Q: You're increasing your holdings in foreign businesses, but not in Japan. What is your analysis? Do you not find Japan attractive? Why?
WB: We've owned stock in four or five Japanese businesses but below the thresholds for reporting. We'd be quite happy to own more. We've tried to buy entire companies in the past without success. We haven't found a lot that look good from a valuation perspective, but we'd love to buy entire Japanese businesses.
CM: We would have owned more stocks if we weren't stupid.
WB: That's true a lot. People like John Templeton found Japan way before everyone else did. I was busy with other things ... probably sucking my thumb.
Q: [from The Guardian] What are your views on the U.K. investment environment? We're about to have a new prime minister [Gordon Brown] -- what would you want him to do?
WB: Raise the 3% reporting threshold for buying businesses. It's always a problem, because there are people who jump in when they find we're buying, and that drives the price up and makes it less attractive for us. If it's a £10 billion business, we have to report when we invest £300 million ($600 million). We like to invest billions.
CM: They're not going to change it just for you.
WB: But we're just as comfortable looking at things on the FTSE than on the S&P.
Q: [from the Times of London] Tell us more about this animation series you mentioned yesterday at the annual meeting.
WB: Andy Huard -- he did "Liberty's Kids" -- is doing it. He's recorded my voice. I'm not writing it but am approving the ideas and can have some editorial input. I like not writing, and I like what he hopes to do. Directed at kids, ages 7-11, tells stories, and hope to get across some ideas to give good habits -- things like steering them away from credit cards, and the like. Sell a few more on Charlie's "Ben Franklin virtues." We're not doing it for money.
Q: [from Bankrate] You're a known supporter of the federal estate tax. This hurts family farm owners, particularly with the $1 million threshold for the tax. Is there a fairer way?
WB: Well, let's say that we raise $30 billion per year from the estate tax, and we then get rid of it. From whom else shall we raise the money. All taxes are unpleasant and hurt, so what is the fairest way to distribute the hurt. We could replace it with a $1,000 tax on the 30,000,000 poorest families, which wouldn't be too popular. We want to hear them suggest an alternative, but they never do.
About 2 million Americans died last year. Estate taxes were filed on less than 2%, and about half the money was raised from 4,000 people. The average after-tax for those folks was over $40 million. If they're receiving $40 million after tax, I'm not too concerned.
CM: You'd support raising the exemption from $1 million to $2 million?
WB: OK, but I think it should get aggressive as the inheritance goes up. As a nation, we didn't believe in the divine right of kings, and we shouldn't believe in the divine rights of the womb. Resources shouldn't reside in those who picked the right womb. We wouldn't want to send an Olympic team made up of the first-born children from the team of 25 years ago. We don't reward members of the "lucky sperm club" in other areas of the world. Why here?
Other than that, I have no opinion.
And I'm seeing Hillary Clinton later tonight, so we'll have much to talk about. (Laughter.)
Q: You have said that you're interested in owning for the long term and you have a bias against divesting anything. With everything that's currently going on, don't you think that a company like yours could make a difference in ethics?
WB: I don't think so. The group that was there yesterday thought we don't do things ethically. But say they were Wesco shareholders -- they couldn't affect the way Berkshire does things. Even the government is limited in how much it can do regarding China. The idea of selling our shares just doesn't make any sense. As another example, Charlie like Costco (NYSE: COST) a lot; perhaps even more than he likes Berkshire. But Costco is the third-largest seller of cigarettes in the U.S. They are right up front in Costco, and they are also marked with some of the lowest margins in the store. But I'm not about to sell Costco stock because they sell cigarettes. As another example, we went to Memphis about 25 years ago to meet with a company. It was a great business, great people, and they sold chewing tobacco.
CM: And they all chewed their own product.
WB: They were terrific people, and they preferred to be bought by Berkshire. We ended up deciding not to buy it, but at the same time that wouldn't prevent me from going out the next day and buying shares of UST (NYSE: UST) -- a major smokeless tobacco company. We also ran ads in the Buffalo News for investing products that I don't like. It's likewise ridiculous to say that one oil company is "purer" than another, since oil is such a commodity. The people yesterday probably would have like to see us sell off all of our position in PetroChina to sink the stock, but that would make no sense. Sudan is going to continue to sell oil, and if the Chinese were to pull out they might even be better off because they'd sell it to someone else and potentially get an even better price. There's a limited supply of oil out there, and though the U.S. doesn't buy Sudan's oil, we sure don't want to see that supply taken off the market.
CM: That said, there are some people that we won't deal with because of morals.
WB: Yes, when we have a say. When PetroChina was planning on issuing shares a few years ago I wrote to them and told them it was a bad idea, they went ahead with it anyway. Overall, we've had little luck changing the way companies operate that we don't own a controlling position in.
CM: The conditions in Darfur are just so terrible and so it's not surprising that people want to do something and strike out against it.
