Notes from the 2016 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. Paraphrasing, as necessary, was performed in as journalistic a manner as possible given the live nature of the event.

Gregg Warren: Berkshire only generates 1/3 of energy from renewables. Is the endgame for Berkshire to hit 100% renewable generation?

Warren Buffett: Any decision we make about generation has to go through regulations at the state level. We can't make unapproved changes. Western states have been harder to work with. Iowa has been marvelous. They have seen the benefits. We have one major competitor in Iowa and they have not pursued renewables in the way we have. Although they have higher rates than we do, we don't have to raise ours. Regulations are driven at the state level. We would not have the renewable generation we have had those projects not been subsidized by the Federal government. The benefits to renewable generation don't just accrue to the people of Iowa. I think you will see the rules vary by jurisdiction, and we would hope that we could use our capital to take advantage and be a very big player.

Charlie Munger: We're doing way more than our share to move to renewable energy, and we're charging less than our competitors. The world would be better off if everyone behaved more like us. I like the shift to renewables, but I have a different reason than carbon emissions: I think we'll need every drop of hydrocarbons to raise food in the future, so I'm in the same camp as the carbon-reduction people, but for different reasons.

Warren Buffett: It should be noted that people in Council Bluffs are paying less for their electricity than people in Nebraska, even though the same wind is blowing across the same land, and Nebraska is entirely with public power -- there are no shareholders to satisfy. The server farms Iowa is getting are because Iowa has cheap, wind-generated electricity. Nebraska prides itself on public power, but lately it's been a source of cost, too.

Shareholder station #3: In your 2008 shareholder letter, you said derivatives were dangerous because they made it hard to evaluate commercial banks' finances.

Warren Buffett: Derivatives do complicate matters, but they are moving towards collateralization. If you asked me to describe the Bank of America's derivatives position, I could tell you that they have been conscientious, but the great danger in derivatives is when there are great discontinuities. If the system stops for a while, as it did just after 9/11, and at the outset of WWI, or as it could after a major cyber, biological, nuclear, or chemical attack, then you'll have a lot of problems. When things re-open, you can find that there are enormous gaps in things that you thought were protected. I regard very large derivatives positions as dangerous. We inherited a modest-sized position at GenRe, and even in a benign market we lost a lot of money.

Charlie Munger: When the accountants blessed those derivatives, they were only off by hundreds of millions of dollars.

Warren Buffett: I know of one badly mis-marked derivative that doesn't affect our operations in any way, and one can only begin to speculate what influenced the people who did the mis-marking. I know of some that are so far off it would blow your mind, yet I'm not sure that any of the auditors have any capacity to keep that under control. Derivatives are still dangerous in large quantities, and we would not do them on a collateralized basis, and I won't get us into a situation where we could have money demanded of us that I couldn't get to you with ease. It's still a potential time bomb in the system. Anyplace where discontinuities exist creates hazards to the system.

Charlie Munger: We're different from the rest of the banks; we'd be better off if they had been illegal.

Carol Loomis: In your 2015 letter, you said that float allowed you to significantly increase your income. If the US were to experience negative interest rates, how would Berkshire be affected?

Warren Buffett: Some of our float is located in Europe, where they're already facing negative rates. Obviously, anything that affects the cost of holding capital affects us. We've got $60 billion out there earning 0.25% -- and it only hurts a little less than having it out at negative 0.25%. Float remains useful to us today, and will continue to be valuable to us in the future.

Jonathan Brandt: Railroads appear to be exposed to some of the worst weakness in the economy? How much is cyclical and how much is secular?

Warren Buffett: The decline in coal affects about 20% in revenues. That's secular. We had a very mild winter and had entered the winter with utilities carrying large amounts of coal. Part of the reason for that is how poor our service had been the year before, and they overcompensated. They continue to have excess stocks, and they're trying to draw down before buying more. We value BNSF a great deal, and wish we could find something at an equally attractive price today.

Shareholder station #4: How should children view stocks?

