執子之手 與子偕老

二零霰七年十一月十九日
以下是一篇blog友的entry ，我覺得很有意思.。


「你定是很愛她吧?」
我站在床尾的位置
在心病檯上寫著她的病況記錄
但眼前的一幕
卻有點觸動了我

每天到了探病時間
我們都會看到這個伯伯
拿著大包小包的
與我們微笑的點點頭
然後步履蹣跚的走進十號病格

在床上躺著的
是一個八十來歲的婆婆
這次是因摔倒入院
只是腳部受了傷
其他一切安好
而且精神不錯

「都一把年紀了，還說什麼愛與不愛呢!」
伯伯看看我
笑了笑
然後輕描淡寫的說

他拿著一塊小毛巾
為婆婆抹去身上的汗
他用手撥弄著她的頭髮
讓人看在眼內
都感覺到那是充滿憐惜的

「我覺得你很疼愛她呀!」
說的時候
我感覺到有一刻我因堅持而漲紅了臉
但仍然想說

伯伯又笑笑　
這次是婆婆先說話

「我們在一起差不多六十年了。你看起來年紀很小吧！我們從前都是盲婚啞嫁的，誰是丈夫誰是妻子都不由自己選擇的。這樣一來，便一輩子了。」

婆婆看著伯伯
拍拍他的手背然後又繼續說

「不像你們年輕的，女性都十分能幹，有自己的工作事業。有主見又獨立，不像我們從前，沒讀過書，又不識字。」

那一刻我的心裡起了一個又一個的問題

從前的盲婚啞嫁
好像都是天長地久的
他們總是在婚後才慢慢培養感情
縱有磨難都互相包容患難與共廝守終生

而我們這一輩
現今社會都高呼自由戀愛
每個人轉轉折折的說要尋找自己心中認為是對的人
以為找到了
立下山盟海誓說要相守
然後有天
發現激情不再
認為愛情消失了
感覺變質了
便乾脆與曾和你一起承諾同甘共苦的結髮提出分離

我不知道從前夫妻之間有的是恩情還是愛情
但他們就是會努力經營
相濡以沫互相支撐一起成長到老

是現今世界的人少了忍讓及諒解的特質
還是婚姻愛情都變得純粹
令法律名義與責任轉眼便消失淨燼

聽著從前的一些悲劇故事
明白能自由戀愛該是幸福的事
選擇廣闊了
知識豐富了
心　怎麼卻好像變得空洞了又冷漠了?
是我想得太多了嗎?

「我只想我們大家都能多活幾年，那就可以相守多幾年。」她這樣說
他　牽著她的手
彷彿不願鬆開

執子之手
與子偕老

沉默是金

夜風凜凜　獨回望舊事前塵　是以往的我充滿怒憤

誣告與指責積壓著滿肚氣不忿　對謠言反應甚為著緊

受了教訓　得了書經的指引　現已看得透不再自困　

但覺有分數　不再像以往那般笨　抹淚痕輕快笑著行

冥冥中都早注定你富或貧　是錯永不對真永是真

任你怎說安守我本份　始終相信沉默是金

是非有公理　慎言莫冒犯別人　遇上冷風雨休太認真　

自信滿心裡　休理會諷刺與質問

笑罵由人　灑脫地做人

少年人　灑脫地做人

繼續行　灑脫地做人

http://space.geocities.jp/ahlam99jp02/99-keep_in_silence.Mp3

貧孝少年實在撐不下去自殺

中三輟學學廚 力爭完整的家

【明報專訊】「我反對社署 將我的家解散，這樣不算完整的家，我該盡力負起自己的責任，維持家的完整。」5年前，黃葵香的父親癌病死了，母親智障，妹妹還是個小學生，社署打算將黃母送進中途院舍，把兄妹倆交給寄養家庭，脆弱的黃家頃刻搖搖欲墜。但他的小學校長李錦棠清楚記得，5年前探望葵香時，13歲的稚嫩容顏是那麼的倔強，一句與年齡不相稱的沉重承諾，把幾近分崩離析的家庭，緊緊維繫了好幾年。

懂事倔強 拒社署接走智障母

李校長曾這樣勉勵對家庭如此固執的這個孩子﹕「葵香，你要成長，還要比一般的同學更快成長。」他沒有辜負校長的期望，16歲已懂得保護家人免受傷害。李校長說，當年黃家孤寡住在東涌 富東，智障的母親受盡鄰居歧視，葵香對不友善的眼光深感厭惡，終於得罪了左鄰右里，不能再住下去了，這孩子為了母親過上好日子，於是向房署 申請調遷，當局卻認為孝子的理由不成理由。

鄰居歧視 搬居唐樓

黃葵香非常決斷，自己明明在東涌上班，卻安排一家人離開廉租的公屋，寧願以數倍租金在深水租下一個唐樓單位；為了節省車資，他經常住在東涌的友人家中。他雖然令母親遠離歧視的痛苦，但他沒想到，不斷將家庭的砝碼往年輕的肩膀上壓去，遲早會把自己壓垮。

但他所做的一切，無不是圍繞家庭的，就連自己的夢，也為了家人而發。李校長說，葵香生前老說﹕「我有個夢想，想開一間麵檔，足以供養母親和妹妹就夠了。」

葵香的中學校長黃偉東說，葵香為了掙錢幾乎放棄了學業，中三便開始曠課，到麥當勞 等食肆當兼職養家，所以校內成績很一般，中三畢業後便輟學了。

為了達成夢想，年紀輕輕的葵香已經開始為自己的計劃鋪路，不斷出入東涌各間食肆學藝，有老師說，他幾個月前到東涌一間意粉餐廳學煮意粉，由於工作認真，表現上佳，深獲上司讚賞，不久前獲公司升職。今年，葵香18歲長大成人了，當他向夢想跨進艱難的一步的時候，不知不覺間卻跨越了自己的精神極限，突然在沉重壓力下結束了年輕的生命，留下年幼的妹妹和不能自理的的母親，還有一個未完的夢。

養家擔子壓垮貧苦孝子 父離世 母智障 妹在學 須還2萬綜援

【明報專訊】5年前，一名13歲少年被癌魔奪去父愛，智障母親只有7歲智商，妹妹還是小學生，社署 幾乎接管這個綜援 家庭。但倔強的少年抖擻精神，一句「我有責任維持家的完整」，把沉重的擔子摃上肩膀。生活艱難，他逃學掙錢，公屋鄰居歧視其母，他寧願住唐樓捱貴租。為養家，他夢想開麵檔，中三輟學學藝。但社署指他無申報入息，其母須分期攤還2萬元多領綜援金。少年昨凌晨偕友以酒澆愁，回家後先割脈後上吊。他的小學校長在屍首前悠悠長嘆﹕「他母親的存摺只剩20元……神啊，為什麼讓悲劇降臨到這個家庭……」

終年18歲的黃葵香，眉粗，髮短，鼻高，雙瞳黝黑。師長指他無比堅強，向晴軒督導主任郭志英說﹕「社會還有這種孝順懂事的年輕人……」警方說，葵香沒留下遺書，也沒有透露死因，但死因無可疑，正調查他是否因為財政及家庭壓力自殺。

母智商如7歲 戶口餘20元

黃葵香生於內地，1995年與父母及妹妹來港，後來住進東涌 富東，兄妹倆當年分別入讀區內的靈糧堂秀德小學二年級與四年級。校長李錦棠說，兩人後來先後升讀隔鄰的靈糧堂怡文中學，惜黃父不幸患癌症，5年前撒手人寰，社工跟進時發現黃妹其時仍讀小學，黃母更因智障無工作能力，表達能力差，落街難辨回家之路，智商如同7歲小孩，明顯欠缺自理能力，更遑論照顧子女。

申調遷被拒 舉債搬屋

李校長說，社署遂提出全面接管該家庭，把黃母送進智障人士院舍，將兄妹交給寄養家庭，但當年僅13歲讀中一的葵香堅決反對，聲言會自力養家，維持家庭完整。社署遂發放8600元綜援給三口子過活，此後，葵香開始曠課打工幫補家計，成績甚差，16歲中三輟學後，在東涌輾轉打工，後來為了將來開麵檔養家，於是入廚學藝，生前在東涌一間意粉餐廳工作。該意粉屋負責人承認此事，但拒絕回應。

無申報工作 多領2萬綜援

李校長說，黃母被公屋鄰居歧視，數年前要求調遷不果，葵香於是向銀行舉債約2萬元，舉家搬往深水汝州街一唐樓單位躲避是非，新居約400呎，4000元月租比公屋貴得多，葵香又簽信用卡為住所添置家俬電器，欠款未清。

社署發言人表示，去年個案覆檢時，發現葵香平均月入7000元，但無申報工作，多領了2萬元綜援，黃家同意分20期攤還款項，發言人強調，還款計劃以不影響該家庭基本需要為原則。至今年8月，葵香為了節省來往車資，經常在東涌朋友家寄宿，其母主動知會社署，綜援金減至6700元。

割腕上吊身亡

但李校長說，葵香舊債纏身，難以清還，前晚相約友人往飲酒，至凌晨才返家，當時懷疑他心情低落，先以利器割腕自殺，不遂，於是取房間的喇叭電線綁於窗花上吊。及至昨清晨7時，其妹起上學叫喚兄長無反應，推門發現反鎖，取鑰匙入內，發現兄長已經昏迷，臉色鐵青，大驚報警，惜警方趕至證實葵香已經死去多時。

(註：看到這裡，我很想罵‧‧‧﹞

十年一遇：巴菲特面对次贷风波的态度

巴菲特的格言是：“当一家有实力的大公司遇到一次巨大但可以化解的危机时，一个绝好的投资机会就悄然来临”。所以，我们很想知道巴菲特是否视此次的次贷风波为一次绝对的投资机会。

1.危机下的金融股是否值得投资？这不由地使我们想起巴菲特在美国运通上的投资故事。1964年，美国运通遭遇危机，股票价格从65美元/股跌至35美元/股。但巴菲特发现商人们依旧在接受美国运通信用卡，由于这些信用卡仍有信誉，美国运通的整个帝国依然完整无缺。巴菲特将当时巴菲特合伙公司40%的净资产、价值约1300万美元买下了美国运通5%的股份。随后5年美国运通的股价上涨了5倍，从每股35美元涨至每股189美元。时隔31年后，美国运通的股价再一次出现暴跌，巴菲特又一次出手，结果是又一次胜券在握。到2003年底，巴菲特依然持有美国运通11.8%的股权，市值73.12亿美元，为其第二重仓股(第一重仓股为可口可乐，市值101.5亿美元)。　

2.从媒体的多次报道里，我们了解到巴菲特对次贷风波的态度是积极的：(1)2007-11-13《华尔街日报》援引消息人士的话称，账面上现金已经达到450亿美元、拥有AAA级信用资格和多年再保险经验的伯克希尔-哈撒韦公司，已经可以为其他保险公司提供援助，并可能亲自进军债券保险业务，最近几乎每家大的债券保险公司都向伯克希尔-哈撒韦公司求助；(2)2007-11-10《华夏时报》在《谢国忠：花旗银行或一分为三 巴菲特伺机进入》中称：谢国忠认为，花旗现在的领导层是过渡班子，未来新班子调整好后，花旗银行为避免破产可能会一分为三：投资银行、商业银行和信用卡公司。他认为，花旗银行的股价还没有到谷底，如果股价跌入谷底，花旗银行一定会找美国股神巴菲特的。“从巴菲特的投资策略上看，我认为，他会收购花旗银行的。主要理由是，巴菲特投资的企业一般都是全球有影响的大公司，花旗银行最适合，尽管花旗银行在次级贷上损失惨重，但是花旗银行的品牌是无价之宝，营业网点几乎遍布全球。美国政府和投资者不会坐视花旗银行倒闭破产，那时候巴菲特出手，不仅能低价收买，还扮演了一个救市英雄的角色。”谢国忠介绍说，巴菲特从中石油H股上抽回的资金可能会派上用场。

續「騎士批綠」（Knight criticized Green）公開信

匯豐銀行就是匯豐銀行，原來已徐徐地回應騎士的公開信了‧‧‧

http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=88060&eventID=1699612
Investor Event - Strategy Update (2:30 pm UK time)
Stephen Green, Group Chairman, and Michael Geoghegan, Group Chief Executive were presenting.

次按是頭盤，接來的是無抵押貸款及信用咭‧‧‧匯豐總是先知先覺地進行撥備，不信？就看看吧，相信一年內，其他銀行會像匯豐一樣為信用咭等作撥備。

一間公司的管理層能對批評信作出反駁，不是難事，困難的卻是能從批評信中找出有價值的地方，而又能徐徐圖之，正所謂治大國，如料理小饍一般，善。再加上先知先覺的準備，不禁令我要投下信心的一票。

現在買下，可能會比未來一段時間買貴一點，但我知我沒有估低的本事，所以唯有如此。畢竟，我只是一名農民。謀事在人，成事在天。

最後，應記住，銀行是做利息生意的，是必同金錢的成本和風險掛鉤的。成本低時，風險也就是低了，需求自然增加，利潤如是。當然，時間也是必要的。

冒一生一世的風險愛你

我和男友相戀時，由於工作的緣故，我們不得不常常分離。

他常在外地奔走，我則孤單地守在燈下，等待他疲憊地歸來，再無奈地離去。這一年來，我真的覺得很累。 終於，在一個有月亮的晚上，我暗自下決心，放棄這份聚少離多的愛情。

等到他再一次回來時，我沒有去接他。 他提著許多給我買的禮物來看我， 我卻說了一大堆挑剔的話，故意氣他，他盡力忍著不發作。 一連幾天，我總找彆扭向他發脾氣， 想激他發火，讓他說出分手的話。 看著他痛苦的樣子，我的心真難受。 可是一想到以後長久的離別，就硬著心腸給他寫了一封分手信。 其實那是一紙白紙，我想，就讓我們的未來成為一片空白吧！ 信發出後，我內心忐忑不安， 晚上睡不著覺，閉著眼睛胡思亂想，就像等待一場審判。 可是什麼也沒發生。

像往常一樣，我在單位忙碌了一天，快下班的時候， 我將頭往窗外看了一眼，一下愣住了。只見夕陽下，他背著一個大大的旅行包， 孤單地站在我必經的路旁，揚著頭朝我的方向張望。 他手中緊握著一封信。 我不安地走過去，他冷冷地看著我， 他說：“想分手，沒那麼容易，讓我們算算賬。”我一愣，輕蔑地說：“我花你多少錢，我還你。”他把手一揮：“我不跟你算經濟賬，我和你算感情賬。 這一年的時間，我每天都思念你，牽掛你，為你擔憂， 為你祈禱，為你快樂和憂傷，為你睡不著覺，喊著你的名字，遙望你的方向。 我把我的心交給了你，把我的現在和未來交給了你，讓你好好珍藏。 可是你卻給我一紙空白，這不公平。 昨晚我想了一夜，這是我花一夜時間列出的情感明細賬單， 你把它們都還給我，我就和你分手。”

我接過他手中的信，上面密密麻麻地寫滿了數位：
思念：365天；
牽掛：365天；
擔憂：365天；
快樂：365天；
痛苦：365天；
對別的女孩的欲望：0；
愛你的風險：一生一世!”

