...that allowed us to set up the Graham Buffett concentration in security analysis at the University of Florida College of Business. And we're honored that Mr. Buffett has agreed to come and lend his name to this concentration. The Graham Buffett course sequence is important to this college because it enables us to attract students who want this perspective on investing and the managing of corporations, a perspective that has been successfully employed by Mr. Buffett, Mr. Hawkins, and before them, Benjamin Graham.

This perspective is quite simple but sometimes lost in the complexity of our University analysis. The perspective is that you have to understand the underlying economics of the businesses you invest in, work in. You have to be clear-eyed and not be swayed by the crowds or the passing fancies of the moment. And you have to learn and stick to disciplined principles of business valuation. In the long run, this disciplined approach will more often than not bring success, or perhaps just as important, avoid spectacular failures. Hopefully here at the University of Florida, we can successfully convey those principles to our students and create a program that attracts the very best people and, in time, the very best employers as well.

So we thank Mr. Hawkins for his gift and for creating this environment that makes it possible for a man like Warren Buffett to come to our University and share his thoughts with us today. So without any more conversation, let me introduce to you Mason Hawkins.

Thanks a lot, uh, Dr. Lori. Um, I've got a prepared thing or two to say, but before I started, I wanted to just say that looking around this audience, it's a huge improvement from when Dan Connell and Witt Storm and some of the rest of us were here. Uh, this this group's been greatly upgraded.

Um, as a Florida graduate living in the state of Tennessee, um, it's, uh, it's been a, it's been quite an experience. Um, and so I can say without, without any exaggeration, it's great to be back in Gator Country, especially after our little sojourn to the city of Knoxville not too long ago. Um, if I ever hear Rocky Top again, it's going to be one time too many.

Uh, these are exciting times for value investors. Uh, they're very exciting times to be a University of Florida graduate business student. Today, we're extremely fortunate and grateful to have a very special guest to share his many, many insights with us. He's someone I've admired tremendously for the last 30 years. Um, in additionally, he is a person I think each of us could pattern our lives after, uh, as a role model, uh, even if he, even though he happens to be, uh, an avid Nebraska Cornhusker, and we've got our scars for that too.

Um, it's my honor as well as my privilege to welcome our lifetime's best long-term investor, Mr. Warren Buffett.

1 million, 2 million, 3 million. Seems to be working.

Uh, I'd like to just say a few words, uh, preliminarily, and then, uh, uh, the highlight for me will be getting your questions in in in a few minutes because, uh, that's, I want to talk about what's on your mind. I urge you to throw hardballs. It's it's it's more fun for me if you, uh, if you put a little, uh, put a little speed on the pitches as they come in. That you can ask about anything except last week's Texas A&M game. That's off limits.

Uh, we have a couple men here from SunTrust. I was just up at the Coke meeting, uh, and I sit next to Jimmy Williams there, who ran SunTrust for many years, and he wanted to be sure that I wore this SunTrust shirt down here. I've tried to get sponsorship on the senior golf tour, I haven't had much luck, but now on the banker's tour, I'm doing a little bit better. And he said, I got a percentage of the increase in deposits in Gainesville, so all go out for SunTrust. Dear old SunTrust.

Uh, I would like to talk for just one minute to the students about your, about your future when you leave here because there's, you're going to learn a tremendous amount about investments and you'll learn, you'll learn enough to do well. You you've all got the IQ to do well. You've all got the initiative and energy to do well or you wouldn't be, you wouldn't be here. Uh, and most of you will succeed in in in in meeting your aspirations. Uh, but in in determining whether you succeed, uh, there's more to it than intellect and energy.

And I'd like to talk for just a second about that. In fact, there was a fellow that Pete Kiewit in Omaha used to say that he looked for three things in hiring people: look for integrity, intelligence, and energy. And he said if the the person didn't have the first two, that the latter two would kill them. Because if they don't have integrity, you want them dumb and lazy. You don't want them smart and energetic.

Uh, and I I really like to talk about that first one because we we know you've got the second two. And and play along with me in a little game for just a second, uh, in terms of thinking about that question. Uh, you've all been here, I I guess almost all of you are second-year MBAs, and you've got to know your classmates. And think for a moment that I granted you the right to buy 10% of one of your classmates for the rest of his or her lifetime.

Um, now you can't pick one with a rich father, that doesn't count. I mean, you've got to, uh, you've got to pick them, pick somebody who's going to do it on their own merit. And and I gave you an hour to think about it, which one are you going to pick among all your classmates for the one you want to own 10% of for the rest of their lifetime? Uh, are you going to give an IQ test, pick the one with the highest IQ? I doubt it. Are you going to pick the one with the best grades? Uh, I doubt it. Uh, you're not even going to pick the most energetic one necessarily or the one that displays the most initiative.

But you're going to start looking for qualitative factors in addition, because everybody's got enough brain here and and enough energy. And I would say that if you thought about it for an hour, decided who you're going to place that bet on, you'd probably pick the one who you responded the best to, because the one that was going to have the leadership qualities, the one that was going to be able to get other people to carry out their interests. And that would be the person who was generous and honest and who gave credit to other people even for their own ideas, all kinds of qualities like that. And you could write down those qualities that you admire in this other person, whoever you admire most in the class.

And then I would throw in a hook. I would say as part of owning 10% of this person, you had to agree to go short 10% of somebody else in the class. That's fun, isn't it? And you think, "Well, now who do I want to go short of?" And uh, uh, again, you wouldn't pick the person with the lowest IQ or the, or you you would, you would start thinking about the person really who turned you off for one reason or another. I mean, they had very various qualities quite apart from their academic achievement, but they had various qualities and you really didn't want to be around them and other people didn't want to be around them.

And what were the qualities that lead to that? Well, there'd be a whole bunch of things, you know, but it's the person who's egotistic, oh, the person who's greedy, the person who's slightly dishonest, cuts corners, all of these qualities. And you can write those down on the right-hand side of the page. And when you look at that— we'll just, I don't know which one I'm using, can you hear me okay with this? Fine. Yeah. Microphone to the side, back... What do I do with it? It just came loose. Oh, it just came loose. Okay. You can see why I avoid technology. Chewing gum is about as far as I get.

Uh, as you looked at those qualities on the left and right-hand side, there's one interesting thing about them. It's not the ability to throw a football 60 yards. Uh, it's not, it's not the ability to run the 100-yard dash in 9.3. It's not being the best looking person in the class. They're all qualities that if you really want to have the ones on the left-hand side, you can have them. I mean, they are, they are qualities of behavior, character that that are achievable. They're not forbidden to anybody in this group.

And if you look at the qualities on the right-hand side, the ones that you find turn you off in other people, there's not a, there's not a quality there that you have to have. If you have it, you can you can you can you can get rid of it. And you can get rid of it a lot easier at your age than you can at my age because, uh, most behavior is is habitual. And they say the chains of habit are too light to be felt until they're too heavy to be broken. And there's, there's no question about it. I see people with these self-destructive behavior patterns at my age or even 10 or 20 years younger, and they really are entrapped by them. They they go around and they do things that turn off other people, uh, right and left. And uh, uh, they don't need to be that way, but by a certain point, they get so they can hardly change it.

But at your age, you can have any any any habits, any any patterns of behavior that you wish. It's simply a question of which you decide. And why not decide the ones that— I mean if you like, Ben Graham did this, and Ben Franklin did it before him, but Ben Ben Graham in his low in his low teens looked around and he looked at the people he admired, and he said, "You know, I want to be admired, so why don't I just behave like them?" And he found there was nothing impossible about behaving like them. And similarly, he he did the same thing on the reverse side in terms of getting rid of those qualities.

So I would suggest that if you write those qualities down and think about them a little while and make them habitual, you will be the one that you want to buy 10% of when you get all through. And the beauty of it is you already own 100%. You're stuck with it. So you might as, you might as well be that person as somebody else. Well, that's that's a short little sermon. So let's get on to what uh, what you're interested in. And uh, like I say, you can you can go all over the lot. So I don't know exactly how we're going to handle this, but uh, but uh, let's start with a hand here someplace or other. Where do we go with the first one?

Yeah, right here. Your thoughts about Japan?

My thoughts about Japan. I am, I'm not a macro guy. Now, I say to myself, Berkshire Hathaway can borrow money for 10 years at 1% in Japan. Now, 1%. And I say to myself, "Gee, I took Graham's class 45 years ago and I've been working hard at this thing all my life, maybe I can earn more than 1%." You know, if I really worked hard at it. 1% annually doesn't seem impossible, does it?

So I wouldn't want to get involved in currency risk, so I'd have to do it in something that was Yen denominated. So I have to get, I have to be in Japanese real estate or a Japanese business or something of the sort and be, and all I have to do is beat 1%. That's all the money's going to cost me, and I can get it for 10 years. Uh, so far I haven't found anything that, uh, it's, it's, it's kind of interesting. The the Japanese companies earn very low returns on equity. And and, uh, uh, they have a bunch of businesses that earn 4, 5, 6% on equity, and it's very hard to earn a lot as an investor when the business you're in doesn't earn very much money.

