Corrigan at Large: 5/6/07

No, not the batty old chick from the matrix, I'm talking about the one from Omaha, Warren Buffet. Last week was the annual shareholders meeting for Berkshire Hathaway, Buffet's investment company. Naturally, news coverage over here wasn't so good but I'm sure that anyone in the states with even a passive interest in investing has seen some of the articles or highlights on the news. Famous for his frugal lifestyle Buffet is probably the most successful investor alive, possibly ever. So when he speaks, people listen. There is an entire industry devoted to buffet paraphernalia from books to bobble heads. Despite being a shareholder I couldn't attend, unfortunately it's a bit of a hike from here, but I read through some of the highlights and thought I'd share some of my favourites. Also speaking was Charles Munger (CM), Buffets second in command. There's allot here..but its a good read. Besides, these two are actually pretty funny. Enjoy!

Question: "Investment managers are benefiting a lot more at the expense of shareholders and investors these days. What do you think is best structure for fees that a manager should have, to give him an opportunity to maximize his wealth but is also fair to investors?"

WB: Well, there are more problems with having the wrong manager than having the wrong compensation system. Charlie and I think compensation has a natural tendency, because of the ratcheting and because of the publicity of what others get, and a natural lack of intensity in the bargaining process...you read about these labor contracts and hear about how they go for weeks and at all hours with both sides arguing...when do you see a compensation committee do this? It doesn't happen, because the CEO cares a great deal, and to the compensation committee it is play money. They are looking for Cocker Spaniels with tails waging, not Dobermans. I try to pretend I'm a Cocker Spaniel to get in, but it doesn't work. There is no intensity on the committee...one guy cares enormously and the others don't. And what really drives the ratcheting is envy. If you pay $2 million to somebody they can be quite happy -- until they find out the guy next to them made $2.1 million. You know, Charlie says that envy is worst sin because you have no fun when you have it. With the other sins you can have fun. For example, gluttony is fun, and indecently we're going to engage in it right now (grabs See's Candy box). I've heard you can have fun with lust too, but you'll have to ask Charlie about that.

CM: Compensation consulting reminds me of and old story of a mother asking her child why she told the census taker that the man of house was in prison for embezzlement. And the child said, "because I didn't want to admit he's a compensation consultant."

WB: Don't be laughing if that's not you, we'll get to the rest of you next.

QUESTION - AREA 4: U.K.
I read a study by Yarno(?) that showed that companies with private jets underperform their peers by 4%. What is your yardstick to judge whether others are good stewards of money or not?

CM: I want to report that we're solidly in favor of private jets.

WB: In recent years, I shamed Charlie into getting his own Netjets card. I have two cards, he now has one. Actually, Berkshire is significantly better off in a number of its businesses because we use corporate jets. I don't know which deals wouldn't have been made, but I would not have had the same enthusiasm for traveling thousands of miles to go after deal and after deal. It has been an invaluable business tool. Many years ago, we owned stock in a public company, and the CEO stopped off in Omaha to explain that they used some grocery chain to be a test case on their new products. You can abuse any system, but properly used they have been a real asset.

We compensate people about things that are under their control. We talked last year about what you do in a commodity business like copper or oil. If oil goes from $30 to $60, there is no reason in the world to pay oil executives more.

CM: I'd like to go back to the corporate jet thing. If the trappings of power are greatly abused, you would find a correlation that those companies would be a disappointment to investors. Man has known for long time that the trappings of power are counterproductive. In Roman times, Marcus Areleus (?) was against the trappings of power even though he had them all around him. I think the best way to tackle the subject is to provide counterexamples.

QUESTION - AREA 5: New Jersey
Could you please explain impact (and hopefully benefit) of a credit contraction on Berkshire? And maybe higher interest rates as well.

WB: Well, we do benefit sometimes when others suffer, but it doesn't mean we enjoy their suffering. There are times of chaos in financial markets, there was a situation in junk bonds in 2002, and in equities in 1974. I don't think you'll necessarily see a contraction in credit, although you very well could see some exogenous event that starts feeding on itself if you really got a shot to the system, and that would result in a huge widening of the credit spread, which means cheaper equities. This would actually be very helpful to Berkshire because we have cash ready. We were trying to buy a bank 40 years ago, and the only people that would lend to us in the world (because banks weren't loaning money for acquisitions) were people in Kuwait who would lend it to us in Dinars. We thought it would be fine to borrow, but when it came time to pay back the loan, they would tell us what Dinars are worth, so we passed. I would say the Fed is not going to produce any credit crunches.

CM: Well, last time we had a credit contraction, we made what, three or four billion dollars? The whole investing world is more competitive now. A real credit contraction -- no one would welcome that. If we ever had a really big credit contraction after the period like the one were in with all of this excess and resentment, we would get legislation most of us wouldn't like.