我的眼淚順著臉頰滴落下來。 這一年我只想到我的等待與守候， 卻不曾想過我的等待和守候只是一個圓的一半， 加上他的那一半，才組成一個共同的“圓”。

我在這邊等待的時候，他同樣在月亮的那一邊守候。

愛，注定了我們一生的等待與守候，注定了情感賬單永遠的支援!

「愛情的路…一個人走不到最美的盡頭…兩個人才能過完一段真實的路程…」

最後一句是精華喔！

偶而也要在別人滴立場想想唷~~^_^

老婆比情人好

風雨中的匯豐

關係和信心的建立，在乎風雨中的經歷。

匯豐，作為我的橙樹，我仍會不離不棄，而且更會分段買入。其實，作風一向穩健的匯豐，不失為次按風暴中的避難所。因為，最壞的情況只不過是把次按撥得一文不值，而匯豐卻還有其他業務支持成長，終歸會繼續成長結果。

http://www.youtube.com/watch?v=ALiCNMFXizE

http://www.youtube.com/watch?v=jqDGlzP1M3A

http://www.youtube.com/watch?v=FWEcFSd2deY

有誰見過樹木會生長得超快呢？那些高高的喬木，也是日復一日，年復一年地慢慢成長。其間，也是風雨無常。今天正是買入樹苖的時候，雖然可能還會有更便宜的時候。

三十而立

30歲，人生另一階段， 是事業有成， 還是一事無成？
30歲，人生一個重要階段的開始，是豐衣足食，還是餓死老婆，瘟臭屋？
30歲，是立品、立才﹝和財﹞、立室的時候？
30歲，是看清世事的時候？

http://www.youtube.com/watch?v=-Xw8gG4Y34g

甘苦與共

獻給我大人的：

http://www.youtube.com/watch?v=qDZiiUL4dpY

願像他們倆恩恩愛愛。333

不過說真的，下廚手勢最好就‧‧‧

本錢的重要﹝起步篇：儲錢﹞

儲錢，現在可能已經成為一個很陌生的詞彙了；

其實儲錢很重要，除了因為是有第一筆資本外，最重要是養成量入為出及未雨綢繆的習慣‧‧‧

記憶中，婆婆同媽咪看存摺﹝紅簿仔﹞時，會從她們臉上看見滿足感，也許這就是上一輩人儲錢的原動力了。

http://www.youtube.com/watch?v=qfQPYUlGvMc

你的工作有保証嗎？

今日，突然發覺自己在工作上的位置其實是很容易被取替的。仔細想一下，其實什麼專業資格都是假的，為什麼？後浪推前浪嘛，而且又平過你，經驗可能會頂都一段時間，但不長久，也沒有什麼特別，想想如果你的老闆給其他同事或後浪多點機會，他們就能累積足夠經驗了。所以打工就是打工，老闆就是皇帝。不要相信什麼打工皇帝的鬼話。現在你行，只是老闆看得起你；如果他一眼都不看你，你多行也沒用，等死啦！想到這裏，個心都咪話唔驚，以為自己已有一技傍身，點知唔係，果然無知係最致命的毒藥。連農夫都不如‧‧‧

唔想噤樣，可以點樣？

唯一辦法就是要達到財務自由了。一係就做商人，一係就做投資者。

工作當然要繼續做，仲要做得更好，來儲夠本錢。(本錢也包括身心健康啊！)

心田腦海雜草清除殺蟲劑

書名：The Intelligent Investor／智慧型股票投資人
作者：Benjamin Graham
備註：讀來輕鬆易懂，是想投資股市必讀的入門書。

書名：Security Analysis／證券分析
作者：Benjamin Graham & David L.Dodd
備註：證券分析的經典之作，作者為華倫．巴菲特(Warren Buffett)的老師。

不保證藥到病除，但至少會縮短自己盲目短炒的日子。

要做農夫？你的工具在那？

正所謂，工欲善其事，必先利其器。要做農夫，農具當然要預備好；要去投資，腦袋當然要訓練好。

剛開始，有如開始學行路，要慢慢行，跑不得。就正如蘇格拉底一樣‧．‧．．．

蘇格拉底是一位緩慢的思考者，在大部分對話的開頭他都落後其他的參與者。他解釋他不像別人那麼快，因為要有根據就必須慢慢地想。他說：「對此領域我只是個外行人，我需要了解你在說什麼，以及為什麼這麼說」。

我們通常都想得太快，把思考過程太早切斷，實際上我們在剛開始就以為完成了。這可能是來自學校的訓練，在那兒不管是課堂討論或考試，快速地回答正確答案是重要的。

我們大多數人在開始想的時候，只是接受閃入腦海的東西。那些往往不是我們的主意，而是一些從別人得來但還沒過濾、吸收的東西。

要判斷，你就必須花時間去認真推敲、充分理解、想得透徹。

(摘自Socrates’Way, By Ronald Gross, 2002)

難道你自問會醒過佢？思考的重點不在於快速，而在於深度。惟有徹底想通之後，思考的結果才能為你所用。

所以我們要有獨立思考與判斷，如果不是如此，而經常受到別人的意見或市場的氣氛影響而買進賣出，只會虧錢，苦也是自己受。

在清理農地上的雜草時，先先清理自己心田及腦海，把工具好好放好，方便使用。

投資，沒有捷徑，只要耐性。

Notes from Berkshire Hathaway's annual meeting 2007

Q: There’s so much money chasing private equity deals now, it looks like a bubble. What could cause it to burst?

WB: I wanted to start crying as you described the situation. You see the difficulty we have finding attractively valued deals. Private equity bubbles don’t, by their nature, burst. If a fund has a time horizon of five years or more (as most do) and its holdings aren’t priced daily (and they aren’t) it will take many years for the score to show up on the scoreboard for investors to see. Because of the illiquidity, investors will take many years to exit from their private equity investments. So it’s not like a bubble in marketable securities. Investors can’t leave. But if yields on junk-grade debt jump relative to high-grade debt, that will slow activity in private-equity investing considerably. Right now spreads are very low. They could widen; that would slow deal activity.

There’s no lack of incentive for fund managers to do deals. If I run a $20 billion fund that gets paid a 2% management fee, that’s $400 million annually in fees. But the manager wants to get that money invested, since he can’t very well go out and ask investors for another $20 billion for his next fund until the first $20 billion is invested. So there’s competition to invest quickly. These investors aren’t really competitors to Berkshire. The math of the deal has to make sense to us. We don’t get paid on activity. It will be awhile before disillusionment with private equity sets in and promoters stop pushing funds. It all depends on availability of money to invest.

CM: These sorts of things can go on long after you’re in a state of total revulsion.

Q: John Templeton recently noted that you’ve missed opportunities over the years in not investing outside the U.S. What would it take for you to start investing globally?

WB: We probably bought our first non-U.S. stock 50 years ago. It doesn’t matter where a company like Coca-Cola is based; what matters is where the company does business. The fact is that we weren’t on the radar screen of very many non-U.S. sellers. In the U.S. early on, no one knew about Berkshire. I didn’t do a good job of selling us as a buyer. Iscar found us. We certainly don’t have a bias against buying non-U.S. businesses. Ethan Wertheimer of Iscar is planning a procedure to help get Berkshire better known outside the U.S.

We own a lot of non-U.S. securities. Two in the German market. We don’t have to report a lot of these because the positions aren’t large enough. We have perhaps a half dozen non-U.S. positions. Reporting requirements in certain other countries sometimes prevent us from investing in them as much as we might otherwise. In Germany, holders must disclose equity positions once they’re 3% or more of a company’s shares outstanding. So if we’re looking at a company with a $10 billion market cap, we’d have to disclose our holdings once they exceeded $300 million. That’s not our favorite thing to do. It can be a real minus.

CM: John Templeton made a fortune by being in Japan early. That’s very admirable. We did OK over the same period.

Q: What fee structure is best to maximize returns for investors over the long term that is fair both to investors and managers?

WB: On the question of executive compensation, the real problems start if you have the wrong managers in place rather than having the wrong system. Any compensation sins are minor compared to having a mediocre guy running the company. But the natural tendency is for there to be a lack of intensity in the bargaining process. The CEO is very interested in his compensation package, but to the comp committee, it’s not as urgent an issue as it is to the CEO. Contrast that with the intensity that goes into labor negotiations, where there are cooling-down periods, and arbitrators, and elaborate PR strategies on both sides. When does that happen when the comp committee sits down to determine how much to pay the CEO? To the comp committee, it’s just play money.

I’ve been on 19 boards, and on just one compensation committee—and the board regretted it. There is no parity if intensity in the bargaining process. What drives high comp is envy, not greed. Pay a guy $2 million per year and he’s happy—until the next guy gets $2.1 million. Of the seven deadly sins, envy is the deadliest. It’s not even fun being envious. At least with gluttony, there’s some upside. We’re going to be gluttonous in a little while, and I’m looking forward to it. And I’m told there’s some upside to lust, too—but I’ll leave that to Charlie.

CM: A lot of the problem is with compensation consultants. I’m reminded of the story of the census taker who knocks on the door, and the little girl who lives there tells him that her father is in jail for embezzlement. Her mother asks the girl why she said that. The girl answers, “Because I didn’t want to admit that Daddy is a compensation consultant.”

Q: I read a study somewhere that said companies that don’t own private jets outperform by 4% per year, on average. What yardsticks do you use to judge the quality of companies?

CM: We’re solidly in favor of private jets.

WB: Charlie travels by bus, but only when he can get a senior citizens discount. Charlie has one NetJets share and I own two shares. Berkshire is much better off with corporate jets. There are deals I likely wouldn’t have made if I didn’t have a jet available to travel on short notice. I wouldn’t have had the same enthusiasm for deals if I couldn’t have gotten on a jet quickly. But they can be misused. I remember one CEO of a consumer marketing company who said the company test-marketed all its new products at the same supermarket in Idaho. This supermarket happened to be nearby a lodge the company owned.

Getting back to the CEO compensation issue for a minute, compensation is not rocket science. It’s very simple to determine what someone should be paid. We pay people based on what’s under their control that we care about, not on what they can’t control. If the price of oil rises to $60 from $30, oil company executives shouldn’t get paid more even though the companies’ earnings rise. If the executive can lower his company’s finding costs, that I’ll pay for. The guy is worth a lot. But the price of oil has nothing to do with it. If oil prices fall, but the company has the lowest finding costs, pay him like crazy.

CM: If the trappings of power are important to the manager, the company’s returns will likely fall. Marcus Aurelius was one of the greatest emperors of Rome, and he didn’t care about the trappings of power. All these perks can be abused. Executives should provide examples of contrary behavior.

Q: Please explain how Berkshire would be affected by a credit contraction and higher interest rates.

WB: We benefit when others suffer. Times of chaos—junk bonds in 2002, stocks in 1974—are good for us. We aren’t likely to see a credit contraction. The authorities won’t do that. We might see an exogenous event that could cause a big rise in spreads, though. If that happens, Berkshire has plenty of cash on hand to put to use. Thirty or 40 years ago during contractions, money simply wasn’t available. Back then during a credit crunch, we found a bank we wanted to acquire. No lender was willing to finance us. The only financing we could find was out of Kuwait, but they wanted to lend us the money in dinars. The problem was that they wanted to be repaid in dinars, as well. Inasmuch as the Kuwaiti lender could pretty much determine the value of dinars in dollar terms, we didn’t think that was a very good idea. We didn’t do the deal.

In the old days, Midwestern banks depended on correspondent banks in New York. So if things went haywire there, banks far away from New York were affected, too. Now, the Fed won’t produce a credit crunch.

CM: Last time there was a credit contraction, we made $3 billion or $4 billion. Jonathan Alter recently wrote a book about FDR’s first hundred days. The country was close to broke at that point. FDR got what he wanted from Congress. The economic situation was chaotic. People were dealing with each other using scrip. We won’t see an orchestrated credit crunch again. In 1998 things seized up, but that wasn’t an orchestrated contraction. People were panicked, and we saw credit spreads widen dramatically. There are lots of people with high IQs and lots and lots of cash. But extraordinary things happen. People panicked, and thought others would panic.

Q: What do you think of John and Abigail Adams?

CM: I’m sure they were nice people, but I’d take Ben Franklin every time. I’m sure people say that I’m more like Adams than Franklin, though.

Q: With profits so high as a percentage of GDP, is it hard to find investment opportunities?

WB: You’re right: corporate profits are near a record level as a percentage of GDP. Typically they range between 4% and 6%. Usually, when they range higher than that, it’s not likely to be sustained. When profits get to 8%, as they are now, that’s very high. But there’s still no political reaction, like a move to raise corporate taxes. Many companies are earning 20% or 25% on their tangible equity at a time when government bond rates are 4% to 6%. Economic texts from 20 years ago would have said that that can’t happen. Someone else’s share of GDP has fallen. The labor component has fallen. Will this become a political issue? Who knows? Congress can change the tax laws. Corporate tax rates used to be 52%. Now they’re 35%, and some companies pay even lower rates than that. Corporate America is living in the best of all possible worlds. History says that the current situation won’t last. Corporate profits won’t stay at 8% of GDP.

CM: Much of those profits are in the financial sector, such as investment managers, banks, private equity investors, and investment banks. It has no precedent.

WB: If you’d have said that with returns on long-term governments at 4 ¾%, that one bank after another would earn 20% or more on its tangible equity, I would have said that that can’t happen. Part of those big returns comes from higher leverage. Banks earn a return on assets of 1.5%, and lever up 15 times, and earn a 22% ROE. But that 1.5% ROA should have been competed away, to maybe 0.9%. But that hasn’t happened. In the past 75 years, corporate profits this high as a portion of GDP only happened one or two years, right after World War II.

CM: Some of the high profitability in the financial sector is due to growth in consumer credit. South Korea had a big collapse after a big push on consumer credit there.

WB: But that collapse produced some ridiculously low stock prices. It was like 1932 in the U.S. Things do turn around eventually. As we look for a successor to me, we want someone who can imagine things he hasn’t experienced before. Some people are very smart, but are not wired to see things that they haven’t experienced.

Q: What can be done about naked shorting?

