Notes from the 2013 Berkshire Hathaway shareholders' 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.

Station 5: What do you think about Bitcoin and other unregulated digital currencies?

Warren Buffett: Of our $48 billion, we haven't moved any of it to Bitcoin.

Andrew Ross Sorkin: Bill Ackman critical of Herbalife, saying it's a pyramid scheme. Isn't Pampered Chef a pyramid scheme?

Warren Buffett: Many multi-level marketing projects emphasize loading up their "sales force" with inventory and then waiting for them to leave. Pampered Chef emphasizes sales to others, not investing all your savings in buying a product you don't need, and the parent company waiting for you to drop off.

Charlie Munger: There's more likelihood for "flim-flam" if you're selling magic potions than if you're selling pots and pans.

Doug Kass: More of your recent success has been attributable to your reputation than to classic value purchases. How would that follow to your successor?

Warren Buffett: Successor will have even more capital to work with, and our success will come at turbulent times when an ability to say "yes" with big figures in short periods of time will matter. Berkshire is the (800) number when there's panic in the markets and people need significant capital. That's not our main business, but it happened a few times in 2008 and once in 2011, and it'll happen again. Some day when the DJIA falls a thousand points a couple of days in a row, the people who have been swimming naked will revealed as the tide goes out will come to Berkshire for help. That will only further entrench the company's reputation.

Charlie Munger: Early success came from purchasing little-known companies where there wasn't much competition. He's done the right thing by migrating into a new specialty, becoming a home for big companies that can't be bought by others.

Warren Buffett: I've gotten calls about other deals.

Charlie Munger: And other people haven't gotten those calls.

Warren Buffett: The area we occupy becomes more our own, the bigger we get.

Charlie Munger: That's what I like about it.

Station 6: You've persuaded people to sell companies when they didn't want to. How did you do that? (See's, Sanborn.)

Warren Buffett: There had been a death in the See's family, and he had been instrumental in operations. The rest of the family didn't want to run the business. I didn't even hear about it until a proposed deal fell through.

Charlie Munger: We don't buy from unwilling sellers.

Warren Buffett: Berkshire as a textile company wasn't very attractive. We bought a lot of stock in the open market, and some from family shareholders (Stanton and Chase) who were willing to sell big stakes. We weren't out convincing unwilling sellers to part with their stock. We did talk to a major Wesco shareholder when we thought they were considering an unwise merger.

Carol Loomis: (Reader question) I'm having difficulty explaining to my 13-year-old the importance of competitive advantage as a long-term investment.

Charlie Munger: We've tried to stay sane when other people go crazy. That's a competitive advantage. #2, as we've gotten bigger, we've tried to treat the subsidiaries as we'd want to be treated in their shoes. That attracts businesses who wouldn't fit elsewhere. We try to be a good partner when companies need money. We're leaving behind a place where we were very competitive, and now we're into something very unusual. It's a very good idea, and I wish we'd done it on purpose.

Warren Buffett: A friend came to me and said he was considering selling his business, not because he was tired of running it, but because he'd bought a business in the past from a family where the founder died and it subsequently fell apart. He wanted to make sure that what he had built lovingly over 30 or 40 years would last after he was gone, without destroying his family. His competitors would have been logical buyers, but they would have put their people in charge, saying lofty things about "synergy", and all of the people he'd put into place would get sacked. He didn't want to do that to his people. He assumed private equity would load it up with debt, then sell it off. So he came to me, not because I was so attractive, but because I was the only party left standing that would offer a "permanent home" for the company. It's a major competitive advantage. Moreover, we've tried to develop a shareholder base that would be on board with our philosophy.

Jonathan Brandt: Given that coal-fired power plants are in decline, are BNSF's assets that serve that market truly fungible? And as the Bakken field gets developed, is shipping crude by rail still going to be cost-effective?

Warren Buffett: If there was no coal moving, much of our track wouldn't be very useful. The fluctuations in coal will probably track price changes in natural gas. Oil may cause blips in rail transportation, but I've talked to the big producers in the Bakken, and there's going to be a lot of rail usage there for quite some time, and I think it will increase. Oil moves much faster by rail than by pipeline. Pipelines are much slower. There's a lot of flexibility in oil transportation via oil.

Matt Rose: The two franchises are very different,particularly geographically. We expect coal to stay stable, but may vary with natural gas and EPA regulations. We see a much broader path ahead for oil.

Warren Buffett: It's not just the Bakken; shale developments will open a lot over time.

Station 7: In 2009, you invested heavily in Harley-Davidson; that note comes due in 2014. What are your plans?

Warren Buffett: We'd like to not answer the mail and let them keep paying 15% notes. We had a few transactions when the market for corporate bonds was essentially frozen. That brought us favorable terms; now I wish the 5-year deals had been 10-year deals. That's effectively a depleting asset for us, leftover from a special time. The world does crazy things from time to time, and we're willing to act in those times especially when it's a company that gets its customers to tattoo its logo on their chests.

Becky Quick: If Combs and Weschler wanted to buy stock in a company you've already investigated and dismissed, would you talk them out of it?

Warren Buffett: I don't usually know for at least a month what they buy and sell. I gave them each another $1 billion on March 31st. Aside from some examples (like American Express, where purchases of other banking institutions might violate Federal regulations), they're free to do whatever they want. They could go all-in on one stock, or spread out over 50 stocks (though that's something I wouldn't do). I wouldn't want my hands tied if I were in their shoes, and I believe in letting them keep acting, especially after seeing their performance.

Cliff Gallant: Progressive Insurance says it's getting great performance out of its "Snapshot" tool to track drivers and give them risk-adjusted rates. Why isn't GEICO?