WB: There is a new book from John Alder(?) about first 100 days after Franklin Roosevelt. If you want to get an example, Roosevelt pretty much got anything passed that he wanted, as fast as he could write the bills. That was a good thing with the banks closing, etc. No one wants that to come back. We've learned a lot since the Great Depression . I don't think you'll see a big credit contraction like that again. Ten years ago, you had really extraordinary things happening in markets because people panicked, because they thought others were going to panic. As Mark Twain said, history doesn't repeat itself, but it rhymes. We will have something that rhymes with 1998.

QUESTION - AREA 5:
Charlie you were quoted in Poor Charlie's Almanac saying Ben Franklin was good ambassador, and that whatever was wrong with him from John Adams' point of view probably helped him with the French. Can you offer additional thoughts on John Adams and Abigail?

CM: Well, they were wonderful people, both of them.

WB: Do you know them, Charlie?

CM: But if you want a jolly evening, I would take Franklin every time. I think I remind many people too much of John Adams and too little of Ben Franklin.

QUESTION - AREA 7: Japan
Corporate profits are very high while labor wages have been flat. (missed rest of the question)

WB: Corporate profits are very high, especially in comparison to GDP. I have been amazed at this, after staying between 4-6% of GDP. But when corporate profits get up to 8% + of GDP, that is very high. So far, this has caused no reaction from anybody. One reaction would be higher corporate taxes. You have companies earning 20-25% on equity while bonds (missed rest of statement). If you tried to read economics books from 40 years ago describing a situation like this, you would have not found a book like that. Corporate profits continue to go up as percentage of GDP. That means someone else's share is going down. You are quite correct that labor's portion is going down. Congress has the power to change the ratio very quickly. Corporate taxes not too long ago were 52%, now they are 35%. At the moment, corporate America is living in the best of all worlds. History has shown that those conditions will not last indefinitely.

CM: A lot of the profits are not in the manufacturing or retailing sector either, they are in the financial sector. So there are huge flows to banks, investment banks, investment groups of all kinds, etc. That has no precedent.

WB: Charlie and I would have said 20 years ago, that if you said to us in a world of 4.75% long term government bonds, will one bank after another be earning 20% on tangible equity in basically commodity money, we would have said that wouldn't exist.
There may have been a year or two post WWII, but I would bet there haven't been other years in the past 75 where corporate profits have been this high of GDP.

CM: Some of it is because of lots of consumer credit. Some countries that have pushed too high on consumer credit have had bad times, like Korea, etc. I don't think this is a time to swing for the fences.

WB: When the IMF stepped in with Korea, I found the most ridiculous stock prices I have ever seen in my life, and while companies were fixing balance sheets, etc. I mentioned in the annual report about finding a succeeding investment manager that isn't cognizant of every risk there is based on things that have already happened, but can envision things yet to happen. A lot of people are very smart, but can't think of things they've never seen happen before.

QUESTION - AREA 8: Nebraska
What can be done to make Wall Street deliver stocks they've sold but never delivered?

WB: Yeah, that they've never delivered, and naked shorting is the question. I've never asked a broker to give me a stock and had them decline it. I see no problem at all with people shorting stock...I would welcome people shorting Berkshire. I have no problem with shorts. If someone wants to naked short Berkshire, we'd be happy -- we'd have a special meeting for them. The shorts have a tougher time in this world. I do not see shorts as any great threat to the world. On USG, when it got hammered after bankruptcy, one large brokerage firm came to us and wanted us to lend them millions of shares and paid us a lot of money, and we happily lent them and wished they had borrowed more. It is very easy to spot phony stocks, but it is hard to tell when they will turn around.

CM: Those delays in delivering sometimes reflect tremendous slop in the clearance process. It is not good for a civilization to have huge slop. Sort of like how it isn't good to have a lot of slop in nuclear power plants.

WB: Now, reach back into your law practice Charlie. If I buy GM and they don't deliver, what is situation?

CM: Well, if you are a private customer, you may have to wait awhile.

QUESTION - AREA 9: Germany
You were saying before that gambling companies will have a great future?

WB: Yeah, they will have a terrific future. Which ones, I don't know. The desire of people to gamble -- and in stocks too, with day trading which came really close to gambling, people like to gamble. If the Super Bowl is on, or a really boring football game, you'll enjoy it more if you bet a few bucks. We insure hurricanes, so I watch the Weather Channel. When gambling was legalized in Nevada only, you had to go a long distance. But states learned it was a great source of revenue, and made it easier. The easier it's made, the more people will gamble. 40 years ago I bought a slot machine and put it on third floor. And I could give kids any allowance I wanted as long, as it was in dimes...I had it all back by nightfall. I'm not a prude about it, but to a large extent gambling is a tax on ignorance. I find it socially revolting when a government preys on the weakness of its citizenry rather than serving them. When a government makes it easy to take their social security and start pulling handles or playing lotto, it's a pretty cynical act. Guys like me don't have to pay it. It receives taxes on the backs of those dreaming of a car or color TV...its not government at its best.

CM: I would argue that the casinos use clever psychological tricks to cause people to hurt themselves. There is a lot of harmless amusement to be sure, but also a lot of grievous injury...and I don't think you'll find a casino soon in Berkshire.