WB: Failure-to-deliver has never happened to me. I don’t see it as a big problem. We would welcome people shorting Berkshire. We earn money on the lend, and have a sure buyer of the stock at some point. I’ve read that this is supposed to be a problem. If anyone wants to naked-short Berkshire, we’re happy. Short sellers generally have a very tough time of it. At any given time, there are usually more people bulling a stock than there are bearing it. Shorts are no great threat. We can make money on the lend. We did on USG, lending out the stock. They paid us a lot of money on the short, and we were better off as a result. The USG shorts didn’t do to well. It’s a tough way to make a living. It’s very easy to spot a phony stock. But if its boosters can boost its price up fivefold, they can probably boost it tenfold.

CM: Sometimes there is sloth in the clearing process. That’s not good for civilization. It’s kind of like having sloth in the management of nuclear plants. There’s a lot of sloth in derivatives trading. The clearing process could be awful if a lot of people started trading the same contracts at once.

Q: Will gambling companies do well?

WB: Yes—if they’re legal. People have an inherent desire to gamble, including day trading. People like to gamble. If you’re watching a boring football game, if you bet on it it will be a lot more interesting to watch. (We insure against hurricanes, so I watch the Weather Channel.) The propensity to gamble is huge. Before, you had to go to Las Vegas. Now access to gambling is much easier. Forty years ago I bought a slot machine for my house. I’d give my kids an allowance, but it would all be in dimes. I’d have it all back by nightfall. My payout ratio was terrible. That tells you what kind of father I was. But I do think that gambling is a tax on ignorance.

CM: I find it socially revolting when government preys on the weakest of its citizens rather than protects them. When government makes it easy for people to use their Social Security checks to pull the handle on a slot machine, that’s a cynical act. It is not government at its best. Other things will flow from that. Gambling companies are clever psychological tricksters. It’s a dirty business. You won’t soon see Berkshire owning casino companies.

Q: What’s a good way to become a better investor?

WB: Read everything you can. I read every book on investing in the Omaha Public Library. Fill up your mind with competing thoughts and decide what makes sense. Then jump in the water and start investing real money, rather than a paper portfolio. The difference between investing real money and is the same as reading a romance novel and actually dating. There’s nothing like experience. The earlier you start, the better.

I read a book when I was 19 that formed my framework ever since. You have to read a lot in order to be able to recognize which ones jump out at you—and then do some investing yourself.

CM: When Sandy Gottesman interviews prospective employees, the first thing he asks is, “What do you own yourself?” If the interviewee doesn’t have an answer, Sandy tells him he should look somewhere else.

WB: If I look to buy a farm, I’ll figure how many acres it has, and multiple that by the yield I can expect to get per acre, and then multiply that times the price I think I can receive per bushel of yield. I’ll make a quantitative decision whether I want to buy the farm at the price being offered. It won’t be based on what I hear on CNBC or what my neighbor has to say about the farm.

Suppose GM is at 30, and you’re considering buying it. Assume that you’re thinking of buying GM for its market cap of $18 billion. Take a yellow pad. If you can’t write down a good argument for why you should buy GM for $18 billion, then you shouldn’t buy one share, or 1,000 shares, or the whole company. The business exists, and you should assume that you’re buying the business.

If Gottesman’s interviewee did have an answer for “What do you own?,” Sandy would then ask why he liked the stock.

Q: When you look at companies that operate in cyclical or uncertain environments, how do you judge margin of safety?

WB: We like businesses that operate in environments that we think we know the answer. If the environment is so chancy, we don’t try to calculate a margin of safety. If we buy a company like See’s or Coca-Cola, we don’t think we need a large margin of safety. We don’t think we’ll be wrong. We look for businesses that generate a high return on capital employed. We want to own a good business. We’d like to own businesses like that at 40 cents on the dollar, but if we have to pay a dollar per dollar, that’s OK, too.

If a fat guy walks into the room, it doesn’t matter whether we know he’s exactly 300 pounds or 325 pounds—we know he’s fat. If the competitive nature of the business is such that you don’t know the future of the business, then pass. A company’s past results are only helpful if they give you an idea of its future results. Sometimes you’ll be able to buy it at 25 cents on the dollar. If you can buy a good business at a reasonable value, you’ll be OK.

CM: “Margin of safety” means that you are getting more value than you are paying for. It’s as basic as high school algebra. If you don’t understand high school algebra take up another line of work.

Q: How would you fix the health care finance mess?

CM: It’s too tough.

WB: We can’t solve it. We like easy problems. We don’t try to solve tough problems. We don’t go around looking for tough problems. We do little in health insurance. If we did, we’d look for something with low distribution costs and a better ratio of premiums to benefits paid. But it’s a big problem. Health care accounts for 15% of GDP.

Q: How do you calculate intrinsic value?

WB: The intrinsic value of Berkshire Hathaway equals the amount of its future cash flows, discounted at a proper rate.

CM: Investors should estimate the value of our operating subsidiaries, and the value of our marketable securities. That gives you the value of our operating business. But you also need to estimate how effectively we’ll deploy our retained earnings. In 1965, Berkshire’s entire value lay in its prospective reinvestment of its retained earnings into new businesses, not in its textile business. We now have $80 billion in retained earnings to invest.

WB: If Charlie and I wrote down our estimate of Berkshire’s intrinsic value, the numbers would not be the same.

CM: Berkshire’s future won’t be like its past. Its balance sheet has become extreme. The balance sheet is gross compared to how we started. If Warren hadn’t been learning the whole time, the record would be a shadow of what it is. Warren has gotten better since he turned 65. Our system works better than at other companies where, when the CEO turns 65, he hands off to a 59-year-old, who’ll then hand off to another 59-year-old when he turns 65. Our system should be copied more often. Passing power from one old codger to another isn’t necessarily the best way.

WB: You’d be amazed by how many ideas are a reaction to animal spirits.

Q: Please comment on your view of the growth in derivatives.

WB: It’s not derivatives in themselves that are the problem. We have something like 60 positions in derivatives, and we’ll make money on them. But the problem is the usage of them on a rapidly expanding basis. It’s introduced more and more leverage into the system. Back in the 1920s, leverage contributed to and exacerbated the stock market crash. It was like pouring gasoline on a fire. Stocks would fall 10%, and investors would have to sell to meet margin calls, so prices would fall another 10%, and prices would fall some more. Leverage was thought to be dangerous, so the Feds regulated it by, among other things, dictating margin requirements. It was the source of real attention by regulators. The Feds policed it.

Now with the expansion of derivatives, and the regulation of margin requirements has become a joke. It’s an anachronism. I don’t know how or when it will end, but some unpleasant things are going to happen.

We saw it in 1987, with portfolio insurance. It came out of academia—but it was a joke. Basically portfolio insurance was a bunch of stop-loss orders. A joke. The 1987 crash was caused by a doomsday machine. It was a dead hand trading stocks.

But that’s nothing compared to what will happen to the fund operators who are leveraged into the “crowded trade” but don’t realize it. Add that to extreme leverage and you get a very chaotic situation. Who knew what chaos shooting the archduke of Austria would cause? A disruption will happen.

CM: The accounting for derivatives doesn’t help. If you’re paid to generate bigger and bigger phony profits, you’ll keep generating them. Most of the accounting profession doesn’t know that it doesn’t know the risks. If you pay people to mark to model, you’ll get bigger and bigger exposure.

WB: Four years ago our auditors went through General Re’s derivatives book and signed off on the values of the positions. I wish we could have sold the book to the auditors at those prices. If you run a dry cleaning business and I owe you $15, my books will show that I owe you $15, and your books will show that I owe you $15. There are just four major auditing firms left. Often, one firm will audit firms that have opposite positions in the same contract. The valuation of that contract between the two parties should net to zero. But people will game the system. If we mark a position at $1 million on Berkshire’s books, that position should be marked at minus-$1 million at our counterparty’s. But auditors attest to values that aren’t consistent between counterparties.

CM: This will cause trouble in due course.

Q: What do you think about short-term trading?

WB: There’s a huge electronic herd full of people who think they need to decide things every minute. Their trading turnover is high. There’s nothing evil about that, but they’re playing a different game than buy and hold. If you try to beat every other guy, day after day, you’re going to try to trade faster than him, and hit the computer key faster. But that’s not new to the markets. When I was running Salomon, people used to talk about five- or six-sigma events. Smart people do crazy things, en masse. Markets go crazy all the time. But when people try to beat the market day to day, it’s a fool’s game.

CM: When people talk about “sigmas” in controlling risk, they’re all crazy. People want to model potential outcomes according to a Gaussian distribution, because Gaussian distributions are easy to compute and easy to teach. But the real world doesn’t follow a Gaussian distribution. The distributions are bigger and more dramatic. It’s tough to learn all that higher math, and then find out that it has no meaning. That can be frustrating to find out.

Q: How do you determine intrinsic value?

CM: When we try to determine a company’s intrinsic value or its stock’s margin of safety, there’s no one easy method. We use multiple techniques and models. Lots of experience is helpful. You can’t become a great investor without experience.

WB: Suppose you drive 30 miles to look at a farm you’re thinking about buying. You’ll figure what the yield will be, and what fertilizer and labor costs will be, and how much you’ll have to pay in taxes. And you’ll come up with a number that uses all those inputs. If you figure that the farm will generate $75 per acre, what do you pay for the farm? You might assume that your yields will rise over time, or that crop prices will rise. So you might say the farm is worth $1,000 per acre. So if it’s selling for $900 per care, you might buy it, but if it’s selling for $1,200 per acre, you wouldn’t.

We try to figure out what corporate farms are worth, by looking at what they will produce. The basic math of investing was set by Aesop: a bird in the hand is worth two in the bush.

The ability to distribute cash is what gives Berkshire its value. You may have insight into very few businesses. How much more competition will enter the business? How will buyers’ tastes change? Take all that into account, and the business may be worth X, or X-, or X+. But you have to decide, and those of the sorts of things you need to know. You should stay inside your circle of competence.

CM: Most decisions go on our “too hard” pile. If you’re looking for a way to value all businesses, we can’t help you.

WB: We can jump over 1-foot-high bars, but not 7-foot-high bars, and we’re good at recognizing 1-foot-high bars.

Q: What are you looking for in a successor?

WB: It could be three or four people. We might give them all some money to run. We’re not looking for someone that we would teach, but someone who already knows how to do it. One guy wrote to me and nominated his four-year-old son. I know this is so easy that a caveman can do it—but a four-year-old! The biggest problem will be, can they scale up. It’s different running $100 billion than it is $10 billion. You can’t do as well. That doesn’t bother us. But the individual needs to have the ability to run very large sums and do mildly better than the market. We can’t beat the market by 10 points per year. Maybe 2 points better. But we want someone who won’t blow it. If you take $100 billion and multiply it by zero, you end up with zero, regardless of how strong your interim results were. We’ve seen a lot of smart people go broke. Ninety-nine times out of 100, they made great decisions, but once out of 100 they didn’t.

So we’ll give each one $2 billion to $5 billion, and see how they do, and if they do well we’ll scale them up.

CM: It’s like that story about Mozart. A man goes to Mozart and asks him for advice about writing a symphony. Mozart said, “but why are you asking me?” “Because you were writing symphonies when you were ten years old.” Mozart answered, “But when I was writing symphonies when I was ten, I wasn’t asking others how to do it.”

WB: We’ll carve up the portfolio and give it to a few people. I’ve done this before, in 1969, when I closed my partnership and recommended three other managers for my investors. I approached Charlie Munger, Sandy Gottesman, and Bill Ruane. Charlie was already rich and wasn’t interested. Sandy wasn’t looking for new investors, but took a few. Bill Ruane took most of them and put them in Sequoia Fund. My successor should have three attributes: He should be a great steward of capital; he should never get you into trouble; and he should get a great result.

I also did this before in 1979, when Lou Simpson came to GEICO.

Q: What do you think about global warming?

WB: The odds are good that it’s serious. It’s foolish to say that we’re 100% sure that it’s not a problem. It makes sense to build an ark before the rains come. We should err on the side of the planet. General Re is in the excess-of-loss business and the property business, and won’t be affected by the weather ramifications of global warming. National Indemnity writes catastrophe business. We think cat exposure is going up because of what’s going on in the atmosphere. The relationship between relatively small change in the climate and the effects those changes will have is not linear. A small temperature change could have a huge impact. We are plenty cautious. But this isn’t something that keeps me up at night.

CM: CO2 is what plants eat. I like it warmer. It’s not as if a flood of people are moving from Southern California to North Dakota. It’s not clear to me that it would be so bad to have the planet hotter. But the dislocation warming caused could be bad.

WB: But Charlie, water levels could rise by 15 feet.

CM: The Dutch did OK holding back water levels, given enough time and money. I don’t think that global warming is an utter calamity for mankind. You’d have to be a pot-smoking journalist to think that.

WB: Cat severity was high in 2004 and 2005. But Katrina is not anywhere near the worst case of what might happen. We don’t know all the factors that go into causing hurricanes. On balance hurricane season seems to be becoming more intense. It’s crazy to write cat insurance on the same terms as before. So global warming is a factor with us.

Q: Is the Chinese banking system vulnerable to disruption?

WB: I don’t know. It’s an important question. My insight into Chinese banking is zero. I just don’t know.

CM: All the big economic progress in China has been accompanied by practices of Chinese government banks that would make you shudder. They were doling out money in aid rather than making loans. It may be getting better now.

WB: We’ve had our share of banking problems in this country. Strong economies get through this stuff. The economy has come through lots of economic crises. Gains will continue to be made.

Q: What would you do if you were starting over with $10 billion?

WB: In 1969, prospective returns on stocks were the same as they were for municipals, looking out the next decade. That’s not the case now. If we ran a large endowment now, we would either be 100% in bonds or stocks or cash. We don’t believe in layering. If you asked me which would provide a better return over the coming 20 years, between bonds and stocks, I would buy stocks. It wouldn’t be a close decision, but we would rather buy stocks cheaper. But we don’t know where stocks will be in two years or five years.

CM: We think the current situation could be affected by big disruptions.

WB: But there will always be disruptions that can’t be predicted. We bought $5 billion in equities in the first quarter. It’s not like it was in 1974. We’d like to invest more, and hope we can do it in a big way.

Q: Why did you sell silver?

WB: We sold it to people who knew more than we did. We bought too early and sold too early. Other than that, it was a perfect trade.

CM: We have shown the world that we don’t know anything about the silver market.

WB: But we’re flattered that you asked. The price of silver responds to supply and demand. There’s not a lot of economic conspiracy behind it.

Q: What advice do you have to give to someone who’s planning to give it back in 20 or 30 years?

WB: You have the right time horizon. If your long-term goal is philanthropy, you are in effect an endowment fund. I’ve always said that I would have been foolish to give away money early on, since I have been able to compound money rapidly over time. When my wife had a baby, I called an obstetrician; I didn’t try to deliver it myself. When my tooth hurts, I go to the dentist. I don’t ask Charlie to fix it.