Warren Buffett: People win lotteries everyday. You don't need to be jealous about it. All you have to do is figure out what makes sense. Get yourself into the mentality that when you buy a stock, you're buying a part of a business. If you owned farmland or rental properties or a McDonald's franchise, you wouldn't get a quote on that every day. You can't make that a part of your thinking.

Charlie Munger: If you just listen to your elders, they'll lie to you.

Warren Buffett: American business will do fine over time.

Charlie Munger: Not the average client of a stock broker.

Warren Buffett: A lot of problems get caused by envy, including over people who win the lottery or get rich via an IPO.

Becky Quick: Why is NV Energy fighting rules to make it easier for consumers to install solar energy systems? Does the company need policies in the future for things like environmental responsibility?

Warren Buffett: The problem in Nevada is that people could sell excess power from rooftop solar systems at a price much higher than what we would pay to get power generation elsewhere. That encouraged people to install solar systems -- about 17,000 of them -- subsidized by the Federal government. They were selling it back to us at 10 cents a kilowatt hour, when we could have generated it for 3.5 cents. 99% of our consumers were being asked to subsidize the choices of the other 1% by paying three times as much for that power. Solar power still needs to be subsidized, so the question is who should pay to subsidize it? If society generally benefits, we shouldn't place the costs exclusively on other ratepayers

Greg Abel: We are fundamentally for renewables, but we want to purchase it at a market rate, not an inflated rate. A working family who can't afford rooftop solar of their own doesn't want to subsidize their neighbor's solar unit.

Warren Buffett: From 2010 to 2030, Berkshire Hathaway Energy will reduce coal generation by 57% from 2010 to 2030. It's important that it be done, but that shouldn't be done on the backs of consumers who are struggling.

Cliff Gallant: I've been surprised by how much Berkshire is affected by oil prices.

Warren Buffett: We don't think we can predict commodity prices. We are not two fellows who think we can predict the price of soybeans or corn or oil or anything else. Anything you've seen in our transactions is done apart from commodity price predictions. We don't know how to do it. We're thinking about other things when we make those decisions.

Charlie Munger: I've even more ignorant than you are.

Warren Buffett: That's the first time I've heard him say that. Has a nice ring to it.

Shareholder station 5: Why isn't the founding of new philanthropic educational institutions a bigger part of the discussion? Wouldn't new supply lower the price?

Charlie Munger: If you're expecting efficiency out of higher education, I think you're howling at the wind. I'm frequently disappointed. Monopoly and bureaucracy have pernicious effects everywhere, and higher education isn't exempt.

Warren Buffett: You have the option of very good state schools. We spend a lot of money on education in this country. People talk about "entitlements", but the $600 billion a year we spend on education is an entitlement program for children. I believe in it, obviously, but people in their working ages generally speaking in a rich society have an obligation to both the young and old. If we have problems with our school system, it's not because we're cheap. In terms of the money we put out, we're right up there. I was the trustee of an institution that raised its endowment from $8 million to $1 billion, and I didn't see tuition go down or enrollment go up.

Charlie Munger: Only the president's salary.

Warren Buffett: Anything more to add?

Charlie Munger: I've made all the enemies I can at the moment.

Andrew Ross Sorkin: What specific risks do you see for Berkshire if Donald Trump is elected President?

Warren Buffett: That won't be the main problem. Government has a huge influence on business, but regardless of who is elected, Berkshire will do fine.

Charlie Munger: I'm afraid to get into this area.

Warren Buffett: We've operated under price controls, 52% Federal taxes on earnings, and a variety of regulations. In the end, business has done well in this country for a couple of hundred years, and this is a marvelously attractive place anyway. Imagine that under circumstances of near-zero interest rates, businesses are earning phenomenal returns on tangible equity. Savers have suffered enormously, but owners of businesses have done very well. Business has managed to take care of itself, and for good reason: It has been the engine of a market economy that has delivered output that is staggering by the imagination of anyone who was living a hundred years ago. The system works extremely well at generation of output. 20 years from now, real output will be much higher. 50 years from now, higher still. And the quality will be better. No President can end it. Now, Charlie, say something pessimistic to balance it.

