks at them. A lot of them come in anonymous,
probably most of them, some of them Becky (the internal auditor) refers back to the companies,
probably most of them, but anything that looks serious, I will hear about that. That has led to
action more than once. We spend real money investigating some of those. It has uncovered
certain practices that we would not at all condone at the parent company. It’s a good system. I
don’t think it’s perfect. I’m sure they have an internal audit and hotline at Wells Fargo. I don’t
know the facts, but I would bet a lot of communications came in on that. I don’t know who did
what at any given time. It was a huge, huge, huge error if they were getting – and I’m sure they
were - some communications, and they ignored them or sent them back to somebody down
below. Charlie, what are your thoughts on it?

Charlie Munger: Put me down as skeptical when some law firm thinks they know how to fix
something like this. If you’re in a business, where you have a whole lot of people, it’s very likely
to cause a lot of misbehavior. Of course, you have a compliance department. Every stock
brokerage firm has a huge compliance department. If we had one, we would have a big
compliance department, also, wouldn’t we, Warren?

Warren Buffett: Absolutely.

Charlie Munger: It doesn’t mean everyone should solve their problems by having more
compliance. We’ve had less trouble over the years by being careful of whom we picked to have
power and having a culture of trust. I think we have less trouble, not more.

Warren Buffett: But we will have trouble from time to time.

Charlie Munger: Of course, we will be blindsided some day.

Warren Buffett: Charlie says an ounce of prevention - when Ben Franklin, whom he worships, said
an ounce of prevention is worth a pound of cure, he understated it. An ounce of prevention is
worth more than a pound of cure. I’d say a pound of cure promptly applied is worth a ton of cure
that’s delayed. Problems don’t go away. Salomon’s John Gutfreund said that problem - originally
he called it a traffic ticket. It almost brought down the business. Some other CEO described a
problem he encountered as a foot fault. It resulted in incredible damage to the institution. You
have to act promptly.

Frankly, I don’t know any better system than hotlines and anonymous letters to me. I’ve gotten
three or four of them probably in the last six or seven years that resulted in major changes. Very
occasionally, they are signed. They are almost always anonymous. It wouldn’t make any
difference because there will be no retribution against anybody obviously if they call our attention
to something that is going wrong. I’m telling you as we sit here, someone is probably doing
something wrong at Berkshire, and usually it’s very limited, maybe stealing small amounts of
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

money or something like that. When it gets to some sales practice like was taking place at Wells
Fargo, you can see the kind of damage it would do.

DRIVERLESS VEHICLES

Q. You addressed the risk of driverless cars to Geico’s business. Is autonomous technology
more of an opportunity or more of a threat to Burlington Northern Santa Fe?

Warren Buffett: I’d say that driverless trucks are a lot more of a threat than an opportunity to
Burlington Northern, and I’d say if driverless cars became pervasive, it would only be because
they were safer, and that would mean that the overall economic cost of auto-related losses had
gone down and that would drive down the premium income of Geico. Autonomous vehicles
widespread would hurt us. If they spread to trucks, they would hurt our auto insurance business.
My personal view is they will certainly come - I think they may be a long way off. That will depend
on experience in the first early months of the introduction, other than test situations. If they make
the world safer, it’s going to be a very good thing, but it won’t be a good thing for auto insurers.
There tends to be driver shortages in the truck business now. It obviously improves their position
versus the railroad.

Charlie Munger: I think that’s perfectly clear.

Warren Buffett: Finally, approval after all of these years.

SWEET SPOT FOR INVESTING

Q. In the HBO documentary, Warren Buffett, you had a great analogy comparing investing to
baseball. Ted Williams knew his sweet spot was a pitch right down the middle. What attributes
make a company a pitch in your sweet spot that you will invest in?

Warren Buffett: I’m not sure I can define it in exactly the terms you would like. We sort of know it
when we see it. It would tend to be a business, that for one reason or another, we can look out 5,
10 or 20 years and decide that the competitive advantage that it had at the present would last over
that period, and it would have a trusted manager that would not only fit into the Berkshire culture
but was eager to join the Berkshire culture, and then it would be a matter of price. When we buy a
business, essentially we are laying out a lot of money now based on what we think that business
would deliver over a period of time. The higher certainty in which we make that prediction, the
better we feel about it.

The first outstanding business we bought, which was kind of a watershed event, was See’s
Candies, a relatively small company. When we looked at See’s Candies, in 1972, we asked would
people still want to be eating and giving away that candy in preference to other candy. We paid
$25 million for it, net of cash, and it was earning about $4 million pre-tax then. We took $2 billion
or something like that out of it since. We felt that people would not be buying necessarily a lower-
priced candy. It doesn’t work very well if you go to your wife or girlfriend on Valentine’s Day – I
hope they’re the same person - and say, here’s a box of candy, honey. I took the low bid. It loses
a little as you go through that speech. And we made a judgment about See’s Candies, it would be
special – probably not in the year 2017- but we thought it would be special in 1982, 1992, and
fortunately we were right on it. We are looking for more See’s Candies, only a lot bigger.

Charlie Munger: It’s also true we were young and ignorant then.
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: Now we are old and ignorant.

Charlie Munger: It would have been very wise to buy See’s Candies at a slightly higher price. If
they had asked it, we wouldn’t have done it. We’ve gotten a lot smarter.

Warren Buffett: If it were $5 million more, I wouldn’t have bought it. Charlie would have been
willing to buy it. Fortunately, we didn’t get to the point where we had to make the decision that
way. He would have pushed forward when I probably would have faded. The seller was the
grandson - Larry See’s brother, he was not interested in the business, but he almost changed his
mind. He was more interested in girls and grapes. He did change his mind about selling. I wasn’t
there, but Charlie went and gave an hour talk on the merits of girls and grapes over owning a
candy company. And the fellow sold to us. I call Charlie out on emergencies like that.

Charlie Munger: We were very lucky early to buy horrible businesses because they were real
cheap. They gave us a lot of experience trying to fix unfixable businesses as they headed
downward toward doom. We were very good at avoiding it thereafter. I would argue our early
stupidity helped us.

Warren Buffett: We learned we could not make a silk purse out of a sow’s ear.

Charlie Munger: You have to have your nose rubbed in it to really understand it.

REVIEWING STOCK INVESTMENTS

Q. Given issues at Wells Fargo (sales scandal), American Express (loss of business with
Costco), United Airlines (customer service) and Coca-Cola (slowing soda sales), how much time is
spent reviewing Berkshire stock investments?

Warren Buffett: Those are very large holdings. American Express and Wells Fargo, you are
getting up well into the high tens of billions of dollars. Those are businesses that we like very
much – they have different characteristics. United Airlines, we are the largest holder of the four
largest airlines, but all businesses have problems and some of them have very big pluses. You
mentioned American Express. If you read their first quarter report, they talk about their platinum
card, it is doing very well. There’s competition in all of these businesses. We didn’t buy them with
the idea that they would never have problems or never have competition. We bought them
because we thought they had very strong hands. We liked their position. We do look to see where
they have durable competitive advantages. If you’ve got a very good business, you will have
plenty of competitors who will try to take it away from you. Then you make a judgment as to the
ability of your particular company and product and management to ward off the competitors.
They won’t go away. I’m not going to get into the specific names. Those companies are very well
positioned. If you have a wonderful business, even if it’s a small one like See’s Candies, you
basically have an economic castle. In capitalism, people are going to try to take away that castle
from you. You want a moat around it protecting it in various ways, and you want a knight in the
castle that’s pretty darn good at warding off marauders. There will be marauders that will never
go away. Coca Cola was established in 1886, American Express was started in 1851 or 1852,
Wells Fargo, I don’t know what year they started -- American Express was started by Wells Fargo
as well. These companies had lots of challenges over the decades. Our insurance business had
challenges, but we have leaders like Tony Nicely and Ajit Jain, who has added tens of billions of
dollars of value to Berkshire. There will always be competition in insurance. There are various
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

things to do to ward off the marauders. The specific question was how much time is spent
reviewing our investments? I do it every day.

Charlie Munger: I don’t think I have anything to add to that either.

Warren Buffett: We will cut his salary if he doesn’t participate.

AIG RETROACTIVE REINSURANCE DEAL

Q. Based on AIG’s track record, will the recent deal be profitable to Berkshire?

Warren Buffett: At the time we do every deal, I think it’s smart. The deal might be unfamiliar to
many people –AIG transferred to us a $20 billion liability. We got paid $10.2 billion in an upfront
premium for that. Ajit Jain, who has made a lot more money for you than I have - he evaluates that
sort of transaction. We came to the conclusion that we think we will do well by getting $10.2
billion today with a maximum payout of $20 billion – between now and judgment day on this large
piece of business. AIG had very good reasons for doing this. Reserves had been under criticism,
and it put to bed the question of whether they were underreserved on that business – and we hit
on the $10.2 billion.The question is how fast we pay it out. Ajit does 99% of the thinking on that. I
do 1%. We project out what we think will happen, and we know whatever our projection is that we
will be wrong. We have done a fair number of these deals, but this is the largest. We try to be
conservative. A deal that was formed out of Lloyds of London some years ago, we’ve been wrong
on one transaction that involved something over $1 billion in premium, clearly wrong, and there
are a couple of others that may or may not work out, depending what you assume we’ve earned
on the funds, but they’re okay. Overall, we’ve done okay on this business. It’s less okay when we
are sitting around with $90 billion of cash. The incremental $10.2 billion we took in during the first
quarter is earning us peanuts at the moment. We do have to assume we will find uses for the
money to have the deal work out. The money will be with us quite a while. I think our calculations
are on the conservative side. They are not the identical calculations that AIG makes. I think it was
quite a good transaction from AIG’s standpoint in taking a $20 billion liability off their balance
sheet. I think they satisfied the investing community.

Charlie Munger: I think it’s intrinsically a dangerous type of activity, which makes it an interesting
transaction. I don’t think there are any two people in the world that are better at this kind of
transaction than Ajit and Warren. Nobody else has had the experience we’ve had. Get me in a lot
more of those businesses, I will accept a little extra worry.

Warren Buffett: We were actually the only insurance operation in the world who would write that
size of a contract and where it would be satisfactory to the other party. When someone hands you
$10.2 billion dollars and says I’m counting on you to pay $20 billion back, even if it’s 50 years from
now, there’s very few people that they want to hand $10.2 billion to, so there’s limited people on
the other side.

Charlie Munger: By very few, he means one.

FAVORITE DEAL

Q. Mr. Munger, in your career and business dealings, which one sticks out in your mind as your
favorite?
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: I don’t think I’ve got a favorite. The one that probably did us the most good as a
learning experience was See’s Candies. The power of the brand, the unending flow of ever
increasing money with no capital. I’m not sure we would have bought Coca-Cola if we didn’t buy
See’s. I think a life properly lived is just to learn, learn, learn all the time. I think Berkshire has
gained enormously in their investment decisions by learning through a long period. Every time
you appoint a person who has never had big capital allocation experience, it’s like rolling the dice.
We are better off because we’ve done it for so long. But the decisions blend. The one feature that
comes through is the continuous learning. If we had not kept learning, you wouldn’t even be here.
You would be alive probably, but not here.

Warren Buffett: There’s nothing like the pain of being in a lousy business to make you appreciate
a good one.

Charlie Munger: I have a friend that says the first rule of fishing is to fish where the fish are. The
second rule of fishing is to never forget the first rule. We’ve gotten good at fishing where the fish
are.

Warren Buffett: That’s only metaphorically.

Charlie Munger: There are too many other boats in the damn water, but the fish are still there.

Warren Buffett: We bought a department store in Baltimore in 1966 – there’s really nothing like
having the experience of trying to decide whether you will put a new store in an area that hasn’t
developed and where it won’t support it, but your competitor may move there first. Then you have
the decision of jumping in. Now you have two stores where even one store isn’t quite justified.
How to play those business games, you learn a lot by trying. What you really learn is which ones
to avoid. If you stay out of a bunch of terrible businesses, you are off to a great start. We’ve tried
them all.

TECHNOLOGY COMPANIES

Q –Do you view IBM and Apple differently?

Warren Buffett: I do view them differently. When I started buying IBM six years ago, I thought it
would do better in the six years that have elapsed than it has. I think Apple is much more of a
consumer products business. In terms of sort of analyzing moats around it and consumer
behavior, it’s obviously a product with all kinds of tech built into it. In terms of laying out what
their prospective customers will do in the future as opposed to IBM’s, it’s a different sort of
analysis. That doesn’t mean it’s correct. They are two different types of decisions. I was wrong
on the first one. We will find out whether or not I am right on the second. I do not regard them as
apples and apples, and I don’t quite regard them as apples and oranges. It’s somewhat in between
on that.

Charlie Munger: We avoided the tech stocks because we felt we had no advantage there and
other people did. I think it’s a good idea not to play where the other people are better. If you ask
me in retrospect what was our worst mistake in the tech field, I think we weren’t smart enough to
figure out Google. Those ads worked so much better in the early days than anything else. I’d say
we failed you there. We were smart enough to do it and didn’t do it. We knew that.

Warren Buffett: We were their customer very early on with Geico – these figures are out of date,
but as I remember, we were paying $10 or $11 a click. Any time you are paying somebody 10 or 11
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

bucks to punch a little thing, where you have no costs at all, that’s a good business, unless
someone will take it away from you. We were close up seeing the impact of that. Incidentally, if
you don’t have anything to do in your hotel rooms tonight, keep punching Progressive. Don’t
really do that. The thought just happened to cross my mind. I think for Lasik surgery, I think the
figures were 60 or 70 bucks a click. No costs. The guys that designed the Google prospectus,
they came to see me – they modeled it a little bit after Berkshire’s owner manual. I had plenty of
ways to ask questions to educate myself. I blew it.

Charlie Munger: We blew Wal-Mart, too. It was a total cinch. We were smart enough to figure that
out and didn’t. Our worst mistakes have been mistakes of omissions.

Warren Buffett: Execution is what counts. I could be making two mistakes. It’s harder to predict
in my view the winners in various tech industries or how much price competition will enter into
something like cloud services. It’s really remarkable where one person has built an extraordinary
economic machine in two pretty different industries almost simultaneously –

Charlie Munger: From a standing start of zero.

Warren Buffett: From a standing start of zero – with competitors with lots of capital - to do it with
retailing and to do it with the cloud, like Jeff Bezos, the CEO of Amazon, has done. The people like
the Mellon’s invested in a lot of different industries, but Bezos has been in effect the CEO
simultaneously of two businesses starting from scratch. Andy Grove used to say think about if
you had a silver bullet, and you could shoot it and get rid of one of your competitors, who would it
be? I think both in the cloud and retail, there would be a lot of people who would aim the silver
bullet at Jeff. He played his hand as well as anyone possibly could. It’s a remarkable business
achievement, creating two businesses feared by competitors. He has been involved actually in
the execution, not just in bankrolling it.

Charlie Munger: We are sort of like the Mellon’s, old-fashioned people who have done all right by
bankrolling people we like. Jeff Bezos is a different species.

Warren Buffett: And we missed it entirely. We never owned a share of Amazon.

