1. In an inflationary environment, is it better to hold consumer goods or utilities?
Audience: Good morning. Angie Janssen (PH) of Cambridge, Massachusetts.
My question is, in addition to the large amount of capital required to operate, do you still think that such a high-return tangible capital business is the best asset in an inflationary environment? Or do you now think that irreplaceable hard assets with pricing power, such as railways or hydropower plants, are superior?
Warren Buffett: The first class of assets is superior. I mean, if you can have a great consumer product—not necessarily a consumer product—a product that requires very little capital to grow. Just like in inflation, even if you don't have unit growth, you can create more dollar sales, and you don't need much capital to support that growth, which is a good asset in times of inflation.
I mean, the ultimate test is your own ability to make money. I mean, if you're a brilliant doctor, lawyer, or teacher, your services will become more and more valuable without you needing to make any additional investment in yourself.
People will think, you know, if there's a very long-lived real estate asset or something like that, or a farm, or anything that doesn't require additional capital to fund inflationary growth.
The worst businesses are those with large amounts of accounts receivable and inventory.
In dollar terms, if their business volume stays the same, but the price level doubles, and they need to come up with double the amount of money to complete the same business volume, this can be a very bad asset.
Typically, we're not interested in businesses that require a lot of capital investment, like utilities and railroads.
We think, on the other hand, especially railroads, you don't have any guarantees of a low rate of return, and you should be entitled to a return from assets that are increasingly valuable to the economy, whether due to inflation or natural growth, or in the case of the United States, I think both.
But the ideal business — the business that See's Candy is doing — when we bought it, it was selling $25 million, it sold 16 million pounds of candy — it retailed for a little over $1.90, and we had some volume discounts, so we did a business worth close to $30 million.
Right now, we're doing more than $300 million in business. At $30 million, we need $9 million in tangible assets, and at more than $300 million, we need about $40 million in tangible assets.
So we just need to put $30 million into a business that will allow us — well, that probably make us $1.5 billion pre-tax during that time.
If the price of candy doubles, we don't have any accounts receivable. We adjust seasonally and don't have many fixed assets, so if inflation is serious, our business is much better than utilities.
Charlie?
Charlie Munger: What's interesting is that we don't always know that. So -- (laughter)
Warren Buffett: Sometimes we forget. (Laughter)
Charlie Munger: That's true, too.
But it also shows that in this world, continuous learning is absolutely necessary to achieve anything major.
Warren Buffett: yes, it does indicate, you know, I've said in the past that I'm a better businessman because I'm an investor, and I'm a better investor because I'm a businessman.
Nothing compares to actually experiencing the necessity, especially in the '70s, when inflation was on the rise, and in the early '80s, where you would see that it absolutely required massive capital investment, but didn't produce anything commensurate with it in terms of earnings.
Back in 1977, I wrote an article in Fortune magazine titled "How Inflation Deceives Stock Investors."
What you really want – the ideal asset, you know, is to get royalties from other people's sales during inflation, and all you do is receive a royalty check every month based on their sales.
You invent some products and then license them so you don't have to invest any capital again. You have no accounts receivable, no inventory, and no fixed assets.
This kind of business is true inflation protection, provided the product retains its vitality.
So, even though we're moving into some very capital-intensive businesses, that partly reflects the fact that we can't deploy the money we have on a bunch of See's candy. We just couldn't find these companies. We would love to find them, but we can't find that many.
So when we have to invest billions of dollars a year, we're not doing as well in terms of capital as we are when we invest millions of dollars a year. There is no doubt about that.
This is true in the world of investment. The same goes for running a business. There is a real disadvantage in scale, and we only hope that this issue continues to develop.
Charlie Munger: That's the point.
2. Buffett remains bullish on Bank of America and Wells Fargo
Shareholder: Jeremy Pozen, Newton, Massachusetts.
Mr. Buffett and Mr. Munger, Berkshire Hathaway at Wells Fargo and U.S. Bank has a lot of investment.
