Q1 (New York BRK shareholder): How big a problem are distorted incentives of regulators the regulated (pay differentials and regulators hoping for later jobs in industry)? In Singapore. . .
A1: Yes, it's a problem, and yes, I like Lee Kwan Yew's solution of raising regulators' pay (he also has draconian anti-corruption policies). But in the US, I think the problem with regulators is more “cognitive insufficiency” than corruption.
Q2 (Whitney Tilson (Trades, Portfolio)): Cayne and Schwartz are up testifying to Congress that there's nothing they could have done to prevent the meltdown. Are the hearings a circus?
A2: There's not much point in the hearings. It's human nature to blame others. But Congress is “mad,” and rubbing their noses in the mess they made isn't useless.
Q3 (David Winters (Trades, Portfolio)): When will insurance pricing be better, and Berkshire able to grow float?
A3 Odds are float will not grow much, and may even decline. It's very hard to increase it. “Is that negative enough for you?”
Q4 (Some media guy): Questioner was in China and really blown away; he doesn't think the US is recovering and getting back to basics. Why aren't we getting back to basics, manufacturing and infrastructure?
A4: Of course we're seeing more troubles than we're used to, and we've failed to change some things that need changing, such as education. But I'm not as pessimistic as you are; I'm optimistic about California despite it's troubles—it has its climate, it faces Asia, it has an influx of new talent, especially from Asia. And a big mess brings on corrections; “this very failure that's bothering you so much looks like the first rays of sunshine” to me.
Q5: Any tips on how to develop temperament and character in young people of the BRK type, rather than the MBA type?
A5: It's good to understand models for failure. For example, East Germany. The best 5 million left and the worst 17 million stayed. Then they lived under Communism 60 years. That'll ruin even Germans. The same thing is going on in central cities. It's not an easy problem to fix. Prevention is preferable, though it's not easy to preemptively stamp things out in a democracy. You can't blame the Greek politicians for trying to make it easier for Greeks, but when it comes unglued. . . . In business, if you see high-quality people leaving A for B and C, and no high-quality people going into A, that's a similar model for failure. I recommend a tough-minded, rational approach, plus good will. An ounce of prevention is often worth a ton of cure.
Q6 (James Armstrong, Berkshire shareholder, Pittsburgh): Last year you talked about a smart electrical grid. Are the BNSF rights of way useful for that? Could that add anything to Berkshire's net worth?
A6: I've never heard anyone talk about it but can't imagine the rights of way full of towers. “Put me down as skeptical.”
Q7: Is BYD too dependent on a single person?
A7: There's a risk, but I'm used to it, working around our 80-year-old gallant leader. [At this point, Charlie asks Wang Chuanfu and BYD's vice-chair to stand and wave (applause).]
Q8 (Alex Laga, a BRK and Wesco shareholder, Milwaukee): An engineering mentality is prone to paralysis by analysis and to a fascination with models for their own sake. How does one avoid that?
A8 Look at BYD: 16,000 engineers but determined to be rational. They don't like un-necessary delays, nor analysis for the sake of analysis. By contrast, India has too much paralysis by analysis.
Q9 (Austin, TX): WEB credited you with giving him the concept of “durable competitive ” What are the best ideas he's given you?
A9 Warren knew about durable competitive advantage. He didn't need me. The amazing thing is we did so well while being so stupid. “That's why you're all here: you think that there's hope for you.” Go where there's dumb competition. Patrick Wolff once told me I was better at what I did than Wolff was at what he did. I said no, I just played weaker competition.
Q10 (Australia): How do you determine bet size when you invest? Do you use the Kelly formula?
A10: We don't use any formulas. If you're referring to “Fortune's Formula,” it's very intelli-gent if you get to make lots of bets that pay off quickly, but we get very few opportunities and our problem is to get enough of them to invest a lot of money. I suspect I may have intuitively used the formula when younger. It's correct, but of very little use to how BRK operates.