AIRLINES

Q. You avoided investing in airlines in the past because of low switching costs, rising fuel prices,
high price competition and limited buying power. After consolidation, are airlines different enough
this time around? How do the airline competitive advantages compare to railroads?

Warren Buffett: The decision, with respect to our $10 billion investment in four airlines, has no
connection with getting involved in the railroad business. You can classify both of them as
transportation businesses. There’s no more connection than the fact we own Geico or any other
business. You couldn’t pick a tougher industry. Wilbur should have shot Orville Wright down.
You can go to the Internet and type in airlines and bankrupt, and you will see 100 airlines, in that
general range, that have gone bankrupt in the last few decades. Charlie and I were directors of US
Air. It was one of the dumbest things I’ve ever done.

Charlie Munger: You made a lot of money on it.

Warren Buffett: We made a lot of money out of it because there was a brief period where people
got all enthused about US Air. I was lucky. After we left as directors and sold our position, US Air
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

managed to go bankrupt twice in the subsequent period. You named a number of factors that
make for terrible economics. It’s a fiercely competitive industry – the question is whether it’s a
suicidal industry - which it used to be. When you get virtually every one of the major carriers and
dozens and dozens of minor carriers going bankrupt, maybe you’re in the wrong industry. It has
been operating for sometime now at 80% or better of capacity, being available seat miles. You can
see what deliveries are going to be. I think it’s fair to say they will operate at higher degrees of
capacity over the next 5 to 10 years than historical rates, which caused all of them to go broke.
Now the question is even when they are doing it in the 80s, whether they will do suicidal things in
terms of pricing remains to be seen. They actually at present are earning quite high returns on
invested capital – higher than even Fed Ex or UPS. If you’re running one of the airlines, and the
other guy cuts his prices, and you cut your prices, there’s more flexibility to lower your prices
when fuel prices go down. It’s no cinch that the industry will have more pricing sensibility in the
next 10 years than they had in the last 100 years, but the conditions have improved. They have
more labor stability than they had before -- they have been through bankruptcy. It looks like they
will have a shortage of pilots to some degree. But investing in the airlines is not like buying See’s
Candies.

Charlie Munger: No, but the investment world has gotten tougher with more competition. We
picked up a lot of low-hanging fruit in the old days where we had huge margins of safety, and it
was very easy. Now we operate with a less advantageous general climate, and maybe we have
small statistical advantages. In the old days, it was like shooting fish in a barrel. It’s OK if it gets
a little harder after we are filthy rich.

Warren Buffett: Charlie is a little more philosophical than I am on that point.

Charlie Munger: I can’t bring back the low-hanging fruit - I have to keep reaching to the higher
branches.

Warren Buffett: I think the odds are very high that there are more revenue passenger miles five
years or ten years from now. If the airline companies are only worth five or ten years from now
what they are worth now in terms of equity, we will get a reasonable rate of return. If the company
is worth the same amount and there are fewer shares of stock outstanding, over time we make
decent money. All four of the major airlines are repurchasing their shares.

Charlie Munger: You have to remember the railroads were a terrible business for decades and
decades, and then they got good.

Warren Buffett: I like the position. Obviously, by buying all four, it’s very hard to distinguish who
will do the best. I think the odds are quite high, it will be a higher number. There will be low-cost
people that will come in, the Spirits of the world, Jet Blue, but my guess is all four of the
companies will have higher revenue and fewer shares outstanding by a significant margin. Even
if they are worth just what they are worth today, we could make a fair amount of money but it is no
cinch by a long shot.

COCA-COLA

Q – After a long speech, the question revolved around owning Coca-Cola shares and its alleged
destruction of the environment and shameless exploitation of workers.

Charlie Munger: That was more of a speech than a question.

 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: Yes. I don’t think that quote you had earlier was right. The dollar bill should say in
the Federal Reserve we trust, because they print the money. To my knowledge, I’ve never said
anything like you originally said. I’ve been eating things I like to eat all my life. Coca-Cola, that’s
12 ounces, I drink about five a day. It has about 1.2 ounces of sugar in it. People get their sugar
from all kinds of things - I happen to believe that I like to get 1.2 ounces from this, and it’s
enjoyable. Since 1886, people have found it pleasant. If you pick every meal, in terms of what
somebody in some recent publication has told you is the very best for you, I say, go to it. If you
told me that I would live one year longer if I’d eat nothing but broccoli and asparagus, or all my life
I’d eat everything I enjoyed eating including chocolate sundaes and Coca-Cola, steak and hash
browns, I’d rather eat the way I enjoy eating my whole life than eat some other way and live
another year. I do think that choice should be mine. If someone decides sugar is harmful, maybe
encourage the government to ban sugar. Sugar in Coca-Cola is not any different than putting
sugar on my Grape-Nuts in the morning. Coca-Cola has been a very positive factor in America and
the world for a long, long time. I really don’t want anybody telling me I can’t drink it.

Charlie Munger: I solved my Coca-Cola problem by drinking Diet Coke. I’ve had breakfast before
where he has Coca-Cola and nuts.

Warren Buffett: It’s pretty damn good, too.

Charlie Munger: If you keep doing that, Warren, you may not make 100.

Warren Buffett: I think there’s something in longevity in feeling happy about your life.

Charlie Munger: Absolutely.

COMPOUNDING INTRINSIC VALUE

Q. At what rate has Berkshire compounded intrinsic value and at what rate can intrinsic value be
compounded in the future?

Warren Buffett: Intrinsic value can only be calculated in retrospect, but the true definition would
be the cash to be generated between now and judgment day discounted at an interest rate that
seems appropriate at the time. That’s varied enormously over a 30 or 40-year period. If you pick
out 10 years, and you’re back to May of 2007, we had some unpleasant things coming up. I’d say
we’ve probably compounded intrinsic value about 10% annually since then. I think that’s tough
to achieve - almost impossible to achieve if we continue in this low interest rate environment. If
you ask me to give the answer to the question – if I could only pick one statistic to ask you about
the future before I gave the answer, I would not ask you about GDP growth or who was going to
be president, I’d ask you what the interest rate is going to be over the next ten or twenty years on
average. If you assume our present interest rate structure is likely to be the average, I would say
it would be very difficult to get the 10%. If I were to pick for the whole range of probabilities on
interest rates, I would say that that rate might be doable. If you’d say we can’t continue these low
interest rates for a long time, I’d ask you to look at Japan 25 years ago. We couldn’t see how their
low interest rates could be sustained. We are still looking at the same thing – I don’t think it’s easy
to predict the course of interest rates at all. Unfortunately, predicting interest rates is embedded
in giving a good answer to you. I’d say the chances of getting a terrible result in Berkshire are
about as low as anything you could find. Chances of getting a sensational rate are also about as
low as anything you could find. My best guess would be in the 10% range, but that assumes
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somewhat higher interest rates, not dramatically, but somewhat higher interest rates in the next
10 or 20 years than we experienced in the last seven years.

Charlie Munger: The future with our present size in terms of percentage rates of return is going to
be less glorious than in the past. We keep saying that and now we are proving it.

Warren Buffett: Do you want to end on that note, Charlie?

Charlie Munger: I think we have a collection of businesses that on average has better investment
values than say the S&P 500 average. I don’t think you shareholders have a terrible problem.

Warren Buffett: We do have more of a shareholder orientation than the S&P 500 as a whole. This
company has a culture where decisions are made as a private owner would make them. That’s a
luxury we have that many companies don’t have. One of the questions I ask the CEO of every
public company that I meet: “What would you be doing differently if you owned it all yourself?”
The answer is usually this, that and a couple of other things. If he would ask us, the answer is, we
are doing exactly what we would be doing if we owned all the stock ourselves.

Charlie Munger: I think we have one other advantage. A lot of other people are trying to be
brilliant. We are just trying to stay rational. It’s a big advantage. Trying to be brilliant is
dangerous, particularly when you are gambling.

LOWER TAX RATES

Q – If corporate tax rates are reduced, how much will go to Berkshire shareholders in terms of a
higher book value?

Warren Buffett: In the case of our utility businesses, all benefit of lower tax rates go to customers.
We are allowed a return on equity. Return on equity is computed on an after-tax basis. The utility
commissions presumably give us higher rates to compensate for that, and if the taxes were
lowered, they would say you are not entitled to make more money just because tax rates have
been lowered - forget about the utility portion of deferred taxes. We have $90 billion plus of
deferred taxes on unrealized gains. If the rates were changed on those in either direction, our
owners dollar for dollar would participate in that. All of our other businesses, the railroad you
mentioned, to some extent, if tax rates are lowered, to different degrees in different industries,
some of it almost certainly gets competed away and some of it would likely not be competed
away. Economists can argue about that a lot, but I’ve seen it in action in a lot of cases. And
we’ve had them over my lifetime. We had 52% corporate rates-- a lot of different numbers.
Certainly a lower tax rate would be competed away. It’s certain some of it would be to the benefit
of the shareholder. It’s very industry and company specific as to how that plays out.

Charlie Munger: Dollar for dollar, $90 or $95 billion of deferred taxes, if the rate would drop 10%,
that $9 and a half billion is real.

Warren Buffett: If it goes up, they can take it away from us, too.

Charlie Munger: I think it’s true, if things go to hell in a handbasket and then get better later, we
are likely to do better than others. We don’t wish for that. We don’t want our country to have to
suffer through it. If that real adversity comes, we are likely to do better in the end. We are quite
good at navigating through hard times.
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: There will be occasional hiccups in the American economy. It doesn’t have much
to do with who is president. It’s the nature of market systems to occasionally go haywire in one
direction or another. There’s not a regular picture, but it is certain to happen from time to time,
and we will probably have a fair amount of money. When the rest of the world is fearful, we know
America is going to come out fine. We will not have any trouble psychologically acting at all. We
will also never put the company in any kind of risk just because we will see a lot of opportunity.
We will grab all that we can and not lose a day of sleep.

CADILLAC SALE

Q. You sold your Cadillac at a big profit?

Warren Buffett: Actually, I gave it to Girls, Inc., and they sold it. A very nice guy bought it for a
hundred and some thousand dollars. Girls, Inc. got the money. He drove it away without any
plates. He was driving back to New York and got picked up by the police in Illinois. He started
giving the explanation that he had given the money to Girls, Inc. and was driving the car back, and
he had his nice-looking family with him. The cops were quite skeptical. I had signed the
dashboard for him as part of the deal. They looked at that, and said, “Did he give you any stock
tips?” and then let him go. I can’t recall ever selling a used car at a profit. I don’t recall selling
any personal possessions.

Charlie Munger: You don’t have any personal possessions.

Warren Buffett: I have a house for sale. Anything you see with a figure attached.

INVESTING IN S&P 500 INDEX VS BERKSHIRE HATHAWAY

Q. Berkshire’s business will do better than the S&P 500. Why have you advised to your wife to
invest in index funds after you are gone? Charlie Munger has advised his family, “Don’t be so
dumb as to sell.”

Warren Buffett: She won’t be selling any Berkshire to buy the index fund. All of my Berkshire will
go to charity– I don’t even regard myself as owning Berkshire. It’s committed. So far, 40% of my
shares have already been distributed. For somebody who is not an investment professional, and I
hope reasonably elderly by the time the estate gets settled, I think an index fund works best for
her. What is the best investment, meaning one there would be less worry of any kind connected
with it, and less people coming around and saying why don’t you sell this? She will have more
money than she needs. You want the money not to be a problem. If she holds the S&P 500, she
will have all the money she can possibly use. She will have a little liquid money. If they close the
stock exchange, she will still feel she has plenty of money. It doesn’t make any difference
whether the amount she gets doubles or triples. The object is not to maximize her investments.
The important thing is that she never worries about money for the rest of her life.

I had an Aunt Katie here in Omaha. She worked very hard all her life. She lived in a house she
paid $8,000 for it. Because she was in Berkshire and she lived to 97, she ended up with a few
hundred million dollars. She’d write me a letter every four or five months, and she’d say, “Dear
Warren, am I going to run out of money?” I’d write her back and say, “Dear Katie, it’s a good
question because if you live 986 years, you’re going to run out of money.” Then four or five
months later, she’d write me the same letter again. There’s no way in the world if you’ve got
plenty of money that it should become a minus in your life. There will be people, if you’ve got a
lot of money that will come around with suggestions, sometimes well meaning, sometimes not. If
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

it was all in Berkshire, they would say if Warren was alive today, he would be telling you to do
this. I don’t think they – I think there’s a chance they won’t have peace of mind if they own one
stock, and they’ve got neighbors and friends and relatives - sometimes well intentioned and
sometimes not – telling them to do something else. It’s a policy that will get a good result.

Charlie Munger: I want them to hold the Berkshire.

Warren Buffett: I want to hold the Berkshire, too.

Charlie Munger: I recognize the logic that the S&P 500 algorithm is very hard to beat. It’s almost
impossible for most people. I’m just more comfortable with the Berkshire.

Warren Buffett: It’s the family business. I’ve seen too many people as they get older being
susceptible.

Charlie Munger: If you’re going to protect your heirs from the stupidity of others, you may have a
good system. I’m not much interested in that subject.

UNILEVER

Q. You partnered with 3G to attempt to acquire Unilever. Is Berkshire likely to be in a partnership

with 3G?

Warren Buffett: Kraft Heinz was a widely-owned company in which we and 3G acted as the
control group. But as originally contemplated, we would have invested an additional $15 billion
and 3G would have invested an additional $15 billion if a friendly agreement could have been
reached with Unilever. If the independent directors of Kraft Heinz had approved the transaction,
we would have invested $15 billion. It would have required the approval of the independent
directors as well. Kraft Heinz going forward wanted to be assured there would be enough equity
capital in addition to the debt that would be incurred to make the deal work. Informally, we
basically committed to the $15 billion, and initially, we thought they would be at least possibly
interested in such a deal. When we found out otherwise, we withdrew the offer.

SPECULATION VS VALUE INVESTING

Q. Can you advise us how to spread the value investing philosophy in China versus speculation?

Warren Buffett: In any system, Keynes wrote about this in 1936, I think it was chapter 12, a great
chapter on investing, he talked about investment and speculation, and the propensity of people to
speculate and the dangers of it. There’s always the possibility – when speculation gets rampant
and when you’re getting what Charlie would call social proof that it’s worked recently, people can
get very excited about speculating in markets. We will have it from time to time in this market.
There’s nothing more agonizing than to see your neighbor who has an IQ 30 points lower than you
do getting rich on stocks, whether it’s Internet stocks or whatever. People succumb to it. Early
on in the development of markets, there’s some tendency for them to be more speculative than
markets that have been around for a couple hundred of years. Markets have a casino
characteristic and that has a lot of appeal when they see people are getting rich around them.
Those that have not been through cycles before are more prone to speculate than people that
have experienced the outcome of wild speculation. Basically in this country, Ben Graham was
preaching investment in the book I read in 1949. That book continues to sell very well. The
market gets hot, and the people on leverage are doing well. A lot of people will be attracted to not
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

only speculation, but what I would call gambling. That would be true in the United States. China,
being a newer market and potentially when there’s widespread participation, is likely to have
some pretty extreme experiences in that respect.