Charlie Munger: I think GDP figures greatly understate the real advantage our system gives our citizens. Lots of advantages don't translate easily into things economists can measure. I don't think the future is going to be quite as great as in the past, but it doesn't have to be.

Warren Buffett: I don't think anyone would say that they would take the talents they have today and prefer to live 50 years ago. You're making free choices that were not available to you 20 years ago, and you're making them in different directions.

Gregg Warren: How would future railroad mergers affect the competitive landscape?

Warren Buffett: Matt Rose can answer better than I can.

Matt Rose: We had a failed merger in the past, and the STB said that the rules on future mergers would have to be different. When CP announced a plan to merge with Norfolk Southern, we didn't see any interest in the final round of mergers occurring outside stockholder interests. As the country continues to grow in population, transportation becomes more scarce and the railroads will need to do more. That's when we think future consolidation will occur.

Shareholder station 6: Investment banking relationships are getting harder.

Warren Buffett: Public policy since 2009 has been to tighten capital requirements in a lot of ways, including to make large banks less profitable relative to smaller banks. You can change the math of banking totally by the use of capital requirements. If you require 100% capital, you couldn't make any money. If you require 1%, the results for society would be terrible. Returns on equity were awfully high in the past, and the changes haven't turned it into a bad business, just a less attractive business than it used to be. Wells Fargo is our largest non-control stockholding position, and I like it that way.

Charlie Munger: It's not the investment banking that charms you about Wells Fargo, it's the commercial banking.

Warren Buffett: We didn't buy a single share on the basis of investment banking that came into the company via Wachovia. Investment banking has not been something we invest in significantly. We continue to hold shares we received through warrants in Goldman Sachs, but I can't recall us making purchases of a marketable security in investment banking for a long time.

Charlie Munger: We fear the genre.

Carol Loomis: Will Berkshire eventually be targeted by activist investors, and have you thought about defenses?

Warren Buffett: I used to worry about that more than I do now. Size is one factor. More importantly, we will always be in a position to repurchase lots of stock, and as long as we are prepared to pay something close to intrinsic value, then that should serve as a defense. We would be worth less if broken up -- MidAmerican could never have benefited from renewable investments like it has without being part of Berkshire. I don't think there will be a spread that would be enticing to anyone. We have a shareholder base that recognizes the advantages of the businesses and the culture. I think it's very unlikely, but there have been periods in history when businesses have sold at a big discount to intrinsic value. When the discounts are huge, though, money can be hard to get. It's not a big worry to me. It's very likely that my estate for some years would be by far the largest holder in Berkshire, even after distributions.

Charlie Munger: We have almost no worries at all about this subject, and a lot of other people have thoroughly justifiable worry. That helps us. If you're being attacked by people you regard as evil and destructive and 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.

Jonathan Brandt: Leasing means a lot to Berkshire now. What are the competitive advantages? Would you enter other areas like airplane leasing?

Warren Buffett: We have a very good truck-leasing business and a very good tank-car leasing business. We expanded that by a billion dollars when we bought the GE fleet. We need to bring something extra to the party to make leasing attractive. The math for automotive leasing right now isn't very attractive, so pure money-type leasing is not an attractive business for us when other people have a lower cost of funds. We have railcar leasing, which involves a lot more than just a financial transaction. It includes repair and servicing. Same for our truck rentals. We've looked at aircraft leasing many times in the past, but it's never been attractive. Other people are getting into that market with short-term money buying long-term assets, and that's not attractive to us in the least.

Shareholder station 7: If you had a silver bullet, what competitor would you take out and why?

Charlie Munger: I don't think we have to answer that question.

Warren Buffett: Charlie's a lawyer. In many areas, we have tough competitors and we are tough competitors. We want our managers to think every day about how to increase competitive advantage -- widening the moat. We want to be thinking about what our customers are likely to want from us down the road. Generally, if you take care of the customer, the customer will take care of you. Recognizing reality is also important; you don't want to get into an unsolvable position.

Charlie Munger: We aren't out to destroy any competitors.

Warren Buffett: Spoken like an antitrust lawyer.

