Warren Buffett:
I will let Greg join with me in answering this, but I would say our feeling is that Utah is actually very likely to treat us fairly. Whether the action is in granting appropriate rates that give us the return we expect, or if they decide for some reason to go to public power, I think they would compensate us fairly. In the 1930s, George Norris, a senator from Nebraska, turned Nebraska into a public power state. Our experience in Iowa would indicate that free enterprise has its role, and that we can run a privately owned utility company more efficiently than most states can do with public power.

But what has happened is that there’s going to be enormous amounts of money spent on power. If you’re going to do it with private owners, there’s nobody better situated than Berkshire to satisfy a large portion of the country’s needs. We will do it at a rate of return that is sensible, but we won’t do it if we think we’re not going to get any return. It would be crazy to do so. We’ve seen actions in a few states where some of the costs associated with climate change aren’t regarded as costs that the utility shouldn’t incur. Well, believe me, if it was publicly owned, they would have incurred it too. We’ll do what society tells us, and we have the money and knowledge to participate in this enormously important sector for the country. But we’re not going to throw good money after bad.

I don’t worry about Utah. My understanding is that Utah is not unfriendly to the idea of utilities being treated fairly.

Greg Abel:
That’s a great honor. When we touched on it initially in your letter about the challenges in the industry, you alluded to the significant investment that has to go into the energy industry for many years to come. If we start there, think about our different utilities; it will definitely come to Utah and PacificCorp. If you look at the underlying demand in each of those utilities and the amount of dollars that need to go in to meet that demand, it’s absolutely incredible. The underlying demand is increasing substantially, especially in states like Nevada, where the rate base is expected to grow by billions. We need a regulatory compact that works in concert with the state.

Take Iowa, for example, where we've made substantial investments and had a consistent relationship with both the state and the legislature, which enacted specific laws to encourage investment. That utility has been around for more than 100 years, but the demand is expected to double in the next decade. This requires significant capital from MidAmerican and its shareholders. As we look at Nevada, where we own two utilities, that demand is expected to triple by the later 2030s. Our rate base will increase by $6 to $10 billion. This will require alignment with the state and policies that support proper recovery of both capital and return on capital.

As for the wildfires, it’s been a substantial challenge, and the litigation surrounding them continues. We believe some claims are unfounded and will continue to challenge them. The operations of the assets have had to change as well. Historically, we prioritized keeping the power on, especially during emergencies, but now we’ve recognized that we must prioritize de-energizing the grid in certain conditions. This cultural shift is necessary, and we’ve already changed our operating systems to allow us to turn off the power when necessary and re-energize when safe conditions return.

Warren Buffett:
The return on equity investment in utilities has generally been lower than that of other industries. For example, utilities rarely achieve the kind of return on tangible equity that companies like Coca-Cola or Apple achieve. The trade-off in the electric utility sector has traditionally been a modest return, but climate change and related risks—like wildfires—are just part of the cost of doing business. Whether power is publicly or privately owned, someone is going to invest hundreds of billions, possibly even trillions, to meet the future energy demands. While we are willing to make substantial investments, we won’t continue to invest if we think there’s no return on those investments.

Greg Abel:
Ultimately, there are significant opportunities within Berkshire Hathaway Energy, especially in states like Utah, which recently passed legislation that caps non-economic damages for wildfire claims. This proactive approach has created an environment that’s more conducive to investment. Additionally, Utah has established a Wildfire Fund that will help resolve these issues more efficiently. These legislative measures provide a strong framework for investment, and we’re optimistic about the future in Utah.

Warren Buffett:
We don’t want to risk our shareholders’ capital on bad investments. While some states may offer modest returns, we won’t throw good money after bad. The utility sector, with its challenges, isn’t going to be as profitable as some of our other businesses, but it still presents important opportunities—especially with the large-scale investments required to address the climate change-related needs of the future.

WARREN BUFFETT: Yeah, well, Greg I think, is the best to answer that because since we bought a company called MidAmerican but now called Berkshire Hathaway Energy. But he has been talking about it yearly, preparing reports hoping that we can help solve a number of the problems. And we probably spent more money than any utility, I would guess, in the United States.

GREG ABEL: Absolutely.

WARREN BUFFETT: And we’ve just scratched the surface. But it is not easy when you cross state lines. I mean, you’ve got different jurisdictions. And this country should be ahead of where it is in terms of transmission. We have been the biggest factor in helping that. But why don’t you tell them a little bit about it?

GREG ABEL: Sure, thanks, Warren. So, there’s no question there’s an energy transformation going on around the globe and as Warren touched on, in the U.S. And in some ways, I would hope here in the U.S. we’d at least have a clear plan across the nation as to how to approach that.

But the reality is it is state by state with some exceptions. So, as a result, when you think of Berkshire Hathaway Energy, we own three U.S. utilities there. And they all participate in multiple states. But they’re developing plans state by state and then trying to integrate them across the various states.

The opportunities are significant because there is a transformation going on. We’ve outlined our goal on where we’re going relative to carbon at BHE where they’ll by 2030 reduce their carbon footprint by 50% relative to 2005. So, that’s the Paris Accord and the standard they want to hold the utility industry or the utility companies to.

And we’re well on that path. But to achieve it is a true journey. I’ve often talked to Warren. When we bought Pacific back in the mid-2000s, we immediately recognized to build a lot of renewable energy like we’ve been doing in the Midwest and Iowa.

But that was basically in a single state. Now PacifiCorp, we’re in six states. We started that back in the mid-2000s. Here we are. And we laid out a great transmission plan. Here’s how we’re going to build it. Here’s how we’re going effectuate it, and all the benefits for our customers over that period of time.

Here we are in 2023, and we have a little more than a third of that. At the time it was a $6 billion transmission project. Today we have a little more than a third of it built. And we’ve spent probably closer to $7 billion. And it’s the right outcome.

