Notes from the 2015 Berkshire Hathaway shareholders' meeting

Brian Gongol

These notes are approximate reconstructions of the direct quotations. They should not be considered precise transcriptions, but are intended to reflect the nature of what was said as accurately as possible. Paraphrasing, as necessary, was performed in as journalistic a manner as possible given the live nature of the event.

Warren Buffett: A quarter of my calories come from Coke. Could have been eating Brussels sprouts, but I don't think I'd live as long. I don't see a lot of smiles on the people shopping at Whole Foods.

Greggory Warren: What's the attraction to buying car dealerships?

Warren Buffett: There aren't huge advantages of scale in owning lots of dealerships, but running them well is a good business. It's local. There are 17,000 dealers in the country. If you ask people to name dealers, they come up with local names. Don't think you benefit from consolidating names. We will be buying more dealerships, but on local considerations. We don't bring anything to the finance "party" in terms of autos. Wells Fargo has an advantage in cost of capital when lending. They're the natural lenders. We're not going to be in the finance business. We will keep looking for dealerships; it doesn't give us a buying advantage from the automakers, but we hope they will continue to be regarded as local dealers by their customers. We will look for places where we can run the dealership better.

Charlie Munger: Van Tuyl reminds me a lot of Kiewit; it's a culture of meritocracy. I think they have a lot of good things going for them, and the right people are prospering.

Station 3: Can you share some tips on what characteristics you thought about when building the culture at Berkshire?

Warren Buffett: Culture has to come from the top and be consistent. It has to be part of written communications. It has to be rewarded when followed and punished when not. It's much easier to do when you inherit a culture you like, and it's a lot easier to do with a small firm. I can think of a lot of big companies in America that we couldn't affect if we spent ten years trying. It's like with children: People see how the people they look up to behave, and it tends to affect them. There are always going to be some who don't and who behave badly. When you see that happening, you have to do something about it. I didn't like making 30-year mortgages at Clayton, so I stopped it. I didn't like some of the sales practices I saw at Kirby, so we changed them; we especially didn't like seeing how some seniors were being treated in sales processes, so we instituted a policy to protect them. At GEICO, we work all the time at trying to behave with other people as though our positions were reversed. We're far from perfect, but if you keep working at it, it does get results.

Charlie Munger: We were always dissatisfied with what we already knew, and we always wanted to know more. If Warren and I had stayed frozen in time, this would have been a terrible place. It's that we kept learning that has made it work.

Carol Loomis: Percentage of total market cap versus GDP: You've said it's a good measure of valuations. It's at 125% now. That's about where it was in 1999 when you presaged the bubble. The other indicator, also from 1999, is corporate profits as a percentage of GDP. You said it ranged from 4% to 6.5%. It's now at 10.5%, per the St. Louis Fed. Do these indicators bother you?

Warren Buffett: The second figure might be a concern for other parts of society; it indicates that American business has done very well over the last few years. That reflects tax rates and other things. American business has prospered incredibly. The first indicator is being driven by an interest-rate environment that Charlie and I would have thought impossible only a few years ago. Profits are worth a whole lot more if the government bond yield is 1% than if it's 5%. For many people, the opportunity cost is whether to own bonds or stocks. Bonds aren't earning anything, and stocks are at historic high prices, but the history never included a world of such incredibly low interest rates. We don't know how long those rates will prevail; we might be llke Japan, where they will last indefinitely. If we continue with these rates, stocks will look cheap. If they rise, stocks will start to look more expensive.

Charlie Munger: Now that we've revealed our inability to predict these things, why would you take our advice in the future?

Warren Buffett: We've never made a deal or declined to do one based upon macro factors. We bought Burlington Northern at a time of terrible general economic conditions. We know that we don't know what the next few months will look like, but that doesn't matter if we're looking to own a business for the next 100 years. We think any company that employs an economist has one employee too many. Charlie, can you think of anything rude to say that I haven't said?

Charlie Munger: It would be hard to improve on that one.

Jonathan Brandt: New standards are being imposed on crude oil shipments via rail. The rail industry doesn't like the costs; others don't like the timetable for the new rules. Do you think they strike the right balance between efficiency and safety?

Warren Buffett: You've asked all the questions I'll be asking. The rules are 300 pages long and two days old, so I don't know enough about them to answer. I've talked with Matt Rose and Frank Ptak briefly about them. The interests of their businesses -- BNSF and our tank-car manufacturer -- may diverge at times. Remember that as a common carrier, we're required to carry ammonia and chlorine and other dangerous products that have to be transported, even though we'd rather not. But for some of them, rail is the most sensible alternative to trucks or pipelines. It's up to the government to set the rules about transporting dangerous products, and pipelines and rails both have their own safety risks. The safety figures at BNSF get better year after year, but derailments are inevitable, and nothing will be perfect.

Charlie Munger: Successful companies have a lot of engineers and long histories of trying to be safer than average. None of that's going to change; you'd be out of your mind to run one of those companies and not pay close attention to safety. It will be improved consistently, and it should be.

Warren Buffett: The Bakken crude has shown to be more volatile than other crude.

Charlie Munger: It's almost a misnomer to call it crude.

Warren Buffett: BNSF has the best safety record among the railroads. BH Energy has a remarkable safety record. At every subsidiary we've acquired, Greg Abel has ensured that their safety has gotten better.

Charlie Munger: After we acquired the Omaha pipeline, we saw our people work day and night to make it safer. Nobody wanted to see another pipeline explosion.

Station 4: Advice for someone trying to network with influential people, but who doesn't have access to the alumni network at a top business school.

Charlie Munger: Play the hand you've got.

Warren Buffett: Charlie's very Old Testament about this. He didn't get much past Genesis.

Charlie Munger: I never had any business school training; why should you have any?

Warren Buffett: I'd say that business school training was even a handicap 20 years ago. They were teaching efficient-markets theory, and students were paying $30,000 to $40,000 a year for the "privilege".