Warren Buffett: I don't think Progressive has better customer selection than we do. I think ours is probably better. When GEICO was new, the founder started selling motorcycle insurance, and the first claim came from a red-headed driver. Prohibiting policies to red-headed drivers wouldn't make much sense. Before Snapshot, Progressive had a different model from GEICO, and it stays different now. Under our current system, we're obtaining a huge number of new customers, and our underwriting and investing results are very strong, so if what we're doing now works well, I don't see a reason to change. If we're wrong, I'll admit it.

Charlie Munger: Obviously we're not just going to follow every oddball move by our competitors.

Warren Buffett: If I were starting a new insurance company today, I'd try to copy GEICO. It wouldn't work, because GEICO is already there, but that's the model I'd try to follow.

Station 8: Do you really prioritize your desires by listing the 25 things you want to do, cutting out the bottom 20 and focusing on the top 5?

Warren Buffett: It sounds like a great strategy, but it isn't mine. I don't focus that well. Charlie and I live very simple lives, but now we have the resources to do what we want. Charlie is no longer a "frustrated" architect, because he gets to design buildings that he can afford to buy. I don't think I've made a single list in my life, but I might have to try.

Charlie Munger: We didn't know in the past that making decisions is tiring, and that you shouldn't make decisions while tired. We didn't know that caffeine and sugar would help people to make better decisions. We just tried to avoid work, but it turns out that we're operating optimally, based on modern psychological science.

Warren Buffett: Our book on nutrition is bound to be a best-seller.

Charlie Munger: Warren hasn't ever made an important decision when tired. His decision-making process is accidentally ideal. It looks peculiar, but he's stumbled into something good.

Andrew Ross Sorkin: (Reader question) Glad you bought the Omaha World-Herald as a reader, but not satisfied as a shareholder. What return do you expect to get?

Warren Buffett: Given the S-Corp or partnership structures of many newspapers, we get a major improvement on our after-tax vs. pre-tax returns. We expect to get at least 10% on our newspaper investments after taxes. Very unlikely to be significantly lower, even with declining revenues. The evidence so far says we'll meet or beat 10%. It's not going to move the needle on Berkshire overall, but it will end up being a perfectly decent rate of return based on capital investment. We wouldn't have made the investments in other sectors, but it doesn't require an ounce of effort to manage, and we're buying them at very low prices compared to current earnings. Earnings will decline, but we've seen books from investment bankers who promise rising returns on other businesses, but they never perform as projected. We're actually going into this sector knowing that returns will decline.

Charlie Munger: It's an exception to your normal rules, and you like doing it.

Warren Buffett: I wish I hadn't asked.

Doug Kass: When you're gone, you suggested earlier today that Berkshire would become more concentrated. You've praised Henry Singleton of Teledyne, saying he's a model that students should study, especially because he was so rational. Prior to his death, he split the company into three parts. One of his reasons was because Teledyne was too much for one CEO to manage. Berkshire is even more complex. What would be the advisability of spliitting up Berkshire?

Warren Buffett: Berkshire is the easiest-imaginable company to manage. There would only be a tiny bit of centralization after my death, but not significant amounts. Charlie could tell you a lot about what Singleton did right and wrong.

Charlie Munger: Singleton was a genius who would play chess blindfolded. But he started as a conglomerate so he could always report rising earnings. But he managed those companies on a much more centralized vision than we ever had. By the end, he really wanted to sell to us. But he wanted Berkshire stock, but we didn't want to issue stock. Just because he was a genius doesn't mean he did things better than we have.

Warren Buffett: He played the public markets far better than we have. But to some extent, he looked at shareholders as people to be played. He promoted the stock, but that was a game that we just wouldn't want to play. He wanted stock and we didn't like how it was priced.

Charlie Munger: His cool rationality was to be admired, but we're more avuncular thanTeledyne ever was.

Station 9: Can you elaborate on what business leaders and policymakers should do to aid US competitiveness.

Warren Buffett: Health-care costs are a big item. We're spending a big percentage of GDP, where our rivals are between 9.5% and 11.5%. If we're giving up an extra 6, 7, or 8 points out of every dollar from our economy, that's a big obstacle to competitiveness. That doesn't even relate to the huge Medicare system problem. But in private-pay, we're facing huge costs. If GM was at a $1500 per car disadvantage to Toyota based upon health-care costs (as it used to be said), that's like having a similar cost disadvantage in buying steel. It can't go on forever. Our economic system works, but health-care costs are the number-one obstacle.

Charlie Munger: Young men from Caltech and MIT going into high finance make for a completely crazy outcome. I don't see our societal approach to high finance doing us well.

Carol Loomis: (Reader question) I've never heard whether all Berkshire employees receive health benefits. Do they? What will the costs to us be under Obamacare?

Warren Buffett: I don't know of any units that don't have health-care benefits, but I can't speak to every unit. Health-care costs are a huge expense for us. We do very little on a centralized basis, but we're looking at letting our component companies try to do better by cooperating. I see reports from individual units with costs rising by 10% and 12%. The only thing I know about 2014 is that our competitors will face the same changes and expenses.

Charlie Munger: We prefer decisions like health care to be made closer to the firing line.

Jonathan Brandt: As solar panels decline in cost, will that reduce dependence on the grid, leading to higher rates, leading to greater incentives to exit the "grid"? Are regulated utilities in Iowa, the Pacific Northwest, and the UK really immune?

Charlie Munger: Nobody knows exactly how it will play out. I definitely expect more solar generation in deserts than on rooftops in cloudy places. We get very favorable terms and incentives on our solar investments. I am skeptical of running the utilities of the world from tiny rooftops. I suspect there's some fancy salesmanship taking place. Early entrants looked foolish because the costs of installations are falling significantly.

Warren Buffett: Let's ask Greg Abel.

Greg Abel: A decline in total costs of installation will hurt utilities, but as you see more rooftops coming online, you'll see a restructuring in government tariffs. We're absolutely certain that over the long term, shareholderswill be protected.

Station 10: Bill Gross recently said the success of people from his era owed a lot to timing. Do you agree?