Q11: Given the high price, and in stock, for BNSF, can you improve their operating margins to CN levels?
A11: That's an easy one: we don't have to do “one damn thing—just let Matt Rose do whatever he pleases.”
Q12: To what extent did you share ideas with WEB before you began co-investing? A I always talked over ideas, but not with many people.
Q12b (San Diego): Excesses in the economy blew up in '08. You compared it to being on Are things worked out, or is there a hangover still?
A12: Of course it's not worked out. What you and I see as excesses are regarded by the
people doing them the way a diver regards his air hose. “I need it and I want it and so I should get it” is childish. We need to make changes, or we'll get more trouble.
Q13 (Germany): What do you think about central banks printing money and the ECB accepting Greek “garbage” as collateral?
A13: Everybody knew Greece was problematic when they joined the EU. It's amazing we didn't get a Greece-type problem sooner. It's very hard to fix: you don't want to set a bad example, nor let them go under. Ireland got a big benefit from joining the EU, but Greece threatens the whole system. [Charlie paraphrases a Woody Allen line: “Today we are at a crossroad. One road leads to hopelessness and despair; the other to total extinction. Let us pray we choose wisely.”] I'm glad it's not my problem to solve, though I believe that, with my mindset, I would have acted earlier.
Q14: You suggest studying people one admires and the eminent dead. You've mentioned Lee Kwan Yew, Ben Franklin, Paul Volcker. Who else?
A14: There are lots within Berkshire. An example: managers are reporting, and one says he uses the 80/20 rule, focusing on the 20% of the business that makes 80% of the profit. The next says he does the opposite, focusing on the 20%-profit businesses that you can buy cheap and improve. They're both correct. You need multiple models.
Q15 (College student): I want to invest in Berkshire but I'm worried about succession and the future.
A15: BRK will be very successful long after we've gone. It has wonderful businesses and a durable culture.
Q16: If you were starting out with a small amount of capital, where would you focus?
A16: I wouldn't go where the big boys have to be, trying to decide whether Merck's pipeline is better than Pfizer's. I'd go where there are market inefficiencies and your work could lead to knowing important things that other people didn't.
Q17 (Fund manager, New Delhi): I admire your “lattice work” model but in applying it find that adding to one's toolkit takes a long time because you have to fit new things into a complicated framework. Is this inevitable or is there a way to speed up integration?
A17: I was born with a mind that works that way and am also curious, so learning isn't work but play. If your nature's different, you'll “have to figure out your own damn answer.”
Q18 (Student, Toronto): Why is it the government, rather than someone like Berkshire, bailing out the banks this time?
A18: It's way worse this time. Nobody in his right mind wanted to see how far it would have gone if the government hadn't acted. It's a credit to democracy. England showed us that we could intervene directly in major banks, which was much better than TARP. It's a credit to Paulson that he switched plans when he saw a better one.
Q19 (South Pasadena): What about those condos Wesco built next to the headquarters building?
A19: I'm glad you brought that up because it's like rubbing my nose in financial failure, and that's good for me. We had surplus property and decided to build condos several steps up from what you could buy in downtown Pasadena. We came to market in the worst condo market in a long time. We're selling condos at prices that give us a modest loss and resisting doing stupid things. Eventually there'll be one condo left and two or three buyers. I think it'll make a lot of money eventually for the buyers, but never for Wesco.
Q20: You said you regret so many Caltech grads go into finance. But mightn't they end up running those businesses and do better at it than Fuld?
A20: That could be true. You could probably take anybody at random out of Caltech and have them do better than Fuld. But there's an opportunity cost; there's a loss to civilization when bright people go into money-grubbing instead of science.
Q21: Can you comment on the state of the insurance business?
A21: Casualty insurance is intrinsically a very difficult business. As in financial businesses, people delude themselves to maintain volume. I wouldn't be looking for investments in the field. Berkshire is different, and a few others too, but those others are generally known and priced accordingly. Reinsurance is even worse.