Given the slow U.S. economic growth, the increase in the number of U.S. consumers, a modest rebound in the U.S. housing market, fewer foreclosures and write-downs but still at historically high levels, and potentially higher-than-expected inflation and possibly even Japan-like deflation, what are the revenue outlook and business outlook for these two banks?
Warren Buffett: Yes, Wells Fargo and Bank of America are among the best large banks in the United States, if not the best, unlike some of the money center banks you might imagine, but they are very large. Wells Fargo is four times the size of USB.
In my opinion, the profitability of the banking sector as a whole – the US banking sector – will be significantly lower in the coming period than at the beginning of the century.
A very important reason is that leverage will be reduced. This can be a good thing for society.
This can be a bad thing for individual banks that can use leverage wisely, but the problem is that they all think they can use leverage wisely, one or more unwise actions, you know, have an impact on everyone, and if you look at HBO, you can see, is it May 26th?
I'm talking about return on assets, even if the return on assets is as good as it was a few years ago, every dollar of common stock will have less in assets than before, which means that common stock will return less.
We still think Wells Fargo and Bank of America are very good business. We think they're very good businesses. They are not as attractive as when leverage may be higher.
In terms of the problems in the banking sector, I think you've seen the worst of the past so far. Loan losses have been trending downward for several quarters in a row, and I think that trend will continue, and I think banking is a very basic business.
But as John Stumpf said at Wells Fargo a few years ago, he said, "I don't know why we've been thinking of new ways to lose money when the old ones work so well." (Laughter)
Banks also go berthically crazy. Always in terms of assets.
I mean, here you have cheap money. You have the support of the federal government, even though the federal government has never paid anything for the Federal Deposit Insurance Corporation.
Since its inception on January 1, 1934, the Federal Deposit Insurance Corporation has handled 3,800 cases. The Federal Deposit Insurance Corporation has now paid about 3,800, 3,900 claims, 250 of which have been paid in the past few years. And that didn't cost American taxpayers a penny. I mean, I mean, these are all from the Federal Deposit Insurance Corporation's contributions to other banks. This is a mutual insurance company.
Banking, if you don't have problems with assets, is a very good industry because your money is cheap, and, you know, because of implicit federal guarantees, you can indeed use leverage to some extent, and the U.S. has always been a great place to lend.
So I like our positions there. You'll see—if you look at these totals—you'll see that we've increased Wells Fargo's position. Both companies are well-run institutions, but they won't be able to earn – I don't know what the numbers are, but I guess they've grown 25% or 30% in tangible equity, which won't be repeated in the future and shouldn't be repeated.
Charlie?
Charlie Munger: Well, yes, we can add M&T Bank, most people -
Warren Buffett: Oh yes.
Charlie Munger: - Not to mention being led by a very sensible person, it was a great investment for us.
Warren Buffett: Yes, actually, if you read M&T's annual report, it was written by Bob Wilmers, the first part of the letter is dedicated to M&T, but the second part is dedicated to the U.S. financial economy, and I really recommend you read it.
Bob is a very smart guy and he has a lot of good observations.
Frankly, the other one I recommend you read is Jamie Dimon's letter at JPMorgan Chase, a masterpiece in terms of describing the banking and economic scene. He has some real insights on some very important topics.
We don't own that stock, but I think everyone can learn as much from this letter, just as they can learn as much from Bob Wilmer's letter at M&T.
Charlie Munger: For those who like to add an element of morality to business, Wilmer sounds like an Old Testament prophet.
I mean, he really doesn't like that all the really big banks make so much money from trading because he says you're really trying to be smarter than your own customers, and he'd rather serve them in a trustworthy two-way culture. It's hard to think he's completely wrong.
Warren Buffett: He also expressed considerable dissatisfaction with the fact that the market system creates a reward system in which money flows disproportionately to those who work with it, and that system tends to attract a disproportionate number of people—who he thinks have a lot of abilities—at least some of whose abilities can be better used elsewhere. This is an interesting article. This is an interesting article.
Charlie Munger: This is one of the best annual reports ever in banking. Right in Buffalo.