Charlie Munger: Law schools now are like a pie-eating contest, but if you win, you get to eat a lot more pie.

Becky Quick: One risk to Berkshire is a large railroad accident. It appears they have recently been in rural areas, but how would it affect the company if it happened in an urban area?

Warren Buffett: Our reinsurance unit went to the four major railroads offering very high-limit insurance; in the billions of excess coverage. If you had the perfect circumstances for a terrible disaster, it could be calamitous. You're always working to be safer, but you'll never be perfectly safe. We have some insurance at BNSF, but we don't need insurance at Berkshire; we have the capacity to take on any risk that comes along. We aren't net consumers of insurance; we're selling it. We offered it at very high rates to the major railroads, but nobody wanted to pay. Marmon has taken on a new facility that we expect will be working three shifts at retrofitting cars (our own and those of others) to meet the new Federal requirements. The industry had to wait to find out what the rules would be. There were practically no orders placed for tank cars in the first quarter. Historically, the railroads never really owned the tank cars; the present method of having lesssors like ours will be the future.

Gary Ransom: You've had a number of inter-company transactions in recent years; perhaos more than normal. What's the purpose and what does it do for you? Why now?

Warren Buffett: A lot of things at Berkshire can be answered by "because we just got around to it." We've moved some portions of capital from the insurance companies up to the holding company level in order to simplify transactions. There's no real change in the certainty of payment of policies or anything; it just makes it easier for us to manage money if the funds are concentrated in National Indemnity. We ended up with companies inside Geico Corp., the holding company for Geico, and it just made sense to move some of them up into the holding company.

Station 5: The US isn't set to be a part of the Asian Infrastructure Investment Bank. How will it affect US companies if the US doesn't become a part?

Warren Buffett: I know nothing about that, so I hope Charlie does.

Charlie Munger: I know less than you do.

Warren Buffett: If we tried to answer, we'd be bluffing. Do you have a second question?

Station 5: What about the dollar as a reserve currency?

Warren Buffett: I'd bet a lot of money on the dollar remaining as the reserve currency.

Charlie Munger: I'm more worried than a lot of people about printing and spending a lot of money. Sometimes you have to do that; we just went through one of those times. But it worries me to see us spreading it around with a helicopter. It's always making the economic progression of things more dangerous.

Andrew Ross Sorkin: Can you discuss the risks involved in renaming subsidiaries under the Berkshire name?

Warren Buffett: We created the Berkshire Hathaway Home Services franchise operation because we were losing the rights to the Prudential name. Greg Abel asked whether he could use the name, and I told him that he could, but that I would yank it if I heard about abuses of the name. We had no plans to turn Berkshire Hathaway into a household name, but we had to change the real estate operation's name, and as long as it's not abused, I don't mind using the name. Not all of the auto groups will be allowed to use the Berkshire name, but it will be treated the same way. We have no plans to turn the name into a huge asset. If using the parent company name means I hear sooner about misbehavior and can address it, then it's helpful.

Charlie Munger: We'd be crazy to re-brand it as "Berkshire Hathaway Peanut Brittle" rather than See's.

Greggory Warren: Distributed generation: How long before it becomes a meaningful threat to your utilities?

Warren Buffett: Storage is the key. Obviously, we pay a lot of attention to distributed generation. One defense is to have a very low cost of energy; MidAmerican has done extremely well in that regard. Huge improvements in storage would make a lot of difference.

Charlie Munger: We're obviously going to use a lot more renewable energy because the fossil fuels won't last forever. Berkshire is aggressive and well-located to handle it. To have 20% of MidAmerican Energy getting its energy from wind is something that makes me proud. Additional renewable energy production is a huge benefit to humanity and it'll be a huge benefit to Berkshire. There will be some disruption to the utility industry, but I think there will be more opportunity than disruption.

Warren Buffett: We've just announced our first wind farm in Nebraska, and we're adding a whole lot more in Iowa. It's a moving target.

Greg Abel: When the present projects are completed in Iowa, more than 4000 megawatts will have been built in that state. By the end of 2016, about 58% of our energy going to customers will be coming from wind. We now have more than $18 billion committed to renewable assets. We've committed to retire 76% of the coal at NV Energy, and we're replacing most of it with renewables.

Charlie Munger: Do you think we have more disruption to fear or more opportunity to love?

Abel: We have a lot of opportunity ahead.

Warren Buffett: Wind and solar development are dependent on tax credits for now. The market system wouldn't produce the amount society wants without the tax credits, but because Berkshire Hathaway Energy is part of the parent company, the tax credits allow us to make much more use of those credits than would have made sense if it were non-consolidated with the parent company. That makes it by far the biggest player in renewable energy, and circumstances are set to compound that, since other utilities have less incentive to invest in wind and solar because they don't have the same kind of taxable income.

Station 6: What was your most memorable failure?

Warren Buffett: We've discussed Dexter Shoe many times in the annual report. I looked at a shoe business and spent $400 million on something destined to go to zero in a few years. I gave the purchase price in stock that today would be worth $6 or $7 billion. It makes me feel better when our stock price goes down because it makes me feel less stupid. Nobody misled us. I just made a mistake in my assessment.

Charlie Munger: Every time we've used stock as a purchase tool, it's been a mistake.

Warren Buffett: We've been very cautious about what we've done because of the people among our families and friends who are invested in the company. We could have played harder at times, but I'd rather be 100 times too cautious than 1% too incautious. People looking at our past would say we've missed plenty of good opportunities.

Charlie Munger: If we had used the leverage a lot of other operators did, we would have been a lot bigger, but we would have sweat a lot at night. It's crazy to sweat at night...

Warren Buffett: ...over financial things.

Carol Loomis: In the 2008 letter, you anticipated an "onslaught of inflation" due to the Federal Reserve's actions. What do you think now that interest rates are likely to rise?