Charlie Munger: I certainly agree with that. The Chinese will have more trouble. They are very
bright people. Sure, they will be more speculative. It’s a dumb idea. To the extent you’re working
on it, you’re on the side of the angels, but lots of luck.

Warren Buffett: It will offer the value investors more opportunity actually if they can keep their
wits about them if you have wild speculation. Charlie mentioned if we get into periods that are
very tough, Berkshire will do reasonably well – we won’t get fearful. Fear spreads like wildfire…
you can’t believe until you’ve seen a few examples of it. At the start of September 2008, you had
38 million people invested in money market funds with a trillion dollars in them. None of them
were afraid the dollar wasn’t going to be a dollar when they went to cash in their money market
funds. Three weeks later, they were all terrified. $175 billion flowed out of money market funds in
three days. The way the public can react can be really extreme in markets. That actually offers
opportunities to investors. People like action, and they like to gamble. If they think there’s easy
money to be made, you’ll get a rush to it. It will be self-fulfilling, and it will create new converts
until the day of reckoning comes. Keep preaching investing and if the market swings around a
lot, you’ll keep adding a few people here and there that the markets are there to be taken
advantage of rather than to instruct you.

Charlie Munger: We’ve done a lot of preaching.

INVESTMENT TAX CREDITS

Q. What will be the impact of the proposed investment tax credit be on the railroad business?

Warren Buffett: We’ve had bonus depreciation and investment tax credits in this country. That
does not enter into our calculation very much at the corporate level. Certainly it’s true in wind
projects and solar projects as they are dependent on the tax laws currently – there may come a
time when they aren’t, but they wouldn’t have been done without some subsidization through the
tax law. I’d say if you changed the depreciation schedule to double it, we are still going to do
what we need to do at the railroad to make it safer and more efficient as if you had left it at one
times depreciation. I doubt there would be any dramatic differences. I can’t recall in all of the
years I’ve ever sent anything out to our managers – let’s do this because the tax law might be
changed. At a given time, if the tax rates would be lower, you’d take losses and defer gains.
That’s why it’s useful to get the tax committees – the Senate and House are working on something
– it would be useful if the Chairmen would say, “If we do make any changes, we will likely use this
effective date.” The big tax driven item is in wind and solar. That’s a specific policy. We won’t
make big changes overall as it’s so speculative anyway in terms of what the tax law would be.

Charlie Munger: Nothing to add. We are not going to change anything at the railroad for some
little tax jiggle.

BURLINGTON NORTHERN AND THE DEMISE OF COAL

Q. What is the impact on Burlington Northern, if we are facing the demise of coal?

Warren Buffett: The answer is coal is going to go down overtime. I don’t think there’s much
question about that. The specifics of any given year relate very importantly to the price of natural
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gas. The math is up a fair amount from last year because natural gas is at $3.15 or $3.20, and the
utilities can produce electricity in many cases quite a bit cheaper with coal than with natural gas.
Overtime, coal is essentially certain to decline as a percentage of the revenue of the railroad. You
don’t create generation plants overnight. If natural gas is cheap enough, you will see a big
conversion back to natural gas. Coal will go down as a percentage of revenues significantly –
certainly over ten years it will be quite significant. We are looking for other sources of growth
than coal. If you’re tied to coal, you’ve got problems.

Charlie Munger: Extremely long term, I think all the hydrocarbons will be used, including all the
coal. I think in the end these hydrocarbons are a huge resource for humanity. I don’t think we
have a good substitute. I never minded saving them for the next generation. I don’t like using
them up very fast. I’m all over the whole road on this one. I think we will use every drop of the
hydrocarbons sooner or later. It’s very hard to predict. I’m not at all sure on this.

Warren Buffett: We will produce within a few years virtually as much electricity in Iowa from wind
as our customers use, but the wind only blows about 35% of the time or something like that and
sometimes it blows too hard. The storage – having it 24-hours a day, seven days a week- is a real
problem even if you have the capability of producing a self-sufficient amount in Iowa. Our
shipments of coal are up fairly substantially this year, but they were very low last year. In my
mind, Charlie has a longer-term outlook on this, but in my mind, we are going to be shipping a
whole lot less coal 10 or 20 years from now than we are now. I think there’s some decent
prospects in other long hauls - it’s a pretty cheap way to move bulk commodities long distances,
the rail business is. I think it’s a good business, but the coal aspect of it is going to diminish.

CAPITAL-LIGHT BUSINESSES VS CAPITAL-INTENSIVE BUSINESSES

Q. Berkshire generates substantial cash flows. Are Berkshire shareholders better off if you
continued to invest in capital-light businesses?

Warren Buffett: We’d love to find them. There’s no question that buying a high return on assets,
very light capital-intensive business that is going to grow, beats the hell out of buying something
that requires a lot of capital to grow. And this varies from day to day – but I believe that probably
the five largest American companies by market cap [Apple, Alphabet, Microsoft, Amazon, and
Facebook], and some days we are in that group and some days we are not, but they have a market
value over two and half trillion dollars. I don’t know what the aggregate market cap of the US
market is -but they are probably getting up close to 10% of the whole market cap of the US. If you
take those five companies, essentially you could run them with no equity capital at all. None.

That is a very different world than when Andrew Carnegie was building a steel mill and getting
very rich in the process or Rockefeller was building a refinery and buying tank cars. But generally
speaking for a very long time in our capitalism, growing and earning large amounts of money
required considerable reinvestment of capital and large amounts of equity capital. The railroad is
a good example. That world has really changed. I don’t think people quite appreciate the
difference. You literally don’t need any money to run the five companies that are collectively worth
more than two and a half trillion dollars and who have outpaced any number of names that we are
familiar with if you looked at the Fortune 500 list 30 or 40 years ago – whether it was Exxon or
General Motors or you name it. We would love – there’s no question that a business that doesn’t
take any capital and grows almost infinite returns and doesn’t require equity capital is the ideal
business. We own a few businesses that earn extraordinary returns on capital, but they don’t
grow. We still love them, but if they had yields that would grow, believe me, they would be
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number one on our list. We aren’t seeing those that we can buy. You’re absolutely right, that’s a
far, far better way of laying out money than what we are able to do when buying capital-intensive
businesses.

Charlie Munger: The capital-intensive companies of America at one time were wonderful
investments. DuPont was sold at 20 times earnings. They kept building more complicated plants
and hiring more PhDs, chemists, it looked like they owned the world. Now most chemical
products are commoditized– it’s a tough business being a big chemical producer. In comes all
these other people like Apple and Google, and they are just on top of the world. The world has
changed a lot, and the people who made the right decisions of getting into these new businesses
that are so different from the old ones have done very well.

Warren Buffett: Andrew Mellon would be baffled by looking at the high-cap companies now, the
idea that you could create hundred of billions of value essentially without assets. That is the world
now. When Google can sell you something that Geico was paying 11 bucks every time somebody
clicks something-that is a lot different than spending years finding the right size, developing,
hiring minds to supply the steel plants, railroads to haul the iron to where the steel is produced in
distribution points, all that sort of thing. Our world was built when we first looked at it– our
capitalist system basically was built on tangible assets and reinvestment and that sort of thing
and a lot of innovation and invention to go with it. This is so much better if you happen to be
good at it-- essentially to be able to build hundreds of billions of market value on intangible assets
without really needing any capital. That is a different world than existed in the past. It’s a world
that is likely to continue. I don’t think the trend in that direction is over by a long shot.

Charlie Munger: A lot of the people that are chasing that sort of thing very hard now in the
venture capital field are losing a lot of money. It’s a wonderful field, but not everybody is going to
win big in it. A few will win big.

VALUE OF BERKSHIRE TO THE WORLD

Q. Apple provides the iPhone, Geico provides low-cost insurance and 3G provides value through
cost-cutting. What is the value of Berkshire to the world as you delegate to the point of
abdication?

Warren Buffett: I’m with him to the point to where he accurately describes delegation just short of
abdication. I would argue that abdication actually in many cases will enable those businesses to
be run better than they would if they were part of the S&P 500, or the target perhaps of activists or
somebody that wants to get some kind of a jiggle in the short term. I think our abdication actually
has some very positive value on the companies we own. You have to look at it company by
company. We probably have 50 managers in attendance here. Actually, they are not going to say
anything publicly on television. Get them off on a private corner and ask them whether they think
their business can be run better with a management by abdication from Berkshire but also with all
the capital strengths of Berkshire. Any project that makes sense can be funded in a moment
without worrying whether the banks are still lending like in 2008 – or whether Wall Street would
have bought it. I think our hands-off style can add significant value in many companies. We
certainly don’t add to value by calling them up and saying we developed a better system or can
run Geico better than Tony or anything of the sort. But we have a very objective view about
capital allocation. We can free managers up. I’d say that we might very well free up at least 20%
of the time of a CEO in the normal public– otherwise who would have a public company - just in
terms of meeting with analysts and the calls and dealing with banks and all kind of things that we
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essentially relieve them of. They can spend all of their time figuring out the best way to run their
business. I think we bring something to the party even if we are just sitting there with our feet up
on the desk.

Charlie Munger: We are trying to be a good example to the world. I don’t think we would be
having these big shareholder meetings if there weren’t a little bit of teaching ethos in Berkshire.
I’ve watched it closely for a long time – I’d argue that’s what we are trying to do is set a proper
example, stay sane and be honest. I’m proud of Berkshire.

Warren Buffett: I’d say Geico is an extraordinarily well run company, and it would be
extraordinarily well run if it were public. It has gone from two and half percent of the market to
twelve percent, and part of the reason, a small part, is that when other – the real reason is Geico
and Tony – but at least two of our big competitors said they wouldn’t meet their profit objectives if
they didn’t lighten up their interest in new business 8 or 10 months ago. I think our business
decision to step on the gas is a better business decision, but I think Geico as a public company
would have more trouble making that decision than they do when they are part of Berkshire. We
are thinking nothing but where Geico is going to be in five or ten years. We want new business
costs to penalize our earnings in the short term, and other people have different pressures. They
have a different constituency than Geico has with Berkshire and what Berkshire has with its
shareholders. I think our system is superior. It’s not because we work harder. Charlie and I don’t
do hardly anything.

STRUCTURED SETTLEMENTS

Q. Please talk about the interest rate of 4.1% used on structured settlement contracts.

Warren Buffett: These are structured settlements primarily. When somebody young has a terrible
auto accident and – perhaps urged by the court or family members who really do have the interest
of the injured party at heart – they may defer what could be a large sum settlement, maybe a
million dollars or two million dollars, into periodic payments for the rest of the life of the injured
party, and we issue those for other insurance companies. In fact, sometimes the court directs
that Berkshire should be the one to issue those. You’re talking about somebody’s life 30 or 40 or
50 years from now. The court or the lawyer or the family make very sure whoever makes that
promise is going to be around to keep it. Berkshire has a deferred position in that. We look for
taking the longer maturity situations, we always have, and we have to make assumptions about
mortality, and we have to decide at what interest rate we will do it. The 4.1% is a mix of a lot of
contracts over a lot of years. If you take an average of 15 years or something, that’s how we come
up with that sort of a figure. We adjust for interest rates. When doing that, we are making an
assumption that we are going to earn more money than is in the coffers of these structured
settlements. We have six or seven billion dollars in this business now. We will keep doing them.
Incidentally, probably a significant percentage of the six or seven billion, we are not yet paying
anything. Somebody else may have the earlier payments. They are certainly weighted far out. It’s
a business that we will be in 10 or 20 years from now. We have some natural advantage because
people trust us more than any other company to make those payments. The test is whether we
over time earn a return above that we are paying to the injured party. That’s a bet we are willing to
make, but if interest rates continue to be low for a long time, assuming we kept the money in fixed
instruments, we’d have some loss. We do make monthly payments to these people eventually.
We have to keep track whether they are still alive or not because you cannot count on the
relatives of somebody that is deceased that when the check is coming in every month to notify us
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

promptly that the person has become deceased. That number will go up over time. If interest rates
stay where they are, that 4.1% will come up a little bit.

USG INVESTMENT

Q. In 2001, you made an initial investment in USG shortly before the company declared
bankruptcy.

Charlie Munger: It was very cheap.

Warren Buffett: USG, overall, has been disappointing because the gypsum business has been
disappointing. I may be wrong, but I think they went bankrupt twice. It’s not been a brilliant
investment. If gypsum prices were at levels that they were at some years in the past, it would
have worked out a lot better.

Charlie Munger: It hasn’t been terrible.

Warren Buffett: Gypsum has taken a real dive several times. Managements have been, not
necessarily at USG, they’ve gotten more optimistic about future demand than they should have.
It’s a business where the potential supply has been significantly greater than demand in a lot of
years. You’ve seen housing starts since 2008 and 2009 not come back to where people
anticipated. Gypsum prices have moved up but not dramatically. It’s not one of my great ideas.
Charlie wasn’t involved in that. It’s no disaster though.

Charlie Munger: No, it isn’t.

AJIT JAIN

Q. If Ajit were to retire, what would be the effect on insurance operations?

Warren Buffett: No one could possibly replace Ajit. We have a terrific operation in insurance
outside of Ajit, and it’s terrific-squared with Ajit. There are things only he can do, but there are a
lot of things that are institutionalized in our insurance business where we’ve got extraordinarily
able management. Ajit, for example, bought a company called Guard Insurance a few years ago
based in Wilkes-Barre, PA. It is expanding like crazy in Wilkes-Barre. It has been a gem. Ajit
oversees it. We have a terrific person running it. We bought Medical Protective some years ago.
Tim Kenesey can run a terrific insurance company with or without Ajit, but he’s smart enough to
realize if he has somebody like Ajit who is willing to oversee it to a degree, that’s great. Medical
Protective has been a wonderful business. Look at the section in the annual report called other
insurance companies, that’s a wonderful insurance company. Geico is a terrific company. Ajit
has made more money for Berkshire than I have probably. We still have what I would consider the
world’s best property casualty insurance operation, even without him, and with him, I don’t think
anybody comes close.

Charlie Munger: A few years ago, California made a little change in its workmen’s compensation
law. Ajit saw it instantly that it caused the underwriting results to change drastically. We went
to10% of the market which is big. He grabs a couple billion dollars at least out of the air. We
don’t have a lot of people like Ajit. It’s hard to snap your fingers and grab a couple billion dollars
out of the air.
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: (Warren snaps his fingers) Worker’s comp, Guard has moved into that. We have
a lot of terrific insurance managers. Peter Eastwood is one who is running a good business. And
Ajit has found some of those. I’ve gotten lucky a few times. People don’t even know we own
these things. We have $105 billion in insurance float. It is a good business when people pay you
to hold and invest that money.

****

I’ve been handed something Kraft Heinz came out with a few weeks ago, I had three of these. It’s
good. It’s a cheesecake arrangement with a topping. You create your own cheesecake for 170
calories. I can eat it while Charlie is talking. So you don’t feel too guilty, there’s – I don’t mind
having 500 or 600 calories for dessert. I will let someone else eat broccoli while I eat dessert.
They brought 8,000 or 9,000 of these to the annual meeting. I will be disappointed if we don’t run
out.