CM: If all Warren wanted to do is talk to grant applicants, we wouldn’t have been too successful over the years.

WB: I have everything in life that I want. When I gave away my Berkshire stock, I didn’t really give up anything. Other people change their own lives when they make big philanthropic gifts. They forego vacations, or give up huge amounts of time. I haven’t done that.

Q: If you were starting over, what would you do?

WB: If I were working with very small sums, I’d be doing other stuff than I’m doing now. The universe of alternatives expands dramatically. You have thousands of times more options. You can earn high rates of return with small sums of money. You can find value with small sums. At our size now, we can’t earn a phenomenal rate of return. We have to put $5 billion into a stock for the position to have meaning. It’s not even close. But if we were investing $1 million or $5 million, we could earn a high return on capital.

CM: But there’s no point in thinking about that now.

Q: What do you think about what’s going on in the subprime lending market?

WB: Lots of people borrowed money to buy houses that they don’t want to own anymore, or can’t make the payments on. Intermediaries and lenders will suffer. Will it spill over into other parts of the financial system? My guess is no. If unemployment doesn’t go up and interest rates don’t rise, I don’t see the subprime mess being a trigger for a wider financial contraction.

We’ve looked at the 10Qs and 10Ks of a number of financial institutions. A number are accruing earnings on loans even though the borrower is making only the lower option payment. I think it’s a case of dumb lenders lending to dumb borrowers. The growth in subprime was largely a bet that housing prices would keep rising. It worked until it didn’t. It’s similar to what happened to the manufactured housing industry in the 1990s. When supply expanded, some borrowers didn’t want to own the asset unless its price kept going up.

CM: Much of what happened was a combination of sin and folly. The accountants let lenders show profits when anyone in his right might would see that that was crazy. Historically, low-interest loans have gone to the “deserving poor.” That’s good. More recently people have been getting paid to get lenders to lend to the undeserving poor. When the guy who does that looks at himself in the mirror in the morning, he sees someone who is evil and stupid.

WB: On a lot of these defaulted loans, the borrower didn’t even make the first payment. Early-payment defaults shouldn’t happen. That happened in the late 1990s in manufactured housing. When loans are packaged and securitized and local lenders aren’t part of the process, discipline leaves the system. You’ll have some faraway institution making a loan on a piece of property, and the local lenders will know that it’s a crazy loan to make. But when those loans get securitized, discipline leaves the system. The overhang of bad loans hasn’t yet worked its way through the system. In some cases it will take a few years. The overhang is huge. People who thought they were flipping are the ones who are getting flipped.

Q: What do you think about managed-futures funds?

WB: The most logical investment is the one that we think makes the most sense. Anyone who’s limited to one segment of the market is at a disadvantage to someone who has total authority. We wouldn’t want to run a fund that was devoted just to stocks, or bonds, or futures. It’s a mistake to shrink your universe of possibilities.

It doesn’t matter if you’re set up as a hedge fund, or a mutual fund, or a private equity fund. The form doesn’t produce investment results. It depends on the manager.

CM: I think the return of the typical managed futures fund will end up being somewhere between lousy and negative. Usually funds like that are sales tools. Promoters will sell them until they stop selling. I think it’s a mistake to be sold “areas of opportunity.” Brains make opportunities, not areas.

Q: What are some of the areas of opportunity you see in the coming 50 years?

WB: Read everything in sight. If you’ve done your work, you’ll identify opportunities. We’ve seen some, missed others, and kept looking. We knew there were ways to make money. Just read everything you can find, 8-10 hours per day. But you can’t lay it out ahead of time. It’s not a road map, it’s a reservoir of opportunities. You’ll see a lot of things. But don’t do anything where you can lose a lot of money. It should never be two steps forward and one step back. Avoiding catastrophes will be important.

CM: The place to look early is at inefficient markets.

WB: Don’t try to figure out which drug company’s new-product pipeline is better, or where bond prices are headed. You’ll have no edge there.

The Resolution Trust Corp. was a great chance to make money. You had disinterested sellers (the federal government), no willing lenders, and prior buyers had all been cleaned out. There was an imbalance of intensity in the process. The government just wanted to be rid of the properties as quickly as it could, and there was no one there to buy them. There was no scarcity of opportunities.

Q: What do you think of the changes to the insurance system that Florida has put in place, and the Katrina-related litigation?

WB: Insurers will be reluctant to write more coverage if they think that the words on the policy won’t be honored. Yes, homeowners will be unhappy if their flood claims aren’t paid. Put the exclusions in very big type, so the homeowner will be sure to understand them. But if thousands of people sustain losses, courts and legislatures will want to stretch or abrogate policy terms.

It’s tough to ask people in Nebraska and Michigan to subsidize homeowners in Florida. If there’s a $150 billion loss in Florida, there will be calls for Washington D.C. to pay the tab. If that doesn’t happen, taxes in Florida are going to go up. How much should people who are not exposed to a risk subsidize people who elected to be exposed to it?

Q: Discuss the $5 billion in acquisitions you made in the first quarter. Have you changed your hurdle rate? Does this mean you’re giving up looking for elephants?

WB: I don’t think we’ve changed our standards. Then again, if you haven’t been out on a date for a month, can you say for sure that the girl you finally ask out, you would’ve asked out on the first day? I can’t say for sure.

We have plenty of money to put to use if we ever found an elephant. We would even sell stocks to raise more money if we had to. TTI, an electronics distributor in Fort Worth we bought is the kind of thing we want to own. It’s a terrific business. We can swing in and make a deal quickly.

CM: We won’t earn the kinds of returns we were making even five or ten years ago. It’s a different world.

Q: Why do you support Planned Parenthood?

WB: Planned Parenthood is a terrific organization. For years, millions of women all over the world were involuntarily bearing children, living under governments run by men. It’s a very important issue. If we’d had a Supreme Court made up of nine women when the country was founded, these questions wouldn’t even have come up.

Q: In investment theory, risk is defined by volatility. Why would a rational investor listen to the opinion of the marketplace?

WB: Volatility does not measure risk. Past volatility is not a measure of risk. It’s nice math, but it’s wrong. If a farm in Nebraska used to sell for $2,000 per acre, and now it sells for $600 per acre, investment theory would say that the beta of farms has gone up, and than they are more risky than before. If you tell that to people, they’ll say that that’s crazy. But farms don’t trade daily the way stocks do. Since stock prices jiggle around, finance professors have translated that into these investment theories.

It can be risky to be in some businesses. Risk is not knowing what you’re doing. If you know who you’re dealing with, and know the price you should pay, then you’re not dealing with a lot of risk.

We haven’t had a permanent loss that’s added up to a significant portion of our capital. We made a big mistake about Dexter Shoe. I was wrong about the business—but the problem wasn’t that the business was too volatile. We have invested in a lot of sectors that have high betas. The development of beta has been useful to people who want careers in teaching.

CM: In both corporate finance programs and most MBA programs, 50% of what they teach is twaddle. One reason we’ve done well is that we saw early on that smart people do dumb things. We want to know why. Who, too.

WB: We will not run big risks at Berkshire.

Q: What should I focus on in company filings to determine the quality of management, if I haven’t met management?

WB: We bought $5 billion in stock this past quarter, and I don’t know the management of any of the companies we bought. (If I buy a whole business, then that’s different. I care how management behaves.) But when it comes to investing in marketable securities, we read the reports. Charlie and I were talking the other day about a large oil company who’d just put out an annual report that’s more than 100 pages long. We went through it, and couldn’t find its finding cost per MCF—the most important piece of data investors should want to know. But it’s not even discussed. It’s like getting dishonest information.

You can learn a lot by reading CEO letters. If it seems like it’s been written by the P.R. department, that should tell you something. If a CEO can’t take the time to write a few pages once a year, then I’d have some questions. I like to get the feeling I’m being directly talked to.

We have bought some businesses that were run by mediocre managers, but we felt that the businesses couldn’t be screwed up.

CM: There’s a difference between the quality of a business and the quality of a management. If it’s a strong enough business, it should be able to withstand poor management.

WB: If you gave me the number-one pick in the CEO draft, and said he had to run Ford Motor, I wouldn’t do it. It would be too tough. A CEO depends on too many things happening that are outside his control, even if he’s the best in the world.

Q: In 1999 you wrote an article for Fortune that said that 17 fat years in the stock market would be followed by 17 lean years. How have things turned out?

WB: There was nothing magical about the number 17; I was just using a biblical analogy. If I had to choose between owning long bonds and equities right now, I would own stocks. I wouldn’t have high expectations, but they’d be higher than the 4 ¾% that long-term governments pay.

In 1999, people were extrapolating the recent past into their expectations. If I were writing that article now, I wouldn’t have high expectations for stocks.

CM: When Warren says, “modest expectations” for stocks, he’s got it about right.

WB: You can’t say something smart about the market every day, or every week, or every month. But every once in awhile things get really out of whack. The good thing is that you don’t have to do something every day.

Q: What is your position on removing PacifiCorp.’s outdated dam on the Klamath River in the Pacific Northwest?

WB: FERC and the local regulatory commission have 27 proposals in front of them. Some advocate hydro power, since it doesn’t cause pollution. Some advocate other types of generation, since they are cheaper. This is not PacifiCorp.’s decision, but rather FERC’s. It’s a tough decision. The state public utility commissions will listen to arguments. We are a public utility. We will respond to regulators.

Q: What do you think of the NYSE-Euronext merger?

WB: I don’t know the answer. Both exchanges were big before. Their combination should result in narrower spreads and a lower cost of execution. That’s good. The NYSE has gotten much more efficient over the past 30 years. We are satisfied. We get good executions around the world.

CM: I don’t know anything about it.

Q: How do I learn who to trust and not to trust in figuring out where to invest?

WB: A lot of the problem with many investments isn’t fraud, but rather fees and frictional costs. We have had good luck buying whole businesses. A lot of it is knowing how to filter out people. People give themselves away. What they say early on isn’t always important, but it will give clues to their subsequent behavior. Our batting average on people is about 90%.

CM: We are deeply suspicious when an offer is too good to be true. I remember one guy was selling fire insurance on a concrete bridge that was underwater. He said it was like taking candy from a baby.

WB: We get suspicious when a promoter says that his deal is “so easy,” and then laughs about it. It’s not easy. We look for guys we can clearly trust. We’ve probably passed on lots of good guys. I don’t like unfair fee structures, or like to hear “oh, I can get it for you at . . .”

Q: How do you come up with your discount rate?

WB: We don’t have discount rates. Charlie keeps reminding me I’ve never prepared a spreadsheet.

We want to earn more than the rate on Treasurys. But if the Treasury rate is 2%, 3% or 4% that isn’t good enough. If Treasurys are yielding 4 ¾% as they are now, we want more than that. I never ask Charlie, “What’s our hurdle rate?” It would be OK by us if they shut down the stock market for a few years.

CM: Hurdle rates make sense, but people go overboard with them. Just because you can measure something doesn’t mean you should let the math take over the whole process. That’s the trouble with hurdle rates. Hurdle rates don’t work as well as just comparing various alternatives. If I can earn 8% for sure, I don’t need to take two minutes to decide whether or not to invest in an alternative that yields 7%. It’s like deciding whether to marry a mail-order bride who has AIDS. The concept of opportunity cost is too-little taught. Maybe that’s because it doesn’t lend itself to complicated mathematics.

WB: I’ve sat on 19 boards. Every deal that every one of those companies did had attractive prospective IRRs as calculated by the bankers. The boards would have been better off if they’d burned all those slide decks. You get nonsense figures to support a story that the CEO wants to hear.

CM: One of my friends promotes commercial real estate investments. I asked him what returns he tells his investors he aims for. He says 20%. I asked him how he came up with that numbers. He said it’s the number that investors want to hear.

WB: If we hear promises like that, we run ‘em off. It’s amazing how gullible big money is.

Q: Is there anything that’s too tough that doesn’t go on the too-tough pile.

CM: Sure. If your child has a terrible disease, you can’t put that on the too-tough pile.

WB: If it’s an option we put it on the too-tough pile. But it’s not always an option. We hope there aren’t too many like that.

Q: How often do you review each position in the portfolio?

WB: Berkshire’s had two different periods in its life. When we had more ideas than money, we reviewed the portfolio a lot. Now we have more money than ideas, and the main option is cash.

Q: Have you thought about adding to your existing positions?

WB: Yes, we do think about it—and have. But in some cases we might hit reporting limits and position thresholds. We can’t cross certain thresholds. Adding to certain positions is always something we’re considering. We like to add when we can. These are companies we understand and like.

CM: It’s not as easy as it looks to buy big positions. When we were accumulating our Coca-Cola stake, we accounted for 30% to 40% of trading volume per day, and it still took awhile to build the position. There’s no easy way to move elephants around.

WB: We can do 20% of daily trading volume and not move the price around; more than that and the price is affected. So if we want to build a $1 billion position in a stock, $5 billion of it has to trade—which is a lot.

Q: Will you be willing to talk to the leaders of the tribe that’s affected by the PacificCorp facility in the Pacific Northwest?

WB: We won’t make the determination of what should be done. That will be made by FERC. The decision to go with wind vs. coal will be made by the commission. Any time a major decision is made in the public utility field, some groups are happy and some are unhappy. We will do exactly what FERC decides. Twenty-seven groups will present their views. The Department of Interior will provide some advice. It takes a lot of time.

Q: What effect will the Florida reinsurance legislation have on Berkshire’s subsidiaries?

WB: I’m going to ask Joe Brandon to address that.

JOE BRANDON: Florida recently expanded its public reinsurance fund. The effect will be to move private coverage to public coverage, which charges lower prices for wind risk. So the new law will have the effect of lowering prices. Florida is taking a big risk. It had earlier offered $18 billion in coverage. The new law raises that by $12 billion to $16 billion.

WB: Florida is going to have a big problem if a $150 billion hurricane hits. There won’t be enough money in the state fund to cover the losses. The state could float a big bond, or it could go to Washington to ask for assistance. A $100 billion storm is unlikely but could happen. Andrew was $30 billion. If there are no big hurricanes in a few years, the whole matter will die down. If there are big hurricanes, Florida will go to D.C., or sell some bonds, and taxes will go up. It’s tough to be where the wind blows a lot, but is a nice place to live.

Q: Who are your present-day role models?

WB: One thing I’ve been lucky with is that the role models I’ve had have never let me down. That would be a terrible situation—worst when the role model is a parent. Choosing your heroes is important. You should want to associate with people who are better than you are. Marry up and hope you can find someone willing to marry down.

CM: Some of the best people are dead. When you’re looking for role models, don’t limit yourself to the living.

Q: What are your views on ethanol?