Warren Buffett: So far, I've been very wrong. Charlie's been a little bit wrong. I would not have predicted that you could have five or six years of rates close to zero (and even negative right now in Europe), and sustain deficits, and not raise the ratio of debt to GDP. Deficits aren't a dirty word, but large ones are scary. The Federal Reserve's balance sheet is well outside what we discussed in my Economics 101 course, and the only real negative consequence is that savers have just been killed. If the money supply grows and grows, I don't know how you don't have inflation. Poland issuing bonds with negative interest rates is just something I never would have anticipated. Berkshire will be positioned well to be strong even in strange times. We will remain poised to act on our own at any time. We're sitting on $60 billion right now; I'd rather have $20 billion and one great $40 billion acquisition. If any kind of economic turbulence occurs, I want to be ready for it when a lot of people won't be.

Charlie Munger: We're just swimming all the time, and we let the tide take care of itself.

Warren Buffett: People who make big macro predictions get a lot of air time, but they don't make a lot of money.

Charlie Munger: People who make a lot of pronouncements will make the mistake of thinking they're right. We'd prefer to acknowledge when we're ignorant.

Warren Buffett: We will occasionally see things that make sense for Berkshire, and we'll remain prepared both financially and psychologically.

Jonathan Brandt: There's a big difference between deferred taxes and cash taxes. Given your capital spending, is deferred taxation a permanent source of float?

Warren Buffett: There are two forms of float from deferred taxes. One is the unrealized appreciation of assets. The other is accelerated depreciation, which has been around forever. In our utilities, that helps our customer but it doesn't really help us. We get a return on equity, but it's not "free" equity, and the regulators take it into account. There's less cash going out the door, and that reduces our need for cash for capital investment, but as a hidden form of equity, I'd rather have the deferred taxes than not, but it's not huge to us. If there were a change in corporate rates, that might affect us. The float from the insurance business we regard as a huge asset. The deferred taxes we regard as a plus, but not a huge asset.

Station 7: Can you speak to your knowledge of Teledyne?

Warren Buffett: Charlie knew and studied Henry Singleton personally. There's a lot to be learned from Singleton in his operating years, and from what happened after.

Charlie Munger: Henry Singleton was a lot smarter than Warren or me. He aced his tests and could play chess blindfolded. Singleton looked only at initial guidance, but Warren worked harder and got a better result. Singleton had very clever incentives that applied to his executives. The incentives got so strong and the culture of performance got so strong that the people inside Teledyne went too far in dealing with the Defense Department and got the company in trouble.

Warren Buffett: We believe a lot in the power of incentives. But we've seen really decent people misbehave because they though there was a loyalty to the leaders that went too far. We want to keep people from misbehaving for ego satisfaction and for other rewards.

Charlie Munger: At the end, Henry wanted to sell his business to Berkshire for stock. He was smart right to the end.

Warren Buffett: Jack Ringwalt ran National Indemnity extremely well, but his personality was such that his claims manager started hiding claims, which in turn had effects on our reinsurance contracts. The claims guy had no financial incentives to hide anything, but he couldn't take the kidding he got from Ringwalt. You want to build that out of your culture.

Becky Quick: If the reinsurance business is deemed too big to fail, how does that affect Berkshire?

Warren Buffett: There are two regulatory aspects: A European group that looks at insurers generally and applies special attention to a group of about 9 insurers. In the US, we have the Financial Stability Oversight Committee, which designates systemically significant financial institutions. The question isn't just whether you're large -- Apple, Exxon, and Walmart are all large. The definition of a non-bank institution that qualifies is that 85% of revenues come from financial services. We're nowhere close to that. The question is whether problems for Berkshire could destabilize the economy generally. There's no reason to believe for any reason that Berkshire should be so designated. In the last time of trouble, we were about the only party strong enough to supply help to the financial system. We want to remain such that the troubles of others can't take us down. I think we're unique in that way. It's a moot question; the law exists and we haven't been approached about it. It takes a year after you're first approached, and I don't think we even come within miles of being approached.

Charlie Munger: I think there's a lot of risk in high finance, and the thought that Dodd-Frank did away with the risk is ridiculous. The idea of trading derivatives is like running a gambling parlor. You say you're sharing risk, and that's mostly nonsense -- people just like making money with their gambling parlors. I think our competitors like it that they think they deserve regulation and we don't.

Warren Buffett: My understanding is that Dodd-Frank weakens the power of both the Fed and the Treasury to take actions like the ones they took in 2008, and I think those actions were downright necessary. To have people believe you when you say "Whatever needs to be done will be done" is essential. That people believed Hank Paulson when he said money-market funds would be protected -- that prevented a devastating run on money-market funds, which could have taken down the entire system. When you have a panic, you have to have someone somewhere who can say and be correctly believed that he or she will do whatever it takes. You saw what happened when Draghi, Bernanke, and Paulson were able to say that. If they can't say that, panics will accelerate like you'd never believe. The only way they could get the job done was to make guarantees without exceptions. I think Dodd-Frank weakens that, and I think that's a bad thing.

Gary Ransom: What's the overall strategy of your commercial insurance lines?

Warren Buffett: We will find out what the consumer wants. We're experimenting with online workers compensation insurance. As you know, we've done well with direct auto insurance sales. We don't think there's a lot of channel conflict between direct and agent-driven insurance. We believe in experimenting, and we have the know-how to write that business direct. We'll find out if the customer wants to buy it that way. The nature of insurance has changed; GEICO was all direct mail in its early days. The basic idea was to save people money on auto insurance, but it migrated from direct mail to television and phone, and then to the Internet. The world moves on. Whatever way saves people money and gives them good service is what will win over the next 20 or 30 years.

Station 8: What is the one question you've never been asked that you'd like to answer now?

Warren Buffett: I can think of the question, but I'm not sure I want to answer it now. Charlie, do you have any you've been aching to answer?

Charlie Munger: We could ask the asker the worst thing she's ever done...

Andrew Ross Sorkin: You take great pride in running the company in a deliberate way that respects the management in place. Are you saying that 3G's management method is congruent with yours? If they ran Berkshire, wouldn't there be a lot of layoffs?