Becky Quick: Have your views about Sequioa changed?

Warren Buffett: In a sense, I'm the father of the Sequoia Fund. When I was closing up my partnership, we told equity-oriented investors that there were two people we would trust to be executors of our wills: Sandy Goettesman and Bill Ruane. We had a lot of people who weren't large enough to be individual clients, but Bill opened an office in Omaha and a number of our ex-partners joined Sequoia as a way to join a highly-qualified investment manager with smaller sums. Bill did a great job for people, and the record continued to be good after he died. If you're hiring someone, you want them to have energy, intelligence, and integrity. If you don't have integrity, you want them to be dumb and lazy. Charlie and I have developed some ability to recognize patterns in business that look good in the short run but terrible in the long run. Many of the schemes you see on Wall Street are really just versions of the chain letter scheme.

Charlie Munger: Valeant is a sewer and those who have been blamed earned the opprobium they have received.

Warren Buffett: [Report on the wager with Protege Partners] We have two managers each overseeing $9 billion for Berkshire. If we had the conventional 2-and-20 compensation scheme going, they would each be getting $180 million a year just for breathing. It's a compensation scheme that I simply find unbelievable. There's no pension fund or endowment fund out there that doesn't think it can do better than average by hiring a star manager, and every consultant in the world has every reason to collect a large fee for suggesting something other than sitting still and simply collecting the results of American business at extremely low costs by owning index funds. I've talked to huge pension funds and taken them through the math, and when I leave they hire consultants who charge huge fees anyway. Those consultants come in with lots of charts and PowerPoints and they always suggest small tweaks and changes from year to year -- not so much that it looks like they were wrong last year, but enough to justify charging a fee. The net result of hiring professional management is a huge minus. There's been far more money made by people on Wall Street through sales abilities than through investment abilities.

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Warren Buffett: I have seen hundreds of buybacks. It has nothing to do with preventing dilution. Issuing too much stock is dilution, and buying back stock at too high a price is also dilution. I never see anyone saying how they're tying the buybacks to valuation.

Shareholder station 9:: How is the new Texas store working for NFM?

Warren Buffett: We had the same problem we had in Kansas City -- we made such a splash and had such huge sales that we ended up with delivery problems. It's our biggest store in terms of volume. I expect that store to be a billion-dollar annual store before very long. We have twenty-plus auto dealerships in the Dallas area. They can't build fast enough down there -- Toyota is moving to the area.

Carol Loomis: Have you considered funding a lobbying and educational campaign about systemic threats to the country?

Warren Buffett: In my view there is no problem anything like "CNBC" -- cyber, nuclear, biological, and chemical. It will happen. Government is the real protection against this. I can think of many people who, had they been in the shoes of either Kennedy or Kruschev, would have gotten us into a nuclear exchange. Something from one of these threats will happen. The desire of psychotics and fanatics to do harm to others is a lot greater when you have 7 billion people on Earth than when there were just 3 billion. And there are now much greater means to do it, too. What we unleashed in 1945 was like nothing the world has ever seen, and that looks like a pop gun compared with what exists today. It's overwhelmingly a governmental problem, and it needs to be the top priority for President after President, even if they can't talk about it without scaring the hell out of everybody. Being in the insurance business, you have to know that someone will carry out something on a very large scale, and they'll probably try to make it happen in the United States.

Charlie Munger: Why don't we as Berkshire try to tell the government to do something about the threat?

Warren Buffett: We do. You can't count on there being Kennedys and Kruschevs in place when you need them. I see many people who act contrary to their long-term best interests. You can imagine that if Hitler hadn't been so anti-Semitic, he would have gotten to the nuclear bomb first.

Charlie Munger: Imagine a guy so stupid that he'd try to advance science by kicking out all the Jews.

Warren Buffett: We've been both good and lucky, but if you remember post-9/11, people started getting envelopes with anthrax. When you have a mind that would send anthrax to people, how that decision is made is totally beyond comprehension. I don't know how to do anything about it philanthropically. If I thought there was something I could do to reduce the threat by 5%, I would put all of my money into it. Nobody argues with you about it, they just get discouraged. I don't think it's because we have the wrong leaders. I don't doubt that either Clinton or Trump would view this as the most important issue facing them in the White House, but even if you keep it from happening 99% of the time, something that can happen will happen eventually.