QUESTION - AREA 10: San Francisco (17 year old)
What is best way to a become better investor? Get an MBA, is it genetic, read more "Poor Charlie's Almanac"?

WB: Read everything you can. In my own case, by the time I was 10, I read every book in the Omaha Public Library that had to do with investing, and many I read twice. You just have to fill up your mind with competing thoughts and then sort them out as to what makes sense over time. And once you've done that, you ought to jump in the water. The difference between investing on paper and in real money is like the difference in just reading a romance novel and...doing something else. The earlier you start the better in terms of reading. I read a book at 19 that formed my framework ever since. What I'm doing today at 76 is running things in the same thought pattern that I got from a book at 19. Read, and then on small scale do some of it yourself.

CM: Sandy Gottesman, runs a large and successful investment operation. Notice his employment practices. When someone comes in to interview with Sandy, no matter his hage, Sandy asks, "what do you own and why do you own it?" And if you haven't been interested enough in the subject to know, you better go somewhere else.

WB: If you buy a farm, you'd say "I'm buying this because I expect it to produce 120 bushels per acre, etc...from your calculations, not based on what you saw on television that day or what a neighbor said. It should be the same thing with stock. Take a yellow pad, and say I'm going to buy GM for $18 billion, and here's why. And if you cant write a good essay on the subject, you have no business buying one share.

QUESTION - AREA 11: Austalia
How do you judge the right margin of safety to use when investing? For example, in a long standing and stable business, would you demand a 10% margin of safety, and if so, how would you increase this in a weaker business?

WB: We favor the business where we think we know the answer. If a business gets to a point where we think anything is so chancy that we can't come up with a figure, we don't try to compensate. If we buy See's, or Coke, we don't think we need a huge margin of safety because we don't think we're going to be wrong about our assumptions. We'd love to find things selling at 40 cents on the dollar. If we get to something...when we see a great business, when you see someone walk in the door, you don't know if they weigh 300 pounds or 325 pounds, but you know he's fat. You don't need a huge margin of safety. There are times when we could buy businesses at a quarter of what they were worth, but you don't see those things very often. Should you sit around hoping that comes back for 10-15 years? That's not the way we do it.

CM: The margin of safety concept boils down to getting more value than you're paying -- and that value can exist in a lot of different forms. If you're paid 4 to 1 on something that's an even money proposition, that's a value proposition too.

QUESTION - AREA Mike Klien, a general surgeon from Salinas, California (!? Not our Mike Klein from California though)
Given your experience in underwriting insurance, do you have any thoughts on helping out with the health care mess?

CM: (Long pause) It's too tough.

WB: Yeah, we cant solve that one. We try to look for easy problems. We don't try tough things. Now, sometimes life hands you tough problems, but we don't go around looking. If you're paying close to 15% of GDP for health costs, somebody ought to come up with something. Maybe we'll hear something about it in this next campaign.

QUESTION - AREA 13: Connecticut.
Any comments on Berkshire's intrinsic value?

WB: Well the intrinsic value of Berkshire, like any other business, is based on the future amount of cash that can be delivered between now and Judgment Day, discounted back at the proper rate. That's pretty nebulous. Another way is to look at the value of the businesses we hold presently. We try to give you an estimate. Since Berkshire retains all of its earnings, it becomes important to evaluate what they will do with those earnings over time. In 1965 we had a textile business that was worth $12 per share, but that wasn't the value, because we intended to use the cash generated. It is not the combination of businesses, but the skill at which retained earnings are used. If Charlie and I wrote down what we thought Berkshire is worth, our figures would not be the same.

CM: What's hard to judge at Berkshire is the likelihood that you'll have anything like the past to look forward to. Berkshire has gotten very extreme in terms of investment results. The balance sheet is gross considering the small beginnings of the place. What has caused this extreme record to go on for such a long time? I would argue that the young man reading everything when he was 10 became a learning machine. Had he not been learning all this time, our record would be a mere shadow of what it is. Here, the man holding the power is a ferocious learner. Our system ought to be more copied than it is. The system of passing power from one old codger to another is not necessarily the right system at all.

QUESTION - AREA 14: New York City, Whitney Tilson
You have warned in the past about the dangers of derivatives, yet every year trillions bought and sold. How much longer might this go on? What can we do to help mitigate it?

WB: Well we've tried to do a little to mitigate it ourselves by talking about it, but realize there is nothing evil about a derivative itself. Now, usage of them on an expanding basis in more and more imaginative ways introduces more leverage into the system -- largely invisible leverage. Back in 1920s after the crash, the U.S. held hearings and decided leverage contributed to the crash and the extent of the crash, adding like gasoline on a fire. Leverage was regarded as dangerous and the U.S. empowered the Fed to regulate margin. At the time it was taken very seriously, and for decades was a source of real attention. The introduction of derivate and index futures, etc., has made any regulation of margin requirements a joke. I believe that we may not know when it becomes a super danger or when it will end precisely, but I believe it will go on and increase until there are very unpleasant things because of it. You saw an example back in October 19, 1987 when you had portfolio insurance. You ought to read the literature in academia preceding that. It was a joke. It was a bunch of stop loss orders, but done automatically, and it was merchandized. People paid a lot of money for people to teach them how to put in a stop loss order. I have no idea when the next one would come. I also didn't know shooting some archduke would cause WWI, either.

