Berkshire Hathaway Annual Meeting Q&A - Full Session with Buffett & Munger

Carol Loomis asks if successor candidates can be chief risk officer and handle Goldman/GE/BofA type deals. Buffett: 'I do believe CEO of any large particularly financial company should be chief risk officer. It's not something to be delegated. Charlie and I have seen that function delegated at very major institutions - risk committee would come in and report every week with nice figures, talk about how many sigmas were involved, and the place was just ripe for real trouble.' Key points: 'I am the chief risk officer at Berkshire. My successor will have the same responsibility. We would not select anybody for that job that we did not think had that ability. It ranks right up there with allocation of capital and selection of managers for operating units.' Basic risks: excessive leverage and excessive insurance risk. Munger: 'Not only was this risk decision frequently delegated in America, but it was delegated to people who were using a very silly way of judging risk that they'd been taught in some of our leading business schools.'

Jay Gelb asks about buyback capacity and attractiveness vs acquisitions. Buffett: 'We are not saying that 1.11 or 1.12 is intrinsic business value. We know it's significantly above 1.10. I don't think we will ever announce that we think the stock is selling considerably above intrinsic business value but we will certainly do nothing to indicate we think stock is attractively priced if that comes about.' On buybacks: 'We would love to buy billions and billions and billions of dollars worth of stock - we'll move that up to tens of billions - at 1.10x book. I don't think it will happen but it could. If we get the chance as long as we don't take our cash position below $20 billion, we will buy it very aggressively. We know we're making significant money for remaining shareholders. Value per share goes up when we buy at 1.10x book and it's so obvious to us that we would do it on big scale if given the chance.' Munger: 'Some people buy their stock back regardless of price. That's not our system.' Buffett: 'A lot of share repurchases are idiotic. CEOs like buying their stock better at higher prices and issuing options at lower prices - exactly opposite what we would think. We will only do it for one reason: increase the per share value the day after we've done it.'

Austrian shareholder asks about European vs US banks. Buffett: 'I have decidedly different view on European banks and American banks. The American banks are in far far far better position than they were 3 or 4 years ago. They've taken most of the abnormal losses that existed or were going to manifest themselves in their portfolios from what's now 3.5 or 4 years ago. They've buttressed their capital in a very big way. They've got liquidity coming out their ears. The bigger banks - American banking system is in fine shape.' Contrast: 'The European banking system was gasping for air a few months back which is why Mr. Draghi opened up his wallet at the ECB and came up with roughly a trillion euros of liquidity for those banks. Now a trillion euros is about 1.3 trillion dollars and 1.3 trillion dollars is about one-sixth of all the bank deposits in the United States. I mean it was a huge act by the European Central Bank and it was designed to replace funding that was running off from European banks. European banks had more wholesale funding than American banks.'

Kansas shareholder asks about Mid-American wind/solar and subsidies. Buffett: 'On wind I think the subsidy is 2.2 cents for 10 years per kilowatt hour. That's a federal subsidy. There's no question that makes wind projects in areas where wind blows fairly often work whereas they wouldn't work without that subsidy. The math just wouldn't work out. So the government by putting in that 2.2 cents subsidy has encouraged a lot of wind development. If there had been none, my guess is there would have been no wind development. I don't think any of our projects would make sense without that subsidy.' Greg Abel (Mid-American CEO) confirms and adds solar detail: 'We recover 30 percent of construction costs as we build it. Significant advantage relative to Berkshire being full taxpayer where a lot of other entities in US are not. There's no question both in wind and in solar we benefit from underlying tax structure.' Buffett explains competitive advantage: 'Perhaps 80% of utilities in United States cannot reap the full tax benefits or maybe any tax benefits from doing things we just talked about because they don't pay any federal income taxes. They've used bonus depreciation which was enacted last year where you get 100% write off in first year - wipes out their taxable income. By being part of Berkshire Hathaway which is huge taxpayer, Mid-American has extra abilities to go out and do a lot of projects without worrying about whether they've exhausted their tax capacity.'