CM: Running cars on corn is one of the stupidest things I ever heard of. Our government is under tremendous political pressure even though it makes no sense. The idea of subsidizing ethanol use is about as crazy a decision as has ever been made. We want to have a social safety net, yet we have a policy that has the effect of raising the price of food, in order to make driving an SUV cheaper. Manufacturing ethanol uses up as much hydrocarbons as using petroleum directly does.

Q: What are you doing to protect Berkshire from inflation?

WB: We don’t see metals as a protection against inflation. The best inflation protection is earnings power. If you’re a lawyer or a surgeon or are in some other profession, you can hedge with pricing power. Also, you can offset inflation if you own a wonderful business, like making Snickers or Hershey bars. Make something that people will pay for, in a business that doesn’t require a lot of capital investment. But inflation is bad for investors. Berkshire won’t do as well during times of high inflation as it would in time of low inflation—but it would do better than most companies.

Q: What are your views on railroads?

WB: It’s not the most exciting business, but railroads’ competitive position has improved versus truckers over the past 20 years, especially as oil prices have risen. Rising energy prices raises truckers’ costs four times more than they raise railroads’ costs. Not much new capacity is coming on line. It was a terrible business 30 years ago. The industry was regulated, and I suppose could be re-regulated some day. But it’s very capital intensive. It’s tough to earn high returns in a business that you have to invest heavily in regularly.

Q: What are the best ways a 10-year-old can earn money?

WB: Delivering newspapers was my favorite. I guess you have to be 12 or 13 to deliver papers. I must have tried 20 different businesses by the time I got out of high school. Owning a pinball machine was great. I read a study somewhere that correlated business success with various attributes, such as grades, or whether the individual went to business school. The strongest correlation of success was the age of the individual when he started his first business. That makes sense. You see it in music and in athletics, too. I’ve always wondered why people who are having debt problems don’t work a few extra hours a week and deliver papers early in the morning.

CM: There’s a book called The Richest Man in Babylon. It suggests to underspend your income, which is good advice. Also, give yourself the best hour of the day, to use however you wish. Sell yourself the best hour. If you make yourself a reliable person and stay engaged in what you’re doing it will be tough for you to fail.

Q: What rate of economic growth is sustainable?

WB: We’re in a group of good businesses in the world we face. Some are going to be big winners. Some will be OK. We don’t think a lot about global trends. We don’t like businesses that make products that have a high labor content that can be shipped here from overseas. High-cost operators have a problem. US Air’s cost per seat mile was 12 cents, while the industry average was 8 cents. We’re dealing from strength all the time.

CM: We learned about everything we needed to know about foreign labor competition after we invested in the shoe business. Will Rogers said, “I’d like to be able to learn to not pee on an electric fence without having to try it.”

Q: What are your views on the declining dollar?

WB: We think the dollar will continue to decline against most currencies. When we first became negative on the dollar, we bought $21 billion in foreign currencies directly. Then the carry on that position became negative, and it became expensive to own. More recently, we have focused on owning companies that generate non-dollar earnings. But the currency a company earns in is not a huge determinant as to whether we invest. It is a factor, though. The government’s current policies will likely cause the dollar to fall further. I don’t know the speed of the decline or when it will accelerate. But the fundamental forces are strong.

CM: A falling currency is supposed to be inflationary. During this recent period of the dollar’s decline, the inflation of prices charged by Costco has been basically zero. What matters is what happens to prices in your own country.

WB: Oil is denominated in dollars, so when the price of oil went from $30 to $60, to a European, the effect was as if it went from 80 to 135. The price of oil to a European hasn’t done much.

Currency matters more than people are used to thinking. Thirty years ago, the U.S. never had to think about its currency. That world has changed.

Q: How should boards of directors deal with managements?

WB: Most writers have a distorted view of how companies operate. Most directors were potted plants. CEOs didn’t want input. If someone spends 25 years working his way up, he’s going to want to be boss when he becomes CEO. There’s more governance process now.

By far the most important job for the board is to have the right CEO in place in the first place. If you were the board of Capital Cities, and you had Tom Murphy running things, case closed. Then you want to make sure the CEO isn’t overreaching. Finally, you want to provide judgment on major acquisitions. CEOs like to do big things spending other people’s money. By the time a proposed deal gets to the board, it’s a little game. The bankers always like the deal. The CEO will always stack the deck to make a deal look good.

On for-stock deals, the acquirer usually only thinks about what it’s getting, not what it’s giving. You have to be sure you’re getting as much as you’re giving up. But I’ve never heard a board discussion of what the company is giving up. Acquirers should be concerned about dilution. When I gave away 2% of Berkshire to get Dexter Shoe, that was one of the dumbest deals in the history of the world. It cost me 2% of the company. But that doesn’t show up in the accounting.

CM: M&A reveals the self-serving and delusional nature of good minds.

WB: The standard procedure is to trot in the bankers to present the deal to the board, and no one will argue the other side. It’s no contest. I don’t know how to change that. Our board is made up of people who are all big holders of the stock, which they bought on the open market. We don’t provide them with D&O insurance.

Q: Who would you choose as a partner on big deals?

WB: We normally don’t want partners. If we like the opportunity, we want it all. We don’t need money from partners. If we need a partner’s knowledge, we’re not too crazy about that, either. We have made exceptions. We did a deal with Leucadia that worked out great. They were a great partner. But they brought the opportunity to us. If we’re going to invest, we should understand the situation well enough on our own and not have to rely on partners.

Q: What is your long-term view on commodity prices?

WB: We have no opinion on commodities. If we own an oil stock, it’s not because we expect the price of oil to rise. If we wanted to bet on oil prices, we’d just buy oil futures. Posco is the best steel company in the world. We bought it between four and five times earnings. We like businesses that don’t require much capital. You can’t earn big returns investing in companies that require big capital investment every year. Low-capital businesses are far better than any steel or oil business. If anything, I have a bias against commodity-oriented businesses.

CM: We invest in businesses, not commodities, over time.

Q: What’s your advice to the New York Times Co. and the Sulzbergers?

WB: I wouldn’t blame the Sulzbergers for the troubles the newspaper business is in. We’ve said that many newspaper companies have been operated by people looking in the rear view mirror. We have dual classes of stock at Berkshire. I own 30% of each. But the woes of the newspaper business are not connected with the two voting classes of New York Times stock. The business has gotten a lot tougher.

Assume that Gutenberg had never invented the printing press, and that the news dissemination business originally evolved around the Internet and cable TV. If somebody came to you and said “I’ve got this great idea. Let’s start a business where we print the news on paper. We’ll run the printing presses all night, and distribute the papers with huge fleets of trucks, so that people can read about what happened yesterday.” Would you invest in that? But people’s habits die hard. The world doesn’t turn on a dime. Newspapers still have inertia on their side. The circulation of the Los Angeles Times used to be 1.5 million. Now it’s 800,000. I’m not sure there’s anything executives can do to change the situation. We used to sell 300,000 sets of the World Book every year. Now we sell 20,000.

The Buffalo News’s earnings are off by 40% from their peak—and it has one of the highest penetration rates of any major metropolitan daily.

CM: The dual class structure isn’t the problem. It was part of the basic contract when the company went public. The idea that shareholders want to change it now is crazy.

WB: When the New York Times went public, it said that it was committed to maintaining a high degree of editorial quality, and would spend lots of money to maintain that quality, even if earnings suffered. Everyone knows that the New York Times isn’t going to make huge editorial cuts so it can make its quarter. But look at how many papers in New York have disappeared over the years. Others had different management approaches than the Sulzbergers have. I’m not sure that in ten years, people will say that the New York Times played its hand badly. The Los Angeles Times will have a tougher time maintaining its editorial reputation than the New York Times will.

Q: The hall is packed, and presumably more people will attend next year’s meeting. Where will you hold it?

WB: We’ll have four new hotels opened up in Omaha next year, but you’re right. At some point we’ll hit a wall.

Notes from Berkshire Hathaway's annual meeting 2006

WB: Yesterday we announced the acquisition of Iscar, a large, well-managed, profitable business. I got a page-and-a-half letter from Eitan Wertheimer, the Chairman, that told me about their business. The character and talent of management jumped off the page. Soon after, we met management in Omaha. Charlie liked them a lot. This is one deal where Charlie’s as enthusiastic as I am. We signed the contract yesterday.

CM: From very modest beginnings this company has become the best company in its field. It’s not the biggest—yet. The average quality of the people who run it is off the charts. And they’re young.

This is a very high-quality enterprise. Its people know how to do things that no one else knows how to do. We always like having the opportunity to work with some of the best people in the world.

WB: Iscar is the second-largest cutting-tool manufacturer in the world. It has revolutionized every aspect of machining. It has operations all over the world. We paid $4 billion for 80%. The family will keep the other 20%.

This is the first time we’ve bought a business that’s based outside the U.S.

CM: We’ll look back in 5 to 10 years and see this as a significant event in Berkshire’s history.

WB: We hear from people all the time who think their businesses are too important to auction. We don’t do auctions, generally.

We tend to buy from people who care enough about their businesses that they don’t want to put them up for auction as if they were pieces of meat. This is a very useful filter for us. There’s something going on in their brains; they care about their customers and employees. This works to our advantage. Our crowning acquisition along this line is Iscar. I’m going to Israel in September to try to find more companies like it.

Where should a rich country like the U.S. draw the line on entitlements?

WB: Every society decides what to do with its oldest and youngest members. They are its least productive members; they don't turn out goods and services, but consume them. In 1935, the country decided that the federal government should play a role in helping to take care of older citizens, when it enacted the Social Security program. There is some merit in the idea that 65 is too low a retirement age. That's in the process of being changed. But in a society as wealthy as ours, where GDP per capita is $40,000, there are plenty of resources to use to help support older people. Not everyone needs help. Some people, like Charlie and me, have been wired to be able to make money. Those people will have more than enough to provide for themselves as long as they live. But not everyone is wired that way. They won't be able to take care of themselves once they stop working. The country is wealthy enough that it can easily handle the Social Security question.

I find it ironic that this administration, which thinks nothing of running up fiscal deficits of $300 billion to $400 billion per year, is so concerned about the idea that Social Security could have a $100 billion deficit several years from now.

It's true that the ratio of workers to retirees is only 2 to 1. But worker productivity is going up every year. There's always been a struggle over how to divvie up the wealth pie. But that pie is big, and it's growing. This is a problem that the country can easily take care of.

CM: I've read the evidence put together by people like Pete Peterson, but have come to a different conclusion. If the country grows in real terms by 2% to 3% per year, it should be child's play to take a share of that pie and divert it to older people. It's crazy to freeze the share of wealth devoted to retirees at some arbitrary level set sometime in the past. The society has a responsibility to pay a little more than it has in the past, as the population of retirees grows. Social Security is one of the most successful programs in the history of the country. It is very efficient and has low overhead.

WB: The government had no reluctance counting the Social Security surplus as part of the overall fiscal surplus, when the budget was first unified in 1969. But now that the trust fund is set to go into deficit, suddenly the system has pay for itself.

What's the best way to design a compensation system in a highly cyclical industry, such as oil, that's prone to booms and busts, without avoiding overpaying people in the good times, and underpaying them during the bad ones?

WB: That's a terrific question. If you're a copper company and copper's at $3.50 a pound the way it is now, even the village idiot could run it and you'll make money. But once copper prices go down, it's a tough business. We design different compensation systems at Berkshire for the different businesses. Some of our businesses are very capital intensive. Some of our companies are in tough businesses. Some run themselves. So we have a wide variety of compensation systems. Often people have standardized systems, regardless of what business a company's in. That's crazy.

If we owned a copper company, we'd measure management's effectiveness by looking at the business's cost of production--not the price of copper. Management has control of operating conditions, not market prices. So management's comp wouldn't fluctuate a lot, even though the unit’s results might fluctuate a lot.

Tie compensation to what management can control and have an impact on. At Geico, for instance, we look at growth and profitability of seasoned business. (New business loses money for awhile.) Don't pay for the wrong things, or for what management can't control. I think it's ironic that energy executives are being paid well recently as oil prices have gone up, but then go up and testify before Congress that they don't have anything to do with high energy prices. Energy companies should pay management based on finding costs. If a company can achieve and maintain lower-than-average unit finding costs over an extended period, say 3 to 5 years, then management should be paid well.

CM: It's easy to have a fair compensation system. In about half of public companies, the top people are paid too much. Berkshire can't influence what other companies pay their executives, however.

WB: Berkshire owns 68 operating companies. I have responsibility for determining the comp of around 40 managers. I can't think of anyone we've lost due to differing views on compensation. We've never brought in compensation consultants. Maybe they have at the subsidiaries. (But if they have, they're smart enough to not tell me.) This is not rocket science. It's not something we spend a lot of time on. Complexity serves the needs of those who have their hands on the switch, such as the consultant or the compensation committee.

CM: We don't do well when we sit on comp committees. At Salomon Brothers, Warren was on the comp committee. When he remonstrated softly regarding how much some people were paid, he was outvoted. I think a lot of this isn't driven by greed, but rather by envy. Pay a guy $2 million, and he's happy--until he learns that the next guy got $2.1 million. Then he's miserable.

WB: I've always believed that of all the seven deadly sin, envy is the silliest. When you're envious, you're making yourself miserable. At least with the other deadly sins, you're enjoying yourself. Some of the best times I’ve ever had have come during sustained rounds of gluttony. And I won't even get into lust. But when you're envious, you feel miserable.

This new proposal by the S.E.C. for more full and transparent disclosure of executive comp is a good idea. But I'm afraid it could be counterproductive when executives see the full list of what other people are getting. It becomes a shopping list.

How do you train your successors and measure their effectiveness?

WB: We write the annual shareholder letter to convey what Berkshire is all about. This meeting, too, is intended to convey the company's culture. We're not saying we do things better, but rather that this is us. We want our people to have a lifetime commitment to their businesses, and to underscore the values we have. Everything we do we want to be consistent with Berkshire's culture. Everything they see, hear, and read from the company should be consistent. It's just like children in a home. They see what the grown-ups do and how they act, and learn to act the same way. Homes have cultures. Companies have cultures. Countries have cultures. At Berkshire, people buy into it and see that it works. This kind of thing doesn't require mentoring. Managers see consistency in how Charlie and I act.

Not everyone buys it. I have a guy coming in to meet with me shortly. I know nothing will come of it, because his brain works differently; he wouldn’t buy in to the way we do things here. So it's very unlikely we'll do a deal. But I want to learn about his business, so I'll meet with him.

But there's no formal training needed for successors. If I die tonight, there are three obvious candidates to be my successor. Any of the three would not miss a beat if they took over. It's their culture too.

CM: Warren has kept the faith for 75 years. Does anyone think he will blow the job of passing that faith on? You all have more important things to worry about than that. That faith will go on for a long time. We don't train executives here. We find them--and they're not that hard to find.