Now, now some people do it. In fact, I've got a friend, Walter Schloss, who worked with Graham at the same time I did. And and it was the first way I went at stocks, to buy stocks selling way below working capital, very cheap quantitative stocks. I call it the cigar butt approach to investing, is that you walk down the street and you look around for a cigar butt someplace and you finally you see one and it's soggy and kind of repulsive, but there's one puff left in it. So you pick it up and the puff is free. I mean, it's a cigar butt stock. I mean, you get one free puff out of it and then you throw it away and you walk down the street and try to find another one. And I mean, it's not elegant, uh, but it works, you know, if if you're looking for a free puff, uh, it works.

Those are low return businesses, but time is the friend of the wonderful business, it's the enemy of of the lousy business. If you're in a lousy business for a long time, you're going to get a lousy result, even if you buy it cheap. If you're in a wonderful business for a long time, even if you pay a little too much going in, you're going to get a wonderful result if you stay in a long time. I find very few wonderful businesses in Japan at at present. Now that, uh, they may change the culture in some way so that that management gets more stockholder responsive over there and returns are higher, but at the present time, you'll find a very lot of low return businesses. And that was true even when the Japanese economy was booming. I mean, it's it's amazing. They had a incredible market without incredible companies. Uh, they were incredible in terms of doing a lot of business, but they weren't incredible in terms of the return on equity that and uh, that they achieved. Uh, uh, and that's finally caught up with them. So we have so far done nothing there, but as long as money is 1%, I'll keep looking. I mean that's...

Yeah. Yeah, you were rumored to be one of the rescue buyers of Long-Term Capital. What what was the play there? What did you see?

Well, there's a story in the current Fortune magazine, the one that has Rupert Murdoch's picture on the cover, that tells the whole story of our involvement. It's kind of an interesting story because I... well, it's it's a long story so I won't go into all the background of it, but I got the really serious call about Long-Term Capital, uh, prob, what, four weeks ago this Friday, whenever it was. It was my granddaughter... I got it in mid-afternoon, and my granddaughter was having her birthday party that evening, and then I was flying that night to Seattle to go on a 12-day trip with Gates on a, to Alaska and a private train, all kinds of things where I was really out of communication.

But I got this call on a Friday afternoon saying that things were really getting serious there. I'd had some other calls before that the article gets into a few weeks earlier. I know those people, most of them pretty well. A lot of them were at Salomon when I was there. And uh, the place was imploding and the Fed was sending people up that weekend. And so between that Friday and the following Wednesday, when the New York Fed um, in effect orchestrated a a, uh, a rescue effort but without any federal money involved, uh, I was quite active.

But I was having this terrible time because we were sailing up through these, uh, through these canyons which held no interest for me whatsoever in Alaska. And and the captain would say, "You know, if we just steer over here, we might see some bears and whales." And I said, "Steer where you've got a good satellite connection," because... So so it was, uh, in fact, there's a picture, I've got, my Old Faithful is going off behind me and I've got my back to it, I'm on the phone, which was the people, the group thought was kind of funny the way I was working the phone.

But we put in a bid on on on Wednesday morning. I was, by then I was in uh, Bowman, Montana. And I talked to uh, Bill McDonough, the head of the New York Fed about, uh, about 10:00. They were having a meeting with the bankers at 10:00 that morning in in New York and I caught him right, we actually delivered a message to him, he called me out there in Wyoming a a little bit before 10 New York time. And we made a bid. It was a, it was, uh, because it was being done at a long distance and everything, it was really the outline of a bid.

But, uh, in the end, uh, it was a bid for 250 million essentially for the net assets of, uh, but we would have put in three and three-quarters billion on top of that. And it would have been three billion from Berkshire Hathaway, 700 million from AIG, and 300 million from Goldman Sachs. And we submitted that, but we put a very short time fuse on it because when you're bidding on a hundred billion dollars worth of securities that are moving around, you don't want to leave a fixed price bid out there very long, plus we were worried about it getting shopped. Uh, in the end, they, the bankers made the deal. And uh, uh, but it was an, it was an interesting period.

The whole Long-Term Capital Management, and I hope most of you are familiar with it, but the whole story is really fascinating because if you take John Meriwether and Eric Rosenfeld, Larry Hilibrand, Greg Hawkins, Victor Haghani, the two Nobel Prize winners, Merton and Scholes, if you take the 16 of them, that they probably have as high an average IQ as any 16 people working together in one business in the country, including at Microsoft or or wherever you want to name. So that incredible amount of intellect in that room.

Now you combine that with the fact that those 16 had had extensive experience in the field they were operating. I mean, this these this were was not a bunch of guys who had made their money, you know, selling men's clothing and then all of a sudden went into the securities business or anything. They'd had, they they'd had in aggregate, the 16 had probably had 350 or 400 years of experience doing exactly what they were doing.

And then you throw in the third factor that most of them had virtually all of their very substantial net worths in the business. So they had their own money up, hundreds and hundreds of millions of dollars of their own money up, super high intellect, working in a field they knew. And essentially, they went broke. And that to me is absolutely fascinating. I mean, I I if I ever write a book, it's going to be called "Why Smart People Do Dumb Things." My partner says it should be autobiographical, but I but but this might be an interesting illustration.

And these are perfectly decent guys. I, you know, I I I I respect them and they helped me out when I was had problems with Salomon and so they they're not bad people at all. But to make a money they didn't have and didn't need, they risked what they did have and did need. And that's foolish. That is just plain foolish. It doesn't make any what your IQ is. If you if you risk something that is important to you for something that is unimportant to you, it just does not make any sense.

I don't care whether the odds are 100 to one that you succeed or a thousand to one that you succeed. If you hand me a gun with a thousand chambers, a million chambers in it and there's a bullet in one chamber, and you said, "Put it up to your temple, how much do you want to be paid to pull it once?" I'm not going to pull it. You know, you can name any sum you want, but it doesn't do anything for me on the upside and I think the downside is fairly clear. So I'm not interested in that kind of a game, and yet people do it financially and without thinking about it very much.

Uh, there was a great book, it wasn't a great book, it was a great title. There was a lousy book written once with a great title, uh, by Walter Gutman. The title was "You Only Have to Get Rich Once." Now that's pretty fundamental, doesn't it? What is what difference if you've got $100 million at the start of the year and you're you're going to make 10% if you're unleveraged and 20% if you're leveraged 99 times out of 100, what difference does it make at the end of the year whether you've got 110 million or 120 million? Makes no difference at all. I mean if you if you die at the end of the year, you know the guy that writes up the story may make a typo and he may say 110 even if you had 120. So you've gained nothing at all, you know.

What it can, it makes absolutely no difference. Makes no difference to your family, makes no difference to anything. And and yet the downside, particularly managing other people's money, is not only losing all your money, but it's it's disgrace and humiliation and and facing friends whose money you've lost and everything. I I just, I just can't imagine an equation that that makes sense for and yet 16 guys with very high IQs who are very decent people entered into that game. And you know, I think it's madness.

And it's it's produced by an overreliance to some extent on things. You know, those guys would tell me back when I was at Salomon, you know that a six sigma event wouldn't, you know, wouldn't, wouldn't touch us or a seven sigma event, but they were wrong. I mean that there, history does not tell you the probabilities of future financial things happening. And they had a great reliance on mathematics and they felt that that the beta of the stock told you something about the risk of the stock. It doesn't tell you a damn thing about the risk of the stock in my view. And uh, uh, and and sigmas do not tell you about the risk of going broke in in my view, uh, and maybe in their view now too.

Uh, but but I, you know, I I I don't I don't like to even use them as an example because they are, I mean, the same thing in a different way could happen to any of us probably where we where we really have a blind spot about something that's crucial because we know a whole lot about something else. It's like Henry Kaufman said the other day that the people that are going broke in this situation are just two of two types: the ones who knew nothing and the ones that knew everything. And uh, it's it's it's it's sad in a way.

I urge you in anything, we never basically borrow money. I mean we we get float through our insurance business and to do things, but I never borrowed money. I never borrowed money when I had 10,000 bucks, basically, because what difference did it make? I was having fun as I went along and it didn't make any difference whether I had $10,000 or a million dollars or $10 million, uh, you know, except if I had a medical emergency or something that come along like that. But I was going to, I was going to do the same things when I had a lot of money as when I had very little money.

You know, if you think about the difference between me and you in terms of how we live, you know, we wear the, we wear the same clothes, basically. SunTrust gives me mine, but you, what, we so we wear the same clothes. We we we eat, you know, we we all have a chance to drink the juice of the Gods here, but we we all go to McDonald's or better yet, Dairy Queen. And uh, and we we live in a house that's that's that's warm in winter and cool in summer and and and we watch uh, Nebraska, Texas A&M on a big screen. You know, you you see it the same way I see it.

We do everything. Our lives aren't that different. You know, that you'll get decent medical care if something happens to you and I'll get decent medical care. The only thing we do is we travel differently. You know, I ride around this little plane I love it, and that takes money. But if you leave, if you leave that aside, if you leave that we travel differently, but other than travel, you know, I would, I think about it, think what what can I do that you can't do? Now I get to work in a job that I love, but I've always worked in a job I love. I loved it when I, I I loved it just as much when I, you know, when it was a big deal if I made a thousand bucks.

And I urge you to work in jobs you love. I mean, I think you're out of your mind if you take, keep taking jobs that you don't like because you think it'll look good on your resume. I was with a fellow at Harvard the other day who was taking me over to talk and he was 28 and he was telling me what he'd done with his life and which was terrific. And and then I said, "What are you going to do next?" And he said, "Well," said, "after I get out, my my uh, MBA," he says, "I think maybe I have to go to work for a management consulting firm because it'll look good on my resume."