CM: The accounting being deficient enormously contributes to the risk. If you get paid enormous bonuses based on profits that don't exist, you'll keep going. What makes it difficult is that most accounting professionals don't even realize how stupid they're being.

WB: Four years ago when we liquidated the General RE portfolio, the auditors would have attested that our stuff was mark to market. I wish I could have sold to auditors instead!

QUESTION - AREA 1: Hong Kong
Do you think there is more of a short-term mindset to investing today?

WB: There is no way of precisely measuring, but if you take the degree to which bonds or stocks are held by people who could change their minds tomorrow morning based on a given stimulus, the percentage is far higher today. There is an electronic herd who thinks every decision should be made daily or hourly but he minute. People used to buy bonds o own or to trade, but it is a different game now. It has different consequences than a buy and hold environment. I think it is a fool's game, but it may be required to attract money. When I set up my partnerships I told my partners "you'll hear from me once a year."

CM: When people talk about sigma'ss in terms of disaster potentiality...uh...their all crazy. They got the idea that bad turns in markets would be predicted by Gaussian distributions, because it made things easier to produce and it was easier to teach. You'd have to believe in the tooth ferry to believe in that.

WB: It's tough, when you get to do what the priesthood in your field can do and find out that it doesn't have any meaning. People generally keep on teaching it anyway.

QUESTION - AREA 2: Munich
Can you give us some transparency on investment decisions on how to determine intrinsic value? Which quantitative approach do you use?

WB: I understand the question but will pretend I don't and let Charlie answer.

CM: When trying to determine intrinsic value, margin of safety, etc. there is no one easy method. By definition, you will need multiple models. I don't think you can become a very great investor very rapidly anymore than you can become a great ornithologist very rapidly.

WB: (Gave a farm example showing how much goes into finding a value of a farm, taking into account taxes, labor wages, other costs, etc.

QUESTION - AREA 3: Chicago
In the annual report, you say looking for someone younger to work at Berkshire. Can you expand on this, and how would I apply?

WB: You just did. I don't think it's impossible that we would find three or four we would want. We're not looking for someone to teach. There are people who know how to do it out there. We've heard from 600 or 700. Lots have decent records; the biggest problem is whether they would scale up. Running $100 billion is different from running $100 million. We're looking for someone to mildly perform better than the average security. There is no way in the world someone will beat the S&P 500 by 10% with $100 billion.

CM: Our situation in looking reminds me of an apocryphal tale about Mozart. A young man of 25 or so once asked to see Mozart, and when he met him said "I'm thinking of writing symphonies, and I'm looking for advice." Mozart said "sorry, you're too young to write symphonies." The kid said "I'm 25 years old, and you were writing them when you were 10." Mozart replied, "yes but I wasn't asking anyone for advice when I was writing them."

WB: When I ended my partnership, I was able to recommend Sandy Gottesman, Bill Ruan, and Charlie. Today though, most people my age are already rich and don't need a job, so I need to look in an age cohort that I don't know, which is difficult, but can be done. I picked Lou Simpson before, but its doable. It is more work than I like to do, but I'll do it,

QUESTION - AREA 4: Ohio
Where do you stand on global warming? What are your thoughts on the science?

WB: The odds are good that it is serious, but I'm not a scientist. I can't say I am 100% or 90% certain, but it would be foolish to say that certain it isn't a problem. Once it manifests itself to a significant degree, it is too late to do anything about it. I think you should build the arc before the rains come. If you are going to make a mistake, you should err on the side of the planet. General RE writes way less business that is subject to annual increments that are subject to global warming than reinsurance form National Indemnity, where we write the catastrophe business. If the temperatures in the waters of Atlantic change by small amounts, it can increase expectable losses from a hurricane season by a factor of four or five, so there is plenty of caution about it.

CM: Carbon dioxide is what plants eat, and so generally it's a little more comfortable to have it a little warmer instead of a little colder. It is not as though vast groups of people trying to move to North Dakota from southern California. It is not at all clear that it would be worse for mankind in general to have the planet a little hotter.

WB: What about people being 20 ft under water?

CM: Well that's unfortunate, but with enough capital you can adjust. You'd have to be a pot smoking journalism student to think it will be a calamity.

QUESTION - AREA 5: KANSAS CITY
About the Chinese economy...Chinese banking looks like Japan in the 1990s, are you concerned that China can experience similar disruptions as Japan did in 1990?

WB: I would have to say I don't know the answer to that. I didn't understand what was going to happen in Japan before it happened, and I know next to zero about Chinese banks. I just have no notion, but maybe Charlie does.

