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Q&A: Warren Buffett and Charlie Munger
Sunday May 4, 11:00 am ET
By Andrew Hill in Omaha, Nebraska
Berkshire Hathaway's 2003 annual meeting was attended by more than 10,000 shareholders and
guests, many of whom came for the five-hour question-and-answer session with Warren Buffett
and Charlie Munger, Berkshire's vice-chairman. Here are some edited highlights from their
comments, grouped together by theme.

ECONOMY
On GDP
Buffett: A[Spending on security services] translates into goods and services that the country
wants, but they are goods and services we wish we didn't want. If there are 20 guards instead of
three at the airport that goes into GDP, but it doesn't do much to make you feel better.... When
you get into a war and you drop a plane into the ocean, that's part of GDP, but it doesn't make
you feel any better at your house.... The quality of GDP isn't something that's talked about much
when you open economic reports every day.@
On inflation
Buffett: ALack of inflation is a plus for owners. The real return you will earn from an American
business will be higher if we have long period of low inflation, than if you have period of high
inflation; there's no question about that.... There's nothing wrong in a low-inflation environment
with earning 6 or 7 per cent.... That math isn't bad; it's just bad for those people who got used to
expecting very high returns from looking in the rear-view mirror in '98 and '99.@
Buffett: AInflation is always a latent danger to an economy. I always think of inflation as being
in remission.... Because it has a cause that can recur [because] of human behavior and how
legislatures and governments behave.@

BERKSHIRE'S BUSINESS
On insurance
Buffett: AI can't imagine having a much better group of companies and managers than we have
and they are all working well now. For a while General Re was a drag, but that's not true now
and I think we've an excellent chance of having very low-cost, or no-cost, or perhaps even
negative-cost float* for the next five years or so - or really as far as the eye can see.@ [*
AFloat@, in Buffett's own definition, is money built up in an insurance operation Abecause
premiums are received before losses are paid.... An insurance business has value if its cost of
float over time is less than the cost the company would otherwise incur to obtain funds.@]
Buffett: AWe love the idea of growing [the float], but what we really want is cost-free float.
Growth isn't at the top of the list at all. I hold our managers responsible not f or delivering float
but for delivering profitable float.... I truly believe we will obtain our float at considerably less
cost than the industry - and that's our goal.@
Buffett: AIf you're willing to do dumb things in insurance, the world will find you. You can be
in a rowboat in the middle of the Atlantic and just whisper out 'I'm willing to write this' and
name a dumb price and you will have brokers swimming to you - with their fins showing.@
Buffett: AA few mistakes that are correlated will overcome a lifetime of savings: you will make
a few cents on the dollar when you're right, but you'll lose incredible sums if you're wrong....
There's nothing as deadly as unrecognized concentrations of risk and it happens all the time.@
Buffett: AThere are some very weak reinsurers in the world and if there were to be a major
natural catastrophe, or a major financial catastrophe, there are a number of reinsurers in my view
that wouldn't pay. We conduct our affairs so well always to be able to pay.@
On the market for business aircraft
Buffett: AThe entire business aircraft market is very soft. The used plane market has far more
planes for sale than three, four or five years ago. That's going to dictate the product of new
planes - already is.@
Buffett: A[NetJets] is probably the only operation we have that's losing money and yet it's a
popular product, it's a growing business, it's going to be a very big business, in my mind, over
the years... [In Europe], we have lost and we are losing significant amounts of money.@
Buffett: AI think there will be a shake-up at some point and maybe fairly soon. You can look at
the Raytheon 10K [regulatory filing of results] and you'll find some interesting information
about their operation: it isn't hard to figure out what's going on. I don't have information about
when the shake-out will occur but I can assure you that we will not be one of the shook.@
On energy investments
Buffett: AMidAmerican Energy already is a big part of Berkshire; I would say it's likely to
become much bigger. It would be easier if the Public Utility Holding Company Act* were
repealed. I really think it's quite outdated now. It really is 68 years [since the Act was passed]
and I think we bring something to the public utilities field. There may well be a couple of
companies that would be in bankruptcy now if we hadn't been in a position to act very quickly
[on deals].@ [*The PUHCA limits Berkshire to 9.9 per cent voting control of MidAmerican]
Buffett: A[On future energy deals] we don't have any clear-cut preferences as to whether it
would be a natural gas pipeline, a domestic utility or, conceivably, even a utility in some country
we feel good about. We will look at things as they come along.... It's certain we will look at
some big deals this year. Whether we get one done will depend on competition and the sellers....
You're talking big money always: these aren't lemonade stands; you're talking in the billions.@

