Notes from the 2011 Berkshire Hathaway shareholder meeting
Brian Gongol

These notes are approximate reconstructions of the direct quotations. They should not be considered precise transcriptions, but are intended to reflect the nature of what was said as accurately as possible.

Carol Loomis: Are you confident in BYD?

Charlie Munger: The current stock price is higher than our purchase price. Delays in product launches are inevitable.

Question: Is this an oil bubble?

Warren Buffett: We don't know. Extractions are high, but new discoveries continue. It is a finite resource, so someday the price will be much higher. New oil-exporting countries are much smarter today and will get better returns on their investments than oil countries of 50 years ago. I suggested that BNSF stop trying to hedge the price of oil.

Charlie Munger: Equities are much easier as investments than commodities.

Warren Buffett: ...and we like easy.

Question: What are the most important things you've learned in the last year?

Charlie Munger: I read "In the Plex", about Google.

Warren Buffett: That I'm going to have Charlie write the next press release.

Question: Are we headed down a path toward more "too big to fail" bailouts?

Warren Buffett: There are institutions that some governments may need to backstop for their own good. The problem will contine. But we need to reduce the propensity to fail. Society should have a system to strip CEOs of massively-failed institutions of virtually all their personal assets. Boards of directors should face serious penalties, too. Fannie Mae and Freddie Mac are now "too big to figure out".

Charlie Munger: Big failures follow big speculative bubbles. We have failed to prevent the next one. One problem is that there are lots of big schools teaching terrible economics and finance. Lots of finance students would be better off studying snake-charming instead.

Question: Why did you quit the Washington Post board?

Warren Buffett: I have no sales of Washington Post stock forthcoming. I just got tired of the travel. It's easier for them to just phone me with questions instead.

Question: What about investing in the Australian dollar?

Warren Buffett: We cannot be certain of anything in currencies. The only thing we know for sure is that our interests have to be 100% aligned with those of our shareholders.

Question: Are equity investments now an afterthought at Berkshire?

Warren Buffett: I prefer acquisitions, but they only happen occasionally. I am equally interested as I have been in the past in equity investments, but big acquisitions interest me more. Many of our subsidiaries are capable of vastly greater performance 5 to 10 years from now.

Charlie Munger: Insurance requires us to hold equities, but as our portfolio keeps growing, we can't do much better than the market average. It's more fun to create permanent partners who are creating value than beating someone else at shuffling papers.

Warren Buffett: Oh, I'd say that both are fun.

Question: If your underwriting is always profitable, is it too conservative?

Warren Buffett: We expect big losses every five to ten years, however, we've lucked into a profitable streak. I wouldn't trade our insurance portfolio with anyone else's.

Charlie Munger: Casualty insurance isn't a great business. There's lots of temptation to be stupid, just as there is in banking.

Question: Which operating subsidiaries will do best under inflationary conditions?

Warren Buffett: The ones that require minimal capital investments to keep up with inflation. Candy, for instance. Utilities with fixed returns won't, since they're a lot like bonds.

Charlie Munger: Railroads and utilities are both capital-intensive, but since ours are both best-in-class, they'll do well.

Warren Buffett: BNSF is a terrific asset to own.

Question: Are you considering a split in the "A"-class shares?

Warren Buffett: We already did it, creating the "B" class in the process. There is no disadvantage to the B shares, except in their voting power.

Charlie Munger: Warren used to cheer his friends by saying, "May you live until the A shares split."

Question: Tell us something you like about Ajit Jain.

Warren Buffett: I haven't seen one instance where I would have made a better decision than he did. He's very creative at out-foxing his competition. He is highly rational and loves his work.

Charlie Munger: The secret of success in a field is getting very interested in it, and Ajit does that.

Warren Buffett: To an extraordinary degree, he puts Berkshire first.

Charlie Munger: What is the worst business we own?

Warren Buffett: Generally, anything to do with retailing.

Question: How do you measure returns to capital, particularly when considering goodwill?