I said, "Wait a second, you've been 28, you've been doing all these things. I mean you got a resume that's 10 times as good as anybody I've ever seen it already." I said, "If you take another job you don't like just for..." I said, "Isn't that a little like saving up sex for your old age?" You know, I mean, there comes a time when you ought to just start doing what you know... So I I think I got the point across to him.

Uh, uh, but I, you ought to take a job when you get out here, take a job you love. Don't take a job that you know, you think is going to look good on your resume. Take, take a job you love. You may change it later on, but you'll jump out of bed in the morning. I mean, when I got out, when I got out of Columbia, the first thing I tried to go to work for Graham immediately. I offered to go to work for him for nothing. He said I was overpriced. But but but I kept pestering him. I went out to Omaha and I sold securities for three years and I kept writing him and giving him ideas and doing all, finally I went to work for him for a couple and and uh, it was a great experience.

But I always really worked in a job, I worked in a job that that I would, that I, you know, love doing. And you should really take a job that if you were independently wealthy, you would take. That's that's the job to take because that's the one that you're going to have great fun in. You'll learn something, you'll be excited about it, and you can't miss. You may go do something else later on, but but uh, you'll get way more out of it. And I don't care what the starting salary is or anything of the sort. But uh, uh, I don't know how I got off on that, but I uh, there I am.

Uh, so I I I do think that that if you think you're going to be a lot happier if you've got 2x instead of x, you're probably making a mistake. I mean, it uh, it uh, you you ought to, you ought to find something you like that's that works with that. And if and you'll get in trouble if if you think that making 10x or 20x is the answer to everything in life, because then you will do like borrow money when you shouldn't or or maybe cut corners on on things that your employer wants you to cut corners on. It just doesn't make any sense. You won't like it when you look back on it.

Yeah, would you talk to the students about the companies that you like? I don't mean names, I mean what makes the company things you like?

I like, I like businesses I can understand. We'll start with that. That narrows it down about 90%. I mean, see there's all kinds of things I don't understand, but fortunately there's enough I do understand. And you got this big wide world there, almost every company's publicly owned, so you got, you got all American business practically available to you. Now to start with, doesn't make sense to go with things that you think you can understand. But you can understand some things. I can understand this. I mean, you can understand this, anybody can understand this. I mean, this is a product that basically hasn't been changed much. I've added the cherry, uh, but you know, since 1886 or whatever it was and it's a simple business.

It's it's not an easy business. I don't want a business that's easy for competitors. So I want a business with a moat around it. I want a very valuable castle in the middle. And then I want to, I want to, I I I want the duke who's in charge of that castle to be honest and hardworking and able. And then I want a big moat around the castle. And that moat can be various things.

The moat in a business like our auto insurance business at GEICO is low cost. I mean people have to buy auto insurance, so everybody's going to have one auto insurance policy per per car, basically, per driver. And and I can't sell them 20, you know, but but they have to buy one. When are they going to buy it on? They're going to buy it on based on service and cost. Most people will assume the service is fairly uh, identical among companies or close enough. So they're going to do it on cost. So I got to be the low-cost producer. That's my moat. To the extent my costs get further lower than the other guy, I've thrown a couple of sharks into the moat, you know.

But all the time, if you've got a wonderful castle, there are people out there going to try and attack it and take it away from you. And I want a castle that I can understand, but I want a castle with a moat around it. 30 years ago, Eastman Kodak's moat was was just as wide as Coca-Cola's moat. I mean, if you were going to take a picture of your six-month-old baby and you were going to want to look at that picture 20 years from now and you're want to look at it 50 years from now, and you're never going to get a chance, I mean, you're not a professional photographer, so that you can evaluate what's going to look good 20 or 50 years ago, what is in your mind about that, about that photography company is what counts because they are promising you that the picture you take today is going to be terrific to look at 20 or 30 or 50 years from now about something that's very important to you, maybe your own child or whatever it may be.

Well, Kodak had that in spades 30 years ago. They owned that. They had what I call share of mind. Forget about share market, share of mind. They had something in everybody's mind around the country, around the world with a little yellow box and everything that said Kodak is the best. That's priceless. They've lost some of that. They haven't lost it all. And and not due to George Fisher, who runs it. George is doing a great job, but they let that moat narrow. They let Fuji come and start narrowing the moat in various ways. They let them get into the Olympics and take away that special aspect that only only Kodak was fit to photograph the Olympics. So Fuji gets there and immediately in people's minds, Fuji becomes more on a parity with with Kodak.

You haven't seen that with Coke. Coke's moat is wider now than it was 30 years ago. You can't see the moat day by day, but every time, you know, the infrastructure gets built in some country that isn't yet profitable for Coke but will be 20 years from now, the moat is widening a little bit. The things are all the time changing that moat in one direction or other. 10 years from now, you can see the difference. Our managers of the businesses we run, I've I've got one message to them, you know, which is to widen the moat. And we want to, we want to throw crocodiles and sharks and everything else, gators, I guess, into into the moat to keep away competitors. And that that's comes about through service, it comes about through quality of product, it comes about through cost, it comes about sometimes through patents, it comes about through real estate location.

So that's the business I'm looking for. Now, what kind of businesses am I going to find like that? Well, I'm going to find them, I'm going to find them in simple products because I'm not going to be able to figure out what the moat's going to look like for Oracle or Lotus or Microsoft 10 years from now. I mean, I Gates is the best businessman I've ever run into, and you know, they've got a hell of a position, but I really don't know what that business is going to look like 10 years from now, and I certainly don't know what his competitor's businesses are going to look like 10 years from now.

Now, I'll name one I don't own. I know what the chewing gum business is going to look like from 10 years from now. I mean, the internet is not going to change how we chew gum. And and nothing much else is going to change how we chew gum. And then are there going to be lots of new products? Is it really, you know, are Spearmint, Juicy Fruit and all those going to evaporate? It isn't going to happen. You give me a billion dollars and tell me to go in the chewing gum business and try and make a real dent in Wrigley, I can't do it.

And that's the way I think about business. I say to myself, give me a billion dollars and how much can I hurt the guy? Give me $10 billion. Give me $10 billion and how much can I hurt Coca-Cola around the world? I can't do it. Well, those are good businesses. Now, give me some money, tell me to hurt somebody in in some other fields and I can figure out how to do it.

Uh, so I want a simple business, easy to understand, great economics now, honest and able management. And and, uh, then I can see about in a general way where they're going to be 10 years from now. And if I can't see where they're going to be 10 years from now, I don't want to buy it. Basically, I don't want to buy any stock where if they close the New York Stock Exchange tomorrow for five years, I won't be happy owning it. I buy a farm and I don't get a quote on it for five years and I'm happy if the farm does okay. You know, I buy an apartment house, don't get a quote on it for five years, I'm happy if the apartment house produces the returns that I expect.

But people buy a stock and they look at the price the next morning and they decide whether they're doing well or not doing well. It's crazy because they're buying a piece of a business. That's what Graham, the most fundamental part of what he taught me. You know, you're not buying a stock, you're buying a, you're buying a part ownership in a business. You will do well if the business does well and if you didn't pay a totally silly price. And that's what it's all about. And you ought to buy businesses you understand, just like if you're buying farms, you ought to buy farms you understand. It it's it's not complicated. Uh, in in calling this Graham Buffet, I mean it's just pure Graham. I I I was very fortunate because I I picked up a book when I was 19.

I got interested in stocks when I was about six or seven and I bought my first stock when I was 11, but I was playing around with all this stuff and I had charts and volume and I'm making all kinds of technical calculations, everything. And then I picked up a little book and it just said that you're not buying some little ticker symbol that bounces around every day, you're buying a part of the business. And as soon as I started thinking about it that way, everything else flowed very simple. So we buy businesses we think we can understand. There's no one here that can't understand the Coca-Cola company. I would say there's no one here that can understand some new internet company.

And I said, I said at the annual meeting this year that if I were teaching a class in business school, on the final exam I would pass out the information on an internet company and ask each student to value it, and anybody that gave me an answer, I'd flunk. I don't know how to do it. But people do it every day. I mean, it's more exciting. I mean, if you look at it like going to the races or something, you know, that's that's a different thing. But if you're investing, I mean, investing is putting out money to be sure of getting more money back later, you know, at an appropriate rate. And to do that, you have to understand what you're doing it in. I mean, you have to understand the business and you can understand some businesses, but not all businesses. Yep.

Warren, so you covered half of it, which is trying to understand a business and buying a business, but you also alluded to getting a return on the amount of capital you invest in the business as an investor. And you know, that comes back to to what are you paying for the business? How do you determine, you know, what you think is a fair price to pay for the business?

That's a tough thing to decide, but I don't want to buy into any business I'm not terribly sure of. So if I'm terribly sure of it, it probably doesn't, it probably isn't going to offer incredible returns. I mean, why should something that's is essentially a cinch to do well offer you 40% a year, something like that. So we we don't have huge returns in mind, but we do have in mind never losing anything.