3. Productive assets always trump gold
Andrew Ross Salkin: This question comes from Neil Steinhoff (PH), who wrote: "Commodity markets, especially gold, have appreciated significantly over the past few years.
"Please explain why you haven't invested more in commodities. As long as Ben Bernanke continues to print money, and there is no sign that he will stop printing anytime soon, won't commodities, especially gold, continue to appreciate? ”
Warren Buffett: Well, I want to point out that when we started investing in Berkshire, it was about 3/4 of the gold ounce, which was $20 an ounce back then, and now it's $15 an ounce.
So gold, even at $1,500, has some way to go, and — (laughter and applause)
I think he's right about inflation. But if you think about it, there are three main categories of investments. Before you start thinking about what investment options are available in this category, you should seriously consider which category you want to invest in.
The first category is anything that is denominated in currency. It can be bonds, it can be bank deposits, it can be money market funds, or it can be cash in your pocket.
If you put your hand in your pocket – I don't like to do that, but – take out your wallet – you're watching a historic event. (Laughter)
If you look at this – I might point out that this is one. Charlie's wallet has "We believe in God" written on the back of his wallet, which is really false advertising.
If Elizabeth Warren were here, she would say quite appropriately, "We trust the government" because God doesn't do anything with that dollar, you know, in terms of a dollar, keep its value, and you give it up when you give it up to buy bonds or put it in a bank if the government does something wrong.
Any money-related investment is a bet on how the government will behave now and in the future. If you happen to be unfortunate enough to live in Zimbabwe, or are lucky enough to live in Zimbabwe, and you decide to make a currency-related investment, you know, your family may have left you by now, which is not a good decision.
Over time, almost all currencies have depreciated. I mean, almost all economic systems may have the idea that currency depreciation is easier to handle than currency appreciation, and the Japanese would probably reiterate this here with their experience.
So as a category, money-related investments, whether in the UK, or in the US, or anywhere else, don't think it makes much sense unless we get a very good reward from it.
The second type of investment is those you buy that don't generate any value, but you hope someone will give you more in return later. The most typical example is gold.
I've used this example before, but if you put all the gold in the world — don't get too excited right now — into a cube, it would be a cube about 67 feet on each side. That would be 165,000 or 170,000 tons.
So you can have a cube — if you own all the gold in the world — you can have a cube with sides that is 67 or 68 feet, you can have a ladder, you can climb on top of it, you can say, you know I'm sitting on top of the world, you think you're the king of the world.
You can, you know, you can stroke it, you can polish it, you can do all these things with it. Stare at it. But it won't do anything.
When you buy it, all you do is hope that in a year, or five years, someone else will pay you more to own it, and similarly, it won't do anything, but you want the person to think that in five years someone else will buy something from him.
In other words, you're betting not just on how scared people are of paper money now, you're betting on how scared they think people will be in two years from now.
Keynes described it all. I think in chapter 12 of the General Theory, he talked about this famous beauty contest, the purpose of which was not to choose the most beautiful woman among a group of people, but to select the woman that others thought was the most beautiful, and then he carried the contest to the second and third degree of reasoning.
Any time you buy an asset that doesn't do anything and produces nothing, you're just betting on whether someone else will pay more for an asset that can't do anything.
Actually, we do the same with silver, but silver has industrial uses, and we — I bought a lot of silver about 13 years ago. If you notice, silver has been changing lately, so my timing is only about 13 years off, but, you know, who is perfect?
The third type of asset is something that you value based on what it will produce and what it can bring. You buy a farm because you expect a certain amount of corn, soybeans, cotton, or whatever happens each year. You decide how much you pay based on how much you think the asset itself will generate over a period of time. These are assets that attracted me and Charlie.
Now, there are some logical follow-up questions. If you buy that farm, and you seriously consider how many bushels of corn it can produce, how many bushels of soybeans, how much I'm going to pay the sharecropper, how much tax I'm going to pay, etc., you can do rational calculations, and the success of this investment will be determined in your own mind, depending on whether it meets your expectations of what it brings.