CM: Well if you stop to think about all the progress we've seen in China in the last 15 years, it has been accompanied by practices in the Chinese banks that would make you shudder. Banks are almost dolling out money for aid in addition to regular banking. They've been doing it for long time, but it may be getting better now though.

WB: Strong economies come through those things. If you've seen all he problems with real estate loans, etc., you'd say it's going to be terrible for the American economy, but it has come through all kinds of financial crises.

QUESTION - AREA 6: Indiana
Will 1973-74 opportunities happen again?

When I closed my partnership, the prospective returns going forward I felt was the same as municipal bonds. Don't think that it is the same situation now. If I managed endowment funds, it would be 100% in stocks or long bonds or short bonds, no mix. If I have 20 years and a choice between index funds and 20 year bonds, I would rather buy stocks today.

CM: I don't think that's the answer expected, but that's the answer. (crowd laughter) We think the current scene will cause a large disruption not too many years ahead.

WB: Yeah, but those will occur. Predicting and waiting around for them is not our game. We bought $5 billion in equities in the first quarter. We'd rather have those ones than cash or waiting for things we think will get a lot bigger.

QUESTION - AREA 7: Vancouver
You sold y our silver. Why, and to who?

WB: I don't know who I sold it too, but they were a lot smarter than us. I bought too early, sold too early, and other than that it was a perfect trade.

CM: I think we've demonstrated all we know about silver.

QUESTION - AREA: Santa Monica
What advice do you have for people giving money 40 years from now?

WB: As long as you plan to give it back, there is nothing wrong with your time horizon. If you're compounding money at a rate greater than people generally do, you are an endowment for society. Endowments do that to get average returns. You can let someone else take care of the giving now.

CM: I think its wonderful for shareholders that someone else is giving away the money.

WB: I haven't really given away anything. When a family can't take a trip to Disneyland because they donated to a church or whatever, or their time, they have given away something. I have everything I need. I can't eat any better or sleep any better...so I haven't really given anything.

QUESTION - AREA 9: New York
(Asked about Buffett's 50% returns if starting all over claim)

WB: With a small sum I would be doing things entirely different.

CM: There's no point of thinking about it now.

QUESTION - AREA 10: Subprime market relative to the foreign market?

WB: Well the market was encouraged by lenders, intermediaries, and borrowers themselves, and it resulted in loans they cant make payments on. Whether it spills over and effects the general economy, my guess would be that if unemployment doesn't rise and interest rates don't move up dramatically that it will be a very big problem, but I don't see it ...don't think it's unlikely that factor alone triggers anything of a massive nature. I read 10-Qs and 10-Ks and a very high percentage of loans made in last few years allowed people to make below average payments and therefore need above average payments later...that is dumb lending and dumb borrowing because someone who can only make 20-30% of payments now isn't going to be able to make 110% payments in the future. It worked for awhile until it didn't work. I don't think it's going to be any huge anchor to the economy.

CM: A lot of what went on was a combination of sin and folly. A lot because accounting institutions allowed them to show profits when no one in their right mind would have allowed them to show profits. I don't see how people did it and still shaved in the morning, because looking back at them was a face that was evil and stupid.

WB: We've seen a lot of loans recently where the person couldn't even make the first or second payment, and that shouldn't happen. Securitization accentuated the problem. With securitization, the discipline leaves the system. We had it in subprime loans just like we had it in manufactured housing a few years ago. It will be at least a couple of years before real estate recovers. I mean, the overhang is huge. The people that were counting on flipping things there are going to get flipped but in a different way.

QUESTION - I am a 23 year old with high ambitions and modest capital -- what is the best area of opportunities for the next 50 and even 100 years?

WB: Read everything you can. I probably learned more from Lorimer Davidson in those four or five hours than I did in college. Charlie and I made money in a lot of different ways, some of which we didn't anticipate 30 or 40 years ago. You can't have a defined roadmap, but you can have a reservoir of thinking, looking at markets it different places, different securities, etc.. The biggest thing, too, is to have something in your program so that you don't have to do anything that can be a catastrophe.

CM: And of course the place to look when you're young is the inefficient markets. You shouldn't be trying to guess whether some drug company has the best drug pipeline...you should go where things are inefficient.

WB: The RTC was a great example of a chance to make a lot of money. Here was a seller of tens of billions in real estate, and the people selling had no economic interest in the sale, and you had an imbalance of intensity with the seller that was the government with no economic interest -- and probably just wanted to end the job -- and buyers on the cautious side. There won't be any scarcity of opportunity in your life, although there will be times when you feel that way.

QUESTION - AREA Florida
Florida insurance companies are having problems with the state government. Is this a cause of concern?