A number of closed-end country funds are currently trading at premiums to their NAVs. Is that rational?

WB: A premium on a closed-end fund tends to be irrational. I haven’t looked at pricing on closed-end country funds recently, and so can’t speak to this instance directly. But most go to discounts once they’ve been priced. For one thing, the commission, usually 6%, comes out of the price right away. Investors who buy on the deal end up paying $1 for 94 cents of assets. If I had an interest in buying into an emerging market, and a fund that invested in that market were trading at, say, 1.2 times NAV, you’d have to convince me that the manager of the fund is truly superior to get me to buy it. But the premiums can be huge. I’ve seen premiums of 30%-40% or more. Years ago Overseas Securities sold at a huge premium, and everyone was baffled. But eventually the prices come down to earth.

Do you think the trend toward majority voting for directors, away from plurality voting, will help governance?

CM: I don’t believe it will improve ethics at all. From time to time different fashions pop up in corporate governance, and this is one of them. But they don’t fix governance problems. New governance rules need to be considered in light of who’ll be activist in using their new powers. On most boards, it’s a mixed lot, at best.

WB: The quality of a company’s governance is determined by whether the people on the board truly think like owners, and whether or not they’re any good at overseeing a business. I haven’t seen any changes in behavior based on switches to majority voting. The big difference in whether a board is effective or not is whether or not the people in the board room have a lot of business savvy. I’m not sure a certain rule or other will make a big difference. The board’s job is to get the right CEO, and prevent him overreacting to problems and issues. Also, a board needs to exercise independent judgment on important acquisitions. Many CEOs are motivated by non-rational reasons when they consider doing big deals.

The only cure for bad governance is to have the largest shareholders, say the 8-10 largest, make sure that these issues are addressed. So if they don’t like a comp plan, for instance, they tell the company, “this comp plan is no good, and we’re not going to vote to re-elect the directors.” Yet some big holders actually farm out their voting decisions to outsiders. I don’t understand it. You want board members, and large holders, to think like owners.

What have you learned about technology investing?

WB: I know enough about tech to know that I don’t know very much about tech. We know our circle of competence; we know what sorts of businesses we understand. There are some businesses that no one can understand. They change too fast. We like to bet on businesses that will be basically the same in 5 to 10 years as they are now. Iscar will be bigger in 5 to 10 years, but its fundamentals won’t be any different. The telecom business has been through startling change over the past 5 to 10 years.

Charlie says that we have three boxes: “In,” “Out,” and “Too Hard.” It doesn’t bother us if we have to put something in the “Too Hard” box. If you make it to the Olympics as a sprinter, why should you worry that you didn’t make it as a javelin thrower? Tom Watson, Sr. used to say, “I’m no genius, but I’m smart in spots—and I stay around those spots.” You don’t want to compete with Pete Liegl at Forest River. He’ll kill you. But Pete doesn’t try to tell us how to run the insurance business.

It’s not that I haven’t been exposed to technology. I was present at the birth of Intel. I was on the board of Grinnell with Bob Noyes. But I don’t think anyone in the industry has a clue how to forecast the future of the business. At Intel they’ve had some surprises lately. AMD’s recent success has been a surprise. I don’t think in that industry you can tell what’s going to happen. It’s very hard to predict.

CM: A reporter once asked me, “How is that you’ve had such success running a multi-industry company? You’re not smart enough to have done so much better.” We know the edge of our competence better than most people. It’s not a competence if you don’t know the edge of it.

Which would you prefer to own: 1 share of median family income (which has been stagnant for 30 years), 1 share of all corporate income (which is lately a very high percentage of GDP), or 1 share of all corporate assets (even intangibles)?

WB: I’d rather buy Iscar. It’s true that corporate profits as a portion of GDP is near a historical high. But corporate income taxes aren’t so high. I’m not shooting to achieve median family income. The tax breaks for the wealthy that have been enacted are extraordinary. Most members of the Forbes 400 pay a lower portion of their income in taxes than the receptionist on our office does. That wasn’t true 30 years ago—and it should not be true in a rich society. In 2004, my tax rate was the lowest of anyone among the 15 or 16 people who work in our office. And that wasn’t because of any tax shelters I invested in (I don’t own any tax shelters) or any special tax advice I got. It’s crazy.

The media hasn’t conveyed the extent to which the typical individual hasn’t shared in the prosperity of the past 10 years as much as the wealthy have.

CM: I’m not as concerned about the levels of median family income. The important issue is how fast GDP per capita growing. People’s economic status will change over time, and will move up and down deciles. The most important thing is that the pie grows. Some changes in the tax system have been crazy. But I don’t think they’ve been all that important one way or the other in determining the rate of growth.

What do you think of investing in ethanol?

WB: Charlie and I don’t know enough to figure out what the return on capital of an ethanol-related investment might be over the next 5 or 10 years. It’s easier to predict how many people will be drinking Coke or eating candy. I don’t know anything about the government regulation of ethanol production and use and how that might change. But I know it’s easy to raise money for ethanol-related investments lately. It’s a hot area. That’s usually not a good sign. My son is the head of the ethanol board for the state of Nebraska. If he starts getting richer than I am, then I’ll be interested. There’s no question interest in ethanol will grow. But ag processing businesses tend to have low returns on capital. I don’t see how you gain a big competitive advantage.

CM: I’m more hostile. It takes more fossil energy to create the ethanol than the ethanol itself will create. It’s a stupid way to create energy.

Are we in a commodities bubble?

Energy, oil, and metals have all seen terrific moves. Copper may have had the biggest. The start of most trends is driven by the fundamentals of supply and demand, but then speculation takes over. People have been watching the fundamentals of commodities for years. There’s an old saying, “What wise men do in the beginning, fools do in the end.” Any move that starts with fundamentals will sooner or later draw speculators, and eventually the speculators will dominate. Probably the best known example is the tulip craze of the 1600s.

Once a move starts, people get envious. My guess is that we’ve seen some speculative activity in the commodity area, and in housing, too. How far it will go—who knows? My guess is that a lot of the activity on both sides of the commodity market is speculative.

CM: To get a sense of how little we know about commodities, look at our operations in silver.

WB: Right. We bought early and sold early—otherwise it was perfect. We’re not good at figuring out how far booms will go. If we get the fundamentals right, we’ll make some money. Booms tend to get wildest at the end. People gather around the punch bowl and it gets later and later, and all the girls look prettier. But at midnight everything turns to pumpkins and mice again. But everyone plans to be out before midnight. The problem, as Adam Smith (Jerry Goodman), has pointed out, is that during the party, there are no clocks on the wall. We saw it with the Internet stocks. We saw it with the uranium stocks in the 1950s. There were no clocks on the wall.

Do you see investment opportunities in South America?

WB: The problem that we have with emerging markets is that, because we’re so big, we have to be able to put a lot of money to work to move the needle. The opportunity has to be at least several hundred million dollars. So that narrows the field of what we can look at. We invested in PetroChina 5 years ago. We could only invest $400 million. That’s worth a few billion now. We weren’t afraid to go into China. We wanted to be paid more than we’d earn in the U.S., because we didn’t know the game. There’s a terrific brewer in Brazil that I should have invested in. But opportunities in emerging markets have to be cheaper than opportunities in the U.S., because we don’t know the tax laws as well, and we aren’t familiar with the nuances of government regulation.

What is the outlook for manufactured housing?

WB: The manufactured housing business has an interesting history. Volume is lower now than it was 30 or 40 years ago—and quality is higher. Some years back then, 1 out of 5 houses built was a manufactured home. Last year 130,000 manufactured homes were constructed (ex FEMA-related construction), or around 6% or 7% of total home construction. You can install a manufactured home for $45 per square foot. There’s a lot of resistance to manufactured housing via restrictive zoning laws in many locations, spurred by local builders. But in many areas, developers are building entire subdivisions of manufactured homes.

The industry got into a problem a few years back because manufactured homes were being mis-sold. Retailers would sell against a down payment. The buyer would take out a long-term loan and the loans were securitized and sold to investors, usually insurance companies. There was an abuse of credit. Manufactured homes should be financed on shorter terms than was the case. It’s a mistake to finance a manufactured home with a 30-year loan, unless the borrower owns the land under the home. The industry is slowly working through its hangover. I believe the market will get bigger—but not this year.

The number of retailers and manufacturers has fallen, too. Clayton has a much better record than the rest of the industry does.

CM: One of the problems for manufactured-home makers is that builders of stick-built houses have become much more efficient. One of the reasons for that is efficiency-enhancing products made by companies like MiTek. But the manufactured housing business will get better, and will take more share of the market.

WB: Some day, the industry will deliver 200,000 units per year, but not in the next year or two. The industry has to think through how to finance its sales so that, after 5 to 10 years, the buyer has an asset that’s worth more than the loan that’s financed it. It can’t just make loans and sell them to Wall Street. Clayton could be the biggest homebuilder in the U.S. in a few years.

Some of the sins of manufactured-home finance have shifted to stick-built-home finance. There’s a lot of ridiculous credit in loans being made lately. My guess is that there will be trouble in the stick-built finance area. Dumb lending always has its consequences. It’s like an epidemic in which no symptoms appear for years. Then when they finally do appear they are severe. What’s going on now is like what happened in commercial finance in the late 1980s and early 1990s. A developer will develop anything, if someone gives him the money to.

We saw it in commercial real estate finance. We saw it in manufactured-housing finance. I think that’s what’s happening in residential real estate finance. If you go through the Qs and Ks of residential lenders and look at the balances of interest accrued but not paid, the numbers are big.

CM: A lot of this is being facilitated by contemptible accounting.

What needs to happen in Russia for you to consider investing there?

WB: Walter Wriston once said that sovereign governments don’t default. We found out in 1998 that they do. We inherited some energy-related assets in Russian, via Salomon Brothers, a number of years ago. The authorities were happy to let us invest when we were drilling the holes. But when the time came to take the oil out, they weren’t so crazy about us being investors. It might be awhile before we invest there again. Maybe things have changed, but I’m not sure. Three years ago, I had breakfast with Khodorkovsky, when he was considering listing Yukos on the NYSE. Now he’s in jail and the company is in bankruptcy. It’s hard to develop confidence that the Russia changed much in its view of capitalism and outside capitalists. At one point, we were concerned about the lives of our people there. When we went to pull the equipment out of the country, we got word that if we tried to pull the equipment out, not only would we not get the equipment, we wouldn’t get the people out, either.

What do you think about the residential real estate market?

WB: Well, I invested in some property in California once, and after 20 years I got my money back—with interest! When we developed the property we were cashing out on a piece of land and got $5 million or $6 million. Now it’s worth at least $100 million. It’s a great piece. Terrific climate, wonderful location, on the water. But even in great locations, the swings in value can be huge. What we’re seeing in our residential brokerage business is a slowdown just about everywhere. The markets that had been the hottest are slowing the most, especially at the high end, and in markets where people had been buying houses for speculation, rather than to live in.

In areas where spec buying was low, any cooling shouldn’t be too severe. If somebody takes out a $270,000 mortgage to buy a house for $300,000, he’s not going to sell it and move out if its value falls to $250,000. For investment-type holders, it may be a different story.

There’s a tendency for seller to think about the house down the street that went for a big price. Or to convince himself that he just needs that one buyer to come in.

In Dade and Broward counties in Florida, the average condo is worth $500,000. Not long ago, there’d be 9,000 units on the market at any given time, and around 2,400 would sell per month. So the available inventory would turn over every four moths or so. Now there are 30,000 units on the market--$15 billion worth—and just 2,000 selling per month. We have had a bubble in residential real estate to some degree. I think there will be downward pressure in price, especially on higher-end properties. In Omaha, prices are OK.

The housing boom has been great for our home furnishings retailers. In 1997, the Nebraska Furniture Mart did $5.5 million in sales on annual meeting weekend. That rose to $17 million by 2003, and $27 million in 2004. This year NFM is on track to do $30 million. That’s equivalent to a normal month.

Shouldn’t you either find something to invest in with Berkshire’s $40 billion, or think about giving it to shareholders?

WB: We’re too big to hit any home runs with the cash. We had $37 billion at the end of March. For us, a “normal” level of cash is around $10 billion. We need to keep some liquidity because of the cat business. We spent $4 billion on Iscar. We’d be happy to just have $10 billion in cash, and to put the rest to work. I’m looking at one idea now, that’s low probability, that could take $15 billion. Whether it comes to fruition, who knows. But if I don’t like holding a lot of cash, I like doing dumb deals even less. They’re forever. You don’t want to go out and make an investment for its own sake. It’s likely (but not certain) that within three years we’ll have significantly less cash. You’re right to keep jabbing at us, though. Neither of us likes cash. People come to us because they know we’re so liquid. But we don’t need to be this liquid. We’ll get more chances like PacifiCorp.

CM: If you go back and look at our annual from ten years ago, and look at Berkshire now, you’ll see that we’ve managed to get a lot of great stuff into Berkshire over the past ten years. We’re not gloomy about the process.

What’s your view of Coca-Cola now that you’re no longer on the board?

WB: Coke is a fabulous company. It sold the equivalent of 21 billion cases last year, and that number goes up every year. Back in 1997 and 1998, when the stock was trading at $80, earnings per share were $1.50. Last year the company earned $2.17—and earnings were of much higher quality than back in the late 1990s. Every year the company gets a little higher share of the liquids that people consume. The company has $5 billion or $6 billion in tangible assets (ex bottler assets), and earns about that much annually. A 100% pretax return on tangible assets is pretty attractive.

In the late 1990s the stock got a little crazy, but we can’t hold management responsible for that. But long-term it’s a wonderful business. Volume grows by 5%, year in and year out, while global population grows at just 2%. It’s just that for awhile the stock got to a silly price. You can fault me for not selling any. We’ll own Coke years from now.

How much have insurance rates hardened? Have you seen a flight to quality?

When you say insurance, I assume you’re talking about reinsurance. Other lines, like auto, have been softening.

In reinsurance, there’s been a big variance in how much rates are rising. Rates for marine platforms in the Gulf of Mexico are up by a lot—and they should be. In the past 2 years in the Gulf, reinsurers have taken in $2.5 billion in marine-related premiums, and have endured $15 billion in losses. We have been the biggest meg-cat carrier, but our mix has changed. Prices are up, but we don’t know if our exposure has gone up. On hurricanes, the question is which is a more meaningful indicator, the experience of the past two years, or the experience of the past 100 years. It’s silly to assume that the 100-year experience is right. We don’t know all the variables and causes that go into hurricane frequency and severity. If the past two years are the most reliable indicator, we’re not getting paid enough. If the past 100 years record is more reliable, we’ll be making a lot of money.