MARKETS AND DEALS

On acquisitions
Buffett: AIt makes more sense to buy a wonderful business at a fair price than it does to buy a
fair business at a wonderful price.@
Buffett: AThe way to get a reputation for being a good businessman is to buy a good
business.@
On evaluating management of potential acquisitions
Buffett: AWhen we buy a business we ask 'Do they love the money or do they love the
business?' If they love the money - there's nothing wrong with that - but they probably won't be
running the business a few years down the road.@
Munger: ABerkshire is full of people who have a peculiar amount of passion in their love for
their own business. I would argue that passion is probably more important than brainpower.@
On markets
Munger: AThe issue is: is it likely that there will be an opportunity like 1973-74, or 1982, when
equities generally are just mouth-watering? I think there's a very excellent chance that neither
Warren nor I will live to see either of these [opportunities] again. If so, Berkshire isn't going to
have a lot of no-brainer opportunities, we're going to grind ahead the way we've been doing,
which isn't too bad.@
Munger: AI do think there's a lot to be said for developing a temperament for owning securities
without fretting. I do think that the fretful disposition is the enemy of long-term performance.@
Buffett: AIt's almost impossible to do well in equities over time if you go to bed thinking about
the price of them.@
Buffett: AThe stock market is there to serve you and not to instruct you, so you need to
formulate your ideas on price and value and if the price gets cheaper and you have funds,
logically you should buy more - and we do that all the time.@
On cash
Buffett: AWe're probably getting about seven-tenths of 1 per cent, or three-quarters of 1 per
cent after tax on $16bn [held by Berkshire at end-March], which doesn't make us salivate. But
we would rather avoid salivation than encounter problems.@
Buffett: AWe have $16bn in cash because we don't see anything that makes us want to part with
that cash.@
On telecoms investments
Buffett: AIn terms of figuring out the future economics in that business, what this player or that
player is going to look like five or 10 years down the road, I don't have the faintest idea. It looks
like the people who thought they knew three or four years ago didn't know either.@