Jonathan Brandt: Please update us on the Lubrizol acquisition.

Warren Buffett: The additives business is a no-growth but still very good business, so it has behaved exactly as anticipated. Lubrizol overall has been very much as we anticipated. They made one large acquisition which was a big mistake and that was in the oilfield specialty-chemical area. It was made just about the time oil took a nosedive. We've had some decent acquisitions there, but the biggest one was a mistake. It's a very well-ruin operation, but it's not a growth operation.

Shareholder Shareholder station 1:0:: How do you stay rational in the face of psychological effects that try to drive you away from rationality?

Warren Buffett: We both read a lot and we are familiar with almost all of the macroeconomic factors. That doesn't mean we know where they're going to lead. We don't know where zero interest rates are going to lead. In terms of the businesses we buy, we try to know as many of the microeconomic factors as possible. I like looking at the details of a business, whether we buy it or not. It's interesting to study the species. I don't think there's any lack of interest in those factors.

Charlie Munger: There can hardly be anything more important than the microeconomic factors. Microeconomics is really just another way of saying business. Microeconomics is what we do, and macroeconomics is what we put up with.

Warren Buffett: We like understanding businesses; that's interesting to us. Who knows when some little factoid stored in the back of your mind is going to turn out to be useful? We like studying business like some people like watching baseball. That's what our activity is devoted to doing.

Charlie Munger: We try to avoid the worst anchoring effect, which is your own previous conclusions.

Warren Buffett: Charlie always says you should be able to state the other person's argument better than they can.

Charlie Munger: We'd be a lot better off if all of our politicians followed that rule. Otherwise you should just shut up.

Becky Quick: When do you decide when to own a business in your personal portfolio but not inside Berkshire?

Warren Buffett: I have about 1% of net worth outside of Berkshire and about 99% inside Berkshire. There are some things that are the wrong size for Berkshire. As a practical matter, I try to keep my best ideas for Berkshire. Every now and then I see something that is sub-sized for Berkshire and I'll put some of my 1% there.

Charlie Munger: You don't want even the appearance of conflict of interest. Both of us have virtually nothing of significance outside of Berkshire. Berkshire shareholders have a lot more to worry about than anything we do on the side.

Warren Buffett: I'm way more tied into Berkshire results than into my own. I have way more money than I need, and I know I'm headed to zero since I'm giving it all away. I don't want to do anything that would risk taking Berkshire to zero along the way.

Cliff Gallant: What is Berkshire's free cash flow picture?

Warren Buffett: Overall, I think of the cash flow of Berkshire relating to our net income plus any increase in float. Over time, float has added $80 billion to what was available to invest. Our utilities and railroads are going to spend a lot more than depreciation, so our earnings not counting capital gains, plus our change in float, is the net new available cash. We can always sell securities and get additional cash or borrow, too. But it's not a complicated equation. For a long time people didn't understand the value of float. The big goal is that we want to add something to the normalized earnings power per share of the company. Some years it won't look like we have accomplished much, and some years things all come together. We never really know in advance which year will be which.

Charlie Munger: It's a pretty good system and we're not going to change it.

Warren Buffett: It allows for a lot of mistakes. American business is such that you don't have to be really smart to get a good result. If you can bring a little bit of smarts to the picture, you can do really well.

Shareholder Shareholder station 1:1:: What elusive truth have you been able to see that other people have missed out on?

Warren Buffett: I owe a great deal to Ben Graham for what I know about investing, and I owe a great deal to Charlie for what I know about business. It's important to recognize what you can't do. We try to swing only at things in our particular strike zone. You don't need the same kind of IQ in the investment business that you need in other areas of life, but you do need emotional control. We've seen very smart people do very stupid things. Some people make a great deal of money, then leverage themselves up. We've tried to avoid self-destructive behavior.

