Book Review – A Man for All Markets, By Ed Thorp

By Jesse Koltes,

When I was eight years old, my dad caught me trying to cheat at blackjack.

“People get shot for doing that,” he said. If I wanted to win, he told me I needed to count cards. My dad became calm as he methodically explained a simplified counting method involving the five card.

Even as a boy, I sensed his fascination, and caught an early glimpse of my dad’s gambling streak. I wanted to connect with him about whatever this was.

Seeing that I wasn’t quite following, and still reeling from the casual death threat, my dad handed me a dog-eared copy of Ed Thorp’s book Beat the Dealer, and said that that was how he had learned.

Twenty years later, Ed Thorp’s autobiography, A Man for All Markets, was the only book Charlie Munger recommended at the 2017 meeting of the Daily Journal Corporation. That recommendation was my most important takeaway from the 4-hour affair. *

While Mr. Munger’s own comments from the meeting are worth reading, I’d suggest reading Thorp’s book first. In many ways, Thorp is a second Charlie in terms of both intellectual power and scope, which is perhaps the highest praise I could offer another person. Thorp’s book is chock- full of knotty lessons for investors, thinkers, and business people, but because Thorp is far less well covered than Munger, many of these ideas felt new and let me see them with fresh perspective.

My biggest takeaways are below.

Extreme Knowledge and Circles of Competence

“We often find that winning systems go almost ridiculously far in maximizing or minimizing one or a few variables” – Charlie Munger


“I’m no genius. I’m smart in spots—but I stay around those spots.”

— Tom Watson Sr., Founder of IBM

 One of my favorite ideas from Charlie is that the secret to winning systems is the maximization or minimization of one or two key variables. Think of the minimalism at Costco, fee reductions at Vanguard, or portfolio concentration in the Kelley formula: In order to have better than average results, you need to have different than average behavior.

But one of my other favorite ideas from Munger is that investors should stay within their circle of competence, and only bet big when they have a high conviction understanding. As Buffett has said, he greatly prefers stepping over one foot hurdles to heaving himself over ten foot hurdles.

Both of these ideas are fantastic advice, but Thorp’s book made me realize that when you combine them there is a tension.  In knowledge work fields (like investing), the variable you want to maximize is actionable understanding. You have to constantly improve your probabilistic understanding of how events will unfold in the future, while at the same time constraining your faith in your own abilities to understand the things you’ve learned about. You are forced to push and pull in opposite directions—to an extreme degree—at the same time.

Ed Thorp is an excellent and understudied example of how to thread this needle between growth and humility. When Thorp began to study the stock market, he was surprised and encouraged to discover “how little was known by so many.” He quickly recognized that the stock market was full of the same ignorance and lazy analysis that had pervaded the gambling world.  Where others saw an unbeatable game of chance, Thorp saw a system of probabilities and payoffs masked by a veil of psychology and whim. If he could maximize his understanding of the system, perhaps he could beat the market, just as he had beaten Vegas.

His ambitious endeavor paid off. By applying the tools of physics, computer science and math to finance, Thorp created the world’s first “quant shop,” and a trading system that functioned profitably for decades with few drawdowns.

What I find incredible about Thorp’s example is not only that maximized his understanding and beat the market, but that he avoided the quackery and hubris that can so often bedevil people who have ventured so far from the average.

To make this point clear, consider how Thorp’s example compares with inventors of the Black-Scholes model. Thorp, and later Fischer Black, Myron Scholes and Robert Merton, stretched their understanding of the world to the extreme, and were able to deduce a theoretical model for pricing derivatives. Thorp took his discovering and traded it profitably for years. Merton and Scholes won the 1997 Noble price for the same discovery, but were unable to control themselves and use it safely within their circles of competence. Their hedge fund, Long Term Capital Management, blew up in 1998 and had to be bailed out by a government led consortium.

Thorp’s example is like an anti-Icarus, skilled enough to balance hubris and humility, flying neither too low nor too high.

Nontransitive Odds

Although Munger’s observation that winning systems often maximize one or two variables, Thorp’s book points out an an important exception: non-transitive games.

In Thorp’s telling, Warren Buffett introduced him to the subject at a fateful meeting of the two greats. Buffett would offer a guest their pick from a set of three dice. The guest was asked to pick the “best” die, and Warren would pick the “second” best. Both players would roll the dice at the same time, and the highest number would win. The trick was that no matter which die the guest selected, Warren could always beat them by picking second.

“This puzzles people because they expect things to follow what mathematicians call the transitive rule: if A is better than B, and B is better than C, then A is better than C. For example, if you replace the phrase “better than” by any of the phrases longer than, heavier than, older than, more than, or larger than, then the rule is true. However, some relationships don’t follow this rule. For instance, is an acquaintance of, and is visible to, do not. The childhood game of Rock, Paper, Scissors, is a simple example of a nontransitive rule.”


A Man for All Markets, page 158.