And I mean we we bought See's Candy in 1972. See's Candy was then selling 16 million pounds of candy at $1.95 a pound and it was making two bits a pound, or 4 million pre-tax. We paid $25 million for it, took no capital to speak of. When we looked at that business, basically, my partner Charlie and I really decided whether there was a little untapped pricing power there, in other words, whether that $1.95 box of candy could just as easily sell for two or two and a quarter. If it could sell for two and a quarter, another 30 cents a pound was was 4.8 on 16 million pounds, which on a 25 million purchase price was fine. We didn't do any, you know, we've never hired a consultant in our lives. We I mean, our idea of consulting is going out and buying a box of candy, you know.

Uh, but what we did know was there was that they had share of mind in California. I mean, there was something special. Every person in California had something in their mind about See's Candy and overwhelmingly it was favorable. They had taken a box, you know, Valentine's Day and given it to some girl, she'd kissed them. If she'd slapped them, you know, we'd have no business, but but as long as she kisses them, you know, that's that's that's what we want in their mind: See's Candy, getting kissed. And if we can get that in the minds of people, we can raise prices.

And and I bought that in, I bought it in 1972. We've raised every year. I raise the price on December 26th. I raise it the day after Christmas so that everybody, because we sell a lot at Christmas. We'll make $60 million this year. We'll sell 30 million pounds, make $2 a pound. Same business, same formulas, same everything, 60 million bucks. Still doesn't take any capital. And we'll make more money 10 years from now.

But of that 60 million, we make about 55 million in the three weeks before Christmas. And our company song is "What a Friend We Have in Jesus." I mean, it is it is a good business. But the important thing about that business is to think about it a little. People don't buy, most people don't buy box chocolates to consume themselves. They buy them as gifts. You know, somebody somebody's birthday, more likely it's a holiday, Valentine's Day, single biggest day of the year. Christmas is the biggest season by far, but women buy for Christmas and they plan ahead and buy over a two or three week period. Men buy on Valentine's Day. They're driving home, we run ads on the radio, you know, guilt, guilt, guilt, guilt. You know, the guys are veering off the freeway right and left and they won't dare go home without a box of candy when we get through with them on our radio ads.

So that Valentine's Day is the biggest day, but can you imagine going home on Valentine's Day and our See's candy is now 11 bucks a pound, thanks to my brilliance. And and and let's say there's there's candy available at $6 a pound. But you really want to walk in on Valentine's Day and hand, I mean, your wife's got all these favorable images of the See's candy over the years and she sees you and that's the way she thinks of you during the rest of the year when you really behave badly. And you walk in and say, "Honey, this year I took the low bid," and then hand her a box of candy. I mean, it just isn't going to work.

So in a sense, it is, it's a, it's it there's untapped pricing, it's pricing, it's it's not price dependent basically. Think of Disney. I mean Disney is selling, we'll say home videos for, I don't know what, 16.95, 18.95 or whatever. All over the world, people, and we'll say particularly mothers in this case, have something in their mind about Disney. I mean every person in this room when you say Disney has something in their mind about it. If I say Universal Pictures, you don't have anything in your mind. You know, if I say 20th Century Fox, you don't have anything special in your mind. If I say Disney, you got something in your mind. And that's true around the world.

Now picture yourself with a couple young kids, you know, who you want to put away for a couple hours every day so you get a little peace of mind. And you you know, if you get them one video, they'll watch it 20 times. So you go to the video store or wherever you buy the video, are you going to sit there and premiere, you know, 10 different videos and watch them each for an hour and a half to decide which one your kids should watch? No. I mean, let's say there's one there for $6.95 and the Disney's there for $17.95. You know if you take the Disney video, you're going to be okay. So you buy it and you don't have to make a quality decision on something that you don't want to spend the time to do. And so you can get a little bit more money if you're if you're Disney and you'll sell a lot more videos.

Makes it a wonderful business. Makes it very tough for the other guy. How would you try to create a brand, DreamWorks is trying, but how would you try to create a brand that competes with Disney around the world and to replace the concept that people have in their minds about Disney with something that says Universal Pictures? You know, so that the mother's going to walk in and pick out a Universal Pictures uh, video in preference to a Disney? It's not going to happen.

You know, Coca-Cola is associated with people being happy around the world. Where every place they're happy, where Disney World or Disneyland, with the World Cup, we'll be at the Olympics, where every place where people are happy, happiness and Coke go together. Now, you give me, I don't care how much money, and tell me that I'm going to do that with RC Cola around the world and have five billion people that have a favorable image in their mind about RC Cola, can't get done. You know, and you can fool around with a, you can do anything you want to do. You have price discounts on weekends and everything, but you're not going to touch it.

And that's what you want to have in a business. That that's the moat. And you want that moat to widen. And if you're See's Candy, you want to do everything in the world to make sure that the experience basically of giving that gift leads to a favorable reaction. That means means what's in the box, it means the person that sells it to you, because all our business is done when we're terribly busy. I mean, people come in in those weeks before Christmas or on Valentine's days, there are long lines. So at 5:00 in the afternoon, some woman is selling the last person the last box of candy, and that person's been waiting in line for maybe 20 or 30 customers. And if the salesperson smiles at that last customer, our moat has widened. And if she snarls at them, our moat has narrowed. We can't see it, it's going on every day, but that's the key to it. I mean, it's the total part of the product delivery is having everything associated with with it say See's Candy and something pleasant happening. And that's what business is all about. Yep.

What purchasing a company, how much qualitative analysis do you do versus quantitative and have you ever bought a company where the numbers told you not to?

Those are the best buys. The question is whether have I ever bought a company where the numbers told me not to, and how much is qualitative and how much is quantitative. The best buys have been when the numbers almost tell you not to. I mean because then you, then you feel so strongly about the product and not just the fact that you're getting a used cigar butt cheap, that it it it's compelling. I mean, I I owned a windmill company at one time and so I've, I you know, windmills are cigar butts, believe me. And I bought it very cheap, I bought it a third of working capital and we made money out of it, but there's no repetitive money to be earned. I mean, there's a one-time profit in something like that and and it it's just not, it's not the thing to be doing. I went through that phase. I mean, I bought street car companies and all kinds of things.

But, uh, in terms of the qualitative, I probably understand the qualitative the moment I get the phone call. I mean, almost every business we bought has taken five or 10 minutes, I mean, in terms of analysis. Uh, and we bought two businesses this year. Uh, General Re is, you know, 18 billion or some deal. I've never been to their home office. You know, I hope it's there. There could be just a few guys and they say, "Well, what what numbers should we send Buffett this month?" You know, I can see, you know, coming in once a once a month and saying, "Well, we'll just tell him we've got 20 billion in the bank this month instead of 18 billion" or something. But I've never been there.

I've never, and before I bought Executive Jet, which is fractional ownership of of of of jet, and before I bought it, I'd never been there. I I bought my family a quarter interest in the program three years earlier and I'd seen the service and seen it develop well, and I got the numbers. But if you don't know enough to know about the business instantly, you won't know enough in a month or two months. I mean, you have to have sort of the background of of understanding and and knowing what you do understand and don't understand.

And that that is the key. It's it's defining what I call your circle of competence. And everybody's got a different circle of competence. The important thing is not how big the circle is, the important thing is staying inside the circle. And if that circle has only got 30 companies in it out of thousands on the big board, as long as you know which 30 they are, you're okay. And you should know those businesses well enough so that you don't need to read, do lots of work now.

I I did a lot of work in the earlier years just in getting familiar with businesses. And and the way I would do that is I would go out and use what Phil Fischer called the scuttlebutt approach. I'd go out, I'd talk to customers, I'd talk to, I'd talk to to to uh, maybe ex-employees in some cases. I'd talk to suppliers, everybody. Every time I'd see somebody in an industry, let's say I was interested in the coal industry, I'd go around and see every coal company and I'd ask every every CEO, "If you could only buy stock in one coal company that wasn't your own, which one would it be and why?" And you piece those things together and you learn a lot about the business after a while. And funny thing is, you get very similar answers as long as you ask about competitors that, you know, I I'd say, "If you got a silver bullet, you know, and you could put it through the head of one competitor, what's your competitor and why?" You know, you'll find out who the best guy in the industry is that in that case or the one that's coming up.

And there's so there's a lot of things you can learn about a business. I I've done that in the past, uh, on the businesses that I feel I could understand. So I don't have to do much of that anymore. It's the nice thing about investing is you don't have to learn anything very new. I mean, you can do it if you want to, but if you learned about Wrigley chewing gum 40 years ago, you you still understand Wrigley chewing gum. Not not a lot of great insights to get or anything of the sort as you go along. So you do get a database in your head.

I had a guy, Frank Rooney, who ran Melville for many years. His father-in-law died, owned a company called H.H. Brown, a shoe company. And uh, he put it up with Goldman Sachs, but he was playing golf with a friend of mine here in Florida and uh, mentioned to this friend, the guy said, "Why don't you call Warren?" He called me at the end of the golf match and in five minutes I basically had a deal. And but I I knew Frank and I knew the kind of business, I sort of knew the basic economics of a shoe business. And so I could buy and quantitatively I got to decide what the price is. Uh, but uh, you know that's either yes or no. I mean, I don't I don't fool around a lot with negotiations. So if they they name a price that makes sense to me, I buy it. If they don't, I, you know, I was happy the day before, so I'll be happy the day after without owning it.

Yeah, Coca-Cola just announced dropping expectations in terms of future earnings and Inc earnings and in light of the fact that Coke has a lot of their profits coming outside the United States, how do you think the the Asian crisis so to speak is going to affect Coke for that matter?