It’s still a great outcome for our customers. But as part of the transformation, you absolutely have to build it to move all that renewable energy. And that’s sort of the complexity Warren was highlighting. You can’t just wake up one day and solve this problem.

You start with transmission, and then you build the resources. But at that same company, and if we look at what we’re doing across BHE Energy and that energy transformation, we have $70 billion of known projects that are really required to properly serve our customers and achieve that type of energy transformation across those utilities.

And that’s in the coming ten years. So, we have a team that’s absolutely up to the challenge. They’re delivering on their commitments. And it’s a very good business opportunity for each of our companies and for our shareholders. Because as we deploy that capital, we obviously earn a return on equity of it. But it will be a long journey. It’ll happen over an extended period of time. And the further you get out there, the more dependent upon the evolution of a variety of technologies that are progressing, but not there yet.

WARREN BUFFETT: You’ve raised a question. I want to just take an extra minute now because it’s so important. And I don’t really know whether our form of government is ideal at all in terms of solving the problem you describe. We have solved it one time. In World War II, we took a country that was semi-limping along.

And we found ourselves in a world war. And what we did in a world war is we brought a bunch of people to Washington at a $1 a year. I don’t know whether it was Sidney Weinberg or Goldman Sachs. You just name them. And we gave them enormous power to reorient the resources of the United States to face the problem that they faced, which was to create a war machine.

And what they did was they found Henry Kaiser, you know, and told him to build ships. And they went to the Ford Motor Company and said, “You build tanks and some airplanes.” And they reordered the industrial enterprise of the United States in a way that was unbelievable.

Because they had the power of the federal government. And they had the ingenuity of American business. And they had the facilities of American business. And it led to a very successful outcome. But can we do that in a peace time where you’ve got 50 states and you have to get them to cooperate?

And you can issue orders. But you can’t designate where the capital goes. It’s the other end. And, you know, we try and do it with tax incentives and all of that sort of thing. But we haven’t created the unity of purpose and the machinery that worked in World War II where essentially everybody felt their one job was to win the war.

And we figured out how to use our industrial capacity to in effect defeat the Axis powers. And how do you recreate that with, you know, the present democratic system? I’m not sure I know the answer. But I sure know the problem. And I think that if you’ve got an emergency on your hands, I mean, you really need to re-engineer the energy system of the United States.

I don’t think you can do it without something resembling the machinery, the urgency, whatever. The capital’s there. The people are there. The objective is obvious. And we just don’t seem to be able to do it in a peace time where we’re used to following a given set of procedures.

And, you know, China’s one country. And we’ve got 50 states. And we got a whole different system of government.

We should be up to the test, but so far it hasn’t worked. So, thank you for the question.

BECKY QUICK: “Do the recent communist party activities in China, including human rights violations, blatant cyber theft from U.S. companies and others, crackdowns on speech from business and media, et cetera, cause you to change your opinion on investing in China? And how do you evaluate the clear dangers of investing under authoritarian regimes, as recently evidenced by Russian atrocities in Ukraine?”

CHARLIE MUNGER: Well, those are good questions, and there’s no question about the fact that the government of China has worried the investors from the United States who invest in China. More in recent months and years than they did in the earlier periods. So there’s been some tension.

And it’s affected the prices of some of the Chinese stocks, particularly internet stocks. Just in the last day or two, the Chinese leader has sort of reversed course on that, and said he went too far and he’s going to pull way back and so on and so on. So we’re having some hopeful signs.

But yes, there are more difficulties investing in, I mean, dealing with a regime in China than there are in the United States. And it’s different. It’s a long way away, and they’ve got their own culture and their own loyalties and so on and so on.

And the reason that I invested in China is I could get so much better companies at so much lower prices, and I was willing to take a little bit of a risk to get into the better companies at the lower prices. Other people might reach the opposite conclusion. And everybody is more worried about China now than they were two or three years ago. So that’s just the way it is.

WARREN BUFFETT: I have nothing to add. (Laughter) (Applause)

WARREN BUFFETT: I like banks generally; I just didn’t like the proportion we had in them, compared to the possible risk if we got bad results that did not — so far, we haven’t gotten. So I just — and I —

We were over 10% of Bank of America. It’s a real pain in the neck, both to the bank — more to the banks than to us, if we go over 10%, there’s just a whole lot of —

And I like Bank of America. I mean — and I like (CEO) Brian Moynihan very much. And I like the banking business fine, so we took that up, but we took the overall bank position down. We didn’t want to go above 10% in any of the others. And we didn’t want to increase the BofA position, but we, overall, didn’t want as much in banks as we had.

We like — the banking business is way better than it was, in the United States, than 10 or 15 years ago.

The banking business around the world, in various places, might worry me.

But we — our banks are in far, far better shape than 10 or 15 years ago. But when things froze for a short period of time, the biggest thing the banks had (laughs) going for them is that the Federal Reserve was behind them. And the Federal Reserve is not — they’re not behind Berkshire. It’s up to us to take care of ourselves.

It’s interesting. In 1776, we said we hold these truths to be self-evident: that all men are created equal, endowed by their creator with certain unalienable rights, among these are life, liberty, and the pursuit of happiness. And yet 14 years later, a year after we really officially began the country in 1789, we adopted a constitution. We found that more than 15% of the people in the country were slaves. And we wrestled with that. But when you say the word self-evident, that sort of sounds like you’re saying any damn fool can recognize that. And you can argue maybe a little bit about life and the pursuit of happiness, but I don’t see how in the world anybody can reconcile liberty with the idea that 15% of the population was enslaved. It took us a long time to at least partially correct that.

It took a civil war; it took losing 6% of those people, males that were between 18 and 60 years of age. But we’ve moved in the right direction. We’ve got a long way to go, but we’ve moved in the right direction now.

In addition, going back again to that 1776 statement — that all men are created equal, and endowed by their creator, et cetera — I think it was self-evident to the 50% of the population that they were not getting a fair deal for over half the lifetime of the country. It took 131 years until women were guaranteed the right to vote for our country’s leaders.