Warren Buffett: At purchase time, we conduct a fundamental analysis based on return on tangible capital -- not including goodwill. Later on, you should take goodwill into account as part of the total return, since you paid for it. When buying, look first at return on net tangible assets. We paid $9 billion for Lubrizol, and it had $1 billion a year in pretax earnings and $2 billion in net tangible assets. We evaluated the decision to buy based upon the $1 billion in earnings to $2 billion in net tangibles, but as an investment, it should be evaluated on the $1 billion in earnings to $9 billion in purchase price.

Charlie Munger: We aren't going to find operating businesses at decent prices today.

Question: Can you give examples of good and bad business actions?

Charlie Munger: Costco is an extreme meritocracy with high ethics. That results in fierce customer loyalty. By contrast, GM wiped out its common shareholders after becoming #1 in the world. Unionization and foreign competition did them in. They let success kill them. Business schools are afraid to teach these case studies because they're afraid to cross disciplines. Harvard Business School stopped teaching this way [with case studies] probably because it stepped on the toes of the barons of finance, marketing, and other disciplines.

Warren Buffett: Please shoot me first before letting Charlie tell us any more about how much he loves Costco.

Question: How would you motivate an American kid today?

Warren Buffett: Don't raise kids to think they're entitled to anything just because they came from the right womb. I didn't want my own kids thinking they were special just because I was rich. It's unfair to try to raise kids to try to beat their own parents at what their good at.

Charlie Munger: To some extent, incentives are destroyed naturally as wealth grows. Get your kids really interested in something.

Question: What will be the compensation structure for the next Berkshire CEO?

Warren Buffett: They'll get paid a lot. It should be a base salary, supplemented by an option based upon the value of the base price of the company at the time of accession, minus dividends, minus an adjustment for a natural rate of growth. [Ed.: This should be called the "ham sandwich" adjustment, after the Buffett dictum that every organization will at some point be run by someone as stupid as a ham sandwich.]

Charlie Munger: Somebody in America has to be the exemplar for not trying to grab everything you can.

Question: Can you share your thoughts on water and food supplies?

Warren Buffett: It's an important subject, but it doesn't affect investments to any real degree. Many societal issues are important, but don't affect our investments.

Charlie Munger: With enough energy, the water problem goes away. The main reason for being conservative with hydrocarbons is that they're needed for agricultural purposes.

Question: Was fiduciary duty breached in the purchase of Lubrizol?

Charlie Munger: No. If they wanted an auction, we were out.

Warren Buffett: We don't do auctions. We make deals that are certain.

Question: How do you evaluate your work allocating capital?

Warren Buffett: Over time, we use the market-value test. We must earn a premium over book value.

Question: Why did you apply different interest rates to different loan deals (to Goldman Sachs, GE, Mars, Dow, and Swiss Re)?

Warren Buffett: Each deal was made at a different time. Opportunity costs vary. I could have done better with the Goldman Sachs and GE deals if I'd waited five months. Each deal differs, especially based on opportunity costs. One of the biggest mistakes in business is to measure every deal against the best deal you've ever made. Just make the best deal you can at the time.

Question: Do you have advice for people trying to read more, faster?

Warren Buffett: I'm not a fast reader. It's a huge advantage to be one.

Charlie Munger: Speed is overrated. It's better not to make mistakes.

Question: Are politics being played with the debt ceiling?

Warren Buffett: Breaching the debt ceiling would be the most asinine act ever. You can't change pi to 3, and it's extraordinary that the United States even still has a debt ceiling. It wastes time. More important than the absolute amount of debt is the relationship between debt and GDP, plus inflation. We will survive as long as we can issue debt in our own currency and watch inflation.

Charlie Munger: Both parties compete to see who can be the most stupid. They keep topping each other.

Question: MidAmerican Energy wants to build a nuclear plant. Is that too big a catastrophic risk to take?

Warren Buffett: Nuclear power is important to the world energy equation. We don't see the same risks here as in Japan. We get 20% of US electricity from nuclear power today.