Warren Buffett: GEICO is run just as efficiently as 3G would run it. The home office is run as efficiently as they would run it. We don't believe in having extra people around. The newspapers have cut back as revenues have kept shrinking. The idea of running a fat operation just because you're profitable is crazy. We only gave up on the textile mills when it became impossible to remain profitable. We were trying to reduce our labor component all the time just to stay afloat, and in the end it didn't save us. I don't want any of our operations to be run with excess people; I may not police it as closely as 3G would, but I don't like it any more than they do. You see our attitude on excess people most clearly in how we run the home office.

Greggory Warren: Do you see further consolidation coming in the consumer food business?

Warren Buffett: There will be consolidation in the future. Strong brands endure -- like the ones General Foods had in the 80s and that are with Kraft today. Strong brands are really potent stuff. Heinz ketchup is a great brand. You'll always have a fight between the retailer and the consumer brand. In the end, the retailer may want to shift to a private label (and those have been around forever in the soft-drink field -- I remember getting a six-pack of Sam's Cola from Sam Walton when it first came out) -- but the brands are powerful, too. You have to build and enhance the brands. See's had to address the risk of competition from Russell Stover. A strong brand will survive, and the great retailers will do well, too -- but they'll always be in tension.

Charlie Munger: Waves of layoffs frighten people. Jobs are a huge part of people's identities. But what would our country be if we'd kept all of our people on the farm? We need our businesses to be right-sized.

Station 9: Can you apply value investing to China?

Warren Buffett: Investment principles don't stop at borders. If I were investing in China, India, or the UK, I'd apply exactly the same principles I learned in "The Intelligent Investor". I'd look at stocks as small pieces of the business. I'd look at price fluctuations as a source of opportunity. I'd look for great businesses at good prices.

Charlie Munger: The Chinese have a history of betting hard at times of good opportunity, and that makes things volatile. China can look a lot like Silicon Valley. They'd be wise to copy the way Berkshire operates.

Warren Buffett: There's a certain irony in that we will do the best over decades if we operate in an environment where people behave foolishly -- exaggerating responses to events, getting wildly excited and wildly depressed -- that's great for investors, but it's bad for society. We've benefitted enormously from irrational periods, most especially around 1974, when there were incredibly cheap opportunities. If you can behave like a young investor, evaluate stocks like businesses, and invest when things are very cheap (no matter what the people on TV say), you can do very well. That the Chinese stock market is relatively young may subject it to greater extremes.

Charlie Munger: China is wise to dampen the speculative booms. Value investing will never go out of style. Who in the hell doesn't want value when they're buying things? Why do we want it everywhere but in stocks?

Warren Buffett: Yet it's never very popular.

Carol Loomis: You've often mentioned how much you believe in the intrinsic strength of the US economy. How do the CNBC [chemical, nuclear, biological, and cyber] threats put America at risk?

Warren Buffett: The economic system is enormously powerful; there will be fits and starts, but imagine what a flyover tour of the country would have looked like in 1776. Everything that's been developed since that time is profit. People fret about a 2% economic growth rate, but with a 1% population growth rate that still results in major growth over time. But great growth can be negated by the work of madmen, and we need an extremely vigilant security operation in the US. The country will do extraordinarily well if we ward off those threats or at least minimize their impact. The luckiest person in history on a probabilistic basis is the baby born in the US today.

Charlie Munger: I think I've lived in the most ideal period of human history. But we shouldn't get too smug: China has come up faster than any other nation in history.

Warren Buffett: But that's good for us.

Charlie Munger: I can't think of anything more important than future close collaboration between the US and China. I think it's enormously important that we like and trust each other. Both countries would be crazy not to collaborate and increase trust. There's nothing more important that we could do for our safety or for the general benefit of the world.

Warren Buffett: Would you rather be born today or when you were born?

Charlie Munger: It's very interesting now, but it's always been interesting. I don't like theoretical questions like this. I'd rather think about questions where I can either gain an advantage or help someone else gain an advantage.

Jonathan Brandt: Can the future CEO also be the chief investment officer?

Warren Buffett: It's very unlikely but not inconceivable that they could be the same person. An operating manager needs to have a lot of skills, including capital allocation. But I wouldn't want to put an operating manager who only had experience with investments. I've learned a lot about operations by being in operations. I've seen a lot of businesses run by people who didn't understand the financial and investing background. Some of our operating managers know a lot about investing.

Station 10: Can you talk about Ted Weschler?

Warren Buffett: Ted and Todd are both very smart about businesses and investments. They understand the reality of operations and what makes for competitive strength. On top of that, they have qualities of character that mean a lot to Charlie and me. We've seen dozens of investment managers with great records going back to the 1960s -- but when I gave up my partnership, I picked Bill Ruane to run the funds of my partners who stayed in. We want people who do more than their share, who don't claim credit for things they didn't do, and who have personalities that make you want to entrust them with more responsibility whenever you can. Charlie and I discussed the investment records of Ted and Todd before hiring them, but we talked a lot more about their character.

Charlie Munger: Each of them has helped us buy a business recently.

Warren Buffett: They know the right touch to apply. We've known people with 160 IQs who have self-destructed. Some people are very incapable of functioning day-to-day even though they have occasional bouts of brilliance. Ted and Todd identify with Berkshire and not with themselves.

Charlie Munger: Trustworthiness is more important than brains. We'd never hire anybody, no matter how able, if we didn't trust them.

===== Lunch break =====

Becky Quick: What can you tell us about good investments during inflation?

Warren Buffett: The best businesses in an inflationary period are the ones which you can buy once without having to buy into it again over and over. That's why real estate works so well in an inflationary period; it's a one-time outlay, and you get an inflationary expansion in your capital without any new buy-in. If you're in the utilities or the railroads, they keep eating up new capital. The business where you buy something once -- like a great brand -- is great during inflation. We've had to nourish the See's brand over time, but the value of the brand increased along with inflation. Gillete bought the radio rights to the 1939 World Series; think of the number of impressions they got then for $100,000. Millions of people got the impressions in those dollars. If you tried to get the same thing today, it would cost you vastly more. It was a great investment that could be made in 1939 dollars that paid off still in 1960, 1970, and 1980 dollars.