WB: It is easy to understand. The average homeowner is not going to sit there and read line by line in the insurance policy and the average agent isn't going to explain it to them very well. When tens of thousands get angry, you're going to get legislation. I can understand the insurance company not wanting to write policies if the words won't be adhered to, and I can understand the upset homeowner. As to whether you should have all the people in the country pay premiums for hurricanes and subsidize it through policies in Nebraska or some place, that gets very tough. It can be so expensive that people will not want to do insurance and then will want to socialize it. It could be bad for Florida, and then they end up in DC asking for federal help. And then you've got people in Nebraska saying wait a minute, why should I subsidize you living in the hurricane path? I know you've gotten hurricanes there, but we've got cold winters here too. We will have to see how it plays out, but it may very well end up in Washington.

CM: I've got nothing to add.

QUESTION - AREA 14: New York
First of all, congratulations on getting Sue (from Yahoo), she is a great addition. According to the 10-Q yesterday, you purchased $5.3 billion in the first quarter. Was there some shift in your rate of thinking in hurdle rates?

WB: We did invest $5 billion or so. Did we change our standards? You know, I don't think so, but you cant be 100% sure. You know if you haven't had a date in a month, you may say that was a girl you would have dated on the first day, but who knows. I think we would have dated that girl the first day.

CM: The one thing we can promise you is that we won't make returns now with these purchases that we made 10-15 years ago.

QUESTION - AREA 1: New York
(A Planned Parenthood protester. Was booed loudly by the crowd, Warren had to interrupt amd told him maybe he should get to his question. The question was basically criticizing his personal donations to Planned Parenthood.)

WB: I think it's a terrific organization (loud cheers from the crowd). I don't want to get into this too much or else we'll have a cheering contest, but I really think it's too bad that for millennia, women all over the world have had the involuntary bearing of babies, usually by a government owned by man. I think it's a very important issue, and I think it has a small natural funding constituency because it's not popular like sticking your name on the side of a hospital. If we'd had a Supreme Court with nine women on it when the nation was founded, a question like yours would not even have been asked today.

QUESTION - AREA 2 Los Angeles
Why would people use beta?

WB: Volatility does not measure risk. The nice thing about beta is that it's nice and mathematical, and wrong. With farmland in 1980, farms that were $2,000 an acre went to $600 an acre. I bought one when the farm crash took place. The beta of farms shot way up. According to market theory, I was buying a much more risky farm at $600 an acre than I was at $2,000 an acre. That's nonsense. In farms we see this, but because stocks jiggle around and because people want to use the mathematics they've learned, they've translated volatility into all kinds of measures of risk.

CM: It's been amazing that corporate finance and investment management courses...it is at least 50% twaddle. One of the reason we've done well is because we recognized early that very smart people do very dumb things. We wanted to find out why and also find out who so we could avoid them.

QUESTION - AREA 3: New York
How do I evaluate management through annual reports?

WB: We spent many, many years and bought many things without meeting managements at all. The $5 billion of stocks we bought in the first quarter...most were companies where I never met the management and never talked to them. We read a lot. If we buy the whole business that's a different issue, but for marketable securities, we read the reports. We were talking about an oil company where we read the report and couldn't find the finding cost in the report. And to the extent that it was touched on was in a dishonest manner. It makes a difference to us. With marketable securities we can solve that by selling the stock. You can get a lot by reading the annual reports. It tells you a lot about the individual. If he's not willing to talk once a year to the people who gave him their money, I wonder.

CM: There are two things - the quality of business and the quality of the manager. If the business is good enough, it will carry the manager.

WB: If you gave me first draft pick of all CEOs in America and you said it was my job to run Ford Motor now, I wouldn't do it.

QUESTION - AREA 4: San Jose
If you were to follow up your Fortune Magazine article from 1999 about the lean and fat periods (Mr. Buffett on the Market, 1999), what would you be writing? You talked about 17 year periods. How is it turning out now, since we're half way through the next one?

WB: 17 years I had a little fun with because there were two 17 year periods, and there are 17 year locusts. If I were writing something now, I would say if that I had to own long bonds or equities, I'd rather have equities, but I would not have high expectations for them, but above 4.75%. I didn't feel in 1999 that people were extrapolating the experience in the previous 17 years and there was something magic, and people were bound to be disappointed. Bound by extrapolation, and that was the main point of my article.

CM: I would say that since that article was written, the results from owning equities have been pretty lean. Warren has been right so far and is probably right now when he says modest expectations.

QUESTION - AREA 5: California - Woman and her14 year old daughter
We are here representing fisherman from the west coast. We are barely hanging on to our livelihoods. Last year the salmon season shut down because of the crises in the river caused by four electric dams owned by a Berkshire subsidiary. We used all of our savings and had to take a SBA disaster loan. Dam removal makes economic sense to Pacificorp and MidAmerican. What is your position on removing the dams? (Also mentioned her family lost 95% of its income last year from the fishing season).

WB: The position is quite simple. Several regulatory commissions have 27 proposals from 27 different groups. You have a public policy position that will not be determined by Pacificorp but by FERC. In the end, we are a public utility determined by public policy that will weigh you with others, and in the end our company will do exactly as they say. So that is a position for FERC and the state commissions.