Logically, you shouldn't care if you get a quote for the farm a day later, a week later, a month later, or a year later. We feel the same way about businesses.
When we buy ISCAR, or we buy Lubrizol, or whatever, we don't run around every week, get an offer for it, and say, "Is it going up or down or something?" "Our focus is on business.
We have the same view about securities. When we buy securities, we don't care if the stock exchange closes for a few years.
So when we look at Berkshire, we're looking at what we think we can get from the productive assets that we have, and how we can use that capital to get more productive assets.
Sometimes, you know, the price of cotton has doubled, which annoys us at Fruit of the Loom, but, you know, if you hold cotton correctly for 6 to 8 months in the last year, your money is close to doubling.
But if you go back a century and try to make money by holding cotton, it's not a great investment.
So choose a product, crude oil, cotton, gold, silver, anything, and of course, cotton also works. Gold really has no utility.
I would bet that well-produced businesses will outperform those that don't do anything in any given period.
But there is no doubt that higher prices will bring stimulus. So when people see gold go up a lot — I mean, if your neighbor has some gold and you think you're smarter than him and don't own any gold, your wife says to you, you know, why is that bastard next door making money, you know, and you're just sitting here? , which starts to affect behavior.
People like to buy things whose prices are always rising. But over time, that's not how to get rich.
Charlie?
Charlie Munger: Well, of course I agree. Also, buying an asset that will only really rise when the world really goes to hell is something special. (Laughter)
In my opinion, this is not entirely reasonable.
I think you can count on leaving the country because the country will kill you. All the countries you might go to will also be completely screwed up.
I think all of these people should buy a little gold, but I think the rest of us would be better off buying Berkshire Hathaway stock. (Laughter and applause.)
Of course, there is also a group of people who think that buying soup can paintings will protect themselves. (Laughter)
I also do not recommend it. (Laughter)
Warren Buffett: One more thing about gold, besides this 67-foot cube, more gold is being produced every year.
So, in a natural process, not only do you need buyers to offset sellers, but you also have to absorb $100 billion worth of useless extra items.
I mean, it's really interesting. I mean, they dug it out of the ground in South Africa, and then they shipped it to the Fed in New York, and then they put it back underground.
I mean, if you're looking at this on Mars, you might find it a little weird. But think about it, how many people it makes happy.
I might mention that the value of this cube, all the gold in the world, is now about — worth more than $1,500 — about $8 trillion. There are about 1 billion acres of farmland in the United States. That's 1.5 million square miles. Its value is more than $2 trillion.
If you have 10 ExxonMobil oil, another 4 trillion, maybe not even that much, so you can own all the farmland in the United States, every inch of land, you can own 10 Exxon, you can put about $1 trillion in your pocket as money to carry with you, you can choose this or this 67-foot gold, you can touch it -- (laughter)
It may seem like a good option for some, but not for me. (Laughter)
Charlie Munger: Well, you also need an army to defend gold. This is really not a very good aspect.
4. How did Buffett get started?
Audience: - Millard, Dallas, Texas.
Mr. Buffett and Mr. Munger, how did you attract investors when you raised your first investment fund? When you had your first funds and investors, how did you scale them?
Warren Buffett: It seems to me like someone who is ready to set up a hedge fund. (Laughter)
In my case, around March 1956, I moved back here from New York, and several of my family members said, we want you to manage our investments, just as we did when I sold securities here before I went to New York. I don't like being in the business of selling securities, partly because if I sell a stock to someone at 20 and it goes down to 10, I want to buy more, but I can't face people who buy stocks at 20 and they just have confidence in me, not because they understand stocks, and now they're frustrated, which – this – is not very satisfying.
If people pay attention to my every decision, I can't manage my money as well as I do alone in the room.
So I told seven members of the family — one of whom was actually my roommate from college and his mother, who also came — and I said, you know, if you want to join a partnership, I'm not going to tell you what's going on, but I'm going to tell you that I'm going to do with my own money what I'm doing with your money. Later, I put all my money into it.