Question is about the Asian crisis and how it affects a company like Coke that recently announced that the earnings, actually, they just announced the third quarter earnings, but a few weeks ago they tipped people off that they were going to be lower in the fourth quarter. John... well basically I love it. But but, uh, because the market for Coca-Cola products is going to grow far faster over the next 20 years, uh, internationally than it will in the United States. It'll grow in the United States on a per capital base that's going to go faster elsewhere. So the fact that it it's going to be a tough period for who knows, three months or three years, but it won't be tough for 20 years. I mean, people are still going to, they're, you know, they're going to work productively around the world and they're going to find that this is a a bargain product in terms of uh, the portion of their working day that they have to give up in order to have one of these, or or better yet, five of them a day like I do.

Uh, you know this is a product in 1936 when I first bought six of those for a quarter and sold them for a nickel each and it was in a six and a half ounce bottle and you paid a two, 2 cent deposit on the bottle. That was a six and a half ounce bottle for a nickel. At that time, it's now a 12 oz can which if you buy it on on weekends or if you buy in bigger quantities, so so much money doesn't go to the packaging, you essentially can buy the 12 ounces for not much more than 20 cents. So you're paying not much more than twice the per ounce price of 1936. And it is a product that's gotten cheaper and cheaper and cheaper in relative to people's earning power over the years and which people love in in in 200 countries. You have the per capita use going up every year for a product over 100 years old and that dominates the market. I mean that is, it's unbelievable.

One thing that people don't understand is one of the things that makes this product is worth tens and tens of billions of dollars is one simple fact about about really all colas, but we'll call it Coca-Cola for the moment, happen to be a name I like. Uh, cola has no taste memory. You can drink one of these at 9:00, 11:00, 3:00 in the afternoon, 5:00. The one at 5:00 will taste just as good to you as the one you drank early in the morning. You can't do that with cream soda, root beer, orange, grape, you name it. All of those things accumulate on you. Most foods in and and beverages are accumulate on you. You get sick of them after a while. And if you if you eat, I mean, we get these people go to work for us at See's Candy and we tell them they eat all the candy they want. The first day they go crazy, but after a week they're eating about the same amount they eat if if they're buying it because chocolate accumulates on, everything accumulates on it. There is no taste memory to cola.

And that means that you get people around the world that are heavy users that'll drink five a day or diet coke maybe, you know, seven or eight a day or something of the sort. They'll never do that with with other products. So you get this incredible per capita consumption. The average person in in this part of the world, uh, well maybe a little north of here, drinks about 64 ounces of liquid a day and you can have all 64 ounces of that be Coke and you will not get fed up with Coke if you like it to start with in the least. But if you do that with almost anything else, if you eat just one product all day, you you'll tend, you'll get a little sick of it after a while and and and uh, it's it's a huge factor.

So that today over 1 billion 8-ounce servings of Coca-Cola products will be sold in the world. And that will grow year by year. It'll grow in every country virtually. It'll grow on a per capita basis and 20 years from now it'll have grown a lot faster internationally than in the US. So I really like that market market better because there there is more growth there over time. But it it will hurt them in the in in the, it is hurting them in the short term right now and but that that doesn't mean anything.

I mean it, uh, uh, Coca-Cola went public in, I think it was 1919. Stock sold for $40 a share. It went back before that, it was a Candler family and they they went back, they bought it for 2,000 bucks, the whole business, uh, as the Candler back in the late 1880s and a couple of purchases. So now he goes public in 1919, $40 a share. One year later, it's selling for $19, gone down 50% in one year. Now you might think that's some kind of disaster and you might think that sugar prices increased and the bottlers were rebellious and a whole bunch of things. You could always find a few reasons why that wasn't the ideal moment to buy it.

Years later, you'd have seen the Great Depression, then you'd have seen World War II and you'd seen sugar rationing and you'd seen thermonuclear weapons and the whole thing. There's always a reason. But in the end, if you bought one share for 40 bucks and reinvested the dividends, it'd be worth about 5 million now. And that factor so overrides anything else. I mean, if you're right about the business, you'll make a lot of money and and the timing part of it is very, is is a very tricky thing. So I don't worry about any given event if I've got a wonderful business, uh, you know, whether what it does to next year or something of the sort.

Uh, um, you know, price controls have been in this country at various times and that's that's followed up even the best of businesses. I mean, I wouldn't be able to raise the price on December 26th at See's Candy if we had price controls and we've had them in this country, but that doesn't make it a lousy business if that happens to happen because you're not going to have price controls forever. We had them in the early, in the early '70s. So it it, the wonderful business, you you know, you can figure out what will happen, you can't figure out when it will happen. You don't want to focus too much on when, you want to focus on what. If you're right about what, you don't have to worry about when very much.

Is there an area I'm missing back there any place? Just want to make sure I'm not focusing all of them on one place. Let me get this gentleman over here.

Most the most successful inv from those messages. What investment mistakes you made?

The question is about my business mistakes.

How much time do you have? Well, the interesting thing about the mistakes is that in investments, at least for me and for my partner Charlie Munger, the biggest mistakes have not been mistakes of of commission, they've been mistakes of omission. They're where we knew enough about the business business to do something and for one reason or another we sat there sucking our thumbs instead of doing something. And so we've, we've passed up things where we could have made billions and billions of dollars from things we understood. Forget about things we don't understand. We don't, in fact, I could make billions out of Microsoft, doesn't mean anything because I never understand Microsoft. But if I can make billions out of healthcare stocks, you know I should've made it and I didn't. You know, when when when the Clinton healthcare program was proposed and they all went in the tank, uh, we should have made a ton of money out of that, uh, because I could understand it. I I didn't make... I should have made a ton of money out of Fannie Mae back in the mid-80s because I understood it and I didn't do it.

Those are billion-dollar mistakes or multi-billion-dollar mistakes that the generally accepted accounting principles don't pick up. Uh, the mistakes you see, the mistakes you see, we made a, isn't we, I made a mistake, uh, buying US Air preferred some years ago. I mean, that I had a lot of money around. I make mistakes when I get cash. Charlie tells me to go to a bar instead, you don't hang around the office. But I I hang around the office and I get in my pocket, I do something dumb. It happens every time. And and, uh, so I I bought this thing, nobody made me buy it. I now have an 800 number I call every time I think about buying stock in an airline and they talk me down. They say, you know, I say, "I'm Warren, I'm an air-oholic." And then the guy says, "You know, keep talking, don't hang up, you know, and don't do anything rash." And finally I get over it.

Uh, but I but I, I I bought it, you know, and uh, it looked like we were going to lose all our money in that and we came very close to losing all our money. And and you can say we deserve to lose all our money. And we bought it because it was an attractive security, but it was in not in an attractive business. I did the same thing with Salomon. I bought an attractive security in a in a business that I wouldn't have bought the equity in. So you can say that that's one form of mistake, buying something because you like the terms when you don't like the business that well. And I I've done that in the past and probably do it again.

Uh, the the bigger mistakes though were the ones of of omission. Uh, I did back, back when I when I had the 10,000 bucks, I put $2,000 of it into a Sinclair service station, which I lost. So my opportunity cost on that's about 6 billion right now. Fairly big mistake, yeah. It makes me feel good when Berkshire goes down then because the cost of my Sinclair station goes down too, my 20% opportunity cost. But I will say this, you talk about learning from mistakes. I really believe it's better to learn from other people's mistakes as much as possible.

But, uh, but we don't spend any time looking back at Berkshire. Uh, I've got a partner, Charlie Munger, we've been pals for 40 years, we've never had an argument. We disagree on things a lot, but but we but we don't we don't have arguments about it. And we never look back. We just, you know, we just figure there's so much to look forward to that there's just no sense thinking about what we might. It it just doesn't make any difference. I mean, you you can only live life forward and you can learn something perhaps from the mistakes, but the the big thing to do is stick with the businesses you understand. And uh, so if there's a generic mistake of of getting outside of your circle of competence and you know, buying something because somebody tips you on it or something of the sort in in an area you don't know anything about, I mean that you should learn something from that, which is that you stay with what you can figure out yourself. I mean, you really want your decision-making to be by looking in the mirror and uh, saying to yourself, "I am buying 100 shares of General Motors at 55 because..." And I mean, it's your responsibility if you're buying it and there's got to be a reason. And if you can't state the reason, you shouldn't buy it. If it's because somebody told you about it at a cocktail party, not good enough. You know, I mean, there's just, it's got to be something you know. Can't be because the the volume, you know, the chart looks good on it or anything like that. It's it's got to be a reason you'd buy the business. And we, that we stick to pretty, pretty carefully. That's one of the things Ben Graham taught me.

Yeah, the current continuous, uh, economic situation in the world, although our economy seems to be still chugging along quite well, where are we going? What's going to happen with interest rates?

Question about what's going to happen to the interest rates or where are we going in the world. I don't think about the macro stuff. You know, I I just, um, the important, what you really want to do in investments is figure out what's important and knowable. If it's unimportant or unknowable, you you forget about it. What you talk about is important, but in my view, it's not knowable. Understanding Coca-Cola is knowable, or Wrigley, or Eastman Kodak or anything. I mean, you can understand those business, that's knowable. And whether it turns out to be important depends on where your valuation leads you and the current price and all of that.

