Berkshire Hathaway Annual Meeting

                                                                        April 30, 2016

(Notes taken by David Kass, Department of Finance, Robert H. Smith School of Business,

University of Maryland)

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Warren Buffett And Berkshire Hathaway

A humorous film was shown in which Arnold Schwarzenegger selects “Terminator” Charlie Munger over Warren Buffett as “The Berkshire Apprentice” (Celebrity Apprentice).  There was also an animation of Warren Buffett and Charlie Munger, along with Ajit Jain and the Geico Gecko, in a spoof of the movie “Trading Places”.

Warren Buffett (age 85) and Charlie Munger (age 92) then walk on the stage and sit down.  The format for asking questions was similar to the last seven annual meetings.  One-third of the questions were selected by three business journalists: Andrew Ross Sorkin (CNBC and the New York Times), Becky Quick (CNBC), and Carol Loomis (Fortune).   Shareholders had e-mailed over 2,000 questions to the journalists, who then selected 18 questions relating to Berkshire and its operations.  The journalists who were seated on the stage, alternated with analysts Gregg Warren (Morningstar), Jonathan Brandt (Ruane, Cunniff, and Goldfarb), and Cliff Gallant (insurance analyst), and with shareholders in the audience in the asking of questions.

Approximately 40,000 were in attendance.  This compared to 45,000 – 50,000 in 2015 (celebrating Warren Buffett’s 50 years at Berkshire Hathaway), 40,000 in 2014, 36,000 – 38,000 in 2010-2013, and 35,000 in 2009, 31,000 in 2008, 27,000 in 2007, and 24,000 in 2006.

Charlie Munger initially commented that if a woman has a choice between two old men, she should choose the one who is older.

Warren Buffett mentioned that Berkshire’s first quarter operating earnings declined as a result of insurance underwriting losses incurred from Texas hailstorms.  Berkshire’s railroad also had a decline in earnings.

Questions were asked in the following order:

(1) Loomis:  In your 1987 Letter to Shareholders you mentioned that Berkshire liked to invest in companies requiring only small amounts of capital.  Now you are investing in companies with large capital needs.  Why this change?

Buffett: Companies with little need for capital are harder to find.  Berkshire Hathaway Energy and BNSF Railroad require lots of capital.  We earn decent, but not extraordinary returns on capital.

Munger: When circumstances changed, we changed.

(2) Brandt: Why did you invest in Precision Castparts?

Munger: Precision Castparts has superior management and is a “no-brainer business”.

(3) Audience: What would you have done differently in search of happiness?

Buffett:  I am 85 and love what I am doing.  My favorite employer is myself and my partnership with Charlie.

Munger:  I am 92 and have lots of ignorance to work on.

(4) Quick: Why did Berkshire sell Munich Re?

Buffett:  There is excess capacity in the reinsurance market.

(5) Gallant: Why did Progressive do better than Geico in 2015?

Buffett: Last year the frequency and severity of accidents increased.  Progressive was hit less than Geico and Allstate.

(6) Audience: What impact will the shift from push to pull marketing (Amazon) have on Berkshire?

Buffett: Geico was slow with the Internet, but they jumped in.

Munger: Our retailers are strong.

(7) Sorkin: Why should Berkshire shareholders feel proud to own Coca-Cola when sugar is so harmful to health?

Buffett:  He gets 700 calories per day from Coke, or about 25% of his total calorie intake.  Since Coke makes him happy, he will live longer.

Munger:  This is a stupid question because it ignores the benefit while focusing only on the cost (detriment).

(8) Gregg Warren:  Should Berkshire be generating more electricity from renewables?

Buffett: Berkshire does not need rate increases from renewables, but needs regulators to work with you.  There are benefits to reducing carbon emissions world-wide.

Munger: We are doing more than our share and at lower prices.

(9) Audience: How do you value Bank of America and other commercial banks that Berkshire has investments in since they have significant exposure to derivatives?

Buffett:  If there is a major discontinuity such as a nuclear attack, derivatives could cause a lot of problems.  Large positions are dangerous.  Berkshire has added to its position in Wells Fargo and will likely convert its preferred stock position in Bank of America to its common stock.

(10) Loomis: What happens to float investment income if the U.S. has negative interest rates?

Buffett:  Some of our float is in Europe with negative interest rates.  We can find things to do with our float.  We’ve got $50 billion of short term government securities now and another $8.3 billion coming in June from Kraft Heinz preferred stock.  Float is not worth as much to insurance companies with lower interest rates as it was 10 or 15 years ago.  Our float is likely to be useful to us in the future.  It’s shown as a liability on our balance sheet, but it is actually a huge asset.

(11) Brandt:  The railroad industry is suffering with a decline in volume.  Is this cyclical or secular and how does it affect BNSF?

Buffett:  20% of revenue comes from coal and its decline is secular.  BNSF will earn a lot of money this year, but not as much as last year.

(12) Audience: How should children look at companies when every day they see in the media IPO’s and the business cycle getting shorter?

Buffett:  When you buy a stock you are buying a business.  You don’t get a quote every day on your farm or apartment house or a McDonald’s franchise.  A lot of problems are caused by envy.  You have to figure out what makes sense and follow your own course.

(13) Quick:  Why are there new rules on solar energy in Nevada?

Buffett:  For solar to be competitive it needs a subsidy.  Who pays for the subsidy is the real question.  Ninety nine percent of consumers were being asked to subsidize the 1% that had solar units by paying triple the market price at what we could otherwise buy electricity and sell it to the other 99%.

Greg Abel: We support renewables and solar energy.  We want to purchase renewable energy at the market rate – not where 1% of the customers will benefit and the other 99% will not.  By 2019 we will be replacing 76% of our coal units and replacing them with solar.

(14) Gallant:  Is Berkshire making a long term statement about the price of oil with its recent oil investments?

Buffett: We have no idea about the future price of oil.  Our oil-related investments are based on other considerations.

(15) Audience: Question about rising college education costs.

Buffett:  More philanthropy should be devoted to financing college costs.  There are very good state schools.  We spend a lot of money on education in this country.  We spend $600 billion educating 50 million kids from kindergarten to 12th grade.  We have entitlements for the young.  Nobody ever seems to bring that up.  Working age people have an obligation to both the young and the old.  I was a trustee at a college (Grinnell College) that saw the endowment go from $8 million to over $1 billion.  I did not see the tuition come down or the number of students go up.

Munger: Nothing went up except the president’s salary.

Buffett:  When you read the figures on the endowments at the big schools,

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