Charlie Munger: There are a few simple tricks that work well, and if you have the temperament that has the combination of patience and opportunism, you can do well. We're really just trying to behave well. I had a grandfather of whom the preacher said at his funeral, "Nobody resented his results, earned fairly and used so wisely." There are a lot of people who have earned a lot of money and everybody hates them.

Warren Buffett: We were very lucky to be born where we were and when we were.

Charlie Munger: Think of how lucky you were to have your Uncle Fred. He was one of the finest men I ever knew. Some people have terrible relatives.

Warren Buffett: I was looking at some family pictures, and saw some photos of my four aunts. You'd have been lucky to have any one of them, and I had four.

Charlie Munger: What if you had had more? We would have done better. I'm lucky that I also had Ernest Buffett telling me what to do [as an employee at Warren's family's grocery store].

Andrew Ross Sorkin: Speed may be an advantage in doing business, but does that threaten adequate due diligence?

Warren Buffett: We've made plenty of mistakes in acquisitions, and we've made plenty of mistakes in not making acquisitions. All of the mistakes have been about mis-assessments of the economics of a transaction. What counts is not the normal checklist of items that people go through in making acquisitions; what matters is the future economics of the business. We've made at least half a dozen mistakes -- even more if you count errors of omission. But it's never been anything on a checklist. What counts is whether that manager who exchanges his ownership for your cash will continue to behave as though he owns it. That doesn't show up on any due diligence checklist. I've seen deals fall apart because people squabble about little things and then let their egos get in the way.

Charlie Munger: When you get into a question of business quality, it goes beyond whether you crossed a "T" on some old lease. It gets into personal quality, and I don't know how you make that part of a checklist. I don't think our performance would have improved at all by using a different approach.

Warren Buffett: Negotiations that get drawn out have a way of falling apart. Spotting the bad apples of the world doesn't come from studying documents. I'm perfectly willing to lose small points here and there. Tom Murphy taught me this: You don't try to win every point. If you think it's bad faith, that gives you an indication of the character of the other person, and that gives you early warning.

Charlie Munger: How many happliy-married people in this room bothered to check their spouse's birth certificate?

Gregg Warren: Can you shed light on your succession planning at the subsidiary level?

Warren Buffett: GenRe had a lot of problems we didn't know about when we bought it. Ted Montrose really turned that around and I kept asking him to stay on longer. I find that good people are willing to take on more and more responsibility. Really able people can do anything.

Charlie Munger: Not only can the able people usually do more, but the unable ones usually can't be fixed.

Warren Buffett: We don't feel the need to follow any kind of organizational common view about reporting and structures. We just try to figure out the most logical thing to do at a given time.

Charlie Munger: If a charwoman gave us a good idea, we'd follow it.

Warren Buffett: A cleaning woman once asked, "Do you ever get any good horses?" She must have thought I was making my money at the track?

Shareholder station 1:: Why doesn't Berkshire have a higher bond rating?

Charlie Munger: The agencies are wrong and set in their ways.

Warren Buffett: We don't fit in their models. We don't look like anything else they study.

Charlie Munger: And they're wrong.

Warren Buffett: I like to try to start the negotiations at "Quadruple-A" and move from there.

Carol Loomis: How do you judge when a company like 3G is cutting muscle instead of fat?

Warren Buffett: Sometimes you can cut costs that are a mistake to cut, and you can keep a cost that is a mistake to keep. Tom Murphy had a policy that he would never hire anyone he didn't need. We try to follow that same approach. The idea that you give up your staff when the economy slows down is a mistake. If people are there just because someone started a department, that's a mistake. There are all kinds of American companies that are full of people who are doing the wrong thing or aren't doing the right things. My impression so far is that 3G is smart in the costs they cut, and the things they do have not cut into volumes. In general, the packaged-goods industry has faced declining volumes. So far I see no evidence that the packaged-goods industry is going to grow. I have never seen any company do a better job than 3G of managing their operations.

Charlie Munger: Sometimes when you reduce volumes, you're getting rid of business you don't need. It's hard to judge from outside whether things are going well or not based only on volumes. Generally, the lean-staffed businesses do better than the heavily-staffed ones.