The scary possibility is that the changes haven’t stopped yet, and that the past two years are not as bad as things get. When you start getting down to chaos theory—where seemingly insignificant changes can lead to huge effects, you can dream up some scary scenarios. We will write in certain areas and certain coverages. We are willing to risk a lot of money, if we think we’re getting paid adequately.

We have a lot of exposure to wind, heading into the third quarter, though not as much as we had a couple of years ago. Prices have hardened in that particular area. If we think pricing becomes overdone, we’ll take down more risk.

We don’t believe in modeling at all. We don’t think modelers know a thing.

We get paid for making guesses. Years can go by and we still won’t know if we guessed right. The reinsurance business is still a business we like. We bring a lot to the party. Figure that the biggest possible insured loss would be $250 billion. (Katrina was $60 billion.) We would have 4% of that. We can easily pay that; but a large part of the industry would be in trouble.

We’ll see in 5 or 10 years whether we’re right or not.

CM: Why not use our financial strength to get into an area that gets people frightened?

How do you value the retro policies you’ve written? How is NetJets doing?

WB: There are some deferred charges on the balance sheet related to some retro business we wrote. On these policies, we reinsure losses on an event that has already occurred—although the magnitude is not known. So we’ll have that money over a period of time. It has been as high as $3 billion, and gets amortized over time. I mis-estimated on a retro contract a few years ago, and we ended up losing money on the deal.

NetJets is growing fast—but its expenses are growing faster. It offers outstanding worldwide service, and is in a strong position in larger planes. When we bought the business, we thought it could realize some economies of scale. That hasn’t been the case. If anything, there have been diseconomies of scale. Expenses got out of hand last year, and we’re in the process of fixing that. We can’t have a better operator than Rick Santulli. NetJets provides an important service—it’s just that it’s tough to make money at it. Rising fuel prices have hurt the business somewhat, even though they’re a pass-through.

We thought the company would make money last year for the first time, but costs rose more than we expected. I expect that NetJets will be profitable before long, although you’re entitled to take that with some skepticism, since I’ve been wrong about its profitability before.

You should hold me responsible. We paid a lot of money for the company several years ago, and haven’t earned any money on that investment since.

CM: There’s enormous product integrity both at NetJets and FlightSafety International. Pilots are subjected oxygen withdrawal, so that they’ll recognize the sensation should it occur when they’re flying. Not everyone does that.

What’s your exposure to silver? How do you value non-interest-bearing items such as commodities?

WB: We owned silver at one time, but not now. When we owned it, annual production and reclamation was 100 million ounces less than annual consumption. So supply and demand were out of balance. But there was lots of metal above the ground, that had already been mined and refined, that was available to come on the market. And some could be reclaimed from other uses, such as photography. It’s hard to bring on new production. There aren’t that many pure silver mines (the metal is usually mined as a byproduct from mining other metals.) As I say, we were in early and out early. When an investment doesn’t pay interest, you have to hope it rises in price.

CM: We didn’t get where we are by owning non-interest-bearing investments. It’s a good habit to get into to trumpet your failures and be quiet about your successes.

Is it a good idea to invest in countries that have plenty of natural resources and a strong infrastructure?

WB: That would be a little too macro for us. We prefer to worry about whether or not people will keep eating candy, and will they pay more for it each year. We don’t play big trends. They take too long to play out. There’s too much money to be made year to year, in the meantime.

CM: You’ll note that we have failed to profit from one of the biggest moves in commodity prices in history.

What’s the best way to address the risk of nuclear terrorism in the U.S.?

WB: It would depend on the severity of the event. If you’re looking for a way to profit from such an event, I’m sure there’s some bank somewhere that will sell you a mortality derivative. But a nuclear terrorist event will happen. The world has always had evil people. Thousands of years ago, they threw rocks. Later, they used swords, and then shot each other. Since 1945, man has had the capacity to use nuclear weapons. It’s the most important problem mankind faces. Some people say that the global elimination of poverty will end the nuclear risk, but the U.S. used nuclear weapons in 1945 when it was the richest nation on earth. In order to get nuclear capability, people need to be able to deliver a device, they need access to knowledge about how to build a device, and they need access to the materials needed. We’ve been losing ground in controlling all three of those items. Controlling this should be a top priority. Some people are crazy.

CM: The chances of the world going another 60 to 70 years without a nuclear attack is just about zero. The only thing we can do is elect leaders who understand the seriousness of the problem.

How should Berkshire holders react when Berkshire buys stakes in Wal-Mart and Anheuser-Busch rather than buying back its own stock? Does that mean that you think that WMT and BUD are at bigger discounts to intrinsic value than Berkshire is?

WB: Most of the time, we can’t buy a material amount of stock. If you compare the average trading volume of Berkshire compared to other large-cap companies such as ExxonMobil, G.E., G.M., or Wal-Mart, volume in our stock is a tiny fraction of trading in those other stocks.

CM: Often now, share repurchases by companies are designed to prop up the stock, and are not signals that the company thinks that it is buying a bargain.

WB: Thirty or 40 years ago, it was a great strategy to buy companies that bought back a lot of their own stock. Teledyne was a great example. Management thought its stock was trading a big discount to its real value, so it repurchased shares. Now, though, buybacks are a fashionable way to try to prop up the stock price.

At Berkshire, we have the most honest-to-god owners of any big public company. That’s reflected in the stock’s low turnover. We’re not looking to buy out our partners at a discount.

What is the state of business school education? What advice would you give the new generation of budding “helpers”?

CM: Helpers who come to this meeting are the best in the helper class. What should you do to be like Warren Buffett? The best thing to do is to reduce your expectations.

WB: The activities of most professions are safe and necessary. If your wife is going to have a baby, it’s better to call the obstetrician rather than try to deliver it yourself. Most professions add value. But the investment profession does not do that, in aggregate. It makes $140 billion per year, and it basically does the same thing that one person could do if he spent ten minutes per year thinking about his investments. I can’t think of another business like that. Plus, the business is unique in that, the more you charge, the more money you bring in.

One of the great businesses is business schools. The more you charge, the better your reputation. The vast majority of professional investors can’t add value. In aggregate, you can’t pay people 2 and 20 in an economy that produces 7% annual growth and have investors be net better off. People will say that they’re the exception, though. Name 10 partnerships, and I’ll bet you that those partnerships won’t beat the S&P over the following ten years.

Then again, I’ve identified good managers before the fact. In 1969, when I closed my partnership, I recommended my investors go with Bill Ruane and Sandy Gottesman. The ones who did did very well.

But it’s very hard for institutions such as pension funds to select superior investors. They end up going with the best salesman, not the best investor.

CM: It should be a crime to entertain a state pension official. Watching these managers go after the business is not a pretty sight.

How would Berkshire’s businesses be affected by immigration reform, were it to pass?

WB: In Nebraska, there are plenty of illegal aliens. They work in the meatpacking business in particular. I was at the airport and saw 100 people all shackled together. They were illegals in the process of being deported. Illegal immigration is a problem that should be addressed, and promptly. I can’t see shipping the 11 million people who are here illegally back to their home countries. But we should enforce the rules more aggressive (and perhaps liberalize them some). A reduction in the number of illegal aliens in the work force might cause prices to rise somewhat. But it wouldn’t likely have a big effect on the economy overall, or on specific industries. Who’s to say, if we were born in Mexico or some other underdeveloped country, that we wouldn’t try to enter the U.S. illegally?

CM: My advice is: if you don’t like the results, get used to it. The country will never have the will to enforce the immigration laws. What you see is what you’ll get.

What school has the best finance program?

WB: I speak to students from around 40 business schools over the course of the year. Now we’re doubling up, so that we put to groups together in one visit.

The teaching of finance has improved over the past 20 years, but from a very low base. The flat-earth orthodoxy of 20 years ago, of modern portfolio theory and the efficient market hypothesis, is breaking down. Kansas, Missouri, Florida, Columbia, and Stanford, among others, have good programs. Twenty-five years ago you couldn’t get a job or advance if you didn’t go along with the EMH and MPT orthodoxy.

Nowadays students all think they’ll get rich doing what Charlie and I do. The amount of brainpower going into money management is somewhat distressing. But it’s a great time to be 20 or 25 years old and be getting out of school. A lot of students who come visit say that they want to go into private equity or hedge funds. I’m not sure what the economy is going to do for basics like food and clothes. The Kansas students put on skits and try to sell me companies. Students at all these schools are looking for companies I might buy.

CM: Half the business school graduates at the elite Eastern schools say that they want to go into private equity or hedge funds. Their goal seems to be to keep up with their age cohort at Goldman Sachs. This can’t possibly end well.

Once you’re no longer CEO, will sellers still be as eager to sell to Berkshire? Should you consider becoming Chairman now, so the new CEO could gain experience?

WB: My successor will probably be put on probation by the media for awhile. Maybe a year or so. The phone won’t ring less, but the calls will be different. Bankers will try the new guy out to see if he’ll bite on their deals. But soon it will become clear that the culture has not changed. Yardsticks won’t change. The board won’t change. There will be a hiatus, but it won’t last long. My successor will be very smart, and has bought into the corporate personality.

CM: We could set up an arrangement that Warren continues to do deals, and a co-CEO runs operations. But that wouldn’t work well. We don’t really need an operating guy. I’m not sure what he’d do except show the world that Warren hasn’t been doing anything.

WB: Even after I’m gone, Berkshire will have the reputation of being a one-of-a-kind place for a business owner who cares about the future off his business, but has to sell for some tax or family reason.

CM: But we prefer to wring the last drop of good out of Warren.

WB: And at low pay! But the arrival of my successor could be a positive since it would demonstrate to the market that the Berkshire culture is institutionalized, and doesn’t depend on one individual. I’m not in the same league as Sam Walton, but that’s what happened after he died. People saw that the business didn’t depend on just one man.

How do you allocate capital to charities?

WB: Pick what’s important to you. Most people give to their churches or schools. Give to causes that give you personal satisfaction. I look for things that I think are important, but that don’t have a natural source of funding. But there’s nothing wrong with giving to a cause that gives you pleasure. I often go where my gut leads me. If I’m looking at giving larger amounts, I feel I have a reason, or even an obligation, to focus on problems that wouldn’t get a lot of attention otherwise.

Did you buy into the electric utility business thinking you might be able to use those lines for something else, like telecom?

WB: No. We will earn an attractive return on capital employed if we do a good job in keeping our costs down and our customers happy. We follow the rules and regulations of the states we do business in. We don’t expect any big changes in the economics of what we’re doing. We’re not invested in the electric utility business on the expectation of deriving revenues from other activities.

Do you think that the media business has become permanently less profitable due to new technology?

WB: People will always want to be entertained and informed. But people just have two eyeballs, and there are only 24 hours in a day. Fifty or 60 years ago, media for most people consisted of the local movie theater, radio, and the local newspaper. Now people have a variety of ways of being informed faster (if not necessarily better), and have more entertainment options, too. But no one has figured out a way to increase the time available to watch entertainment.

Whenever more competitors enter a business, the economics of that business tends to deteriorate. Newspapers are still highly profitable, but returns are falling. The size of the audience for network TV is declining. For years, cable TV was thought to operate in its own world, but that’s changing. Few businesses get better with more competitors.

The outlook for newspapers is not great. In the TV business, a license from the government was essentially the right to a royalty stream. There were basically three highways to people’s eyeballs, and companies like P&G, Ford, Gillette, and GM would pay a significant amount of money to be get on those highways and advertise their products to a mass audience. But as the ways to get in front of people’s eyeballs increases, the value of those highways goes down.

World Book used to sell 300,000 sets per year in the mid-1980s, each for $600. Then the Internet cam along; it didn’t require printing or shipping, and people became less willing to pay for World Book sets. It doesn’t mean that it’s not worth $600. But competition has eroded returns.

CM: It’s a rare business that doesn’t have a way worse future than it has a past.

WB: The thing to do was to buy the NFL when it was first organized. There are now more ways than ever to transit events; value can be extracted from them in different ways.

What’s your view on the renminbi, the yen, and the euro?

WB: My view on the dollar is as strong as ever. We’re doing our investing in other currencies less directly than we used to. As interest rates have changed, the carry on currency contracts has gone from being positive to quite negative. There are better ways for us to invest in other currencies. We like the idea of owning earnings power in other currencies. That’s one reason we’re enthusiastic about Iscar.

The fundamental outlook hasn’t changed. There’s still a very high probability that the dollar will weaken over time. The country is following policies that don’t leave much of an alternative. In February of 2002, Alan Greenspan pointed out that the current account deficit was unsustainably large. Now, four years later, it’s twice that big.

People talk about a soft landing, but I have yet to hear anyone explain how that soft landing is supposed to work. We will see significant consequences of the current policies. Berkshire will always be invested mainly in the U.S. More will come from overseas, via investments such as Iscar. But the bulk will always come from the U.S. The odds that inflation will return are rising.

CM: I have no special capacity to predict if the euro is priced right. The fact that half of Berkshire’s cash was held in non-dollar currencies at one point was an absolute non-event. It’s been a very profitable non-event, but it’s still a non-event.

WB: Generally it’s not a good thing to run a large and rapidly growing current-account deficit. This is a great country. But in the end there could be a comeuppance, and it won’t be pleasant. People talk about a “soft landing,” but I don’t see the logic of how you get from A to B to C to see how a soft landing would work. The longer it goes on, the more in debt the country becomes. It could be very chaotic as it all unravels.

In the 1980s, “portfolio insurance” caught on. It was sold as a highly sophisticated way for large institutions to manage money. People paid a lot of money for mechanical ways to manage portfolios.

Then on October 19, 1987, a relatively small amount of money that had been invested in portfolio insurance led to a one-day, 22% decline in the stock market. Each of the individuals who invested in portfolio insurance was intelligent. In aggregate, though, they created a doomsday machine. The potential for that sort of thing has been magnified quite a lot. Who knows how it will start? Who knows who will yell “fire!”?

Do you believe the CPI is a good measure of inflation?

Bill Gross has written a lot on this topic. At the Furniture Mart, there hasn’t been a whole lot of inflation. DVD players are selling for one quarter of what they used to sell for. The CPI is not a particularly good or accurate measure of inflation. People talk about the “core” rate, that excludes food and energy prices. Well, food and energy are pretty core, too! Years ago, the CPI included home prices. People said that distorted it because home prices tended to rise faster than other prices. Now the CPI contains imputed rent, rather than home prices. The rent factor has lagged what the true change in housing costs have been.

I believe that the CPI has understated inflation. But different people have different expense bases. If you sit and drink Coke all day, you don’t face any inflation. But if you drive 30 to 40 miles per day, your cost of living has gone up pretty fast lately.

CM: At Costco, there’s been almost no inflation. But elsewhere, there has been. I’m not going to feel too sorry, though, for people who’ve paid $27 million for an 8,000-square-foot condo in Manhattan.