Warren Buffett: Being born in the US was a huge advantage. Being born a male was a huge advantage. The timing could have been a little better my father was a securities salesman, and I was conceived in November 1929, and as you may remember, there weren't a lot of customers to call and there wasn't television to watch, so here I am. That led to a decade in which a lot of people were turned off by stocks. We've just gone through another. If I'd been born 5 years earlier, I could have made even more money, less if I'd been born 15 years later. I envy the baby born today on a probability basis, their world will be better than mine, and even the investment world will offer great opportunities. Someone born with a passion for investing today will have great opportunities, and will live a better life than John D. Rockefeller did based upon standards of living.

Charlie Munger: Timing benefitted us, but there's lots of room for opportunity ahead. I sat for a long time before I acted on investment. You were drowning in opportunities when I first met you.

Warren Buffett: Too bad I wasn't drowning in money. Now we're drowning in money and don't have any ideas.

Station 10 (again): I'm 30, and don't know what's ahead. How have you changed over the last 50 years? What advice would you give yourself minus 50 years.

Warren Buffett: I'd trade places with you.

Charlie Munger: We're so old-fashioned that we're boringly trite. We think you should just keep plugging along, stay rational, and stay energetic. All the old virtues pay off.

Warren Buffett: You have to work where you're turned on.

Charlie Munger: I've never succeeded for any length of time where I wasn't engaged.

Warren Buffett: We both started in the grocery business, but you'll notice we're not in groceries today.

Charlie Munger: We weren't going to get promoted, even though you had the family name.

Warren Buffett: We have so much fun running Berkshire, it's almost sinful. It's lucky we found early what we liked. What my dad did didn't interest him, but it did interest me.

Becky Quick: What factors have enabled your insurance pricing to remain rational yet still be a big market participant?

Warren Buffett: I think Berkshire is an unusually rational place. We know what we want to accomplish, we've had a very long run, and we're controlling shareholders, so we've never been pushed in directions we didn't want to go. Insurance should be conducted as a rational activity. Competitors sometimes are driven to write more business just to show a growing book. We once contracted National Indemnity's book by 80%. We could only do that because we weren't beholden to quarterly earnings calls. No external factors are pressing on us. It's a great way to operate, and that will continue. If you only own 1%, 1.5% of the company and you're facing hassle from Wall Street, it's hard to resist that pressure. We can resist the pressure to do stupid things. We think natural-catastrophe insurance went from a great business to a terrible one, so we're not doing it. We didn't leave the market; it left us.

Charlie Munger: Other people face a lot of external pressures. If we don't want the pressure, we don't have to have it. Being contrarian is necessary to a successful insurance business.

Warren Buffett: Look at the dot-com bubble. As it was growing, there was lots of "social proof" that it worked people questioned why you didn't get in. What started with skepticism became a bandwagon effect, and you see how that worked out. We don't think we're smarter than other people, but we don't envy others and won't do things just because others are doing it.

Charlie Munger: I say that the reason "thou shall not covet thy neighbor's ass" is in the Bible because they were having problems with it then. Envy is the one deadly sin that isn't any fun.

Warren Buffett: (Eating chocolate) Gluttony sure is.

Cliff Gallant: What about new entrants in the insurance market?

Warren Buffett: We hate dumb competition. Hedge funds are entering the insurance and reinsurance markets aggressively. It gives many the opportunity to get a "beard" in places like Bermuda. They're talking investors into going along with it.

Charlie Munger: It lets them use big words, too.

Warren Buffett: New entrants have appeared before. We know what we want to do and what the prices should be, and we'll do what we can rationally to offer probabilistically-based insurance. It can be irritating to have a dumb competitor. If you're running a gas station and the guy across the street sells below cost, you're in a terrible business. That's why I got out of the service-station business. Fortunately, in insurance, the cost of standing by idly isn't very high. We had dumb competition in the 80s, but we just stood by and it worked out. Old-fashioned principles worked out well, and we found great people. We hit the jackpot on people with people like Jain and Nicely. They, in turn, don't face stupid pressures.

Station 11: I have three daughters and don't want them to be held back. But the board and management at Berkshire doesn't have a lot of women. Is that a problem?

Warren Buffett: I see it as a problem; that's why I wrote the Fortune article this week. Women throughout my lifetime, and for millennia before, have always been at a disadvantage. My sisters were just as smart and were much more personable than me, but they didn't have the same opportunities. It wasn't deliberate; it just existed. All of my teachers were women, but that's because that was one of the only opportunities open to them. They were better teachers than their pay reflected, because it was where all that talent got compressed. Katharine Graham was told too many times by individuals and society that women couldn't run businesses as well as men. That "funhouse mirror" distorted what she saw in herself. I asked her not to see that distorted vision, and the stock went up by more than 40 times under her management. The country is moving in the right direction, but I hope it keeps moving more and faster. I hope that women get rid of the funhouse mirrors.

Andrew Ross Sorkin: Is Berkshire too big to fail? How is Dodd-Frank affecting Berkshire?

Warren Buffett: I don't think it's affecting the insurance business. To my knowledge, the doctrine of too big to fail hasn't affected us in any way. Large banks are being asked to capitalize at higher ratios than smaller banks. Obviously, higher capital ratios mean lower rates of return, and that's going to affect Wells Fargo. But the banks are stronger than they've been in 25 years, with much better balance sheets and much better loans. Canada's banks are extremely strong, but America's are much stronger than Europe's. I don't worry about the American banking system driving the next bubble. We'll have another bubble, but it's not likely to be a housing boom again. Returns on tangible equity will be lower due to capital regulations, but they'll still do well.

Charlie Munger: I'm less optimistic about the banking system long-term than you are. I'd like to see something more extreme: I don't see why derivatives books should be mixed in with depositors. The more bankers want to be investment bankers, the less I like it.