SUCCESSION PLANNING

Q. Question on succession planning as there were fewer names mentioned in the annual report.

Warren Buffett: There has been no change in succession planning. We’ve never had more good
managers than we have now.

Charlie Munger: I certainly agree with that. We don’t seem to have a whole lot of 20-year olds.

Warren Buffett: Certainly not at the front table. We have an excellent group. That’s why we can
manage by abdication. If we had 50 people out there all wanting to run Berkshire, but they have
the jobs they want in life. Tony Nicely loves running Geico. You go down the line, they have jobs
they love. When I’m not around, they will get the nod.

SECTORS OF THE MARKET

Q. Where do you want to go fishing for the next five years?

Warren Buffett: Charlie and I really do not discuss sectors much or the macro environment. We
are looking at all businesses all the time. It’s a hobby. We are opportunistic investors and hope to
get a call for acquisitions. We have a bunch of filters. We probably know within the first five
minutes or less whether it’s likely to happen. The first question we ask, “Can we really know
enough about the business to make a good decision?” There’s a few. We like businesses with
moats around them. If it makes it through the first filter, there’s a reasonable chance of doing a
deal. We do love the companies where consumer behavior can be predicted further out. It’s
getting harder for us to anticipate. It’s a tougher game now. We will look at returns on present
capital and future capital. A lot of people give you signals, whether you’re actually likely to have a
satisfactory arrangement. We know what types of businesses we like, but we don’t really say we
will go after companies in this field or that field.

Charlie Munger: Some subsidiaries do bolt-on acquisitions. That’s going on all the time. Of
course, we like it. But I would say in the general field of buying whole companies, it has gotten
very competitive. There’s a huge industry, the people that used to do leveraged buyouts now call
it private equity. It’s like a janitor calling himself the chief of engineering or something. They can
finance practically anything. They can pay very high prices. It’s very hard to buy a business.
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

There’s a certain small group of people that don’t want to sell to private equity. They love the
business so much they don’t want to just dress it up for resale.

Warren Buffett: We had a guy some years ago who came to see me. He was 61 at the time. He
said, look, I’ve got all the money I can possibly need, but there’s only one thing that worries me
when I drive to work – actually, there’s more than one guy that told me this - if something happens
to me today, my wife is left with the business. I’ve seen cases where executives in the company
try to buy them out cheap or sell to a competitor. I don’t want to leave her with the business. I
want to decide where it goes, but I want to keep running it. I thought about selling it to a
competitor, but if I do, their CFO will become the CFO of the new company, and all these people
who helped me build the business will get dumped. I will walk away with a ton of money. Some of
them will lose their jobs. I don’t want to do that. I can sell it to a leveraged buyout firm, they call
themselves private equity. They will leverage it to the hilt and resell it. They are going to dress it
up some. In the end, it’s not going to be in the same place. It isn’t because you’re so special – it’s
just that there isn’t anybody else. If you’re ever proposing to a potential spouse, don’t use that
line, but that’s what he told me. I took it well, and we made a deal. Logically, unless somebody has
that attitude, we should lose in this market. You can borrow so much money so cheaply. We are
looking at the money as pretty much all equity capital. We are not competitive with somebody that
has a very significant portion of the purchase price, carrying debt, maybe averaging 4%.

Charlie Munger: He won’t take the losses if it goes down. He gets part of the profit if it goes up.

Warren Buffett: His calculus is so different than ours. He has the money to make the deal. If all
you care about is getting the highest price for your business, we are not a good call. We will get
some calls in any event. We can offer something that is unusual. The person that sold us that
business, and a couple of others, actually it’s almost word for word what they say. They are all
happy with the sale they made, very happy. They have lots and lots of money. They are doing
what they love doing, which is still running the business. They know they made a decision that
will leave their family and the people that work for them all of their lives in the best possible
position. In their equation, they have done what is best, but that is not the equation of many
people. When the disparity gets so wide between what a heavily debt-financed purchase will bring
against an equity-type purchase, it gets to be tougher.

Charlie Munger: It’s been tough for a long time, and we bought some good businesses.

SUCCESSOR COMPENSATION

Q. How should you compensate your successor, you had remarked about three years ago that
you would tell us?

Warren Buffett: Unfortunately, at my age, I don’t have to worry about things I said three years
ago. This guy, obviously much younger, remembers. I will accept his word that I said that. A
couple of possibilities. I don’t want to get into details on them. I hope that we would have
somebody that is already very rich which they should be; they’ve been working a long time and
have that kind of ability, that’s very rich, and really not motivated by whether they have 10 or 100
times the amount of money they and their family need; and they might perhaps want to set an
example by engaging for something far lower than what their true market value is –– that could or
could not happen, but I think it would be terrific if it did. I can’t blame anyone for wanting their
market value. If they didn’t elect to go in that direction, you would probably pay them a very
modest amount, then have a substantial option which increased in value – or increased in strike
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

price annually based on the annual increase in retained earnings. Nobody does this hardly, but
the Washington Post Company did it a little bit, but it would increase assuming there were
substantial retained earnings every year. It’s very easy to design that. Private companies, they do
design it that way. They don’t want to do it in public companies because they get more money the
other way. Shares should have to be held for a couple years after retirement. They would then
really get the result over time that the majority of stockholders would be able to get and not to be
able to pick their points when they were able to exercise and sell a lot of stock. It’s not hard to
design a good compensation plan. It really depends on who you’re dealing with in terms of
actually how much they care about money and having money beyond what they can possibly use.

Charlie Munger: I think I’ve avoided all my life compensation consultants. I hardly can find the
words to express my contempt.

Warren Buffett: If the Board hires a compensation consultant after I go, I will come back – mad,
mad.

Charlie Munger: I think there’s a lot of mumbo jumbo in this field. I don’t see it going away.

Warren Buffett: It’s going to get worse. Everybody looks at everyone else’s proxy statements.
The human relations department who work for the CEO comes in and suggests a consultant.
What consultant is ever going to get another assignment if he says you should pay your CEO
below – down in the fourth quartile because you’re going to get fourth-quartile results? It isn’t that
the people are evil. The nature of the situation produces a result that is not consistent with how
representatives of the ownership should behave.

Charlie Munger: It’s even worse than that. Capitalism is the golden goose that we all live on.
People generally get so they have contempt for it because they don’t like the paid arrangements in
the system. Your capitalism may not last as well. That’s like killing the golden goose. I think the
existing system has a lot wrong with it.

Warren Buffett: I think there is something that is coming in pretty soon. Companies will have to
put in their proxy statement the CEO’s pay compared to the average employee pay or something
like that. It won’t change a thing.

Charlie Munger: It won’t get any headlines either. It will be tucked away.

Warren Buffett: It will cost us a lot of money. With 367,000 people employed around the world -
we hope to get something that makes it somewhat simpler where we can use estimates to get the
median income – or however the rules will read.

Charlie Munger: That’s what consultants are for.

Warren Buffett: It’s human nature that produces this. I write in this letter to the managers every
two years that the only excuse I won’t take on something is that everyone else is doing it. Of
course, everyone else is doing it is exactly the rationale for why people did not want to count the
cost of stock options as a cost. All these CEOs went to Washington, and they got the Senate to
vote 88 to 9 to say stock options aren’t a cost. A few years later it became so obvious that they
finally put it in that it was a cost. It reminded me of Galileo or something.

Charlie Munger: Way worse.

 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: I would hope, like I say, I’m not talking about the current successor, or anybody
else, the successors down the line will have gotten very wealthy by the time they are running
Berkshire - the incremental value of wealth gets very close to zero at some point. There’s a
chance to use it as a different sort of model, but I don’t have any problem if a system is devised
that recognizes retained earnings – I’ve never heard anyone talk about it on the 20 boards I’ve
been on – if you and I were partners in a business, and we kept retaining earnings in the business,
and I kept having the value of buying a portion of you out at a constant price, you’d say, this is
idiocy but that’s the way option systems are designed. Usually there’s some correlation between
what CEOs are paid and what boards are paid. If CEOs were getting paid at the rate that they got
paid 50 years ago – adapted to present dollars – director pay would be lower - it’s got all these
built-in things to some extent.

Charlie Munger: No Berkshire director is in it for the money.

Warren Buffett: They own a lot of stock.

Charlie Munger: It’s a very old-fashioned system.

Warren Buffett: I looked at one company the other day and seven of the directors had never ever
bought a share of stock. There they are making decisions on who should be the CEO, how they
should be paid and that sort of thing. They never felt like shelling out a dollar themselves.
They’ve been given a lot of stock. What you want is to have a system that works well in spite of
how human nature is going to drive it. We’ve done awfully well in that respect in this country. The
American business has done very well for Americans generally but not every aspect of it is
exactly what you want to teach your kids.

LOSS OF BNSF VOLUME

Q. With trucking more competitive and the widening of the Panama Canal, will there be a loss of
volume for Burlington Northern?

Warren Buffett: Chicago has lots of problems. Think how the railroads developed. Chicago was
the center, and they laid the rails, and the city grows up around the rails. Chicago can be a huge
problem. Getting to intermodal, car loadings actually hit a peak in 2006. Here we are eleven years
later. The investment of the five big class one railroads, if you look at the investment beyond
depreciation, tens of billions of dollars, and we are carrying less freight. It’s a good business. It
has many advantages over truck in many respects. Their right of way system is subsidized to a
much greater degree beyond the gas tax compared to the railroad industry. It has not been a
growth business in physical volume in any great degree. It’s likely to be a good business. I like
the west better than the east. There will be some intermodal traffic that gets diverted to eastern
ports. We have a terrific system in that respect. We will do well. I do think our fundamental
position is terrific. I think we will earn decent returns on capital. That’s the limit of it.

Charlie Munger: Nothing to add.

CAPITAL ALLOCATION ABILITIES

Q. Will bouncing ideas off one another on capital allocation continue long into the future?

Charlie Munger: It can’t continue very long.

 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: Don’t get defeatish, Charlie.

Any successor that is put in at Berkshire - proven capital allocation abilities are certain to be
upper most in the Board’s mind, in the current case, in terms of my recommendation and Charlie’s
recommendation, for what happens after we are not around. Capital allocation is incredibly
important at Berkshire. Right now we have $280 or $290 billion of shareholders’ equity. If you take
the next decade alone, nobody can make accurate predictions on it, but in the next ten years, if
you take - appreciation right now is another $7 billion a year, or something on that order. The next
manager during the decade will have to allocate maybe $400 billion or something like that. Ten
years from now, Berkshire will be an aggregation of businesses where more money has been put
in in that decade than everything that took place ahead of time – you need a very sensible capital
allocator in the job of being CEO of Berkshire. We will have one. It would be a terrible mistake to
have someone in this job where capital allocation will not be their main talent – it should be very
close to their main talent. We have an advantage at Berkshire in that we do know how important
that is. There is that focus on it. Many people get to the top through ability and sales, all different
sides of business. They then have capital allocation sort of put in their hands. They may establish
strategic thinking divisions and listen to investment bankers, but they better be able to do it
themselves.

Charlie Munger: If they come from a different background and haven’t done it…

Warren Buffett: It’s like getting to Carnegie Hall by playing the violin. You then walk on stage and
they hand you a piano. Berkshire would not do well if somebody was put in who had a lot of skills
in other areas but really didn’t have an ability for capital allocation. I call it a money mind. People
can have 120 or 140 IQs, very similar scoring abilities in terms of intelligence tests. Some of them
have minds that are good at one type of thing and some at others. I’ve known very bright people
that do not have money minds, and they can make very unintelligent decisions. They can do all
kind of other things that most mortals can’t do, but it isn’t the way their wiring works. I’ve known
other people that are not that brilliant – they do fine on an SAT test - but they never made a dumb
money decision in their life. We do want somebody – hopefully, they’ve got a lot of talents, but we
certainly don’t want somebody if they lack a money mind.

Charlie Munger: There’s the option of buying in stock, which isn’t like it’s some hopeless
problem. One way or another something intelligent will be done.

Warren Buffett: A money mind will recognize when it makes sense to buy a stock and when it
doesn’t. In fact, it’s a pretty good test for some people in terms of managements of how they think
about something in terms of buying stock. It’s not a very complicated equation if you sort of think
straight about that sort of a subject. Some people think that way and some don’t, and they’d
probably be miles better at something else, but they say some very silly things when you get to
something that seems so clear as to when buying stock makes sense.

HEDGE FUND COMPENSATION

Q. Should investors pay financial helpers? You describe how valuable Charlie Munger is. Would
you pay a 1% helper fee on assets to Charlie?
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: I’ve said in the annual report, I’ve known maybe a dozen people in my life, there
are undoubtedly hundreds or thousands out there. I’ve known personally a dozen where I would
have predicted or did predict that the person involved would do better than average in investing
over a long period of time. Charlie is one of those people. Would I pay him? Sure. But would I
take financial advisors as a group and pay them 1% with the idea that they will deliver results to
me that were better than the S&P 500 by 1% and thereby let me break even as to what I could have
done on my own? There’s very few. It’s not a good question to ask. If I’d pay Charlie 1%, that’s
like asking would I have paid $100,000 to Babe Ruth to come over from the Red Sox to the
Yankees? Sure! There wouldn’t have been very many people that I would have paid in 1919 to
come over to the Yankees. It’s a fascinating situation. It’s not that the advisors are going to do so
terrible. You have an option available that doesn’t cost you anything that is going to do better
than they are in aggregate. If you hire an obstetrician, assuming you need one, they will do a
better job at delivering the baby than the spouse or someone off the street. In all professions,
there’s value added by the professionals as a group compared to doing it yourself. In the
investment world, it isn’t true. In the active group, the people that are professionals in aggregate
are not, cannot, do better than the aggregate of the people that just sit tight. If you say in the
active group there’s some person that’s terrific, I will agree with you. The passive people can’t all
pick that person, and they wouldn’t know how to identify them.

Charlie Munger: It’s even worse than that. The expert who is really good – when he gets more
and more money in, he suffers terrible performance problems. You’ll find the person who has a
long career at 2% and 20% of profits. If you analyze it net, all the people who lost money, because
some of the early people had a good record, but more money coming in later, and they lose it.
The investing world is a morass of wrong incentives, crazy reporting and a fair amount of
delusion.

Warren Buffett: If you asked me whether those 12 people I picked would do better than the S&P
working with a hundred billion dollars, I’d answer that probably none of them would. When they
actually worked in practice, they dealt generally with pretty moderate sums. As their sums grew,
their relative advantage diminished. The example I used in the report – the guy who made the bet
with me and incidentally all kinds of people didn’t make the bet with me. They knew better than to
make the bet with me. There were at least a couple hundred underlying hedge funds. These guys
were incented to pick the best funds, tons of money, a lot of money went to pay managers of what
was subnormal performance over a long period of time. It’s an interesting profession, when you
have hundreds of thousands of people that are compensated based on something that in
aggregate cannot be true – superior performance. It will continue. The best sales people will tend
to attract the most money. It’s such a big game. People will make huge sums of money – far
beyond what they’re going to make in medicine – you name it, repairing the country’s
infrastructure. You give the people the idea that you can do something magical for them. If you
even have a billion dollar fund and get 2% of it for terrible performance, that’s $20 million dollars.
In any other field it would just blow your mind. People get so used to it in the field of investment.