But we have never either bought a business or not bought a business because of any macro feeling of any kind. We don't read things about predictions about interest rates or business or anything like that because it doesn't make any difference. I mean, let's say in 1972 when we bought See's Candy, I think maybe Nixon put on the price controls a little bit later. Let's say we'd seen that. But so what? We would have missed a chance to buy something for 25 million that's earning 60 million pre-tax now. I we we don't want to pass up the chance to do something intelligent because of some prediction about something that we're no good on it anyway. So we just don't, we don't read or listen to or do anything in relation to to macro factors at all, zero.

And the typical investment counseling organization goes out and they give you the, they bring out their economist, they trot them out and he gives you this big macro picture and then they start working from there on down. In our view, that's nonsense. That, uh, uh, and if if you know, if Alan Greenspan was on one side of me and Bob Rubin on the other side and they were both whispering in my ear exactly what they're going to do in the next 12 months, it wouldn't make any difference to me and what I pay for Executive Jet or General Reinsurance or anything else.

Yeah, what's the benefit of being out of street?

Well, what's the benefit of being an out of towner, uh, as opposed to being in Wall Street? I I worked in Wall Street for a couple of years and uh, and I like, I've got, I've got my best friends actually and on both coasts and I like seeing them and I get ideas when I go there. But the best way to get to think about investments is to be in a room with no one else and just think. And if that doesn't work, nothing else is going to work.

Uh, and the disadvantage of being in any kind of a market type environment in Wall Street would be the extremes that you get over stimulated. You think you have to do something every day. I mean, the Candler family paid 2,000 bucks for this company and that you don't have to do much else if you pick one of those. And the trick then is not to do anything anything else, even not to sell it in 1919, which they, the family did later on.

It uh, so what you're looking for is some way to get one good idea a year, you know, and then and then write it to its full potential. And that's very hard to do in an environment where people are shouting prices back and forth every five minutes and shoving reports under your nose and all that because Wall Street makes its money on activity. You make your money on inactivity. You know, I mean if everybody in this room trades their portfolio around every day with every other person, you know, you're all going to end up broke and and and and the intermediary is going to end up with all the money.

On the other hand, if you all own a stock in a in a group of average businesses and just sit here for the next 50 years, you'll end up with a fair amount of money and your broker will be broke. So his act, his activity is, is he's like a doctor who gets paid by how often he gets you to change pills. I mean basically, I mean he gives you one pill and it cures you the rest of your life and he's got one sale, one transaction and and that's it. But if he can convince you that changing pills every day is the way to great health, uh, it'll be great for him and the prescription and and you'll be out a lot of money and you won't be any healthier, you'll be a lot worse off financially. So you want to stay away from any environment that stimulates activity. And Wall Street would have the effect of of doing that. The, uh, I would, I I used to, when I went, I'll go back about once every six months and I'd go back with a whole list of things I want to check out one way or another, companies I wanted to see and and I would, I would get my money's worth out of those trips, but then I'd go back to Omaha and think about it.

Yeah, how should an investor evaluate owning shares of Berkshire Hathaway or Microsoft when they don't pay dividends to invest?

Yeah. Well, the question with Berkshire Hathaway, question about evaluating Berkshire when it doesn't pay any dividends. And then uh, it won't pay any dividends either. It, uh, it's a promise I can keep. Uh, the uh, all you get with Berkshire, you stick it in your safe deposit box and then every year you go down and fondle it. You know, you take it out and fondle it and then you put it back. And I mean there's enormous psychic reward in that. You don't underestimate it.

But the the real question is whether we can keep retaining dollar bills and turning them into more than a dollar at at a decent rate. And and that's what we try to do. And and and Charlie Munger and I have our our money in it to do that. That's all we'll get paid for doing. We won't take any options, we won't take any salaries to speak of or anything. We ride around in the plane. Uh, but the uh, that's what we're trying to do. It gets harder all the time. The the more money we manage, the harder it is to do that. And we would do way better percentage-wise with Berkshire if it was 1/100th the present size. But it is, it is run for its owners, but it isn't run to give them dividends because so far every dollar that we've earned and could have paid out, we've turned into more than a dollar. It's worth more than a dollar to keep it and therefore it would be silly to pay it out, even if everybody was tax-free that owned it, it would have been a mistake to pay dividends at Berkshire because so far the dollar bills retained have turned into more than a dollar.

But there's no guarantee that that happens in the future and at some point the game runs out on that. Uh, uh, but it is the goal of, I mean, that is what the business is about. We're not, nothing else about the business do we judge ourselves by. We don't judge it by the size of its home office building or you know, anything of the normal people working around it. We got 12 people at headquarters. We got 45,000 employees at Berkshire and 12 people at headquarters, 3,500 ft, and we won't change it. So it, we will judge ourselves by the performance of the company. Uh, and that's the only way we'll get paid. But believe me, it's a lot harder than than it used to be.

Is there anything way in the back? Cuz I I want to make sure I'm not missing people back there that haven't called. Okay, then we'll go to the... How about way over there on the on the aisle? Yeah.

What makes me decide to invest? What investment, one of your investments has reached its full potential as you said earlier that you uh...

I missed the last part. Oh, reached its full potential. Well, ideally you buy in businesses where you feel that will never happen in terms of, I mean, I I don't think, I don't buy Coke with the idea that it's going to be out of gas in 10 years, you know, or 15 years. It I mean, there could be something happen, but I I I would think that chances that are almost nil. So what we really want to do is buy businesses that we would be happy to own forever.

It's the same way I feel about people who buy Berkshire. I want people to buy Berkshire that plan to hold it forever. They may not for one reason or another, but I want them at the time they buy it to think they are buying a business that they're going to own forever. And I don't say that's the only way to buy things. It's just that that's the group I want to have join me because I don't want to have a changing group all the time. I measure Berkshire by how little activity there is in it. If I if I had a church and I was the preacher and half the congregation left every Sunday, I wouldn't say, "Oh, this is marvelous," because I have all this liquidity among my members, you know. You know, this terrific turnover, you know. Uh, I would, I would, I would rather get a church where all the seats are filled, you know, every Sunday by the same people. Well, that's the way we look at the businesses we buy. We want to buy something that we're really happy to own, uh, virtually forever.

And we can't find a lot of those. And back when I started, I had way more ideas than money. So I was just constantly having to sell what I thought was the least attractive stock in order to buy something that I just discovered that looked even cheaper, but that's not our problem really now. And so we hope we're buying businesses that we're just as happy with five years from now as as now. And if we ever found some huge acquisition, you know, then we'd have to sell something, uh, maybe to make that acquisition, but that that would be a very pleasant pleasant problem to have. Uh, we never buy something with a price target in mind. I mean, we never buy something at 30 saying if it goes to 40, we'll sell it or 50 or 60 or 100. We just don't do it that way any more than when we buy a private business like See's Candy for 25 million, we don't say to ourselves if it ever, if we ever got an offer of 50 million for this business, we'd sell it. That that's just not the way to look at a business. The way to look at a business is, is this going to keep producing more and more and more money over time? And if the answer to that is yes, you don't need to ask any more questions. There is, yeah, way back.

...taking Salomon and um, similarly Long-Term Capital, how come up with valuation?

Well, Salomon, like I said, I was, I I went into that because it was a 9% security in 1987, September 1987. We, the Dow was up 35% that year, we'd sold a lot of stuff and I had a lot of money around. I I it looked to me like we were never getting a chance to do anything, so I took an attractive security form in a business I would never buy the common stock of. And I went in because of that. And I I think that's generally a mistake. It worked out okay finally on that, but uh, but it it it's not what I should have been doing. I should have, I either should have waited, in which case I could have bought more Coca-Cola a year later thereabouts, or I should have even bought Coke at the prices it was selling at then, even though it was selling at a pretty good price at the time.

So that was a mistake on Long-Term, uh, Capital. That's, we have learned other businesses that are associated with securities over the years and I mean one of them is arbitrage. I I I've done arbitrage for 45 years and Graham did it for probably, uh, 30 years before that. And that, a business unfortunately I have to be near a phone for and I have to, I have to really run it out of the office myself because it it requires being more sort of market attuned and I don't want to do that anymore. So I I, unless a really big arbitrage situation came along that I understood, I won't be doing much of that. But we, I've probably been in 300 arbitrage situations at least in my life, maybe more. And it's been, it was a good business, perfectly good business.

Long-Term Capital has a bunch of positions. They got tons of positions, but the top 10 are probably 90% of the money that's at risk. And I I know something about those 10 positions. I don't know everything about them by a long shot, but I know enough where I would feel okay at a big discount going in and we would have the staying power to to to hold it out. We might lose money on something like that, but the odds are with us. That's a game that I understand.

There's a there's a few other positions we have that aren't that big because they can't get that big, but they involve, they could involve yield curve relationships or or on the run, off the run governments or things like that that are just things you learn over time if you're around securities markets. They're not the base of our business. Probably on average, they've accounted for a half a percentage point of our return a year, you know, or three quarters of a percentage point a year of our return. They're little pluses that you get for for actually having just been around a long time and learning a little bit about... First arbitrage, not the first arbitrage I did, but one of the first arbitrages I did involved a company where you, they were offering cocoa beans in exchange for their stock. That was in 1955. And I bought the stock, turned in the stock, got warehouse certificates for cocoa beans. And and they happened to be a different type, they were trading on the cocoa exchange, but there was a basis differential, my favorite. And I sold them. I mean, that's just something that I was around at the time, so I learned about it. Hasn't been a cocoa bean deal since, you know, 40 odd years. I've been waiting for another cocoa bean deal, I haven't seen it, but but it's it's there in my memory if it ever comes along. And that Long-Term Capital is that on a big scale.