Warren Buffett: I promised 5 years ago about the enormous costs that investors bear getting sold various products. I talked about hedge funds, private equity, and so forth. The investment industry has been very good at extracting returns at the expense of investors. I made a wager that index funds would beat a basket of private-equity funds. We each put money into Treasuries that would pay off at $1,000,000 after ten years. Interest rates have fallen so far that there's been too little appreciation in our investments to make that million dollars happen, so I took the money and put it into Berkshire instead. It's already worth $1.2 million. Now, at the halfway point of the wager, the S&P is at 8.69% cumulative return; the hedge funds are at 0.13%. Visit to see similar wagers. I love some of these wagers; one is a $1,000 bet on whether the Large Hadron Collider would destroy the world in 10 years. I'm not sure who was supposed to collect. One predicts that someone alive in 2000 would be alive in 2150. I hope Charlie is in contention for that one.

*** Lunch Break ***

Doug Kass: Does the game matter or the scorecard? You did much more research back in the day (like when you purchased American Express) than you have on recent investments.

Warren Buffett: I would feel the same about the company in general as I do now, even if I no longer owned a share or received a dollar in pay. Just because the nature of how we do things has changed does not mean it is less intense than in the past.

Charlie Munger: You didn't know as much early on. Your knowledge and expertise are cumulative.

Warren Buffett: I don't have to go back and spend every day talking to a GEICO executive, as I did when I was just starting. I didn't know a thing about Amex when the salad-oil scandal happened, but I knew the scuttlebutt on the company. I was absorbing knowledge, and I have tried to do the same over time. Now, they're buying back shares and thus our interest in the company has grown even without adding more shares.

Station 1: When you analyze a stock, what quantitative metrics do you use?

Warren Buffett: It's different to look at the business, rather than the stock. We always think of them as businesses. Different numbers matter with different businesses. If you're a basketball coach, you're probably not going to arbitrarily hire a 5'6" player. You know there may be exceptions, but in general, you're looking a 7-footer. We know certain things that we have accumulated over the years that tell us when we're looking at the right business. Occasionally facts will change. True, I had the idea to buy shares in BofA when I was in the bathtub. But I've been buying and watching banks for decades. When the company became subject to conditions in 2011 that looked like a win-win for Berkshire and BofA, it struck me that conditions had changed and would be right for an investment. I don't try to calculate precise PE's more important for me to know what I think the value of a company will be over the next five or ten years, and that there's a big disparity between price and value.

Charlie Munger: We don't do things that you could do through a computer screen.

Warren Buffett: We try to look at any offer as though we're being offered the whole business, and we try to figure what we know about how it will look over 5 to 10 years. We've been looking at the auto business for 50 years, but we'll never know who will be on top five or ten years out.

Charlie Munger: We can have a vastly greater confidence in the future competitive position of Burlington Northern than we can know about Apple. It's just not possible. Very smart people who know math like to convince themselves they can come up with formulas to tell them what to buy. They're just fooling themselves.

Carol Loomis: Will the stock market's general condition become one of lower returns, and will that affect Berkshire's performance?

Warren Buffett: We never consider the macro-scale economic condition when making business decisions. We don't think we can know, nor can anyone else. It's a conceit we have: We think nobody else can know better than we can. So we look at each business on its own. I like Bill Gross, but it doesn't matter what any individual thinks the macroeconomic forecast will be. I have a general feeling that America will do well in the future. I have a high degree of confidence that BNSF will carry more freight in the future than they do now, that it has an incredibly high replacement value, and that there will be two major carriers in the west. To abandon what you do know for what people forecast for a "new normal" or anything else we can't know for certain is quite silly. People who try to time their purchases and sales according to what the economy overall will do are going to make a lot of money for their brokers and not a lot for themselves.

Charlie Munger: If you're a surgeon trying to decide whether to retire in two years or work a little longer based on forecasts, I'd advise you to keep working a little longer. I sort of agree with Bill Gross; I think the next few decades will be slower than the last several.

Jonathan Brandt: Gildan ate a lot into the wholesale screen-printing market from the legacy companies; are they going to do the same with retail underwear?

Warren Buffett: You focus on running the business well, managing prices, and keeping your customers happy. Some competition has hurt Fruit of the Loom over the last decade or so, but we still produce high quality at low prices. Gildan pays very little or no income taxes by routing business through the Cayman Islands; that's a modest factor, but I think in five years or so I think you'll find our market share stable over that time. Hanes is a competitive threat, too, but while it's not Coca-Cola, this is still a branded market. Other markets will be more lucrative, but we'll remain competitive.

Station 2: What ten books influenced you other than those by Graham and Dodd? And what about publishing notes from the early days of your partnership?

Charlie Munger: You wouldn't recognize a lot of names from the early days of the partnership.

Warren Buffett: I've owned shares in 400 or 500 companies over time, but I've made most of my money off about ten of them.

Charlie Munger: I couldn't name ten books that truly stand out.

Warren Buffett: I read all kinds of books early on, but Graham's book was the only one that gave me a bedrock philosophy that really made sense. It taught me how to think about the market, and how to make the market work for me. Learning to look at the whole business, not as stocks as pieces of paper, made all the difference. Phil Fisher's books, like Charlie's advice, taught me to look at the quality of the business, not just the financials. I haven't found anything about that bedrock philosophy that has flaws in it. Reading has been enormously profitable for us, but we do it because it's fun.

Becky Quick: The airline industry has historically been terrible, but its economics seem to look better now. Should Berkshire buy an airline and pair it with NetJets?

Warren Buffett: The answer to the second question is no. Now, on the market overall, there are some places where there can be just two competitors and they just race each other to do stupid things. Fannie Mae and Freddie Mac did that. You see certain industries where they get down to a very small number of competitors, they do very well. But then there are others where there are only a few competitors and they do terribly. If you go into a supermarket on the weekends, you'll see Coke and Pepsi competing very vigorously, even though the two of them are dominant. The airlines have very low marginal costs per seat, but very high fixed costs. They have lots of incentive to sell that last seat on the cheap, but it can be hard to distinguish exactly when to stop with that last seat. If it ever gets down to one airline with no regulation, it'll be a wonderful business, but it's hard to see whether it's a good business yet, even though the number of companies has shrunk due to bankruptcies.