What’s even more remarkable is that after we adopted the 19th Amendment in 1920, it took 61 more years until a woman was allowed to join those eight males on the Supreme Court. I grew up thinking that the Supreme Court must have had some unwritten rule that said there had to be nine men. But it took 61 years, 33 males in-between, before Sandra Day O’Connor was appointed to the court.

Now you can say there was a pipeline problem. Half the population may have been women in 1920, but they weren’t half the lawyers — probably only 10%. So you can understand some delay. But 61 years is a long time, and if that was entirely by chance, the odds against that fewer flipping coins is about eight billion to one. Like I said, there was a pipeline problem, but it took us a long, long time. And it’s not done yet.

But I think it does give meaning to the fact that we are a better society, with a lot of room to grow, than the one that existed in 1789.

When you go to Colonial Williamsburg — I’ve been there a couple of times; as a matter of fact, I watched the debate between Jimmy Carter and Gerald Ford there in 1976 — it was not a great time to be black, it was not a great time to be a woman. Both of those categories still certainly have potential for significant improvement in terms of fulfilling that pledge made in 1776 about how we believe that it’s self-evident that all men were created equal. But we have made progress. We are a better society, and we will continue to improve as the years go by.

If you’ll move to the next slide — and I believe this — when you evaluate all of the qualitative facts, what we have done toward meeting the aspirations of what we wrote in 1776... What we wrote in 1776 wasn’t a fact; it was an aspirational document. And we have worked toward those aspirations. We have a long way to go. But I’ll repeat, if you move to the next slide: Never, never bet against America.

Last week, China announced 12 new measures further opening up the financial industry. All these measures will allow more invested institutions to enter into the Chinese financial market and ensure the policies of foreign investment to be consistent with those of domestic investment.

What do you think about these new measures? Do you believe the foreign financial institutions will have more pricing power over the Chinese stock markets in the future? Do you have any plans to set up a company in China? If so, what time? Thank you.

CHARLIE MUNGER: Well, we’ve got one now. Dairy Queen is all over China. (Laughter)

And it’s working fine. And we didn’t wait for new laws. We did it under the old laws. But we’re not that big, net, in China, right, Warren?

WARREN BUFFETT: We’re not that big what?

CHARLIE MUNGER: In China.

WARREN BUFFETT: No, but we had something, you know, that could have happened that would have been quite sizable.

But China, it’s a big market, and we like big markets. I mean, we really can only deploy capital in a major way maybe in 15 or so countries just because of the size.

CHARLIE MUNGER: But generally, I think the climate is getting better. It really makes sense for the two countries to get along. Think of how stupid it would be if China and the United States didn’t get along. Stupid on both sides, I might add.

WARREN BUFFETT: Yeah. We’ve done well in China. We haven’t done enough, but —

(Applause)

WARREN BUFFETT: Uh huh.

ANDREW ROSS SORKIN: “I read an investigative article from ProPublica and The Washington Post that many of Berkshire’s various units only offer 401(k) plans with high fees that are actively managed rather than the low-cost indexes you have advocated as the best path for savings for retirement.

“The article’s author said he contacted the company and nobody would comment.

“Will you do something to improve our 401(k) offerings to match your investment philosophy? And from an operational perspective, how did this happen, given your strong views on the topic?”

WARREN BUFFETT: Well, I’ve absolutely said many, many times through annual reports — and our managers know what I think about the attractiveness of having an index fund option. But they all have different plans, different histories, and they run their businesses.

And who knows, you know, which particular — if you go back to the older businesses, they have defined benefit pension plans, generally. Nobody puts them in anymore. And then the question is, you know, do you transition to something else.

In the end, we overwhelmingly thought our managers make those kinds of decisions and others. And my guess is that a very high, significant percentage of people who have — who work at a company that has a 401(k) plan will have an index fund option, but they may not in some cases.

The only thing we — I think we have asked the companies to have a limit on the percentage, I think, that they might put in Berkshire’s stock through the 401(k). We don’t want people to lose jobs who are tied to Berkshire.

We certainly don’t want to be in the position of encouraging people to put 100 percent or something of their savings in Berkshire itself. I don’t want to be in that position.

But I don’t think even there we’ve insisted on any company doing that. I think we’ve probably made that, when we’ve been asked about it once or twice, I think we’ve given that suggestion.

But the managers will run the companies. The employees, if they feel — and some of our companies have human relations departments — if they feel that they’d like different options or something like that, you know, they should make those views known to the managers. And in some cases, the managers, I think, will pay attention to them and in others they probably won’t.

We’ve got a wide variety of managers that run our businesses, and we’re not going to start trying to run them from Omaha.

Charlie?

CHARLIE MUNGER: Well, you’re right. That has happened. That business of the high-fee choices, because we’ve delegated the whole subject to the managers of the subsidiaries. And so no attention at all is being given to the employee choices at headquarters.

And what you’re pointing out is that a lot of the employees in the subsidiaries would do better if they indexed instead of choosing what they did choose. My guess is you’re absolutely right about that.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And if there are any people, managers, in the business today, I hope we’ll do a little better at encouraging better choices.

WARREN BUFFETT: Yeah, although we don’t want them to interfere too much in —

CHARLIE MUNGER: No.

WARREN BUFFETT: — directing what they — you know, we can take over human relations.

CHARLIE MUNGER: No, it’s up to the managers. But we wouldn’t object to a little different viewpoint.

WARREN BUFFETT: And we have made it very clear what we think. I mean, some of them don’t listen to us. (Laughter)

WARREN BUFFETT: Well, it’s got some relevance, but it’s got a whole lot less relevance than it used to. And that’s why — I don’t want to drop the book value per share factor, but the market value tends to have more significance as the decades roll along.