Q: [from CHBC-TV] You have said that return on equity is important for the investment decisions that you make. Just how important is ROE to you currently in making your investments?
WB: Return on capital employed determines how good a given business is. The railroad business, for instance, is not a business that is particularly good in that respect. The Coca-Cola company will make around $7 billion in pre-tax on capital employed that could be $4 [billion] to $5 billion if they wish. See's last year made $75 million on $40 million of capital employed. Union Pacific will spend $2 [billion] to $3 billion for its rails. Return on capital is just not all that high.
While return on capital employed is important, it's even better when you can generate the same returns as you increase the amount of capital employed. The question is how much does it need and how much does it get in return. We really love to see a business with increasing returns on capital employed that can use incremental capital and earn at that same rate. Such businesses are practically nonexistent.
CM: We have all kinds of businesses at Berkshire. Some take a lot of capital, and there are others that don't need as much.
WB: Our utility businesses take lots of capital just to keep up. We'll never get really high returns on that business, and we shouldn't. We have been given the monopoly with those businesses so there's no reason that we should get a bonanza for it.
Q: There are many Asian countries, Singapore in particular, that have been amassing a lot of foreign reserves. What would be your recommendation to the managers of these funds to grow them and do good for the people of the country?
WB: They've done pretty well without us. China was going to buy Unocal with some of those reserves, and we went crazy, even though we were the ones that gave them that money buy buying their products. With a long-term strategy, there are a lot of considerations, and one isn't necessarily doing something that will increase the people's standard of living on that day.
CM: Singapore has managed itself more intelligently than the U.S. The country has come a long way from some horrible beginnings. We should be listening to them.
Q: We've heard a lot about investing today. Can you tell us about how life has been as a newlywed? And Charlie, do you feel slighted that you weren't invited?
WB: We kept it small. We had a judge, my daughter, my wife's sister, two dogs, and a cat -- though they weren't invited. We wanted to keep it quiet until it was done. I hope that I look better than I did last year for it.
Q: With the number of subsidiaries that Berkshire has, how do you get comfortable with succession at any level?
WB: Given the number of managers that we have, I have to be ready to replace any one of them tomorrow. Every couple of years, I ask that each manager send me a letter that gives his suggestion for what I should do if he is gone tomorrow. Along with giving me a suggestion for a replacement, I also ask for the strengths and weaknesses of that person. I've read all of these letters and I know who they're talking about. In some cases we have guys who are 95% as good as the manager currently in place, while in others cases we have someone that's maybe 60% as good. It's always difficult to have to replace a superstar.
But our managers don't leave, and they don't die. I tie immortality into the contract negotiations -- I use immortality whenever I need a tie-breaker. Mr. B. died at 104 after quitting at 103. I use this as an example for my managers of how bad it is to quit.
There are a couple of times where I've had to make a change, but I always hate to do that.
CM: Bringing somebody in from outside Berkshire almost doesn't happen. Most of our replacements work out really well.
WB: Most people working for us like what they're doing and so they want to stay put. Being No. 2 can be difficult because we don't have a mandatory retirement age, and so they can't just wait around for the guy above them to retire. Sometimes this can be bad because people want to move up, but we haven't seen much of this.
CM: Our system is really radically different than what everyone else does. It has been working a lot better.
Q: What do you see as the benefits to joining the EU, and what do you think about opportunities in Estonia?
WB: Our attitude on this is nothing special. We're very happy to buy companies in the EU, and it helps that they have a single currency that stays relatively stable. In general, we don't look at specific sectors or geographies. Charlie and I read the papers every day and get ideas from there, and we also get phone calls sometimes that give us ideas. But we don't have discussions about specific industries or countries.
CM: We also don't have an opinion on Latvian countries joining the EU.
Q: Some people in South Korea say for a variety of reasons that your style of value investing is not applicable in South Korea. Do you think that it is? What advice do you have for the Buffett maniacs in South Korea?
WB: Value investing makes sense any place. When I went to invest personally in Korea I looked for value. Posco came from turning the pages in a directory, and it was a value investment. I used the same decision process as I would if I were investing in the U.S. I get a big book from Citigroup (it's free), and I just turn through the pages. I'm looking for pure value ideas with low ratios and strong balance sheets. I picked out about 20 of them, and the average earnings multiple was 3, and they all had been cleaning up their balance sheets. When you do that there's almost no chance that you don't make money from them. Well, unless war breaks out or there's a major disaster, but you run that risk investing anywhere. Investing is about all about value. You're laying out a dollar today and trying to get more for that tomorrow. This doesn't work if you buy a company making hula hoops or pet rocks, but it does if you're buying a company that makes flour. People aren't going to stop eating flour tomorrow.
CM: And it didn't bother you that South Korea relies so much on exports?
WB: No. If I get 20 companies like these, there is no way you won't make money. I also got an extra kick from the currency.