We have two guys in the office that are managing $21 billion. We pay them a million dollars a year,
plus the amount by which they beat the S&P – they have to actually do something to get
contingent compensation which is much more reasonable than 20 percent. But how many hedge
fund managers say I only want to get paid if I do something for you? Unless I actually deliver
something beyond what you can get yourself, I don’t want to get paid. It gets back to the line I
used when I asked the guy, “How can you in good conscience charge 2% and 20%?” He said,
“Because I can’t get 3% and 30%.” Charlie?
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: I think you’ve beaten up on them enough.

PRECISION CASTPARTS

Q. Please update us on the Precision Castparts acquisition.

Warren Buffett: We have actually made bolt-on acquisitions, and we will make more because we
have an extraordinary manager. We have a terrific position in the aircraft field. There will be the
chance for sensible acquisitions. We’ve already made two anyway. We will make more overtime.
The amortization of intangibles is the only big purchase price adjustment, that’s something over
$400 million a year non-deductible. In my mind, it’s over $400 million of earnings. I do not regard
the economic goodwill of Precision Castparts being diminished at that rate annually. I’ve
explained that in some degree. As a very long-term business– you can worry about 3D printing -
you don’t have to worry about aircrafts being manufactured. Aircraft deliveries can be fairly
volatile. I don’t think the long-term demand is anything I worry about. The question is whether
anybody can do it better or cheaper or if 3D printing at least takes away part of the field. I feel
very good about Precision Castparts. It’s a very long-term business. The initiation of a new plane
may be delayed or something. Take a look at the engine that’s in the other adjoining room, in our
exhibition hall. If you were putting that engine together, with a 20 or 25 year life, carrying
hundreds of people, you would care about your supplier - not only in the quality of the work being
done, but also if you were an engine manufacturer, or an aircraft manufacturer, you would care
about the reliability of delivery. You don’t want a plane or engine that’s 99% complete while
someone is dealing with the problem of faulty parts. Reliability is incredibly important. I don’t
think anyone has a better reputation than the company. I love the fact we bought Precision
Castparts.

Charlie Munger: It’s a very good business purchased for a fair price. This is no screaming
bargain like the old days. For quality businesses, you pay up now a lot more than we used to.

Warren Buffett: You don’t get a bargain price. The $400 plus million goes on quite awhile. It’s the
way accounting works. I don’t want to tell you about this one. Starting the first of next year,
accounting is going to become a nightmare in terms of Berkshire and other companies because
they’re going to have us mark our equities to market like we were a Wall Street trading firm. Those
changes in the value of Coca-Cola or American Express will run through the income statement
every quarter or every day. It really will get confusing. It’s our job to explain it when we report
GAAP earnings, but GAAP earnings will become even more meaningless only looking at the
bottom line.

Charlie Munger: That was not necessarily a good idea.

Warren Buffett: It’s a terrible idea, but we will deal with it. It’s my job to explain to what extent
GAAP accounting is useful to you in evaluating Berkshire and a time when it actually distorts
things. Accounting is not supposed to describe value. It’s a terribly useful tool if understood.
And so certainly, you can’t blame the auditing profession for doing what they think is their job.

Charlie Munger: You can blame the auditing profession for that one. That was really stupid.

Warren Buffett: I agree with that actually. We will always give you the audit figures and then
explain their shortcomings in either direction, or what you should use and probably ignore in
looking at those numbers and using them to come to a judgment as to the value of your holdings.
We want you to understand what you own. We try to cover the details that are really important in
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

that respect - but there are a million things you can talk about that are just of minor importance–
the interpretations that we would regard as important in coming to an estimate of the value of the
business. If they simply look at bottom line numbers, what could be silly this year will be
absolutely ludicrous next year because of the new rule that comes into effect in 2018!

CHINA’S STOCK MARKET

Q. Can someone duplicate your record by investing in China’s stock market?

Warren Buffett: Charlie, you’re the expert on China.

Charlie Munger: It’s like determining the order of precedency between a louse and a flea. I do
think the Chinese stock market is cheaper than the American stock market, and I do think China
has a bright future, but I also think there will be growing pains, of course. We have this
opportunistic way of going through life. We don’t have any particular rules about which market
we are in or anything like that.

Warren Buffett: Charlie has delivered a headline anyway now – “Munger predicts the China market
will outperform the US.”

3G CAPITAL’S EXTREME COST CUTTING

Q. Berkshire partners with 3G Capital on deals. What do you think of their extreme cost cutting
and elimination of thousands of jobs?

Warren Buffett: Essentially, 3G management – I’ve watched them very close - is basically they
believe in having a company as productive as possible, and of course, the gains in this world for
the people in this room and the people in Omaha and the people throughout America have come
from gains through productivity. If there had been no change in productivity, we would be living
the same life as people lived in 1776. The 3G people do it very fast, and they’re very good making
a business productive with fewer people than operated it before. We’ve been doing that in every
industry whether it’s steel or cars. That’s why we live as well as we do. We at Berkshire prefer to
buy companies that are already run efficiently. Frankly, we don’t enjoy the process at all of
getting more productive. It’s not pleasant, but it is what enabled the company to progress.
Nobody has figured a way to double people’s consumption per capita without in some way
improving productivity per capita. It’s a good question, and whether it’s smart overall if you think
you’re going to suffer politically because political consequences do hit businesses. I don’t know
that I can answer the question categorically, but I can tell you they not only focus on productivity
and do it in a very intelligent way but also focus to a terrific degree on product improvement,
innovation and all of the other things that you want a management to focus on. At lunchtime if
you had the Kraft Heinz cheesecake, you will agree with me that product improvement and
innovation is just as much a part of the 3G playbook as productivity. Personally, we have been
through the process of being in a textile business that employed a couple thousand people and
went out of business over a period of time. It’s just not as much fun to be in a business that cuts
jobs rather than a business that adds jobs. Charlie and I would probably forgo having Berkshire
buy businesses where the main benefits would come from increasing productivity by actually
having fewer workers. I think it is pro social to think in terms of improving productivity, and I
think the people at 3G do a very good job.
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: I don’t see anything wrong with increasing productivity. On the other hand,
there’s a lot of counter-productivity publicity to doing it. Just because you’re right doesn’t mean
you should always do it.

Warren Buffett: I agree with that.

SHARE REPURCHASES

Q. With $100 billion in cash, would you increase the multiple you pay for share buybacks?

Warren Buffett: When the time comes, and it could come reasonably soon, even while I’m around.
But if we really don’t think we can get the money out in a reasonable period of time into things we
like, we have to re-examine then what we can do with the funds that we don’t think could be
deployed well. At that time, we have to make a decision. It might include both. It could be
repurchases and dividends. There are inferences that people draw from a dividend policy,
different than from a repurchase policy, in terms of expectations that you won’t cut a dividend.
You have to factor that all in. If we felt we had excess cash that was unlikely to be used in a
reasonable period of time, and we thought repurchases had a price that was still attractive to
continuing shareholders and was feasible in a substantial sum that could make a lot of sense. At
the moment, we are still optimistic enough about deploying the capital that we wouldn’t be
inclined to move to a price much closer – there’s only a narrow spread between intrinsic value
and the repurchase price– but at a point the burden of proof is definitely on us. The last thing we
like to do is own something at 100 times earnings [like Treasury bills] where the earnings can’t
grow – 90 plus billion dollars invested in a business where we are paying almost 100 times
earnings. It’s kind of a lousy business. We don’t like that. We shouldn’t use your money that way
for long periods of time. Are we going to be able to deploy it? I would say history is on our side,
but it would be more fun if the phone rang instead of just relying on history books. I am sure that
sometime in the next ten years, and it could be next week or nine years from now, there will be
markets in which we could do intelligent things on a big scale. It would be no fun if it happened to
be nine years off. I don’t think it will be based on how humans behave, the government behaves
and the world behaves, but at a point, the burden of proof really shifts to us big time. Three years
from now, we cannot come back here holding $150 billion in cash.

Charlie Munger: The answer is maybe.

CBT SUBSIDIARY AND SUSTAINABLE INVESTING

Q. Can you comment on CBT and making equipment that does not harm animals? Also would
you address sustainable investing and nuclear war?

Warren Buffett: We have a subsidiary, CBT, and they do make the equipment for poultry growers.
I can’t answer your question specifically, but get in contact with Vic directly. He’s a terrific
manager, one of our very best managers. They do care about how the equipment is used in terms
of poultry and egg production. They do make the equipment for poultry growers. It’s a major
factor in what they do. They do care about how the equipment is used in terms of poultry and egg
production. I can’t tell you enough about it directly. I think you would find him extremely well
informed.

In terms of the nuclear weapon question, I’m very pessimistic on weapons of mass destruction,
although I don’t see nuclear as likely as biological and cyber threats – but I do think that a cyber
threat is the number one problem of mankind.
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: Well, I don’t think we mind killing chickens, and I do think we are against nuclear
war.

Warren Buffett: We are not actually a poultry producer. They use our equipment. That
equipment has been changed substantially, but I’m not as good on specifics.

TODD COMBS AND TED WESCHLER

Q. Why hasn’t more cash been allocated to Todd Combs and Ted Weschler to invest for Berkshire
in proportion to the $100 billion in cash the company holds?

Warren Buffett: I would say they have been. I think we started out with $2 billion and my memory
was $2 billion with Todd when he came with us. There have been substantial additions. Of
course, their own capital has grown, since in a sense they retain their own earnings. So, they are
managing a proportion of Berkshire capital or also measured by marketable securities – it’s
similar or maybe higher than when each one entered– Ted entered a year or two after Todd – I
think they would agree that it’s tougher to run $10 billion than it is to run $1 or $2 billion. Your
expected returns go down as you get into larger sums. The decision to bring them on has been
terrific. They have done a good job of managing marketable securities. They have made more
money than I would have made with the same $20 billion, although it was originally $2 billion.
They have been a terrific help in a variety of ways beyond money management. It’s been a very
good decision. They are smart. They have money minds. They are good specifically on
investment management, and they are absolutely first class human beings and fit with Berkshire.
Charlie gets credit for Todd. I’ll claim credit for Ted.

Charlie Munger: I think the shareholders are very lucky to have them because they both think like
shareholders. It’s a pretense that everyone takes on, but the reality is different. These people
really deeply think like shareholders, and they are young and smart and constructive. We are all
very lucky to have them around.

Warren Buffett: Their mindset is 100%, “What can I do for Berkshire, not what can Berkshire do
for me?” You can spot that over time from people. On top of that, they are very talented. It’s hard
to find people- young, ambitious, very smart- that don’t put themselves first. Every experience
we’ve had, they do not put themselves first. They put Berkshire first. I can spot it when people are
extreme in one direction or another. You couldn’t have two better people in those positions. You
might say, “Why don’t you give them another $30 billion each or something?” I don’t think that
would improve their lives or their performance. They may be handling more as they go along. But
the truth is I’ve got more assigned to me than I can handle at the present time as proven by the
fact we’ve got this $90 billion plus around. I think there are reasonable prospects for using it, but
if you told me I had to put it to work today, I would not like the prospect.

Charlie Munger: I certainly agree with that. It’s a lot harder now than it was at times in the past.

CHARITABLE PLEDGE AND SHARE REPURCHASES

Q. What are the plans for your ownership stake which is heavily in Class A shares? The bulk is
going to the Gates Foundation as part of your charitable pledge. Would Berkshire buy back
shares for more than the stated policy of 1.2 times book value?

Warren Buffett: – Again, it would depend on the price of Berkshire in terms of privately negotiated
share repurchases. In terms of what I give away annually, the last two years it’s about $2.8 billion
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

per year. That can be – that’s one day’s trading in Apple. The amount I’m giving away in terms of
Berkshire’s market cap - you’re down to 7/10 of 1% of the market cap. I know a few big owners
that might have 8,000 or 10,000 shares of A. When we bought that block of 12,000 shares of A, we
bought it because we thought it would increase the intrinsic business value of Berkshire by a
significant amount, and we paid the seller what the market was at the time. We are open to further
share repurchases up to 120% of book value. Who knows if a large block came along at the time,
and it was 124% of book value or something, a very large block, and the directors decided that
was OK, and it was still a significant discount, we might very well buy it. In terms of the orderly
flow of the market, there will be no problems, just as there haven’t been when I’ve given away
shares – I do it every July. Some of the charitable foundations may keep it for awhile, but they
have to spend what I give them– they may build up a position in B shares for a fairly significant
dollar amount, but they’re going to sell it. It is true that for a period after I die, there will be a lot of
votes still in the estate and later in the trust, but that will get reduced over time. I see no problem
with our capitalization over time. I like the idea of a fair number of votes being concentrated in
people that believe in the culture strongly and would not be thinking to get a 20% jump in the
stock if somebody came along with some particular plan. Eventually that will get diminished.
There’s a very good market in Berkshire shares. If we can buy them at a discount to intrinsic
business value, and someone offers a big piece, which may be selling at 1.22 times or 1.24 times
book value, I would pick up the phone and call the directors and see if they didn’t want to make a
change [to the stated policy of 1.2 times book value]. We did it once before. If it made sense, I’m
sure they would say yes. If it didn’t make sense, I’m sure they would say no. I don’t think we have
any problem in terms of blocks of stock. I don’t think that people that owned it would have a
problem selling it, and I don’t think we’d have a problem of evaluating the desirability of
repurchasing it.

Charlie Munger: Nothing to add.

BANK OF AMERICA PREFERRED STOCK AND WARRANTS

Q. Noting that she had been a Berkshire shareholder since she was 15, she jokingly asked if they
knew any eligible bachelors in New York. Then on to her real question. Can you comment on the
Bank of America preferred stock and warrants, and when you would convert those into common
shares?

Warren Buffett: When the price of the stock is above $7 a share, which seems quite likely,
whether we were going to keep it or not, it would certainly make sense to exercise the warrant
shortly before it expired. It’s only a valuable warrant if it’s exercised and exchanged into common
and that warrant does expire. As I put in the annual report, our income from the investment would
increase if Bank of America ever got to where it was paying 11 cents per share in quarterly
dividends – as we get $300 million a year off the preferred, and for us to use the preferred as
payment in exercise of the warrant, we would want to feel we were getting more than $300 million
a year. They may or may not get to where they pay that amount before the warrant expires in 2021.
If it does get to there, we will exercise the warrant and instead of owning the 5 million of preferred
and the warrants, we will have $700 million plus shares of common. That becomes a separate
decision, do we want to keep the $700 million shares of common? If it were to happen today, I
would definitely want to keep the stock. Who knows what other alternatives may be available in
2021, but if our warrants were expiring tomorrow, we would use the preferred to buy the $700
million plus shares of common, and we would keep the common. If it gets to an 11 cent quarterly
dividend, we will convert it and very likely keep the common. If we get to 2021, if the common is
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

above $7, which I certainly anticipate, we will exercise the warrant. I wish you success on your
other objective. And I think probably the fellow will be using very good judgment, too.