Charlie Munger: We've proven ourselves to be slow learners. It's conceivable that the market has changed substantially enough that buying an airline makes sense. We missed the boat early on when the same thing happened to the railroads. But I put airlines into my "too hard" pile.

Warren Buffett: We like to do things where we're sure.

Charlie Munger: You really couldn't create another railroad, but you could create another airline.

Warren Buffett: People love doing it. They find it exciting. I've probably received a dozen proposals over the last 25 years about starting airlines, and some of them have come into reality. It's sexy, for some reason. If you promise to talk to an executive about airplanes, you'll get in the door. You can't do the same thing talking about hauling coal. And you can always raise money to do it. We made quite a lot of money on US Airways because we caught a blip between bankruptcies. We both sat on the board, and none of the predictions ever came true.

Cliff Gallant: Are there circumstances under which you wouldn't buy shares?

Warren Buffett: Don't base your purchases on book value, base it on intrinsic value. Book value has a reasonable tracking utility at Berkshire. Our intrinsic value is considerably above book value. We've signaled it by offering to buy shares as long as we have a substantial cash balance and the price is at or below 120% of book value. If we got the opportunity to buy it there, we'd probably buy quite a lot. The calculus is that you take care of the business with your money first, then if you can buy additional businesses in a way that adds value to the per-share value of the business, then you do that, and then if you can buy the shares of your own business at less than the intrinsic value, it's like spending $0.90 to get $1.00. But it's hard for us to do that because whenever we announce a share buyback plan, people chase the stock.

Charlie Munger: People figure that if those two cheapskates are willing to buy it, it must be a great deal.

Warren Buffett: Most of the time, the stock has sold at a reasonable range relative to the intrinsic value. There have been several times in recent years when it has sold at a significant discount, and there were times before that when it sold much higher. There are unlikely but possible conditions under which we would buy big blocks of shares. We generally wouldn't be comfortable buying from our partners at a big discount.

Station 3: Charlie, have you ever thought about moving to Omaha to be closer to headquarters?

Warren Buffett: We know each other well enough that we barely even need to use the phone.

Charlie Munger: It's amazing how much Omaha has changed in the last five years. I feel like Rip Van Winkle.

Warren Buffett: A third of the lifetime of this country has passed while we've been alive. You have to expect some changes.

Andrew Ross Sorkin: What would the underwriting experts say about climate change risks?

Warren Buffett: Charlie knows science a lot better than I do, which is not saying a lot. But my general feeling is that there's a reasonable chance that the effects of carbon dioxide are right. But I don't know enough to speak as any kind of an expert on it. But I'm willing to assume that it's a reasonable assumption that it could change. I don't think it makes any real difference in assessing the rates from year to year. We tend to be pessimistic anyway, so we assume that whatever the past risk of natural disasters has been, it is likely to be worse. Global warming is not a realistic factor in projecting insurance losses. Pessimism is.

Charlie Munger: I'm a Caltech-trained meteorologist, but that's from before the time of modern meteorology. Carbon pricing among many different countries with different ideas is lofty but unlikely to work well. Europe, because they're socialists and like to tax things, tax petroleum heavily. They stumbled into a carbon tax but it's because they spend too much. We should have higher taxes on fuel.

Doug Kass: In 2002, you told shareholders to submit their applications if you thought they belonged on the board. You said the same thing when Lou Simpson retired from GEICO. Over the last 15 years, short selling has proven very profitable for some investors. Todd Combs did it.

Charlie Munger: He had so much success, he stopped doing it.

Doug Kass: But he still got the job with you. Would you ever commit capital to a short-selling strategy? Could we have $100 million to manage in a short-sale account? [Offers a wager to prove that he could short-sell at a higher rate of return than Berkshire can perform.]

Charlie Munger: The answer is no.

Warren Buffett: We are no strangers to short-selling...

Charlie Munger: We both failed at it.

Warren Buffett: I might let a wager on short-selling ride at some time in the future. We've done a reasonable amount of it ourselves. I've identified a fair number of companies were overpriced, and others that were out-and-out frauds. But making a lot of money short-selling does not appeal to us over a long period of time.

Charlie Munger: We don't like trading agony for money.

Warren Buffett: But we wish you well.

Station 4: Could you be specific about factors you consider when determining the fair price for an acquisition? What sources do you use to make judgments about changes affecting an industry?

Warren Buffett: We usually feel that we're paying too much. But we find the business so compelling and the management and associates so compelling that we gag and pay the price. There's no mathematical formula. Looking back, we could have paid significantly more money for some of our most wonderful acquisitions, and they still would have been wonderful. Generally speaking, if you can buy a wonderful business one that has economic characteristics that lead you to believe with a high degree of probability that they will produce returns at a high rate on the capital invested and that they can reinvest those returns at even higher rates of return on capital, that's the best kind of businesses of all. Sometimes it kills us to pay that last 5%. It happened with See's Candies. It's happened several times.

Charlie Munger: It happens most of the time. Modern businesses aren't cheap.

Warren Buffett: The stock market will offer you opportunities for profit, percentage-wise, that you'll never see in negotiated purchases. The seller can decide when to sell and usually has alternatives. But the stock market will still have flash crashes and other blips that will offer opportunities that you'll never see in the negotiated-purchase market. We really like buying businesses, and we really like finding cheap opportunities in the open market sector. But we really like buying businesses.

Charlie Munger: We're in a different mode now. If we'd stayed in our old modes, we wouldn't have done as well.

Carol Loomis: You have extolled thrift and cost-consciousness. If these are hallmarks of your philosophy, how can you support an administration that has gotten us $16 trillion in debt?