Charlie Munger: If inflation ever goes completely out of control, you never know where it ends up. Without the Weimar inflation, you may never have had Hitler. Imagine the price the world paid for that. We don't want inflation just because it might be good for See's Candy.

Gary Ransom: A few years ago, you talked about buying a major insurance company. Did you replace that by spinning up your own operation in Berkshire Hathaway Specialty?

Warren Buffett: It's almost certain we won't buy out anyone else at this stage. We have a good operation, great managers, more capital than everyone else. If we acquired an outsider, we'd have to pay a substantial control premium. I think it will be huge five or ten years from now. Anything to add, Charlie?

Charlie Munger: I agree with you.

Warren Buffett: That's how he keeps his job.

Station 11: What practical mental models would you impress upon someone trying to start out their career?

Charlie Munger: Reputation is earned over a long period of time. Very few people are like Charles Lindbergh and gain one instantly. You have to build the reputation you can in the time available to you. It's a wise investment. I see opportunities all the time that arise for people who took advantage of previous opportunities. Nothing beats behaving well as you go through life. We have tried to behave better as we've gotten more prosperous. I don't think there's any way of guaranteeing a powerhouse brand, nor achieving great success with low odds.

Warren Buffett: The old chairman of Fiat once told me that when you're old, you'll have the reputation you deserve. When you're young you can fool people. But when you're older, you get what you deserve. The same applies to companies, and I think that applies favorably for Berkshire, even if that's not exactly what we had set out to do.

Andrew Ross Sorkin: You have said that climate change hasn't affected insurance payouts. Competitors say that it has. Are your models different?

Warren Buffett: The lawyers will tell you to put every possible risk factor in a laundry list of things that could potentially create risk. We price our business every year; it's not like a life insurance company that locks you in for 60 or 70 yeras. Property/casualty insurance is priced one year at a time, and I see nothing that tells me that global warming should cause us to change our prices from year to year. That doesn't mean it's not important to humanity. It just means that it's not material in comparison to things like the fire protection or the neighboring buildings when pricing out coverage for property insurance. It would be a different story if I were pricing out 50-year coverage for wind events in Florida. It's just not anything I'd identify in the 10-K as a threat.

Charlie Munger: I don't think it's clear what the results will be over the extremes in weather. There are a lot of people who howl a lot about potential calamities. A lot of people get invested in things and act like they would under the influence of an extreme ideology. That doesn't mean global warming isn't happening and isn't important, but it's easy to take it too far.

Warren Buffett: I don't want my underwriters thinking about global warming; I want them to be looking at the moral hazard of the person owning the property. If you're insuring Marvin the Torch, global warming doesn't matter. Marvin said, "I don't burn buildings; I create vacant lots."

Greggory Warren: What about your oil investments?

Warren Buffett: We call it "energy" in Berkshire Hathaway Energy, but it doesn't include oil and gas. We look for big investments we can fold into Berkshire Hathaway Energy. My ambition ever since buying MidAmerican is to get it to the point where it earns $35.05 a share, which is the price we paid. It'll probably earn about $30 a share this year, even though it doesn't pay a dividend. We won't buy a lot of oil and gas stocks very often, but we probably haven't bought our last. We've made a little money there, but we've not distinguished ourselves.

Charlie Munger: At the time, ExxonMobil was a good substitute for cash, given the dividend it paid.

Station 1: How would you simplify and rationalize the tax code?

Warren Buffett: It takes 218 Representatives and 51 Senators, plus a President who will sign the bill. Despite complaints from executives, corporations have expanded their share of the national income while decreasing their share of tax payments. Absent a major revision of the tax code, it's difficult to extract special exceptions from the tax code. If we're going to spend 21% of GDP, we need to raise 19%. We can have about 2% leeway without expanding our proportional debts. Our corporate rates are 35%; we used to deal with them at 52% and at 48%, and the country grew at those times. I don't shed any tears for American business overall. I think the code could be a lot more equitable, but I don't think the 2% of GDP currently being raised from corporate taxes is onerous. With American business earning 15% on tangible equity, equity holders are being extremely well-treated versus bond holders.

Charlie Munger: California has ridiculous taxes that chase rich people out. Hawaii and Florida understand that seniors don't create a lot of crime and they don't use services like schools, meanwhile they spend a lot of money on things like health care, so they're very attractive. The idea of driving out the rich people makes Florida seem vastly smarter than California. California looks demented. Who doesn't want rich people coming to their state?

Warren Buffett: Remember that when you come to Nebraska. Ron Wyden and Orrin Hatch are smart and patriotic; I think that there's great opportunity to get things done if they can work outside the public eye. Charlie has speculated how badly it would work if the Constitutional Convention were held with TV cameras outside. I don't think it's impossible to imagine having a new corporate tax code within the next year.

Carol Loomis: What did you learn from "The Wealth of Nations"?

Warren Buffett: It taught me economics. Bill Gates gave me an original copy. If you read Adam Smith and Keynes and Ricardo, and if you read a little book called "Where are the Customers' Yachts?", you'll gain a lot of wisdom. That book contains an incredible amount of wisdom in a short number of pages.

Charlie Munger: Adam Smith has worn well. The lessons he taught in 1776 were applicable again when the Soviet Union fell. He understood the productive power of capitalism well and early.

Warren Buffett: I took Smith's ideas of division of labor and applied them to mowing my lawn as well as to my philanthropy.

Charlie Munger: You didn't perform your own bowel surgery, either.

Jonathan Brandt: Do managements at formerly-public companies sometimes have earnings-management behavior that carries over from their public days?

Warren Buffett: I don't know whether our formerly public or formerly private companies are a better set of companies or whether they have performed better.