Yep. The question is about diversification and I've got a dual answer to that. If you are not a professional investor, if your if your goal is not to manage money in such a way as to get a significantly better return than the world, uh, then I believe in extreme diversification. I mean, if it, so I believe 98 or 99%, maybe more than 99% of people who invest, uh, should extensively diversify and not trade. So that leads them to an index fund type of decision with very low cost because all they're going to do is own a part of America. And they made a decision that only a part of America is worthwhile. I don't quarrel with that at all. That is the way they should approach it unless they want to bring an intensity to the game to make a decision and start evaluating businesses.

But once you're in the business of evaluating businesses and and you decide that you're going to bring the effort and intensity and uh, uh, and time involved to get that job done, then I think that diversification is a terrible mistake and to any degree. And uh, I got asked that question when I was at SunTrust the other day. And uh, if you really know businesses, you probably shouldn't own more than six of them. I mean, if you can identify six wonderful businesses, that is all the diversification you need and you're going to make a lot of money. And I will guarantee you that going into a seventh one is going to, rather than putting more money in your first one, it's got to be a terrible mistake. Very few people have gotten rich on their seventh best idea, but a lot of people have gotten rich on their best idea.

And so I I would, uh, I would say that for anybody working with normal capital who really knows the businesses they've gone into, uh, six is plenty. And uh, and I'd probably have half of it in what I liked best. I don't diversify personally, I mean, and and, uh, uh, all the people I know that have done well, with the exception, we mentioned Walter Schloss here earlier. Walter diversifies a lot. He owns a little of everything. I call him Noah, you know, he's got two of everything.

Yeah. How do you separate the Coke of the world from the Procter & Gamble of the world?

Well, Procter & Gamble is a good, a very, very good business. Strong distribution capability, lots of brand names and everything. But if you ask me, we're going to go away for 20 years to put all my family's net worth in one business, would I rather have Procter and Gamble or Coke? Actually, Procter and Gamble is a little more, it'd be more diversified among product line, but I would feel surer of Coke. In Procter & Gamble, I wouldn't be unhappy if somebody told me I had to own Procter & Gamble during that 20-year period. I mean, that would be in my top 5% because they they are not going to get killed, you know.

But I would feel better about the unit growth and the pricing power of a Coke over 20 or 30 years than I would about a Procter and Gamble. Right now, the pricing power might be tough, but you think a billion, billion servings a day, you know, an extra penny, $10 million a day. You know, we own 8% of it, that's that's $800,000 a day for Berkshire Hathaway. Get another penny out of the stuff, doesn't seem impossible, does it? I mean, it's worth another penny, but uh, it doesn't, right now it'd be a mistake to try and get it in most markets, but over time Coke will make more per serving than it does now. 20 years from now, I'll guarantee they'll make more per serving, they'll be selling a whole lot more servings. I don't know how many, I don't know how much more, but I know that uh, P&G's main products, I don't think they have the kind of dominance and they don't have the kind of unit growth, but they're but they're good businesses. You know, I I would not be unhappy, uh, if you told me that I had to put my family's net worth in P&G and that was the only stock I could own. I wouldn't, you know, there I might prefer some other names, but there aren't a hundred other names I would prefer.

Yeah, same, McDonald's, go away 20 years from McDonald's.

The question is about McDonald's and going away for 20 years. McDonald's has got a lot of things going for it and particularly abroad again. I mean, their position in abroad in many countries is stronger relatively than here. It's a tougher business over time. People do not want to eat, exception to the kids when they're giving away Beanie Babies or something, people do not want to eat at McDonald's every day. I mean if people are drinking Coke today, they drink five of them a day, they'll probably drink five tomorrow. Uh, the the fast food business is tougher than that at, uh, but if you had to pick one hand to have in the fast food business, which is going to be a huge business worldwide, you'd pick McDonald's. I mean it has the the strongest position.

Uh, it doesn't win taste tests, you know, with adults and I mean, it does very well with children and it does fine with adults, but it I mean, it is not, it is not like it's a clear winner. And and, uh, and it's gotten into the game in recent years of being more price promotional and and, you know, you remember the experiment a year ago or so. And, uh, so it's gotten more dependent on that rather than just selling the product by itself. I like a product by itself sells. I I feel better about Gillette, if people buy the Mach3 because they like the Mach3 than if they get a Beanie Baby with it, you know. I mean, so I just think it's fundamentally a stronger product if that's the case. And and, uh, you know, it probably is. We own, we own a lot of Gillette and you can sleep pretty well at night if you think of a couple billion men with their hair growing on their faces. You go to, you know, they're it's growing all night while you sleep, you know. And women have two legs, it's even better.

So it's, uh, it beats counting sheep. I and those are the kind of business, but if you got to think, you know, "What promotion am I going to put out there against Burger King next month?" you know, and "What if they sign up Disney and I don't get Disney?" and I mean, that that is, I I like the, I like the products that stand alone, absent promotional price appeals, although you can build a very good business based on that. And and McDonald's is a terrific business. It's not as good of a business as Coke, but that, you know, there really hardly any, uh, it's a very good business. And if you bet on one company in that field, aside from Dairy Queen of course... McDonald's, we bought Dairy Queen here a while back, that's why I'm plugging it shamelessly. Here. Yeah, way back.

There. What do I think of what? Electric utility industry?

Well, I've I've thought about that a lot because you can put big money in it and and I've even thought of buying entire businesses. There's a fellow in Omaha actually that's that's that's done a little of that uh, through CalEnergy, but I don't quite understand the game in terms of how it's going to develop, uh, uh, with deregulation. I mean, it's it, there's got to, I can see how it destroys a lot of value, uh, for the high cost producer, you know, once they're not protected by a monopoly territory. And I don't for sure see how who benefits and how much. I mean, obviously the guy with very low cost power, some guy that's got hydro power, you know, at 2 cents a kilowatt or something like that has got a huge advantage, but how much of that he's going to get to keep and everything, or how extensively he can, he can send that outside his natural territory, I haven't been able to figure that out with a so that I really think I know what the industry is going to look like in 10 years. But it is something I think about, and if I ever develop any insights, you know, that call for action, I'll develop, you know, I will act on them. But it, because I think I can understand the attractiveness of the product and it's it's all that, all the aspects of certainty of of user need and and and the fact that it's a bargain and all of that I understand, I just don't understand who's going to make the money in uh, 10 years from now. And and that keeps me away.

Yeah, do you think that the market has favored the large caps, blue chip stocks, over the small cap stock the next couple years?

Question is large caps versus small caps and why large caps overperform. I I don't know the answer to that. We we don't think, uh, we don't, we don't care whether it's companies large cap, giant cap, middle cap, small cap, micro cap, doesn't make any difference. I mean, the only question for us is can we understand the business, do we like the people running it, and does it sell for a price that is attractive?

From our my personal standpoint running Berkshire now, because we've got pro forma for Gen Re, I don't know what we have, maybe 75 or 80 billion dollars to invest and I only want to invest in about five things. So I I'm really limited to very big companies. But if I were investing $100,000, I wouldn't care whether something was large cap or small cap or anything. I would just look for businesses I understood. Now, I I think that on on balance, large cap companies as businesses have done extraordinarily well the last 10 years and way better than people anticipated they would do. I mean you really have American business earning close to 20% on equity and that's something nobody dreamed of. And that's being produced by very large companies in aggregate.

So you've had this huge revaluation upward of in because of lower interest rates and then much higher returns on capital. And you know, if if American business is really a bond, disguised bond that earns 20%, has a 20% coupon, it's much better than if it's a bond with a 13% coupon. And and that's that's happened with big companies in recent years. Whether it's permanent or not is another question. I'm I'm skeptical of that, but uh, but I don't, I I I it I wouldn't even think about except for questions of how much money we run, I wouldn't even think about the size of the the business. A good small, See's Candy was a $25 million business when we bought it. I mean if I could find one just like it now, even as big as we are, you know, I'd love to buy it. And uh, just it's the certainty of it that that counts. Yeah, way over there.

Uh, you mentioned earlier that in buying stock, almost every company's public and one thing until the last five years, real estate has been primarily private. We're now seeing a great, um, securitization of real estate and what is your insights into the industry?

Yeah, you're talking about real estate. There's been securitization, enormous securitization of of of of the debt too of real estate. And that is one of the items right now that is really clogging up, uh, the the capital markets. I mean, the the mortgage-backed securities are, they're just not moving, uh, in in commercial mortgage-backed now, residential mortgage-backed. And so that's, but I think you're you're directing your question at equities probably and and the equities, if you leave out the corporate form, has been a lousy way to own equities. I mean, you you've interjected a corporate income tax into something that people individually have been able to own with with a single tax. And by having the normal corporate form, you get a double taxation in there you really don't need with real estate and it takes away too much of the return.