It’s a starting point. And clearly, our securities aren’t worth more than we’re carrying them for at that time. And, on the other hand, we’ve got the kind of businesses you’ve mentioned.

But we’ve got some small businesses that are worth 10 times or so, you know, what we could carry them for. We’ve also got some clunkers, too.

I think the best method, of course, is just to calculate intrinsic business value. But it can’t be precise.

We know — we think the probability’s exceptionally high that 120 percent understates it. Although, if it was all in securities, you know, 120 percent would be too high.

But as the businesses have evolved, as we built in unrecognized value at the operating businesses — unrecognized for accounting purposes — I think it still has some use as being kind of the base figure we use.

If it were a private company and 10 of us here owned it, instead we’d just sit down annually and calculate the businesses one by one and use that as a base value.

But that gets pretty subjective when you’ve got as many as we do. And so, I think the easiest thing is to use the standards we’re using now, recognizing the limitations in them.

Charlie?

CHARLIE MUNGER: Yeah. I think the equities in the insurance company offsetting shareholders’ equity in the company are really not worth the full market value because they’re locked away in a high-tax system.

And so I, basically, like it when our marketable securities go down and our own businesses go up.

WARREN BUFFETT: Yeah, we’re working to that end. We’ve been working that way for 30 years now or something like that.

CHARLIE MUNGER: We’ve done a pretty good job, too.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: We have a lot of — we’ve replaced a lot of marketable securities with unmarketable securities that are worth a lot more.

WARREN BUFFETT: Yeah. And it’s actually a more enjoyable way to operate, too, beyond that, but —

CHARLIE MUNGER: Yeah. We know a lot of people we wouldn’t otherwise —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — be with. Good people.

WARREN BUFFETT: Well, we reassess our reasons for owning all investments on almost a continuous basis. And both Charlie and I do that, and we’re usually in a general range of agreement, but sometimes we are a fair distance apart, perhaps.

There’s no question that payments are an area of intense interest to a lot of very smart people, who have got a lot of resources, and —

CHARLIE MUNGER: And rapid change.

WARREN BUFFETT: Yeah. And rapid change, and it will change. And I personally feel OK about American Express. We — and I’m happy to own it. I think — but their position — and it has been under attack for decades, more intensively lately — and it will continue to be under attack.

I mean, it’s too big a business, and it’s too interesting a business, and it could be too attractive a business, for people to ignore it. And it plays to the talents of some very smart people. I mean, it’s a natural, that a great many organizations that are really quite able, think about it. And it’s big. So —

CHARLIE MUNGER: A lot of great businesses aren’t quite so great as they used to be. The packaged goods business, the Procter & Gambles and so forth of the world — General Mills — they’re all weaker than they used to be at their peak and —

WARREN BUFFETT: And the auto companies. I mean, when Charlie and I were —

CHARLIE MUNGER: Oh, my God. When I think of the power of General Motors when I was young, and what happened — they wiped out all the shareholders — I would no more have predicted that. When I was young, General Motors loomed over the economy like a colossus. It looked totally invincible. Torrents of cash. Torrents of everything.

WARREN BUFFETT: Trying to hold down market share.

CHARLIE MUNGER: Yes, because they — yeah, they were afraid they’d be too monopolistic. And so the world changes, and we can’t make a portfolio change every time something is a little less advantaged than it used to be.

WARREN BUFFETT: But you have to be —

CHARLIE MUNGER: Alert.

WARREN BUFFETT: — you have to be thinking all the time and alert to whether there’s been something that really changes the game in a big way. And that’s not only true for American Express, that’s true for other things we own, including things we own 100 percent of.

And we’ll be wrong sometimes. We’ll be late sometimes, we’ll be wrong sometimes. But we’ll be right sometimes, too. But it’s not that we’re not cognizant of threats. Assessing the probabilities of those threats being a minor problem, or a major problem, or a life-threatening problem, you know, it’s a tough game, but that’s what makes our job interesting.

CHARLIE MUNGER: I think anybody in payments, probably has — with an established long-time player with an old method — has more danger than used to exist. It’s just — there’s more fluidity in it.

WARREN BUFFETT: Well, wouldn’t our competitors like to know? (Laughs)

The reinsurance business is not as good as it was, and it’s unlikely to be as good as it was. There’s a lot of money that’s come into reinsurance, not because they want to reinsure people, but because it’s become either a fashionable asset class for people that are looking for so-called noncorrelated investments and may not know what they’re doing, but it’s something you can sell people, you know, that’s an attractive line to go to pension funds with.

And then, secondly, it’s a beard for doing — for asset management. So, if you go to Bermuda and start a reinsurance company, you can actually run a hedge fund, and you need a little business to make it look like you’re doing something other than running a hedge fund, and locating it offshore so you don’t pay any tax, but that’s the primary motivation.

So when you get a whole lot of people that are bringing money in and they sort of need your facade of reinsurance to cover up what their real motivations are, you’re likely to get less attractive prices in reinsurance. And that’s been happening on a fairly large scale, and I would say that I would expect the reinsurance business in the next 10 years to not be as good as it has been — I’m talking about the whole industry — as it has been, you know, in the last 30 or something like that.

It’s a business whose prospects have turned for the worse, and there’s not much we can do about it. We do find things to do. There are certain things that only Berkshire can do, and we’ve — I mentioned in the annual report that there have been eight — I think it was eight — contracts written with premiums of a billion dollars or more, and we’ve written all eight of them. So, we do — there’s a certain corner of the world that we’ve got a strong position in, and there’s a few other things we will do, but it’s not as good as it was. Charlie?

CHARLIE MUNGER: Well, I think, generally speaking, of course, it’s going to be harder and, of course, this competition from promotional finance is getting more and more intense and they’re more optimistic. They’re searching for a robust narrative. We’re not searching for a robust narrative so we can sell something. We’re playing the game for the long pull and other people just pretend to be doing so.