Charlie Munger: I have no idea where anyone gets the idea that earnings management is taking place.

Warren Buffett: When we say to run the company like you'll own it for 100 years, we mean it. We don't ignore the current performance of the companies, but we don't live by them. What matters is where we will be 3, 5, and 10 years from now. If we're working to maximize returns over ten years, that doesn't mean we're out to throw away money.

Station 2: What differences in corporate culture do you see between German and US companies?

Charlie Munger: We've had a hard time buying things in Europe. The family traditions in Europe are different than they are in the United States. Germany has a long tradition at being good at technology and capitalism. That's been a godsend for Germany. We've long admired how the Germans perform. They work a lot fewer hours than many others, and produce a lot more. Warren and I work a lot like that. We admire the Germans and have been looking to own more.

Warren Buffett: I'd bet we buy another German company in the next five years. Our people there will help us find them, and I look forward to doing more with them. We have to get a business we understand. I've gotten four or five letters in the last few months from Germany, but the businesses involved have been very small. We do fit the family situation occasionally. Prices there may be more attractive than here in the United States, though nothing has been good enough for me to buy recently.

Becky Quick: A shareholder wants to know why he couldn't get a better rate from GEICO than at the competition, even after the shareholder discount.

Warren Buffett: Nobody can be the cheapest every time. Our underwriting involves many factors, including age, and after the calculations we sometimes can't beat Allstate, State Farm, or USAA. I don't think any company of size will be the low price more often than GEICO. Different firms weight different variables differently. 60% of the time, someone does better than us. 40% of the time, we should be the lowest. We have 11% of the market now, so we should have a lot of room for additional growth. We know that 16-year-old boys are about as bad as drivers get; 16-year-old girls aren't great drivers, but they're a better class. We have to ask a lot of questions to do our underwriting.

Charlie Munger: If you're older and aren't deteriorating as fast as your contemporaries, you may pay more for insurance, but that may be a worthwhile tradeoff.

Gary Ransom: What opportunities interest you in reinsurance?

Warren Buffett: It's not as good of a business as it used to be. A lot of money has come into the market not because people are seeking to reinsure wisely but because it's a way to break out earnings. It's possible to set up a hedge fund in Bermuda under cover of starting a reinsurance business, and some parties will use that reinsurance business as a "beard" to avoid taxes in the hedge fund. With that going on, they'll sometimes buy reinsurance business just to make it look like they're legitimate. It's hard to compete with that.

Charlie Munger: These parties getting into reinsurance for asset diversification are searching for a narrative. We're not searching for a narrative. We don't particularly admire the way the game is being played.

Station 3: How do you make friends and find people who want to work with you?

Charlie Munger: I was pretty obnoxious and asked a lot of impertinent questions. Not everybody liked me. The only way to fix that for me was to get very rich and very generous.

Warren Buffett: People will see a lot of virtues in you if they think you'll write a big check. I've had a lot of good teachers in the sense of those who exhibited traits I admired and wanted to replicate. If you look at the people you like, write down the things that you like about them. Do the same for the people you avoid. Take on the qualities of the good and dispose of the qualities in yourself that you see in the bad.

Charlie Munger: That really works in marriage. Instead of trying to change your spouse, try changing yourself.

Warren Buffett: Charlie has said that the most important thing to look for in marriage isn't personality or looks or humor, but low expectations.

Andrew Ross Sorkin: Can you comment on the Netjets dispute?

Warren Buffett: Netjets is a very decent business and the pilots have a good job. We don't look at the investment in our fleet as a major metric for the company, since we resell those ownership shares to our customers. We've dealt with lots of labor unions over the years and only had three or four strikes. We have no anti-union agenda whatsoever. We think we have sensational pilots. It's in human nature to have differences of opinion over things like pay. Our pilots average $145,000 a year with a schedule of seven days on and seven days off. We pay them for travel. We'll get it worked out with the pilots, but it won't happen in a day. Our travel volumes are rising in the US and are flat in Europe. Nobody cares more about safety at Netjets than us, since we use it, our families use it, and our managers use it. We have an intense interest in safety.

Charlie Munger: I'm not sure the union is fairly representing the pilots.

Greggory Warren: Duracell provides steady cash flows, but isn't the core business in decline? How much of a role did tax planning play in the purchase?

Warren Buffett: The deal had tax advantages for both Procter and Gamble and for Berkshire Hathway. The deal wouldn't have originated without the tax effects. It's similar to the Section 1031 exchange for real estate; we aren't avoiding taxation, just deferring it. The battery business may be a declining business, but it's not about to disappear. I look forward to getting the purchase completed, probably by the fourth quarter. P&G has been great to work with, and I'll be very happy when we own Duracell.

Station 4: How do you balance giving to your families versus giving to charity?

Warren Buffett: The options for what to do with your money start to run out, so the question is where that money does the most good. There's no Forbes 400 in the graveyard. Old stock certificates can't help me to consume 7000 calories instead of 2000, but they can do a lot of good for other people. I want to get the most utility out of my resources. When someone tells me that he's 70 and doesn't want to think about his assets yet, I ask him whether he's going to make a better decision at age 95 with a blonde in his lap.

Carol Loomis: Could Berkshire distribute any or some of the equity holdings in the future to shareholders, like Yahoo is doing with Alibaba?

Warren Buffett: There's no way to do any similar distributions or spinoffs without large tax implications. What Yahoo is planning to do hasn't done away with the tax.

Jonathan Brandt: Is slow housing formation just a temporary phenomenon?

Warren Buffett: Household formation will come back.

Charlie Munger: I have some grandchildren whom I wish would find a suitable person promptly.

Station 5: What could shareholders do philanthropically to improve the lives of non-shareholders?

Warren Buffett: I believe in personal philanthropy, not corporate philanthropy. I encourage our companies to continue their philanthropic behaviors from before they joined us, and I want them to be good to their communities. But I don't think it's my place to cut checks from Berkshire to my alma mater. I've never given away a dollar that had any marginal utility to me. I admire those who give away money that could have made their own lives better.

