Berkshire Hathaway 2011 Annual Shareholder Meeting - Warren Buffett & Charlie Munger Full Q&A

Buffett opens the 2011 annual meeting by introducing all directors including Howard Buffett, Bill Gates, and others. Explains format: directors intro, Q1 earnings, Lubrizol/Sokol situation discussion, then Q&A. All Lubrizol-related questions will be transcribed and posted to website. Reviews preliminary Q1 results, emphasizing shareholders should ignore gains/losses on securities and focus on operating earnings. Key message: 'Basically pretty much all of our businesses with exception of those related to residential housing are getting better, you can see it quarter by quarter.'

Shareholder confronts Buffett on inadequate press release about David Sokol buying Lubrizol stock before recommending acquisition to Berkshire. Buffett explains timeline: Sokol first mentioned owning stock on January 14th but gave no indication of Citigroup contact. Between Jan 14 and March 14 (announcement day), Sokol never disclosed he had met with Citigroup bankers in October or bought stock in December-January. Buffett learned details March 14th. Defends not firing Sokol immediately, admits press release could have been better. Shareholder criticizes: 'You were not direct in that press release except in praising David Sokol. You stated some facts without expressing any anger. Why were you not incensed?'

Buffett defends Lubrizol as excellent acquisition despite Sokol controversy. Charlie Munger: 'Iskar and Lubrizol to some extent are sisters under the skin. Very small markets that aren't really too attractive to anybody with any sense to enter and fanaticism in service. If you have any more like that, please give Warren a call.' Buffett: 'I saw James Hambrick just yesterday and despite the turmoil around this they are very enthused about becoming part of Berkshire, regarded as the ideal home.' Separates quality of business decision from ethical issues around how it was brought to Berkshire.

Shareholder from Canada asks about valuation: each Class A share owns about $95,000 in investments and commands $6,000 in operating earnings. At 7% discount rate, calculates $185,000 intrinsic value. Buffett: 'We give those figures because we think they're important. Operating earnings are pre-tax so you need to adjust whether applying discount to pre-tax or after-tax. Operating earnings almost certain to increase - how much, who knows. Our goal is to build both numbers but primary goal is to build operating earnings. We never stick a number on intrinsic value ourselves.' Acknowledges: 'We know we can't do remotely as well in the future as we have in the past. No way to compound the kind of sums we're working with now at rates anywhere close to historical.'

Shareholder asks about effect of government ending QE2 (quantitative easing) program mid-July. Buffett: 'You're one acronym ahead of me' on POMO (permanent open market operations). Explains it's 'the most advertised open market purchase in history' with defined amount per month and end date. 'If something is that well known by all participants in a market, I think any effect has been discounted by this point in time. Market doesn't wait until date when tax increases or decreases go through to build that into prices.' Acknowledges huge market force withdrawn ($600B treasuries, $100B/month) but government debt issuances continue at same level. 'It will be a different market but I think it's already been anticipated.'

Shareholder relieved Sokol situation happened while Buffett still at helm, asks about succession plan integrity. Buffett clarifies Sokol was never on list as CEO successor: 'Not very far from situation where someone running Berkshire had talent but lacked ethics - that's not correct. Dave was not going to be running Berkshire.' Explains three-part succession: (1) CEO to run operations (2) Investment managers Todd Combs and Ted Weschler (3) Chairman role for culture and capital allocation among businesses. 'Board knows who would take over tomorrow if I die tonight. They've known for some time and they've met all the candidates.' Emphasizes all three roles critical and succession plan unchanged by Sokol departure.

Shareholder asks why Buffett hasn't invested more in commodities given inflation concerns. Buffett outlines three major investment categories: (1) Currency-denominated (bonds, deposits, cash) - 'bet on how government will behave,' notes dollar says 'In God We Trust' but should say 'In Government We Trust' because God won't do anything about that dollar bill. (2) Assets that don't produce anything like gold - you buy hoping someone pays more later. (3) Productive assets (farms, businesses) that produce output regardless of currency. Buffett started Berkshire at three-quarters ounce of gold ($15), now even at $1500 gold 'has a ways to go.' Prefers productive assets that generate increasing earnings over time.

Buffett discusses reinforcing integrity culture with 260,000 employees across 60-70 businesses. Shows Johns Manville internal memo from Todd Raba dated April 27th after Sokol incident: 'Audit committee clearly found Mr. Sokol compromised integrity values that both Berkshire and JM have worked so hard to ingrain. This should serve as tragic lesson learned for every employee. In bold face: THERE ARE NO GRAY AREAS WHEN IT COMES TO INTEGRITY.' Buffett: 'We hope to get some value out of this experience that will help reinforce with not only the managers but 260,000 people that we do mean business. We've showed we mean business when we sent more than one person to jail.' Charlie: 'Best compliance cultures have attitude of trust. Some with biggest compliance departments like Wall Street have most scandals.'