Warren Buffett: We have to give some blame for the debt to the Bush administration, too. They weren't at fault for the conditions that hurt the market. In the end, I find it unproductive to discuss politics; half of the people will agree with you, half will disagree. I'm a Democrat, Charlie's a Republican, but we really don't disagree as much as you'd might think. The amount of deficit spending in the interest of stimulus has been appropriate, given the level of threat to the country. Berkshire Hathaway got a call because General Electric needed money, and we were the last stop. There's something unreal about Fannie and Freddie failing, and money markets being drained of 5% of their assets in a matter of days. It's a lesser problem to figure out how to pay for the deficit spending than if we'd gone into an austerity program.

Charlie Munger: I agree with you. So did George W. Bush. It was so extraordinary that both sides of the aisle agreed.

Warren Buffett: George W. Bush uttered the most important 10 words in economic history: "If money doesn't loosen up, this sucker is going down." I give him enormous credit for it. Our leaders, generally speaking, once they were in terrible trouble, came up with policies that in general were very useful. I am disturbed by a national debt that grows too fast compared to GDP. But we came out of WWII with debt much higher in relation to GDP than we have now. People predicted terrible things at the time, but the country has done sensationally. The danger is that it grows indefinitely. We've encountered far worse problems than we now face. This is not our toughest hour by any means. We'll do fine, but with a lot of bickering. Through a historical lens, it won't look that bad.

Charlie Munger: I like these episodes where people get together and do things right. If you don't find the current environment confusing, you probably don't understand it well enough. I don't think there's a fixed ratio of debt to GDP that works. The off-the-books debt of this country (the current value of future promises) is much greater than the on-the-books debt. Are they really going to take Social Security away from anyone in this lifetime? I don't think it's likely.

Warren Buffett: Social Security isn't the real problem. If the GDP grows a little faster, the problems go away.

Charlie Munger: All of the problems Republicans worry about go away if we have sustained 2% GDP growth. But we need policies that support that rate of growth, and I'm not sure we have those.

Jonathan Brandt: Is Benjamin Moore at a disadvantage because it doesn't control the distribution?

Warren Buffett: It's a small percentage of the overall paint market, but at the high end, it's the best-regarded. We haven't lost ground on that level. When we bought Benjamin Moore, I promised that the people who had invested their life savings in dealerships with Benjamin Moore and who were committed to the distribution would not lose their investments. We could have had a big jump in sales volume by going to the big-box stores, but it would have represented a total change in the arrangement, and it would have double-crossed a network of dealers who trusted us when we bought the company. A dealer policy will work with a first-class product. We will not follow the Sherwin-Williams path. Our strategy remains a high-end dealer strategy. It will continue to work well. It's up to us to protect and foster the dealer/distribution network.

Charlie Munger: I wish you could buy five more companies like Benjamin Moore tomorrow.

Station 5: You've said people are usually better off putting everything into index funds. How about a strategy of buying the 20 best companies in America and leaving it at that? Would that outperform an index fund?

Warren Buffett: You'll get different ideas from different people on which companies are the 20 best, but you're likely to do about the same as the index fund if that's what you buy. As Graham said in his book, the people who do well in stocks will dedicate a lot of time and attention to it. It's most important to avoid buying the wrong stocks at the wrong times. You have to behave like a professional and if you're not willing to bring that level of dedication to the process, then you should save time and effort and just buy index funds. But a group of 20 would probably just about match an index fund.

Charlie Munger: Knowing the edge of your competency is most important. You think you know more than you do when you're young, especially.

Becky Quick: Could annual sales of your donated stock by charitable funds be the reason why the stock price has been occasionally depressed below 120% of book value?

Warren Buffett: I've been giving away less than 1% a year of the company. A 1% sale annually is peanuts, especially compared with other companies that have 100% turnover annually. The charitable sales are insignificant compared to the company's total market volume and turnover. Everyone else in the room also has the right to sell their stock and give it away; I should have the same right.

Charlie Munger: What's $2 billion to an old man?

Warren Buffett: It has a lot more utility in the hands of other people than in my safe-deposit box.

Cliff Gallant: Are you starting to see a lift in the broader economy?

Warren Buffett: We're willing to invest anyplace we think we can see down the road 5 to 10 years and meet our normal expectations. We're going to find most of our opportunities in the United States; this is a huge market for businesses. But we find things outside the US, especially in bolt-on acquisitions. Since the fall of 2009, we've seen a gradual improvement in the economy. What we see overall is slow progress in the economy. This economy hasn't come roaring back, and it hasn't faltered. The overhang from housing seems to have ended about a year ago, so we're starting to see some recovery in home prices, which has a psychological effect. But we're also seeing improvement in construction, and we hope that we won't see a rate of construction that exceeds that of new household formation. I don't think we'll see a surge looking back a year from now, but I don't think we'll falter.

Charlie Munger: We can't make enough money now.

Warren Buffett: If we see something we like, we'll move in an instant. Opportunity will come along from time to time. And sometimes it'll come along in a big way. Most of the people in this room will see incredible opportunities offered in the equities market at least four or five times. And you have to be ready to act both to be able financially to act, and to have the fortitude to go in when others are running out.

Station 6: What advice would you have for starting a partnership with no track record if you're in your 20s?

Warren Buffett: You haven't sold me. But if you can, start an audited track record as soon as you can. We found those in Todd and Ted. If you have a coin-flipping contest and get 310 million orangutans out there, flip them ten times in a row, you'll get about 300,000 leftover, and then they'll go on to sell everyone on their coin-flipping skills.

Charlie Munger: Didn't you go to your loving family first?

Warren Buffett: I hoped they'd love me later on. It started very slowly. To attract money, you should deserve money. You should develop a track record that you can explain over time that illustrates sound thinking, not just being in tune with a trend or being lucky.