Charlie Munger: I think it’s a very wise thing for a woman that owns Berkshire stock and is a
good-looking woman to put her picture up like that for eligible bachelors.

Warren Buffett: We might actually start selling ads in the annual report. Incidentally, that BOA
purchase, it’s literally true that I was sitting in the bathtub when I got the idea whether they would
be interested in the preferred. I spent a lot of time in the bathtub since and nothing has come to
me. Clearly, I either need a new bathtub or we have to get into a different kind of market.

KRAFT HEINZ AND 3G CAPITAL

Q. Berkshire Hathaway’s Kraft Heinz investment is with 3G Capital. 3G fired 2500 employees as
part of the merger. Does that decision harm Berkshire and its values?

Warren Buffett: Berkshire fired 2000 people over time – some retired and left and all of that - at
the textile operation. It didn’t work. The Baltimore department store Berkshire invested in had to
close. The successor fortunately sold it to somebody else, but they eventually closed up the
department stores because department stores, at least that particular one and a good many of
them, including our competitors in Baltimore, could not make it work. Wal-Mart came along and
now Amazon is coming along with something that changed everything.

We mentioned CBT. The farm equipment that CBT develops--the idea is it is more productive than
what is already out there-- which means fewer people are employed on farms. We had 80% of the
American working population working on farms 100 years ago. If nobody had come up with
things to make it more productive, we’d have 80 percent of the people working now on farms to
feed our populous, which means we’d be living in a far more primitive way. If you look at the auto
industry or any industry, they are trying to get more productive. Wal-Mart was more productive
than department stores. That will continue or it better continue, or people will not live any better
than we do. America does get more productive. People do come up with better ways of doing
things.

When Kraft Heinz finds that they can do $27 billion dollars worth of business and can do it with
fewer people, they are doing what American businesses have done for a couple of hundred years.
They increase productivity. That is why we live so well. They [3G Capital] do it very fast. They are
more than fair in terms of severance pay. They don’t want to have two people doing the job that
one person can do. I faced it with Dexter Shoes. It really needed change. Change is painful for a
lot of people. I would just rather spend my days not doing that sort of thing. It’s essential to
America that we become productive because that is the only way we have more consumption per
capita and have more productivity per capita.

Charlie Munger: You’re absolutely right. We don’t want to go back to subsistence farming. I had
a week of that when I was young at a western Nebraska farm, and I hated it. I don’t miss the
elevator operators that used to sit there all day in the elevator and run the little crank. It’s terribly
unpleasant for the people that have to go through it. Why would we want to get into the business
of doing that over and over ourselves? We did it in the past when we had to when the businesses
were dying. I don’t see any moral fault in 3G at all. I do see that there’s some political reaction
that doesn’t do anybody any good.
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: Milton Friedman would talk about the huge construction project in some
communist country. They had thousands and thousands of workers out there with shovels
digging away on this major project. Then they had a few of these earth-moving machines behind
them which were idle which could have done the work in 1/20th of the time of the workers. The
economist suggested why in the world they didn’t use the machines to get the job done in 1/10th
or 1/20th of the time instead of having all of these workers out there with shovels. The guy replied
that would put the workers out of work. Friedman said, “Then, why don’t you give them spoons to
use instead?”

DEAL SIZE

Q. With Berkshire committed to holding a minimum of $20 billion for liquidity purposes, can that
amount be invested if you found an attractive opportunity?

Warren Buffett: I wouldn’t include the bonds with the cash– when we talk about holding $20
billion in cash. $20 billion would be the absolute minimum in cash we would hold. Since I set $20
billion as a minimum, I’m not going to operate with $21 billion any more than if I see a truck sign
on the highway that says maximum load 30,000 pounds and then drive 28,800 pounds across it –
we won’t come that close. We are not inclined to use debt. If we found something that lit our fire,
we might do some debt, but it’s unlikely under today’s circumstances. $20 billion is an absolute
minimum on liquidity, but we could still do a very large deal if we thought it was sufficiently
attractive. We haven’t put our foot to the floor really for a very long time. We spent $16 billion
back when we were much smaller in a period of three weeks in the fall of 2008 – we never got to a
point where there was any problem of sleeping at night. Charlie, at what point if I called you
would you say that a deal was a little bit big for us today?

Charlie Munger: $150 billion would be too big for a deal.

Warren Buffett: Well, in that case I’ll call you. I’m a little more conservative than Charlie. If we
find a really big deal that makes compelling sense, we will do it.

JORGE PAULO LEMANN

Q. With your deals with 3G Capital, could Jorge Paulo Lemann, a founder of 3G Capital, be a
potential successor for Berkshire or be on Berkshire’s board of directors?

Warren Buffett: I don’t think that would happen, and I think it would complicate things in terms of
the board membership. We love the idea of being their partner, and I think there’s a chance we
will do more and perhaps bigger things together. It’s not likely we will be doing much change in
the board in the next few years. There will be a successor, and the successor may very well be
while I’m alive. It’s a high probability that that will be somebody that’s been within our company
for a very long time.

Charlie Munger: All I can say is my back hurts. I come to these functions because I want to
indicate to my fellow shareholders that they probably have seven good years to get out of Warren.

Warren Buffett: Charlie is inspiring to me. We’ve been very, very lucky in life. So far our luck
seems to be holding.

FRUIT OF THE LOOM

 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Q. Is Fruit of the Loom experiencing difficulty due to online shopping?

Warren Buffett: The answer is essentially no, so far. Anybody that doesn’t think online isn’t
changing retail in a big way is wrong, and anybody that thinks they are totally insulated from it is
incorrect. The world is changing big time. Fruit of the Loom really hasn’t changed much and our
furniture operation, which is setting a record again this year for our shareholders’ weekend – we
did $45 million in one weekend. Our furniture operations, it’s hard to see any effect from online
outside of our own online operations. We had really good same-store sales in furniture. There’s a
lot of things we didn’t see ten years ago that then materialized. One thing you may find interesting
is the Nebraska Furniture Mart here in Omaha, which is an extraordinary operation-- the online
business has grown substantially. I think it’s getting close to 10% of volume. A very significant
percentage of people still go and pick the furniture up at the furniture mart. Apparently, it’s the
time spent entering the stores or the checkout lines which have people shopping online. We keep
looking at the figures. So far, it has not affected Fruit of the Loom in a significant matter or the
furniture operations.

I have no illusions that ten years from now, it will look anything like it did today. The retail
landscape has changed dramatically over the decades with the evolution from department store
sales to online sales. A big department store in Omaha would have thousands of dresses. The
department store was exciting variety. The shopping center then made it horizontal but kept
incredible variety and the convenience of going to one place. Now you go to the discount stores.
Today, you have the Internet, and the ultimate in assortments and people coming in at low prices
and transportation is taken care of. The department store is online, expanded in assortment,
much more convenient, speed has increased dramatically. Brands will be tested in a variety of
ways. They will have to make decisions on whether they try to do it online themselves or work
through an Amazon or hang on to the old methods of distribution. There’s a lot of questions in
retail and branding that are very interesting to watch. We will get some surprises in the next ten
years. I can promise you that.

Charlie Munger: It would certainly be unpleasant if we were in the department store business
today. Just think of what we avoided, Warren.

Warren Buffett: We got very lucky. We were in the department store business and our business
was so lousy that we recognized it. If it would have been a little bit better, we would have hung
on. We owe a tremendous gratitude to Sandy Gottesman, our director, because he got us out of
the business when Charlie and I and Sandy were partners. Something we paid $6 a share for – I
think it’s worth about $100,000 a share now because we got out of the business. If it had been
somewhat of a better business, it might be worth $10 or $12 a share now. Sometimes you get
lucky. We don’t miss it either, do we?

Charlie Munger: No, we don’t miss it.

BOOK VALUE AND INTRINSIC VALUE

Q. With Berkshire’s intrinsic value driven more by its operating businesses than its stock
investments, is book value per share still relevant for valuing Berkshire?

Warren Buffett: It has some relevance. It has a whole lot less relevance than it used to. I don’t
want to drop the book value per share factor, but the market value tends to have more
significance as the decades roll along. It’s a starting point. Clearly, our securities aren’t worth
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

more than we were carrying them for at that time. On the other hand, we’ve got the kind of
businesses you mentioned but also some small businesses that are worth ten times or so more
than we are carrying them on our books. We’ve got some clunkers, too. I think the best method,
of course, is to calculate Berkshire’s value in terms of intrinsic value. It can’t be precise. We think
the probability is exceptionally high that 120% of book value understates it. If it was all in
securities, 120% would be too high. As the business has evolved, as we built in unrecognized
value at the operating businesses, unrecognized for accounting purposes, I think it still has some
use as being kind of the base figure we use. If it were a private company and ten of us here
owned it – instead, we’d just sit down annually and calculate the businesses one by one and use
that as a base value, but that gets pretty subjective when you have as many as we do. I think the
easiest thing is to use the standards we are using now, recognizing the limitations in them.

Charlie Munger: I think equities held in the insurance company are really not worth the full market
value because they are locked away due to taxes. We have replaced lots of our marketable
securities with private companies. I basically like it when our marketable securities go down, and
our wholly-owned businesses go up.

Warren Buffett: We are working to that end now for 30 years now.

Charlie Munger: We’ve done a good job, too. We’ve replaced a lot of marketable securities with
unmarketable securities that are worth a lot more.

Warren Buffett: It’s actually a more enjoyable way to operate beyond that.

Charlie Munger: We know a lot of good people we wouldn’t otherwise be with.

BUY WHAT YOU KNOW

Q. Your investment advice has always been to buy what you know. You are not known for being a
tech guy, but you are now investing and talking more about tech companies. You’ve only tweeted
nine times in the last four years.

Warren Buffett: It was either that or go to a monastery. I don’t think I’ve talked that much about
tech companies. I made a large investment in IBM, which has not turned out that well. We haven’t
lost money. In terms of the bull market we’ve been in, it has been a significant laggard. Fairly
recently, we took a large position in Apple, which I do regard more as a consumer goods company
in terms of certain economic characteristics. It has a huge tech component in terms of what that
product can do or what other people might come along to do to leapfrog it in some way. I think I’ll
end up being one for two instead of 0 for 2, but we will find out. I make no pretense whatsoever of
being on the intellectual level of some 15-year old that has an interest in tech. I may have some
insights into consumer behavior. I certainly can get a lot of information on consumer behavior
and then try to draw inferences as to what consumer behavior is likely to be in the future. I will
make some mistakes on marketable securities. I’ve made them in other areas other than tech. You
will not bat 1000 no matter what industries you try to stick with. I know insurance pretty well, but I
think I’ve lost money on insurance stocks once or twice over the years. You don’t bat 1000, but
I’ve gained no real knowledge about tech since I was born actually.

Charlie Munger: I think it’s a very good sign that you bought Apple. It shows either one of two
things. Either you’ve gone crazy or you’re learning. I prefer the learning explanation.

Warren Buffett: So do I, actually.

 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

ARTIFICIAL INTELLIGENCE

Q. How will artificial intelligence impact Berkshire?

Warren Buffett: I certainly have no special insights on artificial intelligence. I will bet a lot of
things will happen in that field in the next couple of decades and probably a shorter time frame.
They should lead, I would think, again, I don’t bring much to this party, but I would think it would
result in significantly less employment in certain areas, but that’s good for society but it may not
be good for a given business. But let’s take it to the extreme. Let’s assume one person could
push a button and essentially through various machines and robotics turn out all of the output we
have in this country. There’s just as much output as we have. It’s all being done by, instead of
150 million being employed, one person. Is the world better off or not? They would certainly work
less hours per week. It would be a good thing but require enormous transformation in how people
relate to each other, what they expect from government and all kind of things. As a practical
matter, more than one person would keep working. Artificial intelligence is enormously pro-
society eventually, but enormously disruptive in other ways, and it can have huge problems in
terms of democracy and how it reacts to that. It’s similar to the problem we have in trade. Trade is
beneficial to society. But the people that see the benefits day by day of trade don’t see a price at
Wal-Mart on socks or whatever they’re importing. You’re paying X, but you would pay X plus so
many cents if you bought this domestically. They are getting these small benefits, invisible
benefits. The guy that gets hurt by it, who is the roadkill of free trade, feels it very specifically.
That translates into politics. It gets very uncertain to how the world would adjust in my view to
great increases in productivity. Without knowing a thing about it, I would think artificial
intelligence would have a hugely beneficial social effect but a very unpredictable political effect if
it came in fast, which I think it could.

Charlie Munger: You’re painting a funny world where everybody is engaged in trade. I don’t think
it would be good for America to have everything produced by one person and the rest of us just
engaged in leisure.

Warren Buffett: How about if we got twice as productive in a short period of time so 75 million
people could do what 150 million are doing now?

Charlie Munger: I think you’d be amazed how quickly people would react to that.

Warren Buffett: In what way?

Charlie Munger: Favorably. That’s what happened, if everybody remembers with such affection,
back in the Eisenhower years, 5% a year, people loved it. Nobody complained they were getting
air conditioning when they didn’t have it before. Nobody wanted to go back to stinking, sweating
nights in the south.

Warren Buffett: If you cut everybody’s hours in half, that’s one thing. If you fire half the people
and the other people keep working – I think it gets very unpredictable. I think we saw some of that
in this election.

Charlie Munger: We adjusted to an enormous amount of productivity. It just came along a few
percent a year. I don’t think you have to worry about it coming out at 25% a year. I think you have
to worry about it if you get less than 2% a year. That’s what’s worrisome.
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: It is an absolutely fascinating subject to see what happens with this, but it gets
very hard to predict. We have 36,000 people employed at Geico. If you could perform virtually all
the same functions and do it with 5,000 or 10,000 people, it would be disruptive especially if it
came on quickly and the same thing was happening in many other areas. I don’t think we ever
experienced anything quite like that and maybe we won’t because I don’t know that much about
artificial intelligence.

Charlie Munger: I don’t think you have to worry about that.

Warren Buffett: That’s because I’m 86.

Charlie Munger: It’s not going to come that quickly.

WIND INVESTMENTS VS SOLAR INVESTMENTS

Q. Do you favor investing in wind projects over solar projects?

Warren Buffett: We don’t look at it as having more solar capacity than we need. It’s really a
question of what project comes along. We’ve got a big appetite for wind or solar. Just based on
those figures, we’ve seen more wind lately. We have no bias toward either one. If we saw $5
billion of attractive solar projects and didn’t see any wind, it wouldn’t slow us down from doing
the $5 billion or vice versa. We have a huge appetite for projects in either area. We are
particularly well-situated – I think I talked about it in the past - because we pay lots of taxes.
Therefore, solar and wind projects all involve a tax aspect– we can handle those much better than
many others. Most electric utilities don’t have that much money left over after dividends, and their
taxes aren’t that significant. At Berkshire, we have lots of money and pay lots of taxes and can
use the tax benefits from wind or solar. It’s a question of doing the math. We have been very
fortunate in Iowa in finding projects that made lots of sense. We have a much lower price for
electricity than our main competitor in the state. We have a lower price than any state it touches.
We told the people of Iowa they won’t have a price increase for many, many years. It’s worked out
extremely well, but if somebody walks in with a solar project tomorrow and it takes $1 or $3
billion, we are ready to do it, and the more, the better. There’s no specific preference between the
two. Obviously, it depends where you are in the country. Iowa is terrific for wind, and California
is for sun. There are geographical advantages to one or the other. From our standpoint, we can
do them from any place, and we will do them any place.