But progress has been very slow.
A few months later, Graham-Newman, where I worked, was liquidating, and a man named Homer Dodge asked Ben Graham what he should do with the money he received from Graham-Newman. He said: "This kid used to work for me and he's OK. Then he came out and joined me.
In late autumn, another guy saw the notice of the formation of the partnership in the legal newspaper and he said, "What is it? , and then walked in with me. It's just that - we stumbled together like that.
For almost six years, I ran from home with no employees. I kept my own books, filed my taxes, went to pick up the stocks and put them in the safe.
When Charlie showed up, I kept blaming him — I met him in 1959 — and I said, "As a hobby, the law is OK, but someone as smart as you shouldn't spend your time on the law." (Laughter)
Well, I'll let Charlie go on. (laughs)
Charlie Munger: Actually, it took me a long time to leave that family business.
So that's why, any of you who are slow to embrace good ideas should take comfort in my example. Because it was a few years after you started doing work for me, and you lashed out at me, and I slowly understood that.
Warren Buffett: He's actually asking how to attract money.
Charlie Munger: Well, of course, if you act in life that people trust you, it helps you. (Laughter). (Laughter)
And then if-it would be even more useful
Warren Buffett: You can see why I react so slowly and he reacts so fast. (Laughter)
Charlie Munger: It helps if someone else has the right trust in you. So the formula is simple. Make one first, then another.
Warren Buffett: Unfortunately, under the current fee structure, just attracting money, rather than using it to perform, can make huge profits.
So, at least in the short term, and perhaps in the medium term, the skill of attracting money may be a more important quality than financial ability.
But we, none of us, ever charged any kind of fixed fee.
Am I right, Charlie?
Charlie Munger: We stopped doing any major overcharges on other people's money at a very young age, when our net worth was very low.
I wish our example was more common. But I also like our compensation practices, and they're slowly rolling out.
We change to a new company every five years, right?
Warren Buffett: Yes.
5. What is the difference between Berkshire and a M&A conglomerate?
Carol Loomis: This is Jeff — sorry, Jeff Cunningham from the director.
Berkshire's corporate strategy resembles those of the active conglomerates of the '60s: Jenning's ITT, Teledyne, and Textron.
"Small company teams, strict financial controls, industry neutrality, little involvement in the operations of subsidiaries, and ultimately not adequately assessing the value of the parts. If you disagree with this, what's different about Berkshire? ”
Warren Buffett: Yes, we're a conglomerate and people are shy about the name, but that's who we are.
I think I listed in my annual report at least one advantage of being an integrated conglomerate, which is the tax-efficient transfer of funds, the transfer of money from businesses that don't have good ways to use it well to companies that have better ways of using it, which is a very important advantage if done wisely.
The big conglomerates that you mentioned — and I'm all familiar with them — really became some kind of stock issuing machine, and the idea was to have your stock sell at a very high multiple, and then use it in exchange for something else that was sold at a lower multiple, and voila, you know, earnings per share went up, and then people said you would do it too.
So this is – it's really accepted and recognized by Wall Street, and if you have this semi-Ponzi scheme, constantly issuing shares for something with a lower P/E ratio, everybody knows what the game is, but they think the game will continue to be successful. It did work out for a while.
The world of the Gulf and the West, and the world of Lytton, there are a lot of them, it's almost like an unspoken conspiracy, no one will point out that this is a perpetual motion machine, and if they don't point it out, it will continue to work.
But if someone says something, someone says "the emperor is not dressed", it will all collapse.
Interestingly, you mentioned Teledyne in it. Teledyne also played the game, and then the game ended and everything went back to Earth, but Teledyne in turn went on a buying spree because their stock was undervalued.
So they frantically issued shares when the stock price was overvalued and bought like crazy when the stock price was undervalued, setting a sensational record.
Still, I think most of these companies have very little to do with Berkshire.
Indeed, I think, some of them were very scattered, although I remember, didn't Harold Ginin have a very famous room, he called everyone here.
Charlie Munger: Yes.