Charlie Munger: Most people start with friends and family, or those whose trust they've already earned. It's hard, and that's why people start small.

Warren Buffett: Very few will be successful. We showed the hedge-fund management returns earlier; the managers themselves made a lot of money, but their investors didn't.

Charlie Munger: The arithmetic attracts many of the wrong sorts of people.

Warren Buffett: We naturally thought ourselves to be exceptions.

Andrew Ross Sorkin: Is Ajit your successor? If not, what happens to his businesses without him?

Warren Buffett: He's remarkable because when people start copying what he's doing and turn it into something every Tom, Dick, and Harry is doing, he just changes his strategy.

Charlie Munger: If Ajit is ever not with us, we won't look as good.

Warren Buffett: That's true of other managers, too. We operated Berkshire 20 years without Ajit. If he'd come to us in 1965 instead of 1985, we'd probably own the world.

Doug Kass: Howard Buffett has never run a complex business or been an expert in diversified investments. How is he the most qualified person to take over the role as chairman?

Warren Buffett: He's not there to make decisions to run the business or allocate capital. He's there to preserve the culture in case the wrong CEO is chosen. With a separate non-executive chairman, we have the security of knowing that a mistake at the CEO level could be fixed. He knows he won't be running the company. But he'll be there to make sure the board knows it can oust the CEO.

Charlie Munger: The Mungers will be better-off with Howard in the chair. The board owns a lot of stock. We're not trying to gum it up for the shareholders.

Warren Buffett: We've seen more than one example of where a CEO who's a 6 out of 10 and who is very likeable continues to run the business year after year. It can be very hard to make a change if that person is also the chair.

Charlie Munger: You can have a CEO who's a 9 out of 10 but has deep flaws, too.

Warren Buffett: Blessed are the meek, for they shall inherit the earth. But after they inherit it, will they remain meek? The chairmanship of Berkshire could turn into a power-trip for the wrong CEO. When I wrote in the annual report that I wouldn't tell the newspapers whom to endorse for President, I wanted to box-in the behavior of my successor too.

Charlie Munger: It was once said of a certain CEO that he was the only person who could strut sitting down.

Station 7: In a low-interest-rate environment, is selling Berkshire stock our only option to get cash?

Warren Buffett: The loss of purchasing power to people in fixed-income investments is terrible in this low-interest-rate environment. I wrote in 2008 that people should own equities. Equities were cheap, and it was a great time to get into equities. I feel sorry for people who have stayed in fixed-dollar [fixed-income] investments and I don't know what I'd do in their shoes. 0.25% on $1,000,000 is just $2,500 a year. Owning businesses, under most circumstances, has made more sense than owning fixed-dollar investments. And it really made sense in 2008 when the prices on equities were so low. I don't know how long this will go on. I get a lot of letters from people who ask what to do when they've saved $300,000 or so...and it's a terrible time for those people. It's better to own productive assets.

Charlie Munger: They had to hurt somebody, so they hurt the savers. They were an easy target. I would have done the same thing, but I would have felt badly about it.

Station 8: Where do you see the moat in IBM?

Warren Buffett: I have more conviction about the moat around Wrigley or Coke than the one around IBM, but I have a great deal of conviction in IBM's moat anyway. I have enough of it that we took a very large position. I like their financial policy, and the odds are good that its strength will be maintained over time. But I have even more confidence in BNSF, and that's why we bought the whole company.

Charlie Munger: At least IBM's pension plan has the backing of IBM. A lot of once-revered, once-"secure" places are no longer so secure.

Warren Buffett: The mortgage market has terrible instruments if it's good for the borrower, they can keep it for 30 years, but if it's bad, they can give it back to you right away. I would advise everyone here to get a 30-year mortgage right away. Some of the life insurance companies are like the man who lost the switchblade fight he thinks he's won, but the man with the switchblade says, "Just wait until you try to shake your head."

Station 8: How did you manage your early investments?

Warren Buffett: Charlie and I would do things totally differently today managing small amounts than we do managing Berkshire. Opportunities are out there, and periodically they're extraordinary. Our problem now is handling $12 or $14 billion coming in every year, and we've forgotten about what we did when we were smaller.

Charlie Munger: I'm glad to have put those old problems behind me. I used to make big returns on the float from my income taxes.

Station 10: What kinds of global markets are you interested in?

Warren Buffett: We don't start by looking at specific markets. It's not like we wake up and think "It's a good time to invest in China or Brazil". It's not where our strength is. We don't think most people have a strength there. It sounds good, but we don't think anyone is strong there. We've owned securities outside the US and will continue to. But if you told us we could only invest in the United States for the rest of our lives, that wouldn't give us much trouble.

Charlie Munger: On a lot of subjects, we don't think we have a lot of edge, so we don't want to play.

Warren Buffett: When people bring us concepts (like country-by-country investing), we think they'll do better at selling than investing. The thing is to find a good business at an attractive price.

Charlie Munger: They'll come to you one year and say they're excited about Bolivia, but the previous year, they said they were hot on Sri Lanka.

Station 11: Is the government creating another bubble in housing?

Warren Buffett: I don't think we're remotely near a bubble. The whole country went crazy for housing a few years ago, and the government was deeply involved. But there were people encouraging it from all sectors, not just government. Like all bubbles, the skeptics looked like idiots for several years. Everyone else looked wonderful, and people are susceptible to the bandwagon effect. It looks like easy money, and soon enough, everyone succumbs. It doesn't mean the people at Fannie and Freddie were evil though some of them were. It doesn't mean the legislators were evil though some of them were. We're not even close to that same condition today. I certainly recommend financing a house right now, and you'll find that if you're going to live in a community and stay there for a long time, it's opportune to buy it now.

Charlie Munger: The government could have pulled away the punch bowl before everyone was drunk, but instead they raised the proof. It's hard to get governments to pull away the punch bowl when the voters want to get drunk.