Question from John in Brunswick, Georgia: 'You are clearly entitled to speak your mind on any and all subjects as an individual but the recent publicity around the Buffett tax has become quite loud and as a shareholder I fear it is limiting to some degree the interest in the Berkshire stock on principle for some people. For instance my 84 year old father is not interested in investing in Berkshire because of his opposition to [the Buffett tax on principle].' Shows how Buffett's political advocacy on tax policy created investment headwinds among conservative investors who might otherwise be interested in Berkshire stock based on fundamentals. Illustrates tension between Buffett speaking as private citizen on policy issues vs his role as CEO of public company.

James asks why Buffett values insurance at only cash plus investments per share and what multiple for non-insurance businesses. Buffett: 'I don't value the insurance business quite the way you said. I would value GEICO for example differently than I would value Gen Re and even some of our minor companies. Basically I would say that GEICO has an intrinsic value that's greater - significantly greater - than the sum of its net worth and its float. I wouldn't say that about some of our other insurance businesses. That's for two reasons: one is I think it's quite rational to assume a significant underwriting profit at GEICO over the next decade or two decades and I think it's likely that it will have significant growth and both of those are value items of enormous value. So that adds to the present float value.' On operating businesses: 'Under today's conditions I would love to buy those at certainly nine times pre-tax earnings maybe ten times pre-tax earnings. I'm not talking about EBITDA or anything like that which is nonsense but I'm talking about regular pre-tax earnings.' Munger: 'When you use the word EBITDA I thought to myself I don't even like hearing the word. There's so much nutcase thinking involving EBITDA. Earnings before what really counts in costs. We prefer EDE which is earnings before everything.'

Shareholder: 'Since 1999 Berkshire stock has really not gone up appreciably whereas gold has gone up multiple times. I don't own your stock for glamour, I wanted to earn money. What happened?' Buffett: 'When we took over Berkshire, gold was at 20 and Berkshire was at 15. So gold is now at 1600 and Berkshire's at 120,000. So you can pick different starting periods. Obviously if you pick anything that's gone up a lot in the last month or year it will beat 90% or 95% of other investments. But the one thing I would bet my life on essentially is over a 50-year period not only will Berkshire do considerably better than gold but common stocks as a group will do better than gold and probably farmland will do better than gold. If you own an ounce of gold now and you caress it for the next hundred years, you'll have an ounce of gold a hundred years from now. If you own a hundred acres of farmland you'll also have hundred acres a hundred years from now and you'll have taken the crops for hundred years and sold them and presumably bought more farmland with the process. It's very hard for an unproductive investment to beat productive investments over any long period of time.' On gold advocacy: 'I recognize it's very interesting - I can say bonds are no good and Bernanke still smiles on me, I can say some stock there's no good people but if you say anything negative about gold it arouses passions with people which is kind of fascinating because usually if you thought through something intellectually it shouldn't really make much difference what people say.' Munger: 'I have never had the slightest interest in owning gold. It's a much better life to work with businesses and people engaged in business. I can't imagine a worse crowd to deal with than a bunch of gold bugs.'

Andrew asks how Buffett decides personal investments vs Berkshire and what stocks he's bought personally. Buffett: 'The truth is I like Wells Fargo better than I like JP Morgan but we're about - we've bought and we're buying Wells Fargo stock and that takes me out of the business of buying Wells Fargo. So therefore I go into something that I don't like quite as well but that I still like very much.' Shows his approach to avoiding conflicts: when Berkshire is actively buying a stock he prefers (Wells Fargo), he can't buy it personally, so he buys his second choice (JP Morgan) for personal account instead.

On Gen Re's transformation: 'It took us a while to figure that out. When Joe Brandon came in, he operated 100% in terms of focusing on underwriting profit instead of instead of premium volume. And Tad Montrose has followed through on that with terrific results. But it did mean getting rid of a lot of business that didn't make any sense. They did an awful lot of what I would call accommodation business. So it's true that the P&C volume dropped very significantly during that period but it's not volume that we miss. The life business kept growing consistently during that period. Their life business strikes me as very very good. They got a little long-term care mixed in there that we wish we didn't have.' Shows cultural transformation from top-line growth mentality to underwriting discipline.