WARREN BUFFETT: Yeah. We could — we’ve had the opportunity over — for a long period of time — to go out and promote reinsurance-type money, and really take advantage, you know, of people on it, because we would have the best reputation in the field, and we could attract a ton of money, and we could get a big overwrite on it. But it’s not our game.

CHARLIE MUNGER: And we don’t particularly admire the way it’s being played.

WARREN BUFFETT: Absolutely. And so therefore, since we want to increase the demand, the proper thing to do is increase the supply, right? (Laughs) And that’s why we have encouraged, for example, Airbnb, to come in and — they supplied some rooms this year.

But it’s very logical. If you think about most cities, the big events that come to their convention centers and use their hotels, they size themselves in deciding where to go. If you have a relatively small industry, they can pick a moderate-sized city and they can have their convention there, and they don’t outstrip the supply of rooms. If you have a very big industry and you’re having a convention, you know, you have to go to some place like Vegas or some place that has a lot of rooms because otherwise you do throw the supply-demand out of whack.

So, if you have an event, which isn’t sized by the people that are scheduling it, can’t be sized by the people that are scheduling it, then you can totally outstrip rational supply of rooms. I mean, you know, the great case would be something like the Masters tournament. I mean, Augusta can’t size its hotel industry to Augusta, to the Masters, and the Masters isn’t going move any place. Well, there — are certain events like that, but there aren’t very many.

And Omaha cannot size its hotel supply to the Berkshire meeting. It sizes it to the kind of conventions it normally gets and all of that, but the Berkshire meeting has grown beyond what we anticipated. So fortunately, there’s developed — and for that reason people started putting in — what really bothered me were the three-day minimums. I mean, it — you know, I think there’s something particularly irritating about somebody’s coming in for a one-day event to have to buy — have a three-day minimum. And the prices were getting high.

Incidentally, the Omaha Hilton right across the street, they — they’ve been magnificent throughout this, as have many others. But there were a few that were really pushing things, and we didn’t want to cut down on the demand. We didn’t want to move to Dallas, even though we’re opening a store there next year, it would be kind of fun for that. But we’re not going move to Dal — I mean, we want — Omaha people love this event, it’s an economic boon for Omaha, but — and people get a good impression of Omaha when they come here, generally.

So it’s — there’s a lot of good things about having the meeting in Omaha, and we can’t expect anybody to build new hotels to take care of three days a year. So, fortunately, something like Airbnb is sort of a flex supply arrangement that seems to me to make a lot of sense for it. And I think that it will be more developed by next year, and I think that the hotels will do extremely well next year. But I don’t think they can push it to the ultimate extreme of a total scarcity product. And we want them to do well, and that’s why we’ve gone where we have.

CHARLIE MUNGER: Nothing to add.

“As a result, the industry has been consistently profitable this past several years, with many of the airlines now earning double-digit returns on invested capital and generating substantial free cash flow. Do you think the industry’s much improved economics are likely to persist? And would there be any economic benefits if Berkshire were to own a domestic airline and pair it with NetJets?”

WARREN BUFFETT: Yeah. Well, the answer to the second is no. But the question about the industry is really interesting, because it is true that it has consolidated very significantly. And in some businesses, you can have only two competitors and they’re still terrible businesses, they beat each other’s brains out. And sometimes they end up competing to do very stupid things. You can argue that that’s what happened with Freddie Mac and Fannie Mae. I mean, enormous companies that had a huge advantage over everybody else, but they still, in their battle to both report higher earnings every quarter and to beat the other guy out, you know, drove prices for insuring loans down to the improper levels, and did a lot of other stupid things, too.

So you see — you do see certain industries where once they get down to very — a very few companies, do extremely well. And you see other industries where, even when they get to be two of them, they don’t do that that well. I mean, you can take Coke and Pepsi in the United States. I mean, they’re the only two colas that people can name, and 50 percent or so of the soft drinks are colas. But if you go into a supermarket on the weekend, you will see them pricing their product at ridiculously low prices and competing very vigorously.

So it’s very industry specific. The airline industry, you know, has this situation where they have very, very, very low incremental costs per seat, you know, with enormous fixed costs, and the temptation to sell that last seat at a very low price is very high and it’s very — and sometimes it can be very difficult to distinguish between the last seat and other seats. So it’s a labor-intensive, capital-intensive, largely commodity-type business, and it’s been — as Bill Miller points out in that question, it’s been, you know, a death trap for investors ever since Orville [Wright] took off. I mean, as I’ve said, if there had been a capitalist at Kitty Hawk he should have shot down Orville and done us all a favor. (Laughter)

But the — but having neglected to do that, investors have poured money into airline companies, and aircraft manufacturing companies, now for 100 years-plus, with terrible results. And if it ever gets down to where there’s one airline and there’s no regulation, it will be a wonderful business. And then the question is whether, having gotten down, now, through a lot of bankruptcies, to a relatively few that are doing a high percentage of the seat miles, whether it’s a good business yet. I don’t know the answer, but I’m skeptical. Charlie?

CHARLIE MUNGER: Well, the last time we were presented with a similar opportunity was when the railroads did exactly what Bill Miller suggests. The railroads got down and consolidated and got better control of their labor costs and it turned into a wonderful business. And what did we do? We missed it. We stumbled in very late to the party, right?

WARREN BUFFETT: Right.

CHARLIE MUNGER: So we’ve proven ourselves to be slow learners in this field, and it’s conceivable, isn’t it, that Bill Miller is right in what he suggests?

WARREN BUFFETT: Which way do you bet?

CHARLIE MUNGER: It goes into my too hard pile. (Scattered laughter)

WARREN BUFFETT: Mine, too.

CHARLIE MUNGER: But he could be right.

WARREN BUFFETT: Yeah, sure he could. And it will be fun to watch. But we like things we have stronger feelings about. We do not think that things will change dramatically in — well, with See’s Candy, you know, it’s — we’ve got — even there, you know, the real profitability is limited to the West Coast, but we do not see some competitor coming along and taking away business.