QUESTION - AREA 6: Boulder, Colorado -13 year old
What is your opinion of the merger of NYSE and Euronext? Will it have a positive or negative effect?

WB: I don't know the answer to that. The NYSE has gotten far more efficient in terms of costs from the early '70s. The real test is do we get better executions and less costly executions. We're quite satisfied with the functioning on the NYSE.

CM: I don't know anything about it.

WB: I don't either but I took longer to say so.

QUESTION - AREA 7: Seattle
First, I am from Seattle, and Berkshire can contribute to the reduction of global warming if Bill Gates and I fly on same plane. (crowd laughter) How do I learn who to trust and who not to trust?

WB: You have as good a chance of me answering that as you have of getting on Bill Gates' plane next year. People give themselves away, and maybe it does help to be around as long as we have. When someone comes with a business, just the things they talk about, what they regard as important, there are a lot of clues.

CM: Partly we're deeply suspicious when the proposition is too good to be true. Once we talked to a guy who said "we only write fire insurance from concrete bridges covered by water...it's like taking candy from babies." We avoid businesses like that.

WB: In 1969 when I found who to give my partners too, when I thought about who to tell them to turn all their money too, Charlie, Sandy, and Bill Ruane, I couldn't have told you which of the three would be the best, but the one thing I was sure of, was that they were going to be sensational stewards of money.

QUESTION - AREA 8:
A follow up on the other valuation questions.

WB: Well, if government bonds earn 2%, we aren't going to buy something because it earns 3 or 4%. I don't ask Charlie every morning "what's our hurdle rate today?"

CM: The concept of hurdle rate makes nothing but sense, but a lot of terrible errors are made by people talking about hurdle rates.

WB: I've seen lots of presentations, on 19 corporate boards, all have calculated IRR. If they burned them all, the boards would have been better off. You just get nonsense figures.

CM: I have a young friend who sells private partnership interests to investments, and it's hard to get returns in that field. I asked him, "what returns do you tell them you can get?" He said 20%. I said, how did you come up with that number? He said, "if I told them any lower they wouldn't give me the money."

QUESTION - AREA 9: Chicago
Has there been any question that you haven't been able to get a comfortable answer to that also can't go in the "too difficult" pile?

WB: You may have just asked one.

CM: Sure, if you have a child dying of some horrible disease, you can't put it in the "too difficult" pile. There are lots of things.

WB: I have a file on my desk labeled "too hard." If you have the problems of WMD, it is too hard but you have to keep wrestling with it because if you even reduce the probability a tiny bit, it is good. You hope you don't have too many like that.

QUESTION - AREA 10: Germany
How often do you review each positioning in your portfolio? Some look every day, sometimes more, some once a year. What is your frequency?

WB: It breaks down into two periods in my life. When I had more ideas than money, I was doing it all the time because I had to monitor them all so I knew which to sell to buy something more attractive. If I had $100,000 and it was all invested and I wanted to put $10,000 into something more attractive...

Now our situation is such that we have more money than ideas, so we don't do it every minute because the option is cash. We still think about them all the time...we've got a lot of info filed away in our minds. It is a continuous process, but because we want to keep adding to our thinking. If we needed money for a very big deal, 20 or 30 or 40 billion dollars and we had to sell $10 billion, we would use the info we've been collecting.

CM: Even in Warren's salad days, he did not spend a lot of time thinking about his #1 choice. He could put that aside and look at other subjects

QUESTION - AREA 11 New York
When you buy, you buy a few hundred million in each stock. Should you allocate more to each investment since more cash?

WB: When we add to present lists, its because they look most attractive to us, or sometimes we hit reporting thresholds that cause problem and can't sell one share of it for six months because of the short swing rule. If you look at the portfolio at the end of 2007 you'll see that certain positions have been increased by billions of dollars. In general, we feel we can buy 20% of the daily volume and not cause a problem . So if were going to buy $5 billion of something, $25 billion of it has to trade.

QUESTION - AREA 12: Native Americans from California having problems with dams on the Klamath River. Having a tough time reading her question and crying.
Your subsidiary company owns dams on our river. Mr. Buffet, I know you care very much about humanity and ethical business, we understand you cannot exercise direct control with PacifiCorp. Would you be willing to meet with tribal representatives and learn about our issues?

WB: As I said earlier, we will not make the determination in the end. It will be made by FERC. It is the same way about a coal generation plant or wind plant. Any time you get into public utility plants, people are unhappy or happy with decisions because no one wants a power plant in their yard. But the world wants electricity. We will do exactly what FERC says to do. They will hear all arguments of all 27 groups and come with the decision of public policy. When we bought PacifiCorp, Walter Scott and I both signed affidavits, which I will read: "I agree I will not execute matters directly on PacifiCorp except those ministerial in nature.

QUESTION - AREA 13
Follow-up on Katrina, and another legislation question on Florida insurance problems with the government.
Can you explain it and what effect it has on Berkshire?

WB: I can't tell you with precision what the Florida legislation says, but the state of Florida has gotten more into the business of insuring citizens.