Q22 (Ottawa): WEB says he expects a “reasonable return” on BNSF. What percentage or range of percentages is reasonable? Also, any books you've read in the past year and recommend?
A22: Berkshire is looking at opportunity costs. We spent 6% of shares outstanding to acquire BNSF. We were getting low returns on cash, and we paid low rates on the money borrowed to do the deal. It's a better deal for Burlington shareholders, but that doesn't mean it's a bad deal for Berkshire shareholders. Bringing in Matt Rose, who's quite young, is a huge plus. Though not an iron rule, we hope to make, say, 10% pretax long term when buying with equity. But this was part equity, part debt. Stocks generally will probably do worse that 10% pretax; this isn't an environment you should be happy about. We might be wrong about getting 10%, too. As for books, the ones about the Great Recession are all very interesting. John Paulson (Trades, Portfolio) is a very interesting story; his imitators are going to create a lot of trouble. The same applies to me to some extent; I try to atone by doing other things.
Q23 (Toronto): It seems the rate of change in business is speeding up. Does that make things harder?
A23: I don't know what will happen in the next 20 years and have very little reason per-sonally to care. That said, the most interesting rate of change is in China—so fast, so pragmatic that I am quite optimistic. An amazing percentage of Chinese Communists have engineering training. “That's my kind of Communist.” We're too critical for expect-ing them to do things exactly our way. They're coming up the technical competency curve at a rate with no precedent except perhaps Japan, and they're a big country. It's very difficult to compete with them. They're wise to foster people like BYD who are trying to make things better rather than just cheaper. In my youth, I liked the King Fong Restau-rant in Omaha. Recently, I drove by, and downtown Omaha has gone to hell but it's still there. The Chinese find a way to survive.
Q24 (San Jose): You said solar was too expensive for your house, yet Midamerican is investing in solar and wind.
A24: I don't second-guess Midamerican. As for photovoltaic, I thinks it's about to get a lot cheaper, and therefore isn't a buy now. But I could be wrong.
Q25: Float at Wesco has gone up quickly compared to float at Berkshire. Can it keep going up? Also, why was it Berkshire and not Wesco that invested in BYD?
A25: The second one is easy: strategic stuff almost always involves BRK, which is bigger and famous. To repeat, Wesco is not a smaller Berkshire. The insurance is a gift; if Wesco wasn't part of BRK we wouldn't have any way of getting it. As for CORT, it “looks pretty damn mediocre” and was bought at the top of a boom; still, I think it will do all right over time. You shouldn't analyze Wesco as an independent entity; it's a “weird historical accident.”
Q26 (USC MBA student): Can you come talk to us?
A26: I used to once a year; one talk's in POOR CHARLIE'S ALMANACK, and it wears pretty well, so you don't need a live Charlie. Warren does a lot of that and likes it; my taste for it is limited, so I can't help you.
Q27: Does WEB prefers durable competitive advantage to Graham-style investing because it's a better model, or because it works better for large amounts of capital?
A27: If I were young and had a small amount to invest, I would be looking in the small-cap world.
Q28 (Los Angeles): Is CORT in a cyclical or secular decline? Is there a goodwill writedown coming? And what about Goldman Sachs?
A28: CORT will do OK and justify the price paid but not be a worldbeater. But it's getting pretty dominant in its niche, so maybe I'm too negative. On Goldman: The total return derivative is a way to avoid margin limits and deceive accountants; I hate its social implications. I dislike other derivatives too. Warren wrote a letter against allowing S&P derivatives, but after they were made legal anyway, he invested in them; nothing inconsistent in that. In a world where derivatives were allowed, I see no reason to think Goldman was misbehaving, just doing what others were. The disadvantage is that it's hard to explain to the public. I suspect they'll change; Blankfein is pragmatic and flexible. Goldman deserves its share of blame for helping to persuade the government to allow derivatives trading, but no more. The idea that any sort of risk transfer between consenting adults ought to be legal is wrong. But Goldman Sachs shouldn't be singled out.