Warren Buffett: Sloppiness in expansion tends to reflect sloppiness in thinking. We could be sloppy about a billion dollars a year in Berkshire, but you probably wouldn't notice.

Charlie Munger: I would.

Jonathan Brandt: Shouldn't the automotive group have done more to contribute to Berkshire's bottom line than it appeared last year?

Warren Buffett: Things are better than it would appear. There are some very significant accounting charges that appear in association with acquisition that I am very pleased will be falling off in coming years. The economics of Van Tuyl have been almost exactly as expected. Take a billion off the purchase price for starters, then there are some amortization charges that are allowable that correctly make you see a low figure compared to the acquisition price. We haven't had much luck acquiring other auto groups for the same economics as we paid for Van Tuyl.

Shareholder station 2:: How does a negative interest rate affect your estimation of values?

Warren Buffett: If your base rate is reduced by half a point, it's of some significance but it's not that dramatic. What is dramatic is that we've been at near-zero interest rates, and that it's gone on much longer than I anticipated. Very cheap money makes me pay more for businesses than when money was at what we thought were normal interest rates, and very tight money would make me pay even less. We had a rule for 2600 years, going back to Aesop, that a bird in the hand is worth two in the bush. Today's interest rates affect that. If interest rates continue like this for a long time, that will have an enormous effect on asset values.

Charlie Munger: I don't think anybody knows about what negative interest rates mean, because we've never seen them before. Nobody knows what to do with a place like Japan where they've tried all of the accounting, economic, and Keynesian tricks and gotten stasis for 25 years. If you're not confused, you haven't thought about it correctly.

Becky Quick: If GEICO and IBM are working on joint solutions on calculating insurance rates, could that put GEICO at a disadvantage if IBM works with others?

Warren Buffett: I think both sides have thought about it already.

Cliff Gallant: Are you worried about American Express's payments business?

Warren Buffett: I feel OK about American Express and am happy owning it. They've been under attack and will continue to be. It's too big and too attractive for people to ignore it, and it naturally plays to the talents of people who would want to go after it.

Charlie Munger: A lot of businesses aren't as great as they used to be.

Warren Buffett: The auto companies?

Charlie Munger: I think of the power of General Motors when I was a kid, and I think of how that colossus has fallen, and I never would have predicted it.

Warren Buffett: We'll be wrong sometimes, and we'll be late sometimes. But in terms of being cognizant of those problems, it's tough but it's interesting.

Shareholder station 3:: Should a rancher invest in cattle as the world's population expands?

Charlie Munger: I think it's one of the worst businesses I can think about. Not only that, we have no aptitude for it.

Warren Buffett: I've known some people who have done well in cattle, but they've usually owned banks on the side.

Charlie Munger: Somebody has to operate in the tough niches in the economy.

Andrew Ross Sorkin: How do you apply incentives when applying compensation at Berkshire? How should we compensate the next CEO?

Charlie Munger: The basic rule of incentives is that you get what you reward for. If you have a dumb incentive system, you'll get dumb outcomes.

Warren Buffett: At GEICO, we have two variables that apply to well over 20,000 people. I care about growing the business, and I care about growing the profits. So we have a matrix that involves growth in policies in force and growth in seasoned business. Everyone understands it and it works well.

Charlie Munger: You have to think these things through. If you went only by profits, people might pass up business that will become profitable later but that loses money at the start.

Warren Buffett: There are some businesses that work because of the person at the top, and there are others that work because of the business itself. So we try to structure our compensation plans accordingly.

Charlie Munger: Some of the worst compensation plans have come from banking and investment banking. Some people were compensated under systems that permitted them to use historical loss ratios without any regard to the risks of the new loans they were making. So they made high-risk loans and paid themselves richly. And I've never met an accountant who was embarrassed by that behavior.

Gregg Warren: How will oil shipments affect BNSF?