CHARLIE MUNGER: You really couldn’t create another railroad and —

WARREN BUFFETT: I hope not.

CHARLIE MUNGER: — and you — and you can create another airline.

WARREN BUFFETT: Very easily, and you have people that like to do it.

CHARLIE MUNGER: That’s what we don’t like about it.

WARREN BUFFETT: And people love doing it. It’s exciting to people. And you can sell the idea. I’ve had, probably, a dozen proposals over the last 25 or 30 years from people that want to get into the airline business one way or the — and a number of them have. It’s sexy, for some reason. I mean, it — you know, if you go to the office of some Mr. Big CEO and say, “I want to talk to you about this new airplane,” you get in the door. You know, I mean, if you want to talk to him about hauling coal or something, it’s a little different.

So it is a business that attracts people. And you can go out and raise money for a new airline, and the record is — it’s really been something. I don’t know how many bankruptcies there have been in the airline field, but it’s an enormous number. And, of course, some have done it more than once. We bought USAir. I bought that. I was at Gorat’s with [CEO] Ed Colodny, and he explained to me how wonderful the airline was — he’s a good guy, incidentally — and I wrote a check. And by the time the check was cashed, they were having troubles. I mean, it did not take long.

CHARLIE MUNGER: No.

WARREN BUFFETT: And then they went bankrupt twice. We were very lucky on — we actually made quite a bit of money on it, as it turned out, because there was a little blip at one point. But I think it went bankrupt twice after we bought it. And Charlie and I were on the board, and we would look at these projections, you know, and they were just ridiculous. I mean, they never came true, did they, Charlie?

CHARLIE MUNGER: No, no, no. It was —

WARREN BUFFETT: We were very popular because we actually pointed that out a few times. (Laughter)

WARREN BUFFETT: How long will it take China to do what?

CHARLIE MUNGER: I didn’t quite get that one.

WARREN BUFFETT: Connection to Coca-Cola, yeah.

CHARLIE MUNGER: How long will it take China to do what?

AUDIENCE MEMBER: Oh, just how long do you think it will take China to appear a great company like Coca-Cola, and in which industry you think?

CHARLIE MUNGER: China already has some great companies. It’s hard to think of a great branded goods company, but China has some very great companies already.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: (Inaudible). I can’t pronounce them, but they’ve got some very great companies. (Laughter)

WARREN BUFFETT: Yeah. So far it has not been Chinese fast food companies that have been exported to the United States as opposed to — you know, we’ve got over 500 Dairy Queens now in China.

We tend to export certain products well, some consumer products, entertainment products, that sort of thing.

But China’s got some huge companies and they may eclipse in market value, you know, some of the ones such as Coca-Cola that we’re talking about.

4o

WARREN BUFFETT: Well, we think — are you finished on that?

AUDIENCE MEMBER: Yes, thank you.

WARREN BUFFETT: We — growth is part of the investment equation, and obviously, we love profitable growth. So we would love to figure out a way to, say, take a See’s Candy, to move it geographically into new areas, all kinds of things.

I mean, if we could find areas for growth with See’s, it would be likely to be very, very profitable.

If Coca-Cola, which is in 200 countries, I mean they have pursued that policy successfully now for 125 years. And some products travel way better than others.

But when we look at a business and we’re looking out in the future, obviously, if we see growth in that picture and it’s growth which is — produces a high return on incremental capital involved, we love it, but we do not rule out companies where we think there will be little or no growth, if the price is attractive relative to the earning power.

You know, there will be some growth, over time, in something like lubricants, you know, at Lubrizol, but it won’t be dramatic growth.

Would we love it if it, you know, if it were going to grow ten percent a year in units or something of the sort? Sure. But that’s not going to happen.

So it’s a factor in every investment decision because we’re really looking out to the future as to future earning power, but also future capital requirements.

And we think plenty about whether any business we go into is likely to grow profitably, and sometimes we’re right and sometimes we’re wrong. But we don’t rule out companies that have very slow growth or no-growth possibilities.

Charlie?

CHARLIE MUNGER: Yeah, well, the interesting thing is that in our country, the business schools teach people to make these projections way in the future, and they program these computers to grind these projections out. And then they use them in their business decision making, et cetera, et cetera.

I’ve always regarded those projections as doing more harm than good. And Warren has never prepared one that I know of, and where an investment banker prepares one, we tend to throw them aside without reading them.

WARREN BUFFETT: We them upside down, actually.

CHARLIE MUNGER: What?

WARREN BUFFETT: We turn them upside down.

CHARLIE MUNGER: Yeah, yeah. And I think an enormous false precision gets into things when you program computers to make forward projections for a long period of time.

We make rough projections in our head all the time.

WARREN BUFFETT: Sure.

CHARLIE MUNGER: And we don’t do any of those formal projections, because the fact that they’re there on paper and came out of a computer makes some people think they must be significant. I really think they do more damage than they do good.

WARREN BUFFETT: When we bought Scott Fetzer, which was back in about 1985, it had been shopped by First Boston to more than 30 parties. They never got around to calling us.

So after shopping it to about 30 parties, Scott Fetzer, finally, was working on a deal with an ESOP after something else had fallen through, I forget the exact details.

And I sent a letter to Ralph Schey. I’d read about it in the paper. I’d never met him, never talked to the guy. But I sent him a letter.

I figured I’d gamble 21-cents, or whatever the first class rate was then, and I said, “We’ll pay $60 a share. If you like the idea, I’ll meet you in Chicago Sunday, and if you don’t like the idea tear up the letter.”

So that took place and Ralph met me, and we made the deal, and we paid the $60 a share or whatever it was.

And Charlie and I went back to sign up the deal, and the follow from First Boston was there, and he was a little abashed since he had not sent us — contacted us at all — when they were looking for something. But naturally he had a contract that called for a few million dollars of commission even though he’d not bothered to ever contact us and we made the deal by ourselves.