Warren Buffett:- Every month they are kicked out because they didn't make predictions so they learn to make predictions, whether they actually make predictions or not.
If you take Charlie Bludoorn of the Gulf and West, or the whole group, their main concern is how – Jimmy Lim of LTV – their main concern is how to push the stock to a level so that they can buy big incumbents at a lower P/E ratio and let this perpetual motion machine game continue. This game is over.
I don't think there was — you know, at Berkshire, we weren't involved in this kind of game. The game we're involved in is trying to buy the great businesses that we're going to hold forever, let them grow profitably, and let them also provide cash that we can use to buy more businesses like that.
It is a conglomerate group. Large conglomerates, in general, are undesirable, and I have no objection to the reasons for their unpopularity. But I think as long as you focus on running the business and not using it as a stock issuing machine, it's a very rational way to do business.
Charlie?
Charlie Munger: Well, yes, some of these companies are quite badly manipulating the numbers.
One of the companies said, "I know what I'm going to report, I just don't know what I'm going to do." (Laughter)
This is not the attitude here.
Warren Buffett: Yes, we don't know what we're going to report. (laughs)
Charlie Munger: No, no. Sometimes we don't know what to do. (Laughter)
6. Why doesn't Berkshire have a compliance department?
Andrew Ross Salkin: The question is, "Can you explain the company's policy on your personal investments outside of Berkshire and your other managers' investments, and why all investment transactions are not vetted by compliance in the first place like most other firms?" ”
Warren Buffett: Well, I don't think that's the case for most other companies.
We have 260,000 employees, and we have a company that is a subsidiary of General Re, called New England Asset Management, but that's the only company that provides investment advice to others or does business in the investment space.
At Berkshire, there are currently three people who can execute transactions, and several clerical staff members are responsible for reviewing transactions.
But we are not an investment consulting firm. We are not a mutual fund or anything like that.
So if we have some, I think, very clear rules, I can assure you again that the Audit Committee will review them.
However, as far as the Code of Conduct, Code of Ethics and Insider Trading Rules are concerned, these are all aimed at managers, and I don't see any ambiguity in them.
Now, extending that to — I don't know, Mark, how many there are many, but — whether it's 60 or 70 or more, I'm not sure the numbers — but the problem with the rules is, you know, I mean, you have to have them, and we emphasize not just their literal meaning, but their spirit. That's why I write this letter every few years.
For example, I am a member of Coca-Cola's Audit Committee. Coca-Cola had about one-fifth the number of Berkshire, or one-fifth of what it was then. Every time the audit committee meets, we have 8 to 10 violations.
I mean, people — if you take Berkshire's 260,000 people, you know, that's the equivalent of the entire city of Omaha households. While we felt like we were perfect in Omaha, a lot of things happened in Omaha as we sat here, you know, not in accordance with the rules. So this is a real question.
Obviously, the problem with the Sokol incident is that it touched a very, very high position.
But we once had a case where a friend of mine, the vice president of our subsidiary, like I said, a personal friend, and we provided evidence to send him to jail.
You know, it's already happened. I remember a few years ago, I remember it was Woodbury, New York, that a woman was arrested in our office because we wanted to make it very clear that we were serious, and as the audit committee said, this is not PR, this is reality.
This is a letter from John Manville. I didn't know about it until Todd Raba gave it to me a few days ago, but it describes the incident dated April 27, which reads, "The Audit Committee apparently found that Sokol undermined Berkshire and JM's values of integrity that have been ingrained in the structure of both companies."
"This should be a sad lesson learned by every JM employee. It then goes on to write in boldface: "There are no gray areas when it comes to integrity. ”。
So we hope to get some value out of this experience that will help us emphasize not only to 60 or 70 managers, but to 260,000 employees that we are serious about this matter, and we have shown them that when we put more than one person in jail, we are serious.
But, you know, we can have all the records in the world, and if someone wants to trade outside of them, you know, I — they're not going to tell us they're trading in the name of their cousin. I mean, you know, that doesn't work that way.