Warren Buffett: Merely spending depreciation expense won't keep them in the right place. Mere depreciation is a poor reflection of what it takes to remain in a steady state. The true maintenance capital expenditure is much higher to do just the same volume. There is an additional expense that isn't reflected in the figures. We have intangibles that are counted as expenses in other businesses that have no economic reality. Overall, I think economic profits at Berkshire are reported very conservatively. But at the railroads, it is quite likely that we will spend a lot more than depreciation just to stay in the same place.

Shareholder station 4: Do you expect oil prices to affect future monetary policy?

Warren Buffett: The decline in oil prices is very good for consumers in general and very bad for businesses like Lubrizol. It should, net, be good for the United States overall to have low oil prices -- just like it's good for us to have low banana prices, since we're a net importer of bananas. The consumer gets the benefit at the filling station in relatively small increments. The capital value contraction hits immediately -- an oil field that used ot be worth "X" may be worth half of that overnight. And in terms of our chemical operation, people just stop ordering. Our economy has continued to make progress overall even during the price decline, but that hasn't helped areas that are more directly affected.

Carol Loomis: Why do Berkshire manufacturing businesses operate with so much working capital, when other manufacturers get away with so little?

Warren Buffett: We have excess capital everywhere in Berkshire and we don't really worry what pocket it's in. It's not making anything at these levels anyway. If rates move higher, we have the mechanics in place to move the cash into sweep accounts, but I wouldn't read anything into it right now. We should have about $60 billion in cash this summer after redemptions of the Heinz preferred stock. When you're making zero, it doesn't really matter much where you're making zero.

Charlie Munger: I think there's something to be said for bending over backwards to have good relationships with customers and suppliers both.

Jonathan Brandt: Would Berkshire's performance look better if you broke out restructuring costs?

Charlie Munger: That's like asking if you would be better off by killing your mother and collecting the life insurance. We just won't do it.

Warren Buffett: Changes to reporting of restructuring wouldn't really have much of an impact on earnings.

Charlie Munger: We prefer to advertise our defects.

Warren Buffett: Not all of them. But things are good enough at Berkshire that we don't need to inflate the figures.

Shareholder station 5: [Question about derivatives contract]

Warren Buffett: What goes on in the CDS market really isn't of any interest to us.

Charlie Munger: We don't see a lot of reason to try to gain 2 basis points by trying to game the system. CDSs are just a weird historical accident and they will be gone soon enough.

Becky Quick: Is there another Ajit Jain in the wings?

Warren Buffett: Losing Ajit would be quite dramatic in his operations. Literally there were a few years where the operation's earning potential under Ajit was truly fantastic. That probably won't happen again. He's done a tremendous amount for Berkshire and there are other managers who have produced billions in value to us. Having a great manager who produces value is tremendous. Really outstanding managers are invaluable.

Charlie Munger: Ajit also has a longer shelf life than we do.

Cliff Gallant: How should investors value insurance business with an underwriting loss?

Warren Buffett: Under today's interest rates, it wouldn't appear to make sense to use float on business with underwriting losses. But we don't expect that to last indefinitely. And in other cases, float will have significant potential utility to us when it permits us unusual flexibility in the deployment of funds. It's an options cost.

Shareholder station 6: How do you feel about the attractiveness of the real estate market?

Warren Buffett: Not as good as it was in 2012. If you can get money at low rates, you may be tempted to try to chase gains that won't exist. But I don't see a bubble overall, and I don't think real estate will be the bubble that gets us next time.

Andrew Ross Sorkin: Can you talk about the performance from Todd and Ted?

Warren Buffett: They are both of enormous value and manage $9 billion each.

Gregg Warren: [obscure question about cash]

Warren Buffett: We move money around to achieve things like the Precision Castparts acquisition.

Shareholder station 7: How would you explain IBM's moat?

Warren Buffett: It has certain strengths and weaknesses and I don't think we want to get into a strategic analysis of any portfolio companies we own.

Charlie Munger: It's a field a lot of intelligent people are trying to get big in.

Shareholder station 8: Where does your sense of humor come from?

Warren Buffett: I think Charlie has a better sense of humor than I do.

Charlie Munger: I think if you see the world accurately, you're bound to find it humorous because it's ridiculous.