COMPENSATION
On options and incentives
Munger: AOur system of compensation is different from all these big companies - we think it's
less capricious. The stock option system will give extraordinarily big rewards to some people
and deny other people rewards at all at different times, in spite of the big contributions made by
the people who get nothing.@
Munger: AWe're not against rewards for people who make vast contributions, but a system
that's basically capricious and which doesn't tailor the results per person and per activity very
well - we just think that's crazy.@
Buffett: AAn option-holder benefits from retained earnings and benefits not at all from
dividends and that puts his interests maybe quite contrary to those of other shareholders. We
believe in paying for performance, but particular performance that's under the reasonable control
of the employee.@
Buffett: AYou have seen probably more misdirected compensation throughout corporate
America in the last five years than in the 100 years before that. It has been extraordinary: there
was wealth creation in the 1990s, just like in the 80s, 70s, 60s and 50s, but there was a wealth
transfer like had never been experienced before and you can't blame people for wanting to cash
in on it: if anybody wants to walk up and hand me half a dozen lottery tickets for the Nebraska
lottery, I'll accept them, but it will be nothing to do with how I run Berkshire.@
Buffett: AWe love to see people who work for Berkshire making money - but we want to see
them making money for you, too.@
Buffett: ACharlie and I have thought about options all of our lives; my guess is that Charlie was
thinking about that in grade-school. You don't have to understand Black-Scholes [a method of
valuing options] at all, but you have to understand... in a general sense the value of options and
you have to understand the cost of issuing options, which is a very unpopular subject in certain
quarters.@
Buffett: AAny option has value and that's why some people who are kind of slick in business
matters sometimes get options [on assets] for very little or nothing, for far less than their market
value would be.@
Buffett: ABlack-Scholes is an attempt to measure the market value of options and it cranks in
certain variables, but the most important value it cranks in is the past volatility of the asset
involved and past volatilities aren't the best judge of value.@
Munger: ABlack-Scholes is what I would call a know-nothing value system. If you don't know
anything at all about value compared with price.... then Black-Scholes, on a very short-term
basis, is a pretty good guess over, say, a 90-day option. The minute you get into longer-term
options... it's crazy to use Black-Scholes.@
Buffett: AThe accounting firms - what are they called now, Athe Final Four@? - they have now
said they really do feel that options are an expense, and I'm glad they did it, I tip my hat to
them.... I think they've actually found the true religion now. The four firms that lobbied against
options being accounted as an expense in '93 have written to FASB [the Financial Accounting
Standards Board] and said that they think options are an expense. I don't know how something
could not have been an expense in '93 and is an expense in 2003: it certainly doesn't apply to
utility bills, or raw materials.@
On compensation committees and consultants
Buffett: AWhen you get a compensation committee at a large American corporation, you have
someone with an enormous interest in the amount of compensation on one side of the table and
you have someone on the other side of the table who is not a Doberman of the board, I can tell
you.@
Buffett: A[In] almost every other negotiation in American business you have some parity of
concern, but you don't have a parity of concern in terms of compensation at the top levels...
Management has hired a compensation consultant to come in - and I've never seen a
compensation consultant come in and say 'We need to reduce this guy's compensation', or 'We
need to get rid of this bozo'.@
Buffett: AThe CEOs of America: they don't care whether their boards are diverse, or not
diverse. They care about how much money they make... and you, the owners, have to provide
some countervailing force or you will have what we had in the last 20 years - that is, an
enormous disparity in the rates of compensation between people at the top and people at the
bottom, and a disconnect between people at the top and the shareowners who give them the
money. So, 'Arise, shareholders!'@
Buffett: ACompensation isn't rocket science - people will want you to think it is. You read some
of these proxy statements and it blows your mind: some of them are thicker than the annual
report because they talking about compensation.@

FINANCE
On accounting
Munger: AIf the accounting decisions are lousy, the business decisions are lousy and I think
that's going on as we sit here.@
Buffett [asked which accounting books he recommends]: AI think you learn more accounting by
reading good business articles that deal with accounting issues - accounting scandals, that kind
of thing.@
Munger: AAsking Warren what good books he has about accounting is like asking him what
good books he has about breathing.@
Buffett: AI felt better working with financial statements in 1960 than I did working with
financial statements in 2000....What we really deplore is solving operating problems with
accounting maneuvers... It's like heroin: it's a quick fix, but it's difficult to get off it.@
On Ebitda (earnings before interest, tax, depreciation and amortization)
Buffett: AAnybody who is not calling depreciation an expense is living in a dreamworld. But
they're encouraged to do so by investment banks who talk to them about Ebitda [earnings before
interest, tax, depreciation and amortization].@
Munger: A[You would be better off if] each time you saw that phrase you just substituted the
phrase 'Bullshit'.@
On cost of capital
Buffett: ACharlie and I have not the faintest idea what our cost of capital is and we think the
whole concept is fairly crazy, frankly, but it's something you learn in business school and you
have to be able to answer it, or you don't get out of business school... But I've never seen a cost
of capital that makes sense to me - how about you, Charlie?@
Munger: ANever.... We tend to make all our decisions based on opportunity cost, just as they
teach in freshman economics. The rest of the world has gone off on some crazy kick. They have
got a cost of equity based on some formula - it's a perfectly crazy mental malfunction.@ On
academia and economists
On derivatives
Buffett: AI find it extraordinary that you have two derivatives dealers and they write a ticket
and Dealer A records a profit and Dealer B records a profit: that's a world I'd like to live in, but I
haven't found it yet.@
Munger: AIn engineering, people put big margins of safety in systems.... In the financial world
and derivatives it's as though nobody gave a damn about safety.... I'm more negative than
Warren: I'll be amazed if I live another five or 10 years and we don't have a significant
blow-up.@
Buffett: AThey've been advertised as shedding risk, reducing risk in the system. I think they
have long crossed the point where they reduce risk and now they're adding risk.... You haven't
shed risk at all - you've transferred it to a very few players and those players have great
interdependencies.@
On analysts and economists
Buffett: AWe never look at any analysts' reports: if I read one, it was because the 'funny papers'
weren't available.@
Buffett [explaining the term Abeta@, used to describe volatility]: APeople in academia always
like to give Greek names to things that are fairly simple because it creates a priesthood: it's like
priests talking in Latin - it cows the laity.@
Munger: ATo an economist, when a manufacturing job goes to China, that's just so much
productivity increase. If you ask 'What if all those manufacturing jobs went to China - wouldn't
that be a little too much efficiency?', the answer would be 'No'. People actually get paid for
thinking like this at major universities.@
Buffett: AIf all the teaching jobs of economists actually got exported to China - at that point a
new viewpoint would emerge.@