So, in a moment of exuberance while he was collecting his few million dollars, he said to Charlie, he said, “Well, we prepared this book in connection with Scott Fetzer, and since you’re paying us a couple million dollars and have gotten nothing so far,” he said, “maybe you would like to have this book.”

And Charlie, with his usual tact, said I’ll pay you $2 million if you don’t show me the book. (Laughter)

And I should mention, this will — in connection with Lubrizol, Dave Sokol met James Hambrick, I think on whatever it was, January 25, or whatever the date, and he — Lubrizol had already made projections publicly out to 2013.

And Dave told me that they had — they — that James had also given him some projections, I guess out to 2015 or something, and did I want to see them? And I told him no.

I mean, I don’t want to look at the other follow’s projections. I’ve never seen a projection from an investment banker that didn’t show the earnings going up over time, and believe me, the earnings don’t always go up over time.

So, it’s just — you know, it’s the old story: don’t ask the barber whether you need a haircut, you know.

You do not want to ask an investment banker what he thinks the earnings are going to be in five years of something he’s trying to sell.

So I pay no attention to that sort of thing.

But we do, as Charlie says, we are doing projections in our head, obviously, when we look at a business. I mean, when we look at any company to buy, or any stock to buy, we are thinking in our mind, we’ve got a model in our mind, of what that place is likely to look like over some period of years. And then we also have some model in our mind of how far off we can be.

I mean there’s some things we can be way off on, there’s other things we’re likely to be in a fairly narrow range on.

So all that is taking place, but we sure don’t want to listen to anybody else’s projections.

CHARLIE MUNGER: Those of you about to enter business school, or who are there, I recommend you learn to do it our way, but at least until you’re out of school you have to pretend to do it their way. (Laughter and applause)

CHARLIE MUNGER: I think what led to the crisis involved, to some extent, a lack of integrity in many a management. Fortunately, some of them are now gone. So, integrity’s very important. It’s the safest way to make money, also. There’s an occasional perfect knave who succeeds pretty well with money, but that kind of success reminds me of what Pope Urban said about Cardinal Richelieu.

He said, “If there is a God, Cardinal Richelieu has much to answer for. But if there is no God, he’s done rather well.” (Laughter)

And too many people want to be like Pope Urban’s view of Cardinal Richelieu. Integrity is important, it’s terribly important. And of course, everybody mouths the integrity, even when it’s lacking. So it’s difficult to be sure that professing integrity is the same as having it.

WARREN BUFFETT: The “everyone else is doing it” is the toughest thing.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: You had this classic example. In about 1993, roughly, the Accounting Standards Board came out and said what was obvious to everybody all along—that stock options were actually an expense, and that expenses, for some reason or another, belonged on the income statement.

Corporate America fought back like you cannot believe. I mean, it was like World War III had broken out, in terms of armies of CEOs marching on Washington. The Accounting Standards Board backed off. Congress—the Senate—voted 88 to 9 to tell them that, you know, what the hell did the Accounting Standards Board know about accounting, and that the Senate would tell them what accounting was all about.

When the Accounting Standards Board backed off, they said, “We’ll now say that you can do it one of two ways. Number one is preferred,” which was to expense. “Number two was acceptable, but not preferred.”

Of the Standard & Poor’s 500 companies, 498 chose number two, the non-preferred way. Two took the preferred method.

I talked to a number of people in that 498 that I would trust to be a trustee of my will, you know, I’d love to have them as a next-door neighbor, they could marry my daughter, but in the end, they said, “I can’t do it if the other guy isn’t doing it.”

It was a variation on, “I’m doing it because the other guy is doing it.” They basically said, “I’ll be penalizing my shareholders if I report less in the way of earnings than I can report. And all the other guys are doing it that way, and I understand your point.”

The situational ethics problem is huge. I gave you earlier that illustration of how rare it is to find, if you carry it out to tenths of a cent, a four in reported earnings, quarterly. That’s not accidental. But if you talk to the people that play games to get that four up to five, they would say, “Everybody else is doing it, your own statistics proved that.”

It is a tough problem to deal with. We try to create as few situations in Berkshire as we can that would induce such behavior. I don’t have the managers submit budgets to me, there is no Berkshire budget, you know. They can use them in their own operations. Some do, and some don’t. Many do, a great many do.

But if they submit them to me, the temptation becomes, if they’re not quite making it and they think I’m looking at them all the time, the temptation becomes to fudge in some way. Very few would do it, but the more that thought the other ones were doing it, the more that would do it. It’s just human behavior. And you want to try and create a structure that minimizes the weaknesses in human behavior.

And I think Berkshire’s about as good a place at that as any, although I’m sure we’re not perfect at it.

CHARLIE MUNGER: Yeah, what’s really interesting on this issue is that so much of the bad behavior does not come from malevolence or overweening greed or anything like that.

It comes from subconscious poor cognition that justifies a lot of behavior that’s really not justifiable if it’s better understood. And that happens to practically everybody.

The cure is very difficult. The best cure is to have a system where the people who are making the decisions bear the consequences.

That’s why the system that Wall Street created, where nobody really owned the mortgages—they just passed them rapidly to somebody else at a profit—meant nobody felt any responsibility that the mortgages be any good.

Systems like that, at a basic level, are irresponsible systems, and it’s deeply immoral to create irresponsible systems like that. But the people who create them don’t realize they’re being immoral, they think those systems are wonderful.

Who do you see apologizing for the behavior you now find so regrettable in our recent mess? There are very few apologies, you’ll note. People think they did fine.

WARREN BUFFETT: I’m just trying to think whether we have any real contracts.

CHARLIE MUNGER: I hope not.

WARREN BUFFETT: Yeah, we are not big believers in contracts. We hand people hundreds of millions or billions of dollars, in some cases, to sell us their business. And the decision we have to make is, are they going to have the same passion for the business after they hand us the stock certificate and we hand them the money? Are they going to have the same passion that they had beforehand?