(Insurance exec stepping in at Buffett's bequest): Talked about how Florida citizens will be subsidizing the insurance of their houses. He ended with "it will all work out if the wind doesn't blow."

QUESTION - AREA 14: Michigan
Alluded to Graham, Ben Franklin, etc. and asked, "who are your present day role models?"

WB: I have a number of them, I'm not sure I want to name them. One thing I've been lucky on was that the ones I've had have never let me down. Associate well, marry up and find someone who doesn't mind marrying down.

CM: You're not restricted to living mentors. Some of the very best people are dead. (crowd laughter)

QUESTION - AREA 1 - A senior at Purdue. Had his resume screen printed on his shirt. Mentioned the large cost to come down here, how he turned down a $500 offer for his spot in line to ask for a job. "Was it a sound economic decision?" I can't recall the answer, but Warren found some clever and humorous way to blow him off without offending him.

QUESTION - AREA 2: North Oaks, Minnesota
Charlie, what are your current views on ethanol?

CM: Even McCain has had a counter revelation and decided that ethanol is wonderful now that he realizes that's the way they think Iowa. I think the idea of running autos on corn is one of the dumbest ideas that I have ever seen. But in a government with a lot of political pressures, weird decisions get made. Isn't it going to raise the cost of food? And you use as much hydrocarbons making the corn as you get out of ethanol, and you don't count the cost of the topsoil that goes away forever. I love Nebraska to my core, but this was not one of my home state's finest moments.

ANNOUNCEMENT:
WB: Jerry Goodman wrote a book called "Supermoney" and now has a new and revised edition...and it is now outside in the bookstore.

QUESTION - AREA 3
What are you doing to protect the company from inflation?

WB: Metals are no protection against inflation for us. The best protection against inflation is your own earning power, whether the currency is in seashells or paper money. The second best is owning a wonderful business. Not metals or raw materials or minerals. The truth is, if you own Coca-Cola or Snickers bars or anything that people are going to want to give a portion of their current income to keep getting, and it has low capital investment requirements, that's the best investment you can possibly have in an inflationary world.

CM: I've got nothing to add

QUESTION - AREA 4: Georgia
Wouldn't it save money to decommission the dams? Also, what are your views of the future profitability of the railroad industry?

WB: It won't be a lot more exciting, but the competitive position of rails has improved somewhat. Higher diesel raises cost for rails, but raises the cost for trucking competitors by a factor of probably 4. What was a terrible business 30 years ago and had operating regulation, (although now under threat of new regulation) is a better business now. It has never been a sensational business -- very capital intensive. You can earn decent returns on capital. It could be a lot better than it was in the past.

CM : Nothing to add to that one either.

QUESTION - AREA 4: Kentucky - A 10 year old girl
What are the best ways for a 10 year old to earn money?

WB: I must say that was a subject I gave a lot of thought to when I was 10. Delivering papers was my favorite, but you're probably a little young. I must have tried 20 different businesses. The best was my pinball business, but I don't recommend it now. A study I read correlated qualities to success. It looked at GPA, business school, etc. The best correlation was the age at which you first started your first business.

CM: When I was young, I read "The Richest man in Babylon." It taught about under-spending income and investing the difference. I got the idea to add a mental compound interest too, so I decided I'm going to give the best hour of the day to improving my own mind, and the world could buy the rest of the time.

QUESTION - AREA 6: Nebraska
Where is best place going forward with tight credit spreads, large trade deficit, etc. to invest?

WB: We don't try to buy our businesses with thoughts of world trends. We do think of foreign competition though, and don't buy into a business that has high labor content.

CM: We learned about foreign labor competition in our shoe business. In that, it reminds me of Will Rogers, who didn't think man should have to learn these easy lessons in such a hard fashion. You should be able to learn not to pee on the electric fence without actually trying it.

QUESTION - AREA 7: Florida
A declining dollar question.

WB: The dollar over time is likely to decline somewhat more against most major currencies. We backed that up with transactions that got a high as $22 billion, and then the carry on that made it an expensive way to express that belief, so we have focused much more on buying companies that earn more in other countries. It is not a huge determination of what we buy though, but it is a factor.

QUESTION - AREA 8: Iowa
First, with ethanol you should look at the environmental benefits. Second, how do you meet with boards?

WB: Writers have a distorted view of how corporations work. Most boards were potted plants that just sat there, even when we were big shareholders.

CM: Big deals, on average, are bad for shareholders.

WB: They think about what they're getting and not what they're giving.

QUESTION - AREA 9: Kuwait
What is your criteria for choosing partners?

WB: We don't like deals with partners. If we want to own it, want to own it all. We don't need the money from partners.

QUESTION - AREA 10: What is your long term view on commodities?
WB: We have no opinion on commodities. If we thought oil was going up we could buy futures. I have no bias at all toward businesses in commodities.

QUESTION - AREA 11: What advice do you have for NY Times shareholders?

WB: We have said for years that newspapers are overvalued.