Warren Buffett: You'll see it again, not necessarily in housing. Humans will continue to make the same mistakes that they made in the past. People will get fearful when others are fearful. Fear is very persuasive. People get fearful en masse...confidence comes back individual by individual. We are able to avoid getting caught up in what other people are doing. When we see falling prices, we see an opportunity to buy. Since we don't get into buying on margins, we don't let other people get in a position to pull the rug out from under us. Leverage is what made the housing market into a bubble. You don't want to go out on a limb with leverage.

Station 1: Do you see opportunity in the Eurozone?

Warren Buffett: We're perfectly willing to look at businesses in the Eurozone. We've made bolt-on acquisitions there in the last year. We'll look at all 17 Euro countries though we'll look more within some than others. But the European monetary union contains a major flaw, and they're grappling with ways to correct that flaw. With 17 political bodies and a lot of diverse cultures, it's tough for them to do something. They'll do it in time. They synchronized their currency without synchronizing anything else. Nature eventually finds the flaw, and so does economics.

Charlie Munger: Structured as it is, letting Greece into the Eurozone was a stupid idea. It's not a responsible capitalist country.

Warren Buffett: I've tried to get him to use "Country A"and "Country B", but he won't.

Charlie Munger: Europe made terrible mistakes. They have politicians, too.

Warren Buffett: Do you think we'll be behind them in 10 years?

Charlie Munger: I think Europe will muddle through. Think of what they've already muddled through.

Warren Buffett: We would be delighted tomorrow to buy a company in Europe...for cash.

Charlie Munger: I hope you'll call me first if it's in Greece.

Station 2: How has social media affected your businesses?

Warren Buffett: Half the people in this audience could answer that better than I can. It certainly makes a difference for a business like GEICO. It was founded in 1936 and went direct by mail. The world changed through phones and into the Internet. Now it's social media. I've been amazed at how fast the world has changed. I thought the Internet would affect GEICO mainly through younger buyers. It turns out that it affects all age ranges. It would be a terrible mistake to put me in charge of social media at Berkshire Hathaway.

Charlie Munger: I don't understand it because I avoid it like the plague. I hate the idea of teenagers in my family immortalizing the dumbest things they've ever said when they're 13. I think there's a time when your ignorance and folly ought to be hidden. I also think that when you multitask like crazy, none of the tasks is likely to be done well.

Station 3: What signals to you that companies are frauds?

Warren Buffett: It varies over the years. You can't identify 100%, 90%, or even 80% of the frauds, but people have "tells" in business like they do in poker. We don't think we can assess all people accurately, but we only have to be right about the ones where we choose to act. We don't get all of those right, but we've done pretty well. In insurance, we've seen games played with loss reserves. I don't claim to know all the ways to play games, but I've seen how promoters act, and you can see how some people give themselves away when they're playing games.

Charlie Munger: Sometimes it's pretty obvious. I was once introduced to a man who wanted to sell us a fire-insurance company. One of the first things he said was "It's like taking candies from babies. We only write fire insurance on buildings that are made of concrete and are underwater." I was pretty acute I saw that one as a fraud.

Warren Buffett: Any time you see a project movies or construction, for instance where there are progress payments and the like, there's plenty of room for fraud.

Charlie Munger: It's not always fraud; sometimes they're deluded.

Warren Buffett: And then they get hired as salesmen. If you have doubts, forget it. I'm not sure I find financial statements as useful as I found them 30 or 40 years ago, even with all of the disclosures.

Charlie Munger: The financial statements of today's banks are too complex.

Warren Buffett: When we bought General Re, we discovered enormous trouble.

Charlie Munger: I called some of those assets "good until reached-for".

Warren Buffett: Charlie found an error in a Solomon contract to the tune of $20 million. Both parties recorded a profit on the same deal, and the accountants blessed it on both sides. When I took the chairmanship of Solomon, they came to me one day and said about an $80 million figure that it was a "plug number" they had been using for a decade. In ten years with Arthur Andersen as their accountant, they just never figured out how to get the number to balance, so they literally just used it as a plug number for ten years.

Charlie Munger: We had to do that with one of our own savings and loans -- the accountants couldn't figure out how to make the number work out, so they just put in a number and let it run itself out. It's like in Italy, when you don't deliver the mail and it piles up, once in a while you just throw away a couple of carts.

Station 4: If you found a business in sub-Saharan Africa, would you buy it?

Warren Buffett: I wouldn't totally preclude it. I'd find some advisers, and I might not go through with the deal, but I'd look at it.

Charlie Munger: There's money to be made there, but I don't think we'll be the ones to make it.

Station 5: I can design estate plans that would pass down great wealth from Baby Boomers to their children, but many of them are asking me to design "Warren Buffett" plans to give enough to their children that they can do something but not so much that they can do nothing. How much is that?

Warren Buffett: I think more kids are ruined by what their parents do than by what their parents give them. I don't think the amount of money itself determines how the kids turn out. Every time I re-write my will, my kids are excited because I keep loosening up over time. I think that the kids are going to read the will someday, so why should it be after you're dead? If they're going to have questions about carrying out your wishes, why shouldn't they read it while you're living when you can answer questions about how to carry out their obligations? I feel like they should be able to discuss their obligations, and whether they feel like something about it is unfair. I wouldn't do it with a 14-year-old, but once they're into their 30s, they're probably old enough to be involved in that conversation. I don't think a wealthy dynasty creates as much utility as putting that money to work in society.

Charlie Munger: I don't think you want to discuss your will with your children if you're going to treat them unequally.

Warren Buffett: There are circumstances where one child may be more interested in one kind of asset than another child. Your wishes and intentions should be understood so that they don't sense inequality when you were aiming for equality.

Station 7: Would you split the A shares?

Warren Buffett: I like the structure now with the A and B shares. People who own A shares can split in to B shares anytime they like. We've always pledged equal treatment to the two classes of stock and see no reason to change the structure.