WB: If you take a look in Wal-Mart’s annual report, its LIFO adjustment is peanuts. Here’s a company with $200 billion in sales in the U.S., and its LIFO adjustment is not worth a dime. But some of our businesses have seen substantial LIFO adjustment. Our jewelry retailers, for instance. And our steel inventories, at MiTek. Input costs in the carpet business went nowhere for 20 years, but now the adjustments are big, since oil is the main component.

Can you tell us about the acquisitions you’ve done over the past year?

WB: Russell is still in process. We bought BusinessWire after I got a letter from Cathy Tamraz. We bought MedPro on the suggestion of Jeff Immelt. We bought PacifiCorp.

We have not participated in any auctions. We get pitch books occasionally, but the projections are just plain silly. Maybe that’s why no one actually signs the books. I’d love talk to the people who wrote the books, and bet them whether their projections will turn out to be right.

I don’t know how many $4 billion deals you’ll see, like Iscar, where there was no banker on either side.

CM: The interesting thing is the mindset. A lot of these new “helpers” don’t have our mindset. We try to welcome partners, not a guy who “does deals” or wants to make a large, quick profit. Our system works better, we think. There are so many deal flippers now that pretty soon they’re going to be getting into each other’s way.

How might a derivatives meltdown happen?

WB: It’s hard to tell. Why do people yell “Fire!”? LTCM happened. The Fed had to step in. Strange things happen in financial markets. Look at the junk bond market in 2002. It was basically closed for awhile.

In 1991, on a Sunday in the middle of August, Salomon was within a half an hour of filing for bankruptcy. It was terrifying. At the last minute, the Treasury reversed itself. On the same day, Gorbachev was spirited away by would-be coup plotters. What would have happened to Solly’s derivatives book on Monday morning if it had filed the day before? What would have happened in Japan that morning when it came time to deliver securities from Friday’s transactions?

CM: It could have been absolute chaos. Luckily, Nick Brady, who was Treasury Secretary, knew about Berkshire, and trusted Warren. So the element of personal reputation played a role.

WB: The size of the exposure was nothing then compared to what it would be now. It’s true that derivatives positions are more collateralized now.

If you were looking at newspaper publishers as possible investments, what would you use as a margin of safety?

WB: What multiple should you for a company that earns $100 million per year whose earnings are falling by 5% per year rather than rising by 5% per year? Newspapers face the prospect of seeing their earnings erode indefinitely. It’s unlikely that at most papers, circulation or ad pages will be larger in five years than they are now. That’s even true in cities that are growing.

But most owners don’t yet see this protracted decline for what it is. The multiples on newspaper stocks are unattractively high. They are not cheap enough to compensate for the companies’ earnings power. Sometimes there’s a perception lag between the actual erosion of a business and how that erosion is seen by investors. Certain newspaper executives are going out and investing on other newspapers. I don’t see it. It’s hard to make money buying a business that’s in permanent decline. If anything, the decline is accelerating. Newspaper readers are heading into the cemetery, while newspaper non-readers are just getting out of college. The old virtuous circle, where big readership draws a lot of ads, which in turn draw more readers, has broken down.

Charlie and I think newspapers are indispensable. I read four a day. He reads five. We couldn’t live without them. But a lot of people can now. This used to be the ultimate bulletproof franchise. It’s not anymore.

CM: I used to think that GM was a bulletproof franchise. Now I’d put GM and newspapers in the “Too Hard” pile. If something is too hard to do, we look for something that isn’t too hard. What could be more obvious?

WB: It may be that no one has followed the newspaper business as closely as we have for as long as we have—50 years or more. It’s been interesting to watch newspaper owners and investors resist seeing what’s going on right in front of them. It used to be you couldn’t make a mistake managing a newspaper. It took no management skill—like TV stations. Your nephew could run one.

Who are some present-day mentors young people should follow?

WB: You don’t need to look at the present. This stuff doesn’t change. Don Keough. Tom Murphy. Just study them. The lessons are timeless. There’s going to be a Harvard Business School case study on Cap Cities. If you learn certain lessons from the right people, that knowledge won’t change.

CM: I don’t follow any 40-year-old investment professionals.

WB: Investing is not complicated. You work to find pockets of value. You didn’t need a high IQ to buy junk bonds in 2002. You needed to have the courage of your convictions when everyone else was terrified. It was the same in 1974. People were paralyzed. You need to learn to follow logic rather than emotion. That’s easier for some people to do rather than others.

CM: We had less competition when we were young, though. There weren’t too many smart people in the investment business back then. (You should have seen some of the people who worked in bank trust departments.) Now all kinds of bright people want to be in investment management. But in those days, we’d often be the only buyers.

WB: But Charlie, in 2002, there was lots of money and lots of smart people, and it was still easy to make a lot of money in junk bonds.

CM: Yes, but you get a lot of weird behavior during a convulsion like that. If you can be wise when everyone else is terrified, you’ll do well.

WB: Two years ago, a lot of great companies in Korea were trading at 3 times earnings.

CM: That was a result of the Asian meltdown in the late 1990s.

WB: Yes, it took a big convulsion for Korean valuations to get so low. But there were plenty of smart people around, and all the relevant information was freely available to them.

CM: Then name 20 more like that.

WB: If I had 20 more, I wouldn’t name them.

If you were starting out with $1 million today, what strategy would you follow?

WB: We started out almost 50 years ago to the day—May 4, 1956, with $105,000. You don’t need to have a lot of great ideas. I’d follow the same strategy we follow now, although we’d be able to look at smaller stocks than we look at now. We’d have a tougher time finding businesses to buy, since sellers wouldn’t know about us. Charlie started out in real estate. In real estate, you don’t need a lot of capital to start out with, because you can leverage your brainpower. But our basic process wouldn’t have been different. I may have been 100% in Korean stocks.

We’d look for something that was mispriced and underowned.

CM: Finding a single investment that will return 20% per year for 40 years tends to happen only in dreamland. In the real world, you uncover an opportunity, then you compare other opportunities with that. And you only invest in the most attractive opportunities. It’s all about opportunity cost. The game hasn’t changed at all. That’s why modern portfolio theory is so asinine.

If Warren were starting today, he’d put together a concentrated portfolio. Your 1 or 2 best ideas are way better than the rest. So when you act, you’re thinking about how the alternatives compare to your best idea. But you don’t want to own your 10th-best idea when you can use that cash to invest in your best idea.

What do you think of the work done by Jeremy Siegel?

CM: I think he’s demented. He tries to compare apples and elephants in making accurate projections.

What are the advantages of being contrarian?

WB: Being a contrarian is neither right nor wrong. Contrarian thinking isn’t a good thing in and of itself. You collect your facts and do your research, and come to a conclusion. If there’s a fact that’s important, but unknowable—then forget it. And if it’s knowable but unimportant, then it doesn’t matter.

So you care about gathering the facts that are knowable and important. When you’ve done that, then decide whether your information is of enough value to cause you to act.

The market is there to serve you, not to instruct you. The problem with other disciplines, such as technical analysis and momentum investing, is that in those cases, investors are being told what to do by the market.

There’s always something new that pops up without warning.. If you ever get a call on a Sunday, you’ll make a lot of money. Or if you hear that, say, off-run Treasuries are trading 30 basis points away from the on-the-run Treasury. But it depends on how you handle it. Can you play out your hand? Don’t let the other guy call your tune, so that he’s playing your game and not the other way around. Make sure that you have your facts straight, and that your judgment about those facts is sound. If all that’s the case, then you’ll be able to make a lot of money when somebody else’s crisis occurs.

How do you look to see if Berkshire’s stock is overpriced or underpriced?

WB: You can drown people in information if you give them too much of it. When Charlie and I put the annual report together, we write it as if one of us has been on a desert island for a year and the other wants to give him the information he needs to assess the state of the business. It’s worth reading the whole report. What counts is who’s running the business, and the outlook for the business. But we don’t carry things out to 4 decimal places. If each of us were to calculate the value of the business, we’d each come up with a different number, but both numbers would be in the same ballpark.

CM: When I try to come up with an approximate value of Berkshire, I quickly dispose of the no-brainer issues first. The insurance operation is very interesting—so is the process of determining how the excess cash will be redeployed. But take the no-brainers first.

How have worldwide underwriting standards changed, particularly as the risk of things like terrorism and hurricanes seems to be increasing?

Our float at one point was up to $49 billion. We never expected it would get that big.

Our float right now is around 10% of the entire industry’s. We’re all aware of the risks of pandemics, hurricanes, terrorism, and things like that. We talk all the time about the chances of a $50 billion-plus event, or $20 billion events. We’re just making judgments about their likelihood, and whether or not we’re being paid enough to insure them. If we end up paying out a big loss, it doesn’t mean that we were wrong.

The earthquake experience of the past 100 years is more valuable to us in assessing earthquake risk than the hurricane experience of the past 100 years is in assessing hurricane risk. What will the hurricane experience be over the coming ten years compared to what it’s been? I don’t know. But I think about it every day.

CM: According to the laws of thermodynamics, if the oceans get warmer, the weather will be more turbulent. We’d be out of our mind to underwrite as if global warming has had no effect on water temperatures. The key is to charge enough and control risk enough. But small causes can have huge effects. A 1% change in temperature can cause a 100% increase in losses. So if we don’t like the offer, someone else can take our place.

What are the principles you follow in investing in healthcare?

CM: We put the health care companies in the “Too Hard” pile. A lot of people made a lot of money writing health insurance. There are a lot of bad ethics, and there are a lot of good ethics too. But it all goes in the “Too Hard” pile.

WB: We have not owned much in health care. It’s a tough problem. I have no insight into the business.

What do you think about bankruptcy reform?

CM: The bankruptcy process is pretty horrible. You have a situation where courts get into bidding contests to hear cases. If you develop a culture where you overpay people, such as lawyers and bankruptcy consultants, to be involved in the bankruptcy process, you’re going to get more bankruptcies. And that’s what’s happened. It’s so unpleasant to watch, I don’t pay as much attention as I should, because I don’t like to have upset stomachs.

WB: We have bought junk bonds related to bankruptcies. We bought the Osprey bonds out of the Enron filing. A complicated bankruptcy can offer opportunities. We first got involved with Fruit-of-the-Loom when it was in bankruptcy; we bought some debt.

Penn Central was a huge mess when it filed in 1970. There’s a lot of money to be made when that happens. You tend to get a lot of mispricings as a company comes out of bankruptcy. Usually it’s on the low side—but not always.

In the Enron situation, the Ospreys were complicated. We didn’t buy them at the bottom, but we still tripled our money.

The Penn Central situation was extremely complex. There were lots liens and leaseholds and all kinds of things. Finally the judge said I’m going to ignore all that stuff and give you a quick, fast solution. That was probably a good thing. The judge is the one who determines this stuff. I asked Charlie once how much power a judge really has in a case like this. He told me, “For awhile, as much as he thinks he has.”

What is the outlook for P&G’s pharma business?

WB: Procter & Gamble is a consumer powerhouse. Gillette has as strong a competitive position as anyone in the consumer market. The big retailers are developing powerful brands on their own. Power among marketers is becoming more and more concentrated. Each side, between the retailers and consumer marketers, wants to strengthen its hand. So P&G and Gillette are stronger together in their dealings with retailers.

But I don’t know a thing about the pharmaceuticals business.

CM: That makes two of us.

Do you have any interest in acquiring Oriental Trading Co.?

WB: I haven’t been following that lately, although I know it’s for sale. It went private a few years ago, and now the group is reselling. We get approached on deals like this all the time; invariably it’s an auction. First, the seller goes out to try to find a strategic buyer who’ll participate. A “strategic buyer” is defined as someone who’d willing to pay too much.

I’m skeptical of the idea that we’ll find an attractive business to buy if the seller is a guy who’s been looking to sell from the moment he acquired the business. We won’t trust the figures he gives us. We like businesses where the seller wants to be around for 100 more years, and has to sell for some reason. Taxes maybe, or some family reason.

But there are some businesses that pass from one financial buyer to another. It’s A to B to C, and each time the seller takes a 20% markup on the sale. We don’t buy from financial buyers.

CM: In the 1930s, you could borrow more money against real estate than you could sell the real estate for. It’s like that now on a lot of these transactions. This is not our field.

The current account deficit isn’t as dire as you portray, since U.S. investors are taking capital gains on their non-U.S. holdings, don’t you think?

WB: It’s true that the current account deficit would be much smaller if you take into account that the gains that U.S. investors have on their foreign investments is much larger than the gains that foreign investors have on their U.S. investments. But even there the gap is narrowing. Our interest rates are rising, so foreign investors are earning more on their U.S. holdings than they used to. Not too long ago, Treasuries essentially paid nothing. And our investments abroad were made earlier, and are now paying high returns.

CM: It’s amazing how much ruinous behavior you can get away with if, like the U.S. is, you’ve been well-regarded for a long time.

But what are the alternatives? Would you rather invest in Europe? The demographics and economic outlook there aren’t particularly attractive. Brazil has great assets, but has the risk of political instability. Same with Venezuela. So it’s not as if there are many attractive alternatives to dollar-denominated investments. It’s not completely irrational that people like the U.S. Fiscal misbehavior can go on for a long time.

How do you reconcile your views on gambling with insurance underwriting? Aren’t they basically the same thing?

WB: Gambling creates risks that don’t need to be created. It doesn’t matter whether the ball falls in the red square or the black square. But if you have a home in a coastal area, you have a real risk, and you have a real interest in having some one take on that risk. You can watch a football game without taking on risk (unless you volunteer to), but you can’t live in that house without taking on risk.

CM: The whole concept of house advantage is interesting. A lot of people involved in private equity investing are taking a rate that looks awfully similar to what croupier’s rake takes—only bigger.

What do you think about naked short selling?

WB: I have no objection philosophically to shorting stocks. We’re not allowed to lend our shares out to short-sellers, but I’d love to be able to, because it’s a very profitable activity. There’s nothing evil about short-selling. But it’s a tough way to make a living. It’s tough emotionally. If you short a stock at $20, the most you can make is $20, but there’s no limit to how much you can lose. People on the short side will do and say things to try to get their positions to fall; people on the long side do, too. Some of the things they do may be inappropriate.

As to naked shorting, where you don’t have stock to deliver against your short, I don’t have a big problem with that, either.

Historically, a lot of stocks that have high short interest are later shown to be frauds or semi-frauds. I’ve had 100 ideas to be short, and have often been right—eventually, but long after I’ve covered, and the stocks have risen a lot. The people who run those companies tend to be good at keeping their stock prices up.

Being short stocks is a tough psychological game. I’d never put money in a short fund.

CM: One of the most irritating experiences I can imagine is shorting a stock at X, and seeing it go to 3X, and having to look at all those happy crooks that have gotten rich with the help of your money. Why go into it?