Buffett explains ideal inflation-protected businesses require little capital for growth. See's Candy example: doing $25-30M volume when acquired with $9M tangible assets, now over $300M volume with only $40M tangible assets. 'Only had to plow back $30 million into business which made us probably $1.5 billion pretax during that period. If price of candy doubles we don't have receivables to speak of, inventory turns fast, fixed assets aren't big.' Contrast with worst businesses: 'Tons of receivables and inventories - if volume stays flat but price level doubles, they need double the money to do same volume. Very bad asset.' Your own earning ability ultimate example: 'If you're outstanding doctor, lawyer, teacher - your services command more in dollar terms and you don't make additional investment in yourself.'

Asked about Tom Murphy leaving Washington Post board, Buffett: 'I really decided at 80 that I'd been there since 1974 with an interruption when I was at Cap Cities ABC and it's just a lot easier this way.' Charlie on serving on boards generally: 'I really admire Costco and that's one of the pleasures of my life is interfacing with those people. But that's the only one where I don't have a big ownership interest. I think generally speaking serving on a lot of different boards is for the birds.' Buffett agrees. Shows their philosophy: only serve on boards where you have major ownership stake or truly admire the business/people.

Australian investor asks if Berkshire's productivity and pricing power will offset falling dollar for international shareholders. Buffett: 'The answer is no. It'd be a lot easier if you just had the Australian dollar go down. Australian dollar was one of two currencies we did on last year that contributed to $100 million profit.' Cannot predict US vs Australia policies 10 years out: 'I think the movement could be quite dramatic and I think it could be dramatic in either direction. That's why I don't know what to do.' Only promise: 'We try every day to increase the earning power and intrinsic value of Berkshire. To degree we increase it, shareholders will share in exactly same proportion as Charlie and I do. Our interests are 100% aligned.'

Shareholder from India asks how to incentivize wealthy children to compete against hungry kids from emerging markets. Buffett: 'If you bring up your kids to think they are more important in society or have special privilege simply because they came out of the right womb, that's a terrible mistake.' Notes Charlie raised 8 children, most while rich, and he was rich during his own kids' high school/college years. 'I don't think any of them have that sense of entitlement. If you raise kids to think other people should do all the work for them and they'll be entitled to sit around and fan themselves rest of their lives, you will probably not get a good result. One thing I don't think you want to give them incentive to do is try and outdo their parents in what the parents were especially good at.'

Shareholder asks about ending popular program where shareholders directed charitable contributions. Buffett: 'I loved that program which we had for maybe 20 years. Charlie loved it, a lot of shareholders loved it. It was tax-efficient way to let shareholders give to whatever they chose as long as it was 501c3. Some families used it as learning device - get kids around table to talk about philanthropy.' But nobody else copied it: 'Rest of corporate America not interested in having shareholders direct contributions, much more interested in having CEO direct.' Always had backlash from people who didn't like charity choices - Berkshire's name on check. When bought Pampered Chef with 50,000+ independent contractors, campaign developed saying Berkshire gives to pro-choice organizations, threatening to boycott. Program ended to protect subsidiary businesses.

Asked about education recommendations, Buffett: 'I only have one diploma hanging in my office and I got a couple others but the one diploma I have hanging is one I got from a Dale Carnegie course which cost me $100 back in 1950. I can't - it's incalculable how much value I got from that hundred dollars.' Emphasizes communication skills: 'There's nothing like working to improve your own skills and I would say communication skills are the first area I would work on to enhance your value throughout life no matter what you do. I started selling securities and if you can't talk to people you've got a real problem selling securities. If I had stayed in same position I was in terms of communicating back in 1950-51, my life would have turned out differently.'

Charlie Munger on economics education: 'I think economics is a really tough subject. Easy to teach basic microeconomics and certain basic ideas but the minute it gets into full range of complexity you have difficulty that the experts disagree. So I don't think I would hurry if I were trying to learn something into the parts of the fields where none of the experts can agree among themselves. I would master the easy stuff first.' Buffett agrees: 'I would not advise taking lots of courses in economics to somebody going to school. Just trying to think back - it's been a long time since I took economics courses at Wharton but I don't regard them as the ones that pushed me forward in any significant way.'