MISCELLANEOUS
On succession and Berkshire subsidiaries' 'no retirement' policy
Buffett: ASomebody that's just itching to be CEO... is probably not going to stick around. We
don't naturally develop lots of number twos, because we can't promise them when number one is
going to go out of the door; as long as number one doesn't go out of the door, that's just fine
from our point of view.@
On directors' and officers' insurance
Buffett: AI think there would be a great improvement if there were no D&O insurance - zero. I
think people would behave a lot better. The counter-argument is that you would never get
anyone with any money who was willing to sit on a board, but my feeling is that even after
taking that into account the system would work much better.@
On the dividend tax
Buffett: AIf Berkshire were to declare a billion-dollar dividend and my share was $330m and it
were tax-free, as the Bush people suggested, I might be paying one tenth of the rate to the
federal government of my income that my secretary would be paying... [That] would scream
'injustice' to me.@
On equality
Munger: AWhen the Du Pont family goes down and somebody who created Pampered Chef [a
new Berkshire subsidiary] comes up, something wonderful is happening in terms of equality.
That type of churn makes everyone feel good.@
Buffett: AWe prefer not to be part of the churn, however. We were much more in favor of churn
30 or 40 years ago.@
On philanthropy (Buffett intends to donate his fortune to charity on his death)
Buffett: ALet's just assume... that I were in the womb and there was an identical twin next to me
- same DNA, same personality, same propensity to work - and a genie appeared and the genie
said 'I've got a proposition for the two of you. You're going to be born in 24 hours, same talent,
everything identical, and one of you is going to be born in Omaha and one of you is going to be
born in Bangladesh, and I'm going to let you two decide which one gets to be born in
Bangladesh and which gets to be born in Omaha. We'll start the bidding and whichever one of
you bids the highest proportion of your estate when you die gets to be born in the US.' I think
you would bid 100 per cent.@
Buffett: AThere's no reason why generations of little Buffetts now and the next one and 100
years from now should all command the resources of society just because they came out of the
right womb. What sort of justice is that?@
On healthcare costs
Munger: AI would argue that the quality of the medical care delivered - including that from the
pharmaceutical industry - has gone up enormously. But it's a much richer country and I don't
think it's crazy if the US wants to spend 15 per cent of GDP on healthcare; if it went up to 16 or
17 per cent it wouldn't be the end of the world.@
On mortality
Buffett [asked, for the second consecutive year, if he and Munger would consider freezing their
bodies for later revival]: ADo I look like I'm closer to when I might need it?@
On secrets of success and happiness
Buffett: AWhen you get to be my age [72], you'll be successful if the people that you would
hope to have love you, do love you.@
Buffett: ACharlie and I know a few people who get testimonial dinners and buildings named
after them and the tragedy is nobody loves them - not the people who give the dinners, or those
who name the buildings after them.@
Buffett: ACharlie and I have been saying if we could just buy a million dollars of love it would
be so much more satisfactory than trying to be lovable. It just doesn't work that way: the only
way to be loved is to be lovable.@
On public statements
Buffett: AI do try to hold myself in check somewhat, because there's a little bit of this 'I'm rich,
therefore I'm right' that doesn't sit very well... It turns me off at some point.@