We will also encounter times in the future when someone has done something wrong.
This is usually handled at the subsidiary level. I mean, it's that somebody does something, whether it's taking kickbacks from the seller or stealing something from the cash register, whatever it is, and then, you know, we get into big trouble every once in a while, and it's very painful.
But we will – but we will – if we can do something in the rules to make them clearer, or further convey the idea that rules are not meant to dance, but that their spirit transcends the rules, we will make sure to do that.
Charlie?
Charlie Munger: Yes, if you look at the greatest institutions in the world, they choose people who are very trustworthy and trust them very much. It's very interesting to be trusted. And when you're trusted and worthy of being trusted, you get a lot of self-esteem out of it, and the best compliance culture is one that has that trust, and some of the biggest compliance companies, like Wall Street, have the most scandals.
Therefore, it is not necessary to build a larger compliance department to automatically improve compliance behavior.
This universal culture of trust is effective. This universal culture of trust is effective. You know, Berkshire hasn't had that many high-impact scandals, and I don't think we're going to have a ton of them.
7. What economic policies can make the U.S. economy grow healthily?
Audience members: Hi Charlie and Warren. I'm Michelle and I'm Decatur, Illinois.
Do you think any significant changes can be made to current U.S. economic policy or Fed policy or tax code to keep the U.S. economy healthy and growing?
Warren Buffett: Yes, we have taken the first steps in both monetary and fiscal policy.
You know, you've seen, it's clear that in terms of money, there's an effective zero interest rate for a long time, and actually the chairman, just the other day, said that this is going to last a long time.
Then they asked him what he meant by extending a period of time, and he said extended a period of time. (Laughter)
But it's hard to imagine a tougher approach to monetary policy than it is now.
Interestingly, when people think of fiscal policy, we have a stimulus bill.
Well, if you think about what a real stimulus is, it's not whether you call it a stimulus bill. If you have a so-called stimulus bill and you don't have a deficit, it's not, you know, it's not a stimulus. Will you ——。
If you don't have a stimulus bill at all, but you're spending 10% more than you earn, you're delivering an incredible stimulus to the economy — a fiscal stimulus.
We now have a huge fiscal stimulus package, which is called absorbing 15% of GDP and spending 25% of GDP. This is extraordinary.
So, I think we're using these levers in a way that is almost like never before. In general, I believe that the action that has been taken has been wise, and I think that the action taken in the autumn of 2008 has been particularly wise.
But I think that, in general, we followed the right policy. I don't think these policies are as important as most people think.
I think if you have the wrong policy, it can really screw things up. But I don't think — I don't think — I think the natural resilient force of capitalism is — going to be the biggest factor in getting us out of trouble.
I think you've seen that in the last two years, and we're seeing that month by month.
I would say this: residential construction is stagnant, you know, around 500,000 units a year.
I think when it comes back, it will come back, but it needs to — it needs to address the crazy excess inventory that we used to have, and there's no other way to do that than by creating fewer residential units than households. This is how to reduce oversupply.
When that's over, when there's a partial recovery, I think you're going to see a pick-up in employment, and I think you're going to see more of a pick-up in employment than you think, not just for construction workers.
I mean, we have Shaw Carpet Company. You know, I'm sure they're not counted as construction jobs, but we have thousands fewer people working there because residential buildings are where it's located.
We have staff in the furniture market, how many carpets or houses they sell, so I think there will be a lot of indirect and direct job opportunities when the residential building industry recovers.
I don't think I'll measure it just by the number of construction workers employed today compared to four or five years ago.
It will come back. I don't know when. I said in the annual report, I thought you would see it by the end of the year. At this point, I may or may not be right, but it's still my best guess.
We create homes faster than we can create housing units. And, you know, we lost housing units, you know, you look at the recent tornado.
Therefore, this issue will be solved. I don't think when you mention that we're moving slower than anywhere else, of course, in terms of Asia, you know, there's no doubt about it, or Brazil, but actually, I think we're getting out of the woods, while it's slow compared to the blow we got in 2008 — the U.S. economy is paralyzed — but it's recovered quite a long way, and we're seeing that in our businesses.