CM: But there are not always opportunities like that. Korea was suffering from a lot of problems, and people got so pessimistic that they pushed stocks down to levels similar to the U.S. in the 1930s. That's not always going to happen.
WB: There is always a bunch of bad news out there. What other kind of investing is there out there besides value investing? Tip investing, where we go off of rumors? Or no-value investing? Or maybe dream investing. I've just never understood what the alternative is.
Q: There is just so much liquidity out there today. Some say that we're in a golden era with low inflation, low interest rates, and low volatility. At the same time, the difference in wealth between the wealthy and everyone else is the widest it's ever been. Do you expect this environment of liquidity to continue? And why isn't it being spread around more?
WB: The super-rich versus the rest of the country is dramatically changed in the last 15 years. A large part of that is the tax code. The U.S. government has said, if you earn money through a hedge fund or how I do at Berkshire -- work that doesn't cause you to break a sweat -- you pay lower taxes. If I make all of my money through dividends and capital gains I pay a comparatively low tax rate. This has become the favorite class -- apparently Washington believes that the super-rich are endangered as a class.
On liquidity, there's nothing but money running around. Money, money everywhere, but not a drop to drink. It's extraordinary, but situations like this always end the same way. It looked similar back in '69 when I closed my partnership. It has affected a lot of people, and everyone has gotten complacent. The problem with a complacent world is that people end up taking more risk. We can easily have an event that changes everyone's perspective in a hurry. And we will have such an event.
CM: We always have periods of excitement followed by periods of just the opposite. Those in Miami with stretched loans don't feel like there's money everywhere. And we're going to have more occasions like Miami condos. Right now everything is working wonderfully, and the big pension funds and endowments think that if they hire enough advisors they can make 15% for annum, but there is a force out there guaranteeing that they can't do it.
WB: If GDP grows at 5% per year, they can't continue to make 15%. People seem to understand that the entry price on a bond dictates the return, but they don't seem to understand that with stocks.
CM: And they all suspect that the more you pay the advisors, the better the returns will be.
Q: The real estate market has been rapidly cooling lately. Would you consider a purchase in the real estate market if the slowdown continues for another year or two?
WB: We've made deals from time to time in real estate. It's a big market, and if things get too out of whack we could step in.
CM: We didn't do it last time it happened. We've done better in other fields -- we're typically better at buying businesses.
WB: It's really a labor-intensive business, and we're not labor-intensive guys.
Q: Comparing 2007 to 2006, what is your exposure to hurricanes? Do you have any suggestions for public policy in this area?
WB: In 2007 vs. 2006, our exposure is about half, but not across the board. To the extent that prices went down, we have not scaled back equally. We wouldn't mind having more exposure than last year if we thought that prices were appropriate. If there are huge hurricane losses this year and prices are greater next year, we'll take more exposure. We are actually willing to risk a lot of money and expose ourselves to a lot of losses, but we have to be adequately compensated for it.
As for Washington, there should be some level where they are the insurer of last resort, because they are anyway. For banks, the FDIC was set up to provide last resort protection. Why not do the same thing for super catastrophes as the FDIC does for banks?
CM: But the government isn't saving the insurance companies.
WB: No, the insurance companies go broke. You don't save the insurance companies, you save the insured.
Q: What Canadian companies do you admire the most?
WB: You're really insistent on this one! It's not that I don't admire Canadian companies; it's the market cap thing. We don't really look at anything with a market cap less than $20 billion. Other than that I don't have any problem with Canadian companies, I bought my first Canadian stock at 14. We have taken a look at the Canadian banks -- overall, it's a pretty easy country to understand.
CM: There will be immense fortunes made in Canada if oil goes to $200.
WB: The companies involved in the dark sands would do well, but that is a very leveraged play on oil.
Q: There are a number of subsidiaries of Berkshire that have been ranked very low by firms that rank companies on their social impact. Do you have any plans to urge the Berkshire subsidiaries to do better in this respect?
WB: I have no idea how you would go about ranking the S&P 500 companies on a scale like that. I don't know how to rank a company that makes cigarettes vs. one that markets cigarettes or how to compare Chevron to Exxon to BP. If we have a company at Berkshire that's doing something that I don't think we should be doing, I'll talk to the manager. But if people are mad, for example, because Coke makes people fat -- well, I drink Coke and I'm a little fat -- I don't have a problem with it. I don't even know how you would rank something like that.
CM: In a lot of cases, I don't think the people doing philanthropy know whether what they are doing is doing more harm than good.
WB: Take education. It's a very important topic, but there are no easy answers. Or the U.S. as a whole over the last 50 years, what rank would you give there? It's hard to give a grade. It's likewise hard to grade Exxon -- the company has done well in part because of its very low finding costs, which is a great benefit to the world.
CM: If you ask me who has done more good for the world, the Ford Foundation or Exxon, I'd say Exxon.
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