Q29 (Boston): Why did Coke buy back its bottlers, and what makes a good distribution business?
A29: I don't follow Coke, but originally they spun off low-margin businesses into non-consolidated entities to make the accounting look better. That's not a Munger-type thing to do, so if they're undoing it, that's a good thing. By the way, I think the new CEO of Coke is the best we've had in a long time.
Q30 (Chicago): Clayton's products are great, but it's almost impossible to put a Clayton home in Chicago due to zoning. Will that change?
A30: Kevin Clayton is very interested in taking Clayton techniques upscale and getting past regulatory problems. Clayton houses are improving. Charlie thinks we'll see more Clayton-type methods used in the future, though it's a slow process of change; the custom home approach is so expensive.
Q31 (Los Angeles): Can you recommend investment books for children and strategies for getting them interested in investing?
A31: I'm not sure I believe in getting you children interested in investing. For myself, I think that investing helped with wisdom acquisition, and wisdom acquisition is a moral duty; but the money all goes away when you die.
Q32 (Shreveport): Why do you and WEB read 5 newspapers daily? And will Goldman Sachs divest its derivatives business?
A32: To the second question, not unlessed forced to, any more than a diver will step on his own air hose. To the first, “It's all I can conveniently crowd in.” “I am particularly charmed by the FINANCIAL TIMES,” but I also like the WALL STREET JOURNAL; I'd read more if I had the time. I skim. I don't know anyone who's really wise in the practical world who reads no newspapers. Maybe you can do as well with keyboards and multitasking, but I don't think so.
Q33: If you were 35, would you move to Singapore?
A33: I'm such a lover of the US I'm not going to move to Singapore. With all its defects counterbalanced by its virtues, I love this country. The move might be right for somebody else. If crime goes up by a factor of three, affluent people might move to Singapore, but I won't.
Q34 (Santa Monica): You said reinsurance is a tough business, so why the Swiss Re and Munich Re investments?
A34: Warren makes those decisions. Those are both respectable businesses that have been around a long time. They're portfolio investments at what seemed like reasonable prices. That doesn't change my general view of reinsurance. Of course it's difficult to judge whether to invest in them. I like no-brainers like Costco and BYD better, but you don't find very many.
Q35 (Los Angeles): With banks moving away from mark-to-market and keeping troubled assets on their books, how is Wells Fargo affected?
A35: Wells Fargo got very cheap at the low tick. Yes, they made mistakes, and yes, they have a lot of work cleaning up Wachovia, but it's a good investment even at the current price. Even the best banks drift with the times and do stupid things, but I suspect Wells faced up to it better. We may be getting changes in credit cards. We've been issuing them to “fiscaholics.” I don't like issuing credit at 30% to people who can't really handle it. “But that's a crotchet, not a complaint.” However, how many here agree? (Many hands go up.)
Q36 (Chinese online journalist): What fields for investment are you interested in, besides BYD, in China? And what advice do you have for Chinese investors?
A36: It's hard to imagine finding another one as good as BYD. We'll look, but will be surprised to find another one.
Q37: Any more add-on activities at GEICO?
A37: The credit card was “a really stupid decision that got a bad result.” I hope we don't find another “opportunity” like that.
Q38 (Los Angeles area accounting prof ): Advice to accounting students? And should our investment group buy more Berkshire?
A38: Huge changes are needed in accounting standards, but that's a problem at the top of the profession. As a professor, you have to hold your nose and teach the standards as they are. We never—well, almost never—tell people when or whether to buy Berkshire. Accounting is a noble profession; double-entry bookkeeping had a big role in the rise of Venice. But accountants fear liability if they make difficult decisions. I would favor exempting them from liability for anything except deliberate fraud, in exchange for requiring them to be conservative.