And if we’re wrong on that, no contract is going to save us. We don’t want relationships that are based on contracts. So — I can’t — you know, I can’t really think of a formal contract that we have.

We have understandings about bonus arrangements and that sort of thing — and that’s not that complicated — with various managers. I mean, we have — the comp of the top person at each company is basically my responsibility.

And we have all kinds of different arrangements, because we have all kinds of different businesses. Some of our businesses, capital’s an important factor. So you have to put that in the comp arrangement. Some of it, capital doesn’t mean a thing. Some of our businesses are very easy and very profitable. Some of them are very tough. And it takes a genius to, you know, to get a so-so result.

So we have a whole bunch of different arrangements on that. But we don’t try to hold people by contracts. And it wouldn’t work. And we basically don’t like engaging in them. So you’re looking at a company that — can you think of any contracts we have, Charlie?

CHARLIE MUNGER: No. Our model is a seamless web of trust that’s deserved on both sides. That’s what we’re aiming for. The Hollywood model, where everyone has a contract, and no trust is deserved on either side, is not what we want at all.

WARREN BUFFETT: Yeah, we don’t — we do not want to negotiate the size of the executive bathroom. I mean, that is not our game.

WARREN BUFFETT: Well, I — he came up once with two of his boys, and we had lunch. But that was probably 15 years ago. So I really have no special — I mean, you probably know a lot more about Carlos Slim than what I do. I read the news stories and all of that. And we had a perfectly pleasant lunch. But that was a long time ago.

And, Charlie, do you have anything?

CHARLIE MUNGER: No. I think you speak for the total knowledge of both of us about Carlos Slim. (Laughter)

WARREN BUFFETT: We’ll go down the rest of the Forbes 400 for you, too, if you would like. (Laughter)

WARREN BUFFETT: Well, I’ve had a number of them. And I’m not sure I want to name them because the ones you don’t name might feel a little left out. But the one thing I’ve been very lucky on is that the ones I’ve had have never let me down. So I’ve never had that experience where you’ve looked up enormously to somebody and then had that person let you down in some way, which would be a terrible experience and very hard to get over.

And, you know, I’m sure some people have had that in marriage, and they’ve had it in business. And the worst situation, of course, is if you have it with your parents, but that did not happen. In fact, the reverse happened with me. So I can just tell you that choosing your heroes is very important. I tell that to the students when they come. Because you are going to gravitate toward the behavior of those around you.

I tell people to be sure and associate with people who are better than you are. Marry up and hope you find somebody that doesn’t mind marrying down. (Laughter) And it will do wonders for you. It was a huge help to me. I can tell you that.

CHARLIE MUNGER: Yeah. I would say that you’re not restricted to living people when picking your mentors. Some of the very best people are dead. (Laughter and applause)

WARREN BUFFETT: For just the pharmaceutical business or, did you say, or —

AUDIENCE MEMBER: Long-term growth of P&G as a whole.

WARREN BUFFETT: As a whole. Yeah. Well, you know, I think it’s clear that P&G is a consumer powerhouse of sorts. And I think Gillette — in its field, they have just about as strong a consumer position as anybody will ever have. And when you get into blades and razors, stronger than the — most of the P&G brands, strong as they may be. And I do think that the big retailers are becoming — and more so all the time — brands of their own. And they are becoming — and there’s more and more concentration going on.

So I think the struggle between the manufacturers of brands and retailers will go on and on and become more intensified. So I would think, if I were on either side of that equation, I would want to be strengthening my hand. And I think that — I think the future of both Gillette and P&G are better as a combined enterprise than they would have been as a separate enterprise. And I think that’s particularly true because of the strengths of the Walmarts and the Costcos and — you name it — around the world. I don’t know. How do you see it, Charlie?

CHARLIE MUNGER: He also wants you to tell him how P&G will be affected by its pharmaceutical business.

WARREN BUFFETT: I don’t know a thing about that.

CHARLIE MUNGER: That makes two of us. (Laughter)

WARREN BUFFETT: I really don’t. I’d help if I could, but I can’t.

And in addition to that, if you thought rates would stay at this level for an extended period, would you have a more favorable view of the market?

WARREN BUFFETT: Well, the answer to the second part is yes. I mean, if somebody guaranteed me that the 10-year rate would never go above 4.2 percent for the next 50 years, we would have to readjust, recalibrate every decision we make around Berkshire. I think it was [Federal Reserve Chairman] Alan Greenspan — I don’t know whether he’s talking about the 10-year or what is the closest thing now to the 30-year — we don’t issue 30-years anymore — but the — he referred to it as a conundrum. And after I looked it up, I decided I agreed with him. (Laughter)

I don’t understand it. And — but that’s OK. There’s a lot of things in financial markets I don’t understand. And that doesn’t mean I have to make a decision. I don’t have to either go long or go short, the 10-year. Although by keeping as much money as we do short, we are in effect at least making the decision that we don’t want to be long, long bonds. That doesn’t mean we think it necessarily would be smart to be short them. But we do not want to be long, longer bonds.

If you’d told me two years ago that every move that the Fed would make in the last two years, and you told me all the other variables that would take place, and you’d asked me what the 10-year rate would be at this time, I would have been very wrong. So, you know, it’s not a game I’ve excelled at so far. I’m puzzled by it. And we’ll see where it is next year when we meet. Charlie?

CHARLIE MUNGER: Yeah, I think the one thing you can confidently predict is there won’t be some automatic and rational correlation between inflation and interest rates. There will be weird diversions.

WARREN BUFFETT: Do you want to elaborate on how these weird things will manifest themselves?

CHARLIE MUNGER: No, no. All I know is it happens.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Frequently very surprising.

WARREN BUFFETT: Well, it surprised us on this so far, didn’t it?

CHARLIE MUNGER: Sure.

WARREN BUFFETT: Yeah.