Charlie Munger: My taste for giving away other people's money is really quite restrained.

Becky Quick: Has the Euro currency had a positive or negative effect overall for Europe?

Warren Buffett: That's too easy for me to answer, so I'll turn it over to Charlie.

Charlie Munger: I haven't the faintest idea. The Euro had a noble motivation, but the system that emerged was really unwise. You can't form a business partnership with your thriftless, drunken brother-in-law. I think they lowered their standards a little and it's caused strains.

Warren Buffett: Everything said here is off the record, right? [laughter] Everything humans make contains flaws, including our own Constitution. Just because something wasn't perfectly designed at first doesn't mean it should be abandoned. We could have had a common currency with Canada and we could have made it work.

Charlie Munger: Of course we could have made it work.

Warren Buffett: We could have done that with Canada...

Charlie Munger: ...but not with Argentina!

Warren Buffett: Praise by name, criticize by category. It's probably desirable to have a Euro currency designed and enforced so that the rules really apply. There were rules on the Euro that were broken early on by the Germans and the French.

Charlie Munger: Investment bankers helped them prepare phony financial statements. It was investment-banker-aided fraud. Not exactly novel.

Gary Ransom: Are there synergies between Berkshire Hathaway Automotive and GEICO?

Warren Buffett: Probably not. GEICO has a wonderful, low-cost model. The two companies will do better as two different businesses than as merged entities. We've seen a lot of proposals for synergies, and very few have succeeded.

Charlie Munger: I think it's a terrible idea.

Station 6: Do you see value in silver?

Warren Buffett: I really don't follow it and haven't for a long time.

Charlie Munger: It's a very good thing, too.

Warren Buffett: Silver is mostly a byproduct of mining for other products, so it doesn't really respond to its own supply and demand market.

Andrew Ross Sorkin: There will come a time when Warren and Charlie aren't going to be around to run the store...

Warren Buffett: I reject such defeatism.

Andrew Ross Sorkin: Would you consider it a failure if Berkshire were to be broken up in the future?

Warren Buffett: There are lots of benefits to having all of the companies together under one tax return. I think it's very unlikely that at any time in the future there will be any greater return on the parts than on the company as a whole. The best defense against activism, of course, is performance. Much of what I see as activism today is really reaching. Berkshire is likely to be a very, very big institution well into the future. It's set to last a very long time. I have friends who call me worried about activist investors coming after their companies. I tell them to come to us. They can use us as an activist disposal mechanism. There's been a lot of contorted and silly thinking about share repurchases. It falls off like crazy when shares are cheap and rises when they're hot. We do the opposite. But we won't buy at 200% of book because it's not worth it.

Charlie Munger: It's hard to think of many activists whom I'd like to see marry into the family.

Greggory Warren: Hasn't American Express been damaged recently?

Warren Buffett: Ken Chennault has done a fantastic job with the company. It has a lot of loyalty. We're very happy with American Express, but we'll be even happier if the stock goes down and they end up buying back even more shares.

Charlie Munger: I liked it better when they had fewer competitors, but that's life.

Warren Buffett: They started as a parcel express company, then they got into travelers checks, then they got into travel and entertainment cards. They've had challenges in the past, and they'll have them in the future. But we're glad to own 15% of the company.

Station 7: Students in developing countries don't know much about money. I'd like to help Americans teach financial literacy in South America.

Charlie Munger: I've failed in teaching some of my own family members, so I don't have much to recommend.

Warren Buffett: It all starts with early habits. The "Secret Millionaires' Club" is our way of presenting those habits in an entertaining fashion to young kids. I had a head start of a few thousand dollars coming out of school, and we had children at a very young age. My life could have turned out very differently without that head start.

Station 8: Shouldn't Berkshire Hathaway take on more debt at these cheap levels?

Warren Buffett: If someone told the two of us we'd be able to borrow Euros at a long duration at 1%, we would have ended up with a very different balance sheet than we have today. Cheap money makes people do strange things on the asset side of the balance sheet. We don't want to go crazy on the liabilities side. We're not going to de-leverage Berkshire; it's already at very low leverage. I see no drain on funds of any consequence from the float for as far as the eye can see, and I don't want to pay down the debt we have. Rationally, we should probably take on a lot more debt at these cheap prices.

Charlie Munger: It's been a long time since we've been capital-constrained. That would be glorious to have such a good idea.

Station 9: Does the rate of return on capital justify buying more dealerships? What about in China?

Warren Buffett: I don't think we'll get significant beneifts of scale from buying more dealerships. Returns come from having good management with skin in the game.

Charlie Munger: I don't think we'd be very good at running dealerships in China.

Warren Buffett: With 17,000 dealerships in the US, we only have 81, so there's a lot of room to grow. We paid a full but fair price for Van Tuyl; we'll use that price as a yardstick for future purchases. We're having a big car year, and profits are good. If profits are good, we want to pay a lower multiple -- we'd rather pay 10 or 12 times the multiple of a bad year than 8 times a good year.

Station 10: What are your secrets for maintaining youth?

Warren Buffett: If I had to give up the plane or the Internet, I wouldn't want to give up either, but I'd give up the plane.

Charlie Munger: Interesting.

Warren Buffett: Charlie's given up both.

Charlie Munger: The Internet is growing in importance, so like it or not, we're being dragged into it.

Warren Buffett: Sounds like you don't like it.

Charlie Munger: The idea of multitasking my way to glory has never been to my way of thinking.

Warren Buffett: People get pessimistic about America, but just look at the Internet over the last 20 years. I try to imagine rounding up three of my buddies to play bridge on a snowy day, and it's hard not to see the world as getting better.

Station 11: Do you think income inequality affects the future for corporate America?