Now, you know, I believe, in 2006, our train capacity peaked at 219,000 a week, but our lowest point was 150,000 or 51,000. Currently, we are carrying around 190,000 loads, and that number will increase over time.
So now it has recovered significantly. We have a number of companies that are setting records in basic industrial services. If you look at TTI, which manufactures and distributes electronic components, it has thousands of customers around the world, it's setting new records, it's rising in the first quarter, it also set a record last year.
If you look at ISCAR, which only supplies basic industrial products, I mean, nobody buys small carbon cutting tools, you know, to put in their recreation room or somewhere else. These things are used to make big things, and their business is getting better and better, you know, month after month.
So, the economy is recovering, and when the huge glut in residential construction is finally largely eliminated, I think – I think you're going to see a big improvement in employment.
8. Berkshire has the best insurance business in the world
Hi everyone, I'm Whitney Tillerson, a shareholder from New York. Given that the annual report reveals that Berkshire has made $17 billion in profits over the past 8 years and has not lost a year, are you being too conservative?
Don't you think that your insurance business, especially GEICO, has an intrinsic value that isn't just the value of their float?
Warren Buffett: Yes, I agree, Whitney, but I — it's hard to estimate, you know, what a normal underwriting profit might be — what the next 20 years might be, or something like that.
So I agree with you. I don't know if I would call it too conservative. I would say assuming principal protected underwriting is conservative.
But like you said, I mean, if we get another Hurricane Katrina or something like that, let's not talk about winter storms in Europe and things like that, I mean, we're going to have a lot of money on coverage this year, and we're expecting coverage to be going to be a lot of losses, you know, maybe every five years, every decade, whatever the case is.
But I think you're right, and it's appropriate to include some normal underwriting margins in addition to the calculations I made in the annual report.
Charlie Munger: Whitney, let me ask Warren one more question to help you. As far as you know, what other large casualty insurance companies in the world, are you willing to exchange our company?
Warren BUFFETT: Not at all — no, no. Nothing close. I mean, we — no matter how lucky we are, we have — we have an incredible insurance business.
I mean, GEICO is fantastic. You know, if you think about it - since 1936, the idea has been around, but, you know, the strength that all the other companies have, agent factories and everything else, GEICO has now become the third largest company in the United States, surpassing the previous two companies every day and very profitably.
GEICO's combined ratio - GEICO's underwriting profit in the first quarter was close to 8 pips, I remember so. Now it seems that this may be the best quarter of the year, I should add, but it's an amazing business.
Ajit [Jain] built an insurance business from scratch on top of a reinsurance business, and in many ways, you know, he ran it alone.
In a while, he may not see many deals, but there are cases when someone wants huge insurance and needs a quick reply, sometimes even a slow reply, we give them a quick answer because there really is no one else to call. It's a bit like the acquisition opportunity Charlie mentioned.
So he - he did it. I mean, he didn't have that opportunity when he went.
Tad Montrose has been running exceptionally well at Gen Re. While adjustments are needed to some extent, Ted's business there is very, very disciplined.
Then we have a bunch of small companies, some of which have some very unusual franchises.
So really – you know, I don't have anything to do with it, so I can brag about these guys, but they've really done a great job of building an insurance company that I don't think any company can match.
Charlie Munger: Some of you have been here for a long time, and you invested with an Omaha boy and ended up owning part of the best casualty insurance company in the world.
Warren Buffett: If you go to 30th Street and Harney Street, you'll see a building there, and you'll see there's a building there, the National Compensation Corporation. We paid $7 million to the National Compensation Corporation and $1 million to its sister company, the National Fire and Marine Company, where we worked in 1967 and where we work today.
The only difference is that today its net worth exceeds that of any insurance company in the world.
Charlie Munger: yes, so we – accident insurance as a business is not very good.
It's a tough game. In it there is a stupid temptation. Just like a bank. (Laughter)
But if you're in this business, I think we're the best.