AMAZON

Q. You admire Jeff Bezos. Why have you not invested in Amazon?

Warren Buffett: I was too dumb to realize what was going to happen. I admired Jeff for a long,
long time and watched what he was doing. I did not think he could succeed on the scale he has or
even think about the possibility of doing anything with Amazon web services or the cloud. If you
asked me the chances that while he was building up the retail operation, he would also be doing
something that was disrupting the tech industry--that would have been a longshot for me. I
underestimated the brilliance of the execution. It is one thing to dream about doing this stuff
online, but it takes a lot of ability. You can read his 1997 annual report, and he laid out a roadmap.
He has done it and done it in spades, and if you haven’t seen his interview with Charlie Rose three
or four months ago – Charlierose.com, go to it and listen to it because you will learn a lot, at least
I did. The stock always looked expensive. I really never thought he would be where he is today. I
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

thought he was really brilliant. I did not think he would be where he is today when I looked at it 3,
5, 8, or 12 years ago. Charlie, how did you miss it?

Charlie Munger: It was easy. What was done there was very difficult. It was not at all obvious that
it was all going to work as well as it did. I don’t feel any regret about missing out on the
achievements of Amazon. Other things were easier, and I think we screwed up a little.

Warren Buffett: We won’t pursue that line.

Charlie Munger: I meant Google.

Warren Buffett: We missed a lot of things.

Charlie Munger: And we will keep doing it. Luckily, we don’t miss everything, Warren. That’s our
secret. We don’t miss them all.

Warren Buffett: We better move on. He may start getting specific.

SHARE REPURCHASES POST-BUFFETT

Q. If there is selling pressure after Buffett or Munger dies and Berkshire’s stock falls to where
share repurchases are attractive, will the Board repurchase shares or will they think they are
taking advantage of shareholders?

Warren Buffett: As far as I’m concerned, they are not taking advantage of shareholders if they
buy the stock when it’s undervalued. That’s the only way they should buy it. There were a few
cases back when Charlie and I were much younger where there were very aggressive repurchases
or the equivalent of repurchases by people, and the repurchases made a lot more sense then than
they do now. They were done by people with various techniques who tried to depress the shares.
If you’re trying to encourage your partners to sell out at a depressed price by various techniques,
including misinformation, but there’s other techniques, I think that’s reprehensible. Our Board
wouldn’t do that. I think the stock is more likely to go up. If I died tonight, the stock would go up
tomorrow. There would be speculation about break-ups and all that sort of thing. It would be a
good Wall Street story. Breaking up something where some of the parts might sell for more than
the whole – the stock might sell temporarily for more than the whole. I would bet in that direction.
If for some reason it went down to a level that’s attractive, I don’t think the Board is doing
anything in the least that’s reprehensible by buying stock – there’s no false information. The
seller would get a somewhat better price than if they weren’t buying. The continuing stockholders
would benefit. I think it’s obvious what they would do. I think it’s obvious it’s pro-shareholder to
do it. They would engage in pro-shareholder acts.

Charlie Munger: You and I might suddenly get very stupid very quickly, but I don’t think our
Board is going to have that problem.

Warren Buffett: I want to think about that one.

NEW ACCOUNTING STANDARD ON STOCK OPTIONS

Q. Does the new or old accounting standard on excess tax benefits on stock options make more
sense to you?
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Warren Buffett: Charlie, I think you know a lot more about that than I do. If I were to answer that
question, I’d probably call you up and say what do I say? I’ve heard just a little bit about that
accounting standard.

Charlie Munger: It’s not a big deal, Warren.

Warren Buffett: I know that. There are a few things in accounting that we really disagree with.
They might be material to somebody trying to evaluate Berkshire and that primarily gets into
amortization of intangibles. We will go to great lengths to tell our partners and not all of them are
accounting experts – we will try to make clear to them as to what our view is the same way as if I
had a family business and I was talking to my sisters about it. Unless it is material, we will try to
stay away from trying to find any new accounting standards to discuss. If it’s material to
Berkshire, we will go to great lengths to at least give our view.

Charlie Munger: What he is talking about is not very material to Berkshire.

Warren Buffett: Some of the other accounting standards are material like amortization of
intangibles related to acquisitions. We are reporting $400 and some millions less in our earnings
than if Precision Castparts had remained a public company. Are the earnings less real, is the
cash less real because it’s moved the ownership? I don’t think so. I want to convey that belief to
shareholders. I think it’s a mistake not to comment and assume the owners understand it. It’s a
fairly arcane point.

VALUATION METHODS

Q. In looking at the Chinese market vs the U.S. market, what is the best valuation method, market
cap divided by GDP or the Cyclically Adjusted P/E (CAPE) method?

Warren Buffett: Both of the standards you mention are not paramount at all in our valuation of
securities. The present value of the future cash that can be taken out of the business is the
important factor in valuing a business. People are always looking for a formula. There’s not an
ultimate formula. You don’t know what to stick in for the variables. Every number has some
degree of meaning. Valuation of a business - it is not reducible to any formula where you can
actually put in the variables perfectly. Both of the things you mentioned get themselves bandied
around a lot. Sometimes they can be very important. Sometimes they can be almost totally
unimportant. It’s not quite as simple as having one or two formulas. The most important thing is
future interest rates. People frequently plug in the current interest rate saying that’s the best they
can do. The 30-year bond rate should tell you what people who are willing to put out money for 30
years and have no risk of dollar gain or dollar loss at the end of the 30-year period expect to earn.
I’m not sure I can come up with a better figure. That doesn’t mean I’m going to use the current
figure either. I’d say – I think Charlie’s answer is he does not come up with China vs the US
market valuations based on what you’ve mentioned as yardsticks.

Charlie Munger: All I said before is the first rule of fishing is to fish where the fish are. A good
fisherman can find more fish in China now. That’s all I meant. It’s a happier hunting ground.

Warren Buffett: If you want to be a good evaluator of businesses, as an investor, you really ought
to figure out a way to run a lousy business for awhile. You learn a whole lot more about business
by actually struggling with a terrible business for a couple of years than you learn by getting into
a very good one where the business is so good you can’t mess it up. It was a big part of our
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

learning experience, and I think a bigger part in the sense of being involved in a good business
was actually being involved in some bad businesses and seeing -

Charlie Munger: -how awful it was.

Warren Buffett: How awful it is and how little you can do about it and how IQ does not solve the
problem. It’s a useful experience, but I wouldn’t advise too much of it.

Charlie Munger: It was very useful to us. There’s nothing like a personal, painful experience if
you want to learn, and we certainly had our share of it.

WHAT WOULD HARM BERKSHIRE AS A BUSINESS?

Q. What could cause Berkshire not to work?

Warren Buffett: Well, if there were some change, we got some infection, an outside agent of some
sort to change the culture in some way, an invasion of different thought. As a practical matter, I
don’t think anything – it’s the things you can’t think of – I can’t think of anything that can harm
Berkshire in a material permanent way except weapons of mass destruction. I regard that as a
low probability. It would take a recession, depression, panic, hurricanes, earthquakes, they would
all have some effect, and in some cases we would do better because of them, but if there were a
successful, as measured by the aggressor, nuclear, chemical, biological or cyber attack on the
US, and there are plenty of people or organizations that would like to pull that off, and maybe even
a few countries, it could disrupt society to such an extent that it would harm us. I think with the
variety of earning streams and with the asset positions, with the general philosophy, we would be
very close to the last one affected. If someone figures out how to kill millions of Americans and
totally disrupt society, then all bets are off.

Charlie Munger: I agree that it would take something really extreme. British Petroleum took a
huge loss with one oil well blowing. The parent company - one horrible accident somewhere, we
would tend to pay, of course, maybe more than our legal liability - one accident with one
subsidiary that cost a lot of damage – we are better protected than most companies. In every way,
Berkshire is structured to handle stresses.

Warren Buffett: It’s the kind of thing we think about all the time. I don’t know any company that
could better handle specific adversities. If you get into what could happen with weapons of mass
destruction, that’s something we can’t predict. If that ever happens, there will be more to worry
about than the price of Berkshire.

SPECIALTY INSURANCE

Q. Is Berkshire destined to become a leading specialty insurer with $1.3 billion in premium
volume, up 40% in the last year?

Warren Buffett: I think how fast it grows does depend very much on the market. We are not
interested in trying to be a price cutter in a market where the prices aren’t that attractive. We have
built the operation to scale worldwide– a lot of capacity has been added. We will grow a lot, but if
the market should turn hard for any reason, we would grow a lot faster. We are destined to be one
of the leading property and casualty insurance firms in the world just as we were destined to
become a very important reinsurer throughout the world and almost the only reinsurer with
certain types of risk in the world. We have the people, the capital and the reputation. There is no
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

stronger company in the insurance world. We have the talent there. It may grow slowly some
years. It may have big jumps just like the reinsurance operation did many years ago. It’s a very
important addition to Berkshire. I wish we could have started it earlier. You had to have the right
people. They came to us. We will write more this year. We won’t write as much as if we were in a
hard market.

LEARNING MACHINE AND SCUTTLEBUTT

Q. Charlie has called you a learning machine. What are some of the most interesting things
you’ve learned?

Warren Buffett: Charlie is much more of a learning machine than I am. I’m a specialist. He does as
well as I do in my specialty, and he has a much more general absorption rate than I have about
what is going on in the world. It’s a world that gets more fascinating all the time. A lot of fun can
occur when you learn you were wrong on something. That’s when you really learn that the old
ideas really weren’t so correct. You had to adapt to new ones. That, of course, is difficult. I think
actually what’s going on in America is terribly interesting – politically all kinds of things. Just the
way the world is unfolding – it is moving fast. I do enjoy trying to figure out what is going to
happen. I don’t think I have any special insights that would be useful to you.

Charlie Munger: I think buying the Apple stock is a good sign in Warren. He did run around,
asking if he could take his grandchildren’s tablets away. He did market research. I do think we
keep learning. More importantly, we don’t unlearn the old tricks. That’s really important. You
look at the people who are printing money and lying, so forth, take Puerto Rico, who would have
guessed that a territory of the US would be in bankruptcy? I would have predicted it because they
behaved like idiots.

Warrant Buffett: We did not buy any Puerto Rico bonds.

Charlie Munger: No. If you go to Europe, look at the government bond portfolios. There’s no
Greek bonds. No bonds, but from Germany. Everybody in Berkshire is being sensible. That is a
great pleasure and combine that with we are very opportunistic. When something comes along,
like a panic, it’s like playing with two hands instead of one at a game that requires two hands. It
helps to have a fair-sized repertoire. Warren, we’ve learned so damn much. There’s all kind of
things we’ve done in the last ten years that we would not have done 20 years ago.

Warren Buffett: One of the best books written on investments was written in 1958 by Phil Fisher
– “Common Stocks and Uncommon Profits.” I learned the scuttlebutt method of asking lots of
questions from that book. That was something I didn’t learn from Ben Graham. Every now and
then it turns out to be very useful.

Charlie Munger: I saw you do it with American Express during the salad oil scandal and now you
are doing it with Apple decades later.

Warren Buffett: In certain cases, you can learn a lot by asking a lot of questions. I give Phil
Fisher credit. That book goes back a lot of years. Some of the companies he picked as winners
forever did sort of peter out on him. You can learn a lot of things just by asking questions. If I got
interested in the coal industry, to pick one out of the air, when I was much younger and more
energetic, if I went and talked to the heads of ten coal companies and I asked each one of them,
into the conversation after they felt like talking, I’d say if you had to go away for ten years on a
desert island, and you had to put all of your family’s money into one of your competitors, which
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

one would it be and why. Then I’d ask them if they had to sell short one of their competitors,
which one it would be. Everybody loves talking about their competitors. If you do that with ten
different companies, you’ll probably have a better fix on the economics of the coal industry than
any one of those individuals has. There’s ways of getting at things and sometimes they’re useful,
and sometimes they’re not. The idea of learning all the time – I’m more specialized. I just want to
learn about something that will help Berkshire. Scuttlebutt is a very useful attitude toward the
world. I don’t know who said it, but somebody said the problem is not getting the new ideas but in
shedding the old ones. There’s a lot of truth to that.

Charlie Munger: We would never have bought Iscar or Precision Castparts if they had come
along ten years earlier. We are learning. My God, we are still learning!

HEALTHCARE

Q. Is the healthcare problem the number one problem for business? Will it impact Berkshire?

Warren Buffett: If you go back to 1960, or thereabouts, corporate taxes were about 4% of GDP
and now they are about 2% of GDP. At that time, healthcare was 5% of GDP, and now it’s about
17% of GDP. When American business talks about taxes strangling our competitiveness, they’re
talking about something that as a percentage of GDP has gone down from 4% to 2% while medical
costs which are borne to a great extent by business have gone up from 5% to 17%. Medical costs
are the tapeworm of American economic competitiveness if you’re really talking about it.
Business knows that. They don’t feel they can do much about it. The tax system is not crippling
Berkshire’s competitiveness around the world or anything of the sort. Our healthcare costs have
gone up incredibly and will go up a lot more. If you look at the rest of the world, there were a half
dozen countries that were around our 5% if you go back to the earlier years. While we are at 17%
now, they are at 10% or 11% of GDP. They have gained a 5 or 6 point advantage, even in these
countries with fairly high medical costs.

Charlie Munger: That’s the socialized medicine.

Warren Buffett: Whatever I said then goes and is accentuated now. That is a problem this society
is having trouble with and will have more trouble with regardless of which party is in power or
anything of the sort. It almost transcends that. In terms of the new act that was passed a couple
of days ago versus Obamacare, it’s a very interesting thing. All I can tell you is the net effect of
that Act on one person is that my Federal income taxes would have gone down 17% last year if
the healthcare act Trump has proposed went into effect. It’s a huge tax cut for guys like me.
You’ll have to figure out the effects of the rest of the Act, but one thing I can tell you is that if it
goes through what the White House put in is that anybody with $250,000 a year of adjusted gross
income or a lot of investment income is going to have a huge tax cut. When there’s a tax cut,
either the deficit goes up or they get the taxes from somebody else. As it stands now, that’s the
one predictable effect of the Act if it should pass. The Senate will do something different, and it
will go to conference and who know what will happen? That is in the law that was passed a couple
of days ago.