Warren Buffett: Since I was born in 1930, the average GDP per capita has risen 6-for-1. My parents thought they were living in a decent economy. There are a million causes for income inequality. I do think that everyone who is willing to work should have a reasonably decent quality of life. I'll write something soon on how that is to be achieved. I don't mind raising the minimum wage, but to raise it enough to make a difference would change the opportunities available to people very dramatically. I'm much more interested in expanding and reforming the Earned Income Tax Credit. It's a very big problem. There's a lot of fraud in it, and it comes out in a big lump sum, so there's a lot that can be improved about it, but I think a lot more that can be done to reform the EITC.

Charlie Munger: I agree. I think raising the minimum wage dramatically would be stupid and would hurt the poor.

Station 1: Can you comment on college costs?

Charlie Munger: I think it's an enormous problem.

Warren Buffett: I think it's ridiculous to say that a college education is worth "X" because that's the amount that people who go to college earn beyond what others do. You're only looking at one variable.

Charlie Munger: A lot is taught in higher education that isn't very useful, and a lot of people there wouldn't learn much from anything. When the Great Recession came, all of the colleges discovered they were overstaffed. They acted like 3G and laid off a bunch of staff. Now they're right-sized, and it works a lot better. Without some big incentive, I think higher education will keep raising its prices.

Station 2: What advice would you give on the Chinese economy?

Charlie Munger: I'm a big fan of what's happening in China. I've just ordered a bust of Lee Kuan Yew because I think he contributed so much to fixing Singapore, and now in China. One of the things he did was clamp down on corruption, and they're learning that lesson now in China. I think it's one of the greatest things to happen in a large country. It's a wonderful thing they're doing. I think it's very likely to work. They've shot a few people for corruption -- that really gets people's attention.

Warren Buffett: Now we're starting to get some practical advice around here. [laughter] What's happened in China strikes me as totally miraculous. I never would have believed a country of that size would move so far so fast.

Charlie Munger: That's all Berkshire does is copy the right people.

Warren Buffett: The United States started from a smaller base of population but otherwise similar in factors like climate and intelligence to that of China. For centuries, we've had a better system and grown dramatically because of it. Their system is starting to explode with growth upon adopting some of our lessons. I think it's imperative that two countries with nuclear weapons learn to see things to admire in each other rather than their flaws.

Station 3: How did you figure out the operational metrics when you first started?

Warren Buffett: We hadn't thought it out that clearly when we started. But we did know we needed to have a feel for the future of the businesses. There were no planning sessions. We just kept reading and thinking and comparing opportunities. In those days we were capital-constrained, so we often had to sell one thing in order to buy another. But we went with a good result when it was certain rather than trying to be hopeful about an unlikely but brilliant result.

Charlie Munger: It's hard to learn faster than when you get your nose whacked by a bad experience.

Warren Buffett: We've had a lot of them. But we've also had a lot of fun along the way.

Charlie Munger: We were helped because we came from families where there were lots of admirable people, and it's easy to do well when you have admirable people to emulate. My deceased wife often said that you can't build greatness in one generation.

Station 4: How did you persuade your early investors outside your families?

Charlie Munger: We didn't do very well until we had a winning record.

Warren Buffett: A lot of people who were close to me had a lot of faith in me. They knew I'd done reasonably well at that time, after I'd been investing for five or six years after leaving New York. I had enough to retire at age 26, so they figured I knew enough that I must have been doing something right. A lot of stuff comes along if you just keep plodding along. Initially it was just people who knew me and had faith in me, but we started with small sums.

Charlie Munger: We've watched a lot of other people start since we started. The people who follow the Graham-Newman model have all done well. If you can avoid being a perfect idiot, you can do very well.

Station 5: What matters to you most and why?

Charlie Munger: I had an unfortunate channeling device: I was never going to succeed as an athlete or a movie star. But I got the idea early on, mainly from my grandfather, that my job was to be as rational as I could possibly be. Since I was good at that and no good at anything else, I was steered toward things that were good for me. Rationality is a moral duty. I think Berkshire is a temple of rationality. What's admired here is seeing something the way it is. To me, that goes beyond building's a moral principle. It's dishonorable to stay stupider than you have to be. That's my ethos. You have to be generous, too. We're social animals and we're tied to other people.

Warren Buffett: Beyond the obvious -- health and family -- what matters most to me is Berkshire doing well. We can't help it if the stock market declines. But I don't like to lose real money and value for the company.

Charlie Munger: Well, the doctor doesn't like to lose a patient on the table.

Station 6: What's the best answer to the smartest question I could ask you?

Warren Buffett: I'll have to beg off on that one.

Station 7: What was the source of your success with small amounts of capital?

Warren Buffett: I had a great teacher, exceptional focus, and the right sort of emotional qualities. I enjoyed the game. The game was enormously fun. It does require a certain emotional stability.

Charlie Munger: It's an easy game if you have the right temperament. I don't like being too much of an example to people who like being shrewd by buying and selling pieces of paper. I don't think that's a fair exchange for what you're taking out of life. It's different if you're doing something for a charitable endowment or taking care of money for your family members.

Warren Buffett: Running Berkshire is incredibly more satisfying than it was to run the partnership.

Station 8: What were the advantages of the WSJ back in its heyday?

Warren Buffett: Prior to the vast spread of financial information, they had a real lock -- the news ticker, for instance, was all theirs. They just totally missed what was about to happen. They never saw Michael Bloomberg coming. They didn't see areas they could have pursued that would have turned the company into something worth hundreds of billions of dollars, but they didn't do it. The company and the family money were controlled by a lawyer, and everyone was getting dividends and they were happy, and they couldn't have been in a better place with a better balance sheet, but they just totally let the opportunities pass them by.

Charlie Munger: Well, they did end up with $67 billion. They may have blown their opportunities, but they didn't lose the family fortune.

Warren Buffett: If Tom Murphy had been dealt that hand, he could have made an enormous fortune.

Charlie Munger: Yes, but he was more like me than he was like Bill Gates.

Warren Buffett: I don't know where he's going with that, but I would like to have the opportunity to invest in Bill retroactively.