REITs, uh, have in effect created a conduit so that you don't get the double taxation, but they also generally have fairly high operating expenses. And if you if you get real estate, let's just say you can buy fairly simple types of real estate on an 8% yield or thereabouts and you take away maybe close to one or one and maybe even one and a half percent by the time you count stock options and everything, it's not a terribly attractive way to own it. Maybe the only way a guy with a thousand bucks or 5,000 bucks can own it. But if you have a million dollars, $10 million, you're better off owning the real real estate properties yourself than sticking some intermediary in between that will get a sizable piece of of the return for himself.

So we have found very little in that field. Uh, you'll see an announcement in the next couple weeks that may belie what I'm telling you here on one thing, so I want, I don't want you to think I was double crossing you up here. Uh, but generally speaking, we we've seen very very little in that field that gets us excited. Uh, uh, there, people sometimes get very, very confused about, they'll look at, uh, some huge land company, uh, take, I'll take one that's that won't evoke any emotional reactions on the part of anybody, like Texas Pacific Land Trust, which has been around over a hundred years and got a couple million acres in Texas. And they'll take the, you know, they'll sell 1% of their land every year and they'll take that as applying to everything and come up with some huge value compared to the market value, but that's nonsense.

If you really own the property, I mean, you you know, you can't move, you can't move 50% of the properties or 20% of the properties. It's it's way worse than a no liquid stock. So you get these, I think you get some very silly valuations placed on a lot of real estate companies by people that don't really understand what it's like to own one and try to move large quantities of property. Uh, it re REITs have behaved terribly in the market this year, as you know, and it's not at all unreasonable they would become a class that would get so unpopular that they would sell at significant discounts, uh, from what you could sell the properties for. And they could, they could get interesting as a class then. And then the question is whether the management would fight you in that process because they would be giving up their income stream, uh, for managing things and their interests might run counter to the shareholders on that.

I've always wondered about the REITs and say, "You know, our our assets are so wonderful and they're so cheap," and then they go out and sell stock. I mean, that there's a there's a contradiction in that. If they say our stock at 28 is very cheap and then they sell a lot of stock at 28 less an underwriting commission, doesn't, you know, they're either, there there's a disconnect there. And so, but it's a field we look at. I mean, Charlie and I can understand real estate and uh, and we would be open for very big transactions periodically. And if there was a Long-Term Capital Management situation and translated to real estate, you know, we would be open to that. Trouble is, so many other people would be too that it would be unlikely to go go at a price that would that would really get us excited. Way back there.

Understanding your theory that sort of a down market is good for net savers, can you can you sort of give us your thoughts as to where the market's going in its downward trend long term?

Well, I yeah, I've got no idea where the market's going to go. I prefer it going down, but I but I have, you know, my preferences have nothing to do with it. The the market knows nothing about my feelings. Uh, you that's one of the first things you have to learn with a, you know, you buy 100 shares of General Motors, now all of a sudden you have this feeling about General Motors. I mean if it goes down, you may be mad at it. You may say, "Well, if it just go up to what I paid for it, you know, my life will be wonderful again." Or if it goes up, you may say how smart you were and how you and General Motors had this love affair and everything. You've got all these feelings. The stock doesn't know you own it. The stock just sits there. It doesn't care what you paid, it doesn't care that you owned it or anything. So any feeling I have about the market is not reciprocated. I mean, it is the ultimate, yeah, it is, it is very cold shoulder we're talking about here.

And anybody that is going to be a net saver, practically everybody in this room is more likely to be a net buyer of stocks over the next 10 years than they are a net seller. So every one of you should prefer lower prices. I mean if you're going to be a net eater of hamburger in the next 10 years, you want hamburger to go down unless you're a cattle cattle producer. And if you're going to be a buyer of Coca-Cola and you don't own Coke stock, you hope Coke, the price of Coke goes down. I mean you're looking for it to be on sale this weekend at your supermarket. You want it to be down on the weekends, not up on the weekends when you're going to attend the supermarket. Your stock exchange is a big supermarket of companies and you're going to be buying stocks. What do you want to have happen? You want those stocks to go down, way down. And uh, you know, you will make better buys then. And later on, 20 years from now, 30 years from now, when you're in a period when you're dissaving or when your heirs dissave for you, you're gone, I mean that then you may care about higher prices.

But I I find people that was one of the, there's a chapter eight in Ben Graham's Intelligent Investor about the attitude towards stock market fluctuations. And that and the chapter 20 on the margin of safety are the two most important essays ever ever written on investing as far as I'm concerned, because when I read chapter eight when I was 19, I I figured, you know, I mean, what I what I just figured out what I just said, but it was, it's obvious. I didn't figure it out myself though, it was it was explained to me. I'd probably gone another hundred years if I had still thought it was good when my stocks were going up. Uh, now we want, we want things to go down, but I have no idea what the stock market's going to do. I never do, never will. It it's not something that that I think about at all. When it goes down, I feel, I look harder at what I might buy that day, uh, because I know there's more likely to be some merchandise there that I can use my money effectively in.

Okay, Warren, we'll take one more question from the audience.

Okay, I'll let you pick who gets it then. You can be the...

Guy, what's the question right back?

Uh, if you uh, uh, may again, uh, study your life again, then what would you like to do to, uh, to have a happier life?

Yeah, I would say, and this is going to sound disgusting. Question is what would I do if I going to live over again and have a happier life. Uh, well, I the only thing I might do is select a gene pool where people live to be 120 or something. But I've, I've been, I've been extraordinarily lucky. I mean, it it, uh, I use this example, I'll take a minute or two because I think it's thinking about a little bit. Let's just assume that it was 24 hours before you were born and a genie came to you and he said, uh, he said, "Herb, uh, you look very promising and I've got a big problem. I've got to design the world in which you're going to live." And he says, "I decided, hell with it, it's too tough. You design it." So you've got 24 hours. You figure out what the social rules should be, the economic rules, uh, the governmental rules, and you're going to live under those and your kids are going to live under them and their kids are going to live under them.

And you say, "I can design anything?" And the genie says, "Yeah, you can do it." And you say, "Well, there must be a catch." He says, "Well, there is a catch. You don't know whether you're going to be born black or white, rich or poor, male or female, uh, infirm or able-bodied, bright or... all you know is you're going to take one ball out of a barrel that's got 5.8 billion. You're going to participate in what I call the ovarian lottery. You're going to get one ball out of there and that's and that is the most important thing that's ever going to happen to you in your life because that is going to control whether you're born here or in Afghanistan or whether you're born with an IQ of 130 or an IQ of 70. Uh, it's going to determine a whole lot. And you're going to go out of the world and you're going to have that ball.

Now, what kind of a world do you want to design? Well, I think that's a good way to look at social question because not knowing which ball you're going to get, you're going to want a ball that you're going to want a system, design a system that's going to produce lots of goods and services because you're going to want people on balance to live well and you're going to want it that produces more and more so your kids live better than you do and your your grandchildren look better than the kids. But you're also going to want a system that if it does produce lots of goods and services, does not leave behind a person that accidentally got the wrong ball and is not well-wired for this particular system.

See, I'm I'm ideally wired for the system I fell into here. I mean, I came out and I got something that enables me to allocate capital. You know, nothing so wonderful about that if all of us were stranded on a desert island. You know, we all landed there, we were never going to get off of it. The most valuable person would be the one that could raise the most rice, you know, uh, over time. And and you know, I could say, "Well, I going to allocate capital." You know, how about paying me? And you wouldn't get very excited about that. So I am in the right place. I mean, Gates says if I'd been born, you know, a few million years ago, I'd been some animal's lunch. You know, he says, "You can't run very fast, you can't climb trees, you can't do anything." It's just been, you know, just been chewed up in the first day. So he says, "You're lucky you were born today." And I and I am.

But the question, getting back one question you can ask yourself incidentally is, here is this barrel with 5.8 billion balls, everybody in the world, if you could put your ball back and they gave you and then they took out at random a 100 other balls and you had to pick one of those, would you put your ball back in? Now those 100 balls that you're going to get out, roughly, uh, five of them will be American. So there are 95 versus five. So you're only going to have five balls, if you want to be in this country, you're only going to have five balls now left. You know, half of them are going to be women, half of them going to be men. I'll let you all decide how you vote on that one. Uh, half of them are going to be below average intelligence, half are going to be above. I mean, you want to put your ball... most of you, I think, would not want to put that ball back to get a 100. So what you're saying is, "I'm in the luckiest 1% of the world right now," right now sitting in this room, top 1% of the world.

Well, that's the way I feel. I mean, I've been lucky to be born where I was because it was 50 to one against me in in the United States when I was born, lucky with parents, lucky with all kinds of things. Then lucky to be wired in a way that in a market economy pays off like crazy for me. Doesn't pay off for somebody who's absolutely as good a citizen as I am, you know, leading Boy Scout troops, teaching Sunday school, whatever, raising fine families, but it just doesn't happen to be wired in the same way I am. So I've been extremely lucky.

So I would like to be lucky again. And and if I'm lucky, then the way to do it is to play out that game and and and and do something you enjoy, you know, all your life and be associated with people you like. I only work with people I like. You know, I I don't, I don't, if I could make a hundred million by buying a business with some guy that caused my stomach to churn, I'd say no because I say that's just like marrying for money, which probably isn't a very good idea in any circumstances, but if you're already rich, it's crazy, right? I am not going to marry for money. So I would do, I would I would do almost exactly, uh, what I've done except I don't think I'd have bought the US Air. Thanks.