Charlie Munger: I certainly agree with you about the medical care. What I don’t like about the
medical care is that – we are getting too much medical service. There’s too much chemotherapy
on people that are all but dead and all kinds of crazy things going on in Medicare and other parts
of the health system. There are so many vested interests that it’s very hard to change, but I don’t
think any rational person looking objectively from outside of the American system of medical care
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

– we all love the new life saving stuff and the new chemotherapy and new drugs, but, my God, this
system is crazy and the cost is just going wild. It does put our manufacturers at a big
disadvantage with other people where the government is paying the medical costs. I agree with
Warren totally.

Warren Buffett: If you had to bet, ten years from now, will it be higher or lower than 17% of GDP?

Charlie Munger: If present trends continue, it will be more and more. There are huge vested
interests in having this thing continue the way it is, and they are very vocal and active and the rest
of us are indifferent. Naturally, we get a terrible result. I would say on this issue that both parties
hate each other so much that neither one of them can think rationally, and I don’t think that helps
either.

Warren Buffett: It’s kind of interesting that the federal government spends $3 and a half trillion or
something like that–$3 trillion is spent on healthcare. Everybody wants the best. It’s perfectly
understandable. It’s a big number compared to the whole federal budget. If you talk about world
competitiveness of the American industry, it’s the single biggest variable where we keep getting
more and more out of whack with the rest of the world. It’s very tough for political parties to
attack it. It basically is a political subject.

Charlie Munger: It’s deeply immoral. If you have a group of hospital people that are feasting like a
bunch of jackals on the carcass of some dying person, it’s not a pretty sight.

Warren Buffett: Tell them about that group out in California.

Charlie Munger: This is Redding. This is one of my favorite stories. There are a bunch of very
ambitious cardiologists and heart surgeons in Redding, and they got the thought that a heart is a
widow maker. Every patient that came in, they said, you’ve got a widow maker in your chest, and
we know how to fix it. They recommended heart surgery for everyone. Of course, they did a huge
volume of heart surgery, and they got wonderful results because nobody comes through heart
surgery better than a man who doesn’t need it at all. They made so much money that the hospital
chain brought in all of its other hospitals and asked, “Why can’t you people be more like
Redding?” This is a true story. It went on and on. Finally, there was some Catholic priest, and
they said you’ve got a widow maker in your chest, and he didn’t believe them and he blew the
whistle.

Warren Buffett: He was a priest. You can see why he didn’t believe them. When you’ve got a
routine, you just keep using it.

Charlie Munger: Later, I met one of the doctors that threw these people out of the medical
profession, and I said to him, in the end, did they think they were doing anything wrong? He said,
“No, Charlie. They thought what they were doing was good for people.” That is why it’s so hard to
fix these things. The delusion that comes into people as they make money and get more
successful by doing things should never be underestimated. A lot of that goes on. You get on to
such gross craziness. The heart surgery rate was 20 times normal or something. You think you’d
notice it if you were running a hospital, and maybe they did notice it if you wanted your other
hospitals to be more like it.

Warren Buffett: They had a perfect success ratio.

BERKSHIRE ENERGY
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Q. Are there key attributes that Berkshire Energy would be looking for in future acquisitions, such
as transmission assets versus generation assets?

Warren Buffett: Generation assets you could say have inherently more risk because some of
them will be stranded or obsolete. More of the capital investment is in the generating asset. That
tends to be where a good bit of the capital base is. We like the utility business OK. Electricity
demand is not increasing like it was. There are going to be stranded assets. If they are stranded
because of rank foolishness, the Utility Commission will be less inclined to let you figure that in
your rate base as you go forward. We still think the utility business is a very decent asset. The
prices are very high. That’s what happens in a low interest rate environment. I would be surprised
if ten years from now we don’t have significantly more money in not only wind and solar, but we
will probably own more utility systems than we own now. We are a buyer of choice with many
utility commissions. There’s a slide that shows something about our pricing compared to other
utilities. Greg Abel and his group have done an extraordinary job. They’ve done it in safety, in
reliability, price and renewables. It’s hard to imagine a better run operation than exists at
MidAmerican Energy. With that record, people want us to come to their state in many cases.
When prices get to the level they have and some utilities are sold at extraordinary prices, we can’t
pay them and have it make sense for Berkshire shareholders. Just because we can’t do it this
year doesn’t mean it won’t happen next year or the year after. I think we will get a chance.

Charlie Munger: Our utilities are not normal, the way Greg has run those things – they are so
much better run in every way than other utilities. They are better regarded by the paying
customers and by the regulators. They have better safety records. It’s a pleasure to be
associated with people like that and have assets of that quality, and it’s a lot safer. If somebody
asked Berkshire to build a $50 billion nuclear plant, we wouldn’t do it.

Warren Buffett: We have public power here in Nebraska. There are privately-held utility systems.
Those utilities have no requirement for earnings on equity. They can borrow at tax- exempt rates.
We have to borrow at taxable rates. And Nebraska, it’s not that much different than Iowa. We are
selling electricity across the river a few miles from here at lower prices than exist in Nebraska. It’s
an extraordinary utility. I thank Walter Scott, our director, for introducing me to it 18 years ago or
so. I don’t think the utility business as such – if I were putting together a portfolio of stocks, I
don’t think there would be any utilities in that group now, but I love the fact that we own Berkshire
Hathaway Energy.

Charlie Munger: It’s radically different and better.

Warren Buffett: A lot better.

MCLANE

Q. McLane is a subsidiary with large revenues, why don’t we hear more about it?

Warren Buffett: The reason you see their figures separately in the annual report is because the
FCC has certain requirements that are based on sales. McLane is a company that has an
extraordinary amount of sales in relation to intrinsic value or net income. It’s a distributor – it’s a
huge customer of the food companies, candy companies, cigarette companies, anything that goes
into convenient stores, but we bought it from Wal-Mart, and Wal-Mart is our biggest customer. I
can’t tell you the precise volume. You have Wal-Mart and Sam’s together – 20% plus –it’s
nationwide. In the end, it operates on about 6% gross margins and 5% operating expenses. It has
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a 1% pre-tax margin which only works in terms of return on assets if you turn your inventory
extraordinarily fast, and that’s what McLane does. Moving things in and out very fast, very
efficiently. It also has a few liquor distribution subsidiaries that have wider margins. The basic
McLane business is $45 billion plus, and makes 1% pretax on sales. The return on capital is very
decent. Grady Rosier is exceptional and was there when we bought it from Wal-Mart. I’ve been
there once. Thousands and thousands of trucks, big distribution centers all over the country. It is
a major factor in moving goods at wholesale. It earns good returns in relation to invested capital
and on the price paid for the business. Moving your receivables exceptionally fast. Sales are 30
times receivables, 30 times payables and 35 times inventory – this is a business that is moving a
lot of goods. It’s an important subsidiary but not as remotely important as indicated by sales.

Charlie Munger: You said it all.

Warren Buffett: Wal-Mart wanted to sell it. They came to see us. We made a deal. The CFO
came, we talked for a while. He went into the other room and called the CEO, and he came back
and said you have a deal. Wal-Mart told me subsequently that they never had a deal that closed
as fast as the one with Berkshire. We said what we would pay. It was cash. We got it done very
promptly, and they were terrific on their side.

Charlie Munger: That reputation for being quick and simple and doing what we promised has
helped at Berkshire time after time.

Warren Buffett: We wouldn’t have made that deal without having that reputation.

Charlie Munger: You bought the Northern Natural Gas Company in one weekend. They wanted
the money on Monday. Before the lawyers could complete the legal papers, we managed to do it.

Warren Buffett: I think it took some clearance in Washington. I think I wrote a letter and said if
they decided after looking at it, that they didn’t want to clear it, we would undo the deal. These
guys needed the money so bad we were going to give them the money essentially on the deal
clearing. There wasn’t a reason why it wouldn’t clear, but there was a procedural problem. Most
companies can’t do that. We have flexibility that really in most large companies doesn’t plain
exist. There’s too many people that have to sign off on it. The Northern Natural deal wouldn’t
have been made if we had to follow the normal time table.

Charlie Munger: It’s a lovely business to own.

LEGACY

Q. What would you like to be known for?

Charlie Munger: My first memory, when Warren got on the subject, I asked Warren what he would
like said at his funeral. He said, “I want them all to be saying that’s the oldest looking corpse I
ever saw.”

Warren Buffett: That may be the smartest thing I ever said. To me, it’s pretty simple. I really like
teaching. I’ve been doing it formally and somewhat informally all my life. I certainly had the
greatest teachers you could imagine. If someone thought I did a decent job at teaching, I’d feel
very good about that.
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: To making teaching durable, there has to be a bit of wise-assery in it, and that
we’ve both been able to supply.

Warren Buffett: Those of you who are old-time basketball fans, on Wilt Chamberlain’s tomb it was
reputed that it was going to say, “At last, I sleep alone.”

DREAM

Q. What’s your dream now?

Charlie Munger: My dream? Well…

Warren Buffett: Let’s skip the first one.

Charlie Munger: Sometime when I’m especially wishful, I think, oh, to be 90 again!

I’ve got some advice for the young. If you’ve got anything you really want to do, don’t wait until
you’re 93 to do it.

Warren Buffett: That’s the same thing I would tell students. When you go out in the world, look for
the job you would take if you did not need the job. You can’t always find it the first time or the
second time. Don’t postpone that sort of thing. Kierkegaard said life must be evaluated
backwards, but it must be lived forward. Charlie says all he wants to know is where he will die so
he will never go there. You do want to do a certain amount of reverse engineering in life. That
doesn’t mean you can do everything that way. Think about what will make you feel good when
you get older about your life, and you at least generally want to keep going in that direction. You
need some luck in life, and you have to accept some bad things that will happen as you go along.
Life has been awfully good to me and Charlie so we have no complaints.

Charlie Munger: You don’t want to be like the man that has his funeral, and the minister says now
is time for someone to say something nice about the deceased, and nobody came forward.
Surely, somebody can say something nice about the deceased? Finally one man came up, and he
said, “Well, his brother was worse.”

REGRETS IN LIFE and EBITDA

Q. You are highly respected and loved by millions globally. You believe EBITDA (is not a good
parameter to evaluate a business. Do you have regrets in life, one thing you would have done
differently in life, family, personal or business, what is it?

Warren Buffett: I don’t think you should expect us to answer that on personal matters. In
business, I’d say I wished I met Charlie earlier. We’ve had a lot of fun ever since I was 29 and he
was 35. It would have been even more fun if we started many years earlier. We had a chance to.
We worked in the same grocery store but not at the same time.

In respect to EBITDA, it’s the worst kind of expense. We love to talk about float and float is where
you get the money first and have the expense later. Depreciation is where you spend the money
first and then record the expense later. It’s reverse float. It’s not a good thing. It’s much better to
buy a business, everything else being equal, and it has no depreciation because it has essentially
no investment in fixed assets. EBITDA is a very misleading statistic that can be used in very
pernicious ways.
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

Charlie Munger: I think you understated the horrors of the subject and the disgusting nature of
the people that brought that term when I was in business. It would be like a leasing broker of real
estate who has a 1,000 square feet suite to be leased and says there’s 2,000 feet in it – that’s not
honorable behavior and that’s the way that term got into common usage. Nobody in his right mind
would think depreciation is not an expense.

Warren Buffett: It’s very much in the interest of Wall Street.

Charlie Munger: That’s why they did it. It made the multiple seem lower.

Warren Buffett: What’s amazing is the way it’s accepted actually. It just illustrates how people use
language and sell concepts that work to their own use. 2% and 20% has the same sort of thing.
As long as it can get sold, it will get sold.

Charlie Munger: Now they use it in the business schools. That is horror-squared. It’s bad enough
when the thieves are using the term, but when it gets so common that the business schools copy
it, that’s not a good result.

RELOCATING JOBS OFFSHORE

Q. Good US jobs have disappeared. Should business consider factors outside of pure
economics? If Berkshire asked for your approval to locate an operation overseas, would you do
it?

Warren Buffett: The truth is in certain cases production that formerly had been in the US has
definitely been supplanted by production that comes form other parts of the world. I was there
when Fruit of the Loom was called Union underwear and bought by Graham Newman Corp in 1955
– it was probably all domestic then. The truth is if it was all domestic now, it wouldn’t exist. We
had the same thing happen with Dexter Shoes. It was a wonderful company with skilled workers.
In the end, we sold the shoes at what they cost us, they were not competitive with shoes from
around the world. Trade I would argue both ways, export, import. Massive trade should be and is
actually enormously beneficial. Greater productivity will benefit the world in a general way.

The roadkill, the textile worker in New Bedford that will be put out of a job eventually, the shoe
worker at Dexter to be put out of work. It would be no fun saying I’m doing this for a greater good
so that shoes or underwear would be sold for 5% less, and the American public will actually never
know. What you need is two things in my view. We have an enormously prosperous country.
You have almost $60,000 GDP per capita. That’s unbelievable – six times what it was when I was
born. We have the prosperity. That prosperity is enhanced by trade. We were only exporting 5%
of our GDP back in 1970. I think it’s around 12% or something like that now. We are doing what we
do best. We need an educator in chief – logically the President, and I don’t mean this specific
President –I mean any President that has been around for decades - has to be able to explain to
the American public the overall benefits of essentially free trade. Beyond that, we have to have
policies that take care of the people who become the roadkill in the process. It doesn’t make any
difference to me as far as I’m concerned if my life is miserable because I’ve been put out of
business by something that is good for 320 and some million people in some infinitesimal way,
and it’s messed up my life when I tried to live it in a proper way. We have got the resources to
take care of the people. The investors can diversify their investments in such a way that overall
trade probably benefits them. They don’t get killed by a specific industry condition. The worker
can’t do that. You are not going to train a 55-year-old worker in New Bedford who may not even
 2017 BERKSHIRE HATHAWAY ANNUAL MEETING NOTES BY INGRID R. HENDERSHOT, CFA

speak English in our textile mill – if they get destroyed by something that is good for society, they
get destroyed, unless the government puts in some policies that takes care of people like that. We
have a rich society that can do that and we’ve got a society that will benefit by free trade. We
ought to try to hit both objectives of making sure there is not roadkill, and at the same time, we
have 320 and some million people get the benefits of free trade.

Charlie Munger: We have unemployment insurance for that exact reason. I’m afraid that a capital
system is always going to hurt some people as it modifies and improves. There’s no way to avoid
it.

Warren Buffett: Capitalism is brutal to capital if you’re in the wrong business. You could diversify
that result. Capitalism is brutal to people that have the bad luck to develop their skills for decades,
but a very rich society could actually – if it’s beneficial to society overall, they can take care of
those people. The bill that was passed a couple of days ago reduces my taxes by 17%.

Charlie Munger: I wouldn’t start spending the money.

Warren Buffett: I agree. Who knows what happens to the bill. If you polled a thousand people in
Omaha that were walking through a shopping center as to whether my tax bill would go down by
some very large sum because of what passed, I don’t think many people would have the faintest
idea of what happened there in terms of the coverage. We do have $56,000 to $58,000 GDP per
capita, for a family of four that is $230,000, but nobody should be roadkill.

Charlie Munger: Remember what Bismarck said nobody should have to watch. One is the making
of sausage, and the other is the making of legislation.

Warren Buffett: Somebody ought to watch it.