Charlie Munger: We can't be so risk-averse that we never do anything bold.

Warren Buffett: I'll never take a risk that would threaten the entire company.

Question: Would you reinstate the charitable-giving program for shareholders?

Warren Buffett: I loved that program. It was tax-efficient, but it didn't catch on. People got upset that our name was put on checks to specific charities. It led to a boycott of Pampered Chef, and that hurt the independent contractors who were totally innocent.

Question: How can you estimate future growth?

Warren Buffett: There will be some growth over time in our acquisitions, but we also look at future capital requirements.

Charlie Munger: Business schools teach the use of projections using complicated models. That usually results in an enormous false certainty.

Warren Buffett: [Recalling the Scott Fetzer purchase] I told the analyst, "I'll pay you $2 million if you don't show me the book." I've never seen a projection from an investment banker that didn't show earnings going up. Never ask the barber whether you need a haircut. We do some estimates of growth in our own heads, and we know how far off we can be.

Charlie Munger: Business school students should learn to do it our way.

Question: What do you look for when examining business opportunities in China?

Warren Buffett: We use the same principles as domestically, but we also know that outside the US, we know less about the rules of the game. The Petrochina deal was so cheap that I could have maintained a huge margin of safety, but it definitely looked safer than Yukos.

Charlie Munger: You can't draw general lessons from limited information.

Warren Buffett: We're interested globally. But some entire countries are too small for us to consider.

Question: Where is the company's cash kept?

Warren Buffett: We keep it in Treasuries, to be safe. It's ultra-safe, but it pays basically nothing at all in interest.

Charlie Munger: It's really stupid to focus on maximizing very short-term returns when you're an opportunistic organization like we are.

Warren Buffett: Our ability to have ready cash when others need it is unparalleled. If Ben Bernanke runs off to South America with Paris Hilton tomorrow, we want to know our checks will clear.

Question: What do you think about wind power?

Warren Buffett: It's wonderful, but only when the wind blows -- which is about 35% of the time in Iowa. It's super-clean, but unreliable. Works economically only with government subsidies through tax credits. One of our advantages is that we pay enough in taxes for us to benefit from tax credits. We pay about 2% of all US corporate income tax.

Question: Was Netjets really close to bankruptcy?

Warren Buffett: Only if it had been a stand-alone company. The same thing could have happened to two of our insurance subsidiaries, too. We're lots of businesses, but just one entity.

Question: Do you have any advice for smart kids?

Warren Buffett: Mainly, read a lot. Improve your own skills. I only hang one diploma in my office -- the one from my Dale Carnegie course. Communication skills are first and foremost.

Charlie Munger: Economics is tough. It's easy to hit basic microeconomics, but none of the experts can agree on the tough stuff. Start with the easy stuff.

Question: Does your investment in other reinsurers keep Berkshire from getting into more reinsurance opportunities of its own?

Warren Buffett: No. It's not enough of an investment to change my behavior.

Charlie Munger: Beware all derivatives.

Question: Where did Todd Combs come from?

Warren Buffett: He sent me a letter.

Question: Johnson and Johnson just acquired a subsidiary in exchange for stock. What do you think of it?

Warren Buffett: I don't like acquisitions in exchange for stock unless your own company is over-priced.

Question: What are your acquisition criteria?

Warren Buffett: We recently passed up an opportunity because it would have required using a lot of stock. We hate issuing shares. It's selling off a slice of every good business we already own.

Question: What do you think of the future of housing?

Warren Buffett: We're making bolt-on acquisitions. Housing demand will eventually match the rate of household creation.

Charlie Munger: One advantage to buying cyclical businesses: Who cares if earnings are lumpy? Not us. But they're cheap when the market goes down.

Warren Buffett: See's Candy is a loss-making operation 8 months out of the year. But averaged out, it's a great business. Housing will be cyclical, but who cares? Over 20 years, it'll make good money, and we bought a brickmaker in Alabama cheap.