 What’s remarkable about the non-transitive rule is that it bends the mind away from thinking that issues are always about straight-forward maximization or minimization. Sometimes, the edge doesn’t always go to the actor who boldly picks the apparently best option, but to the person who adapts to the first mover, and counters with something better.

Institutions and Resilience 

 For all the similarities between Munger, Buffett, and Thorp, it is notable that Berkshire stands as a colossal monument to the first pair’s intellectual achievements, while no such entity exists in Thorp’s wake. All three men possessed an enthusiasm for the power of compound interest, and enjoyed great returns and long careers. What explains the difference in institutional outcomes?

Part of the answer has to do with how Thorp and Buffett constructed their backup systems. In Berkshire’s conglomerate model, excellent businesses are acquired, but remain totally unintegrated. This requires that Berkshire forego the “synergies” and cost reductions that typical come with merger integrations.

But decentralization gives Berkshire a valuable firewall against negative contagions. When bad practices pop up at Wells Fargo, they can’t quickly spread to Kraft-Heinz or even to Omaha. Because no single pillar is central to Berkshire’s success, perhaps no longer even Buffett himself, the company has grown into one of the largest and most stable businesses in the world.

Compare that structure to Thorp’s now defunct Princeton-Newport Partners. Thorp arranged PNP such that the business was split into two geographically separate but equal offices. The East Coast office handled all the business administration and trading execution work that Thorp found tedious. Thorp was delighted to outsource the administrative parts of the business that he despised, and set up his own office on the West Coast where he designed the firm’s mathematical trading strategies.

Critically, Thorp claims that both offices acted independently, with each exerting full control over their own hiring decisions and cultures. Thorp may have thought that this added a protective layer of redundancy to his business as he often thought deeply about worst case scenario planning in nearly all aspects of his business. Thorp even asked Goldman Sachs what would happen to PNP’s account if a nuclear bomb went off in New York harbor (Goldman allayed his concerns by having a backup system in Colorado).

Unfortunately for Thorp, his backup system overlooked how co-dependent the reputation of two separate offices, with two separate bosses and oversight systems could be. That was a fateful mistake.

When the top five officers at PNP’s East Coast office were charged with stock manipulation and other white collar crimes in the late 1980s, the system Thorp created did have the resilience to guarantee the firm’s survival.  The decentralization of the two offices had let one veer dangerously off track, but the interrelatedness of the two parts meant that neither could survive independently.

Though Thorp’s West Coast office was innocent in practice, it was fatally wounded by its relationship with the East Coast counterpart.  Seeing no way forward, Thorp was forced to wind down his partnership before it could achieve the scale we might have expected of it.

By Thorp’s telling, the opportunity cost of this closure was massive. His ideas went on to inspire the success of the next generation of great quantitative firms such as D.E. Shaw and Citadel, each now valued at many billions of dollars.

*My second best takeaway was taking the opportunity to ask Mr. Munger a brief question in person. Unfortunately, things did not go exactly as planned. I racked my brain for months searching for a line of attack that might shake loose a new, previously undisclosed nugget of wisdom. Unfortunately, Mr. Munger deflected my question before launching into a stump speech that while interesting, was well known.



Horsehead Postmortem: Updating Beliefs After A 100% Loss

By Jesse Koltes, Founder of

My investment in Horsehead Holding went to zero recently. This marks the second time I’ve lost 100% of my money on an investment, but the first time I’ve done so since stumbling across Ben Graham and becoming an aspiring value investor.

As Charlie Munger has said, it’s wise to embrace your errors, and even to rub your nose in them.

It’s wise to embrace your errors, and even to rub your nose in them

Reality, the world, and most of all our own egos are all quite willing to let errors fade into the background, never to be recalled again.

I don’t want to let that happen with Horsehead. Forgetting would only compound what has already been a painful, permanent loss of capital. I want to collect up the broken pieces and build a cairn at this point in the path. I also want to think diligently about the very real possibility that I have been fooling myself.

While I do think the story of Horsehead is quite interesting, the purpose of this article is not to litigate the merits of the investment itself. My focus will be on my reconciling my prior beliefs with my new experiences. As an excellent example of this exercise, I encourage readers to check out Tyler Cowen’s post on how he updated his belief’s after the rise of Trump.

For background on the investment and the events that transpired, I suggest this article by Tom Massedge, as well as this article in the New York Times. I am personally waiting for a tell-all book by Guy Spier and Phil Town to fill in any of the remaining gaps.

Previous Belief #1: Don’t Bowl Without Bumpers

I got this tip from Greg Speicher’s website some years ago. The basic gist is that if you are going to be an active investor, you can probably avoid a lot of stupid mistakes by limiting your investable universe to those investments that have already been prequalified by ending up in some other smart person’s portfolio.

Few ideas have impacted me more than this one. I am a diligent reader of 13Fs, and stumbled across Horsehead while reading Mohnish Pabrai’s SEC filings.

And what an intriguing little finding it was. Not many people held it, it appeared to be an unappreciated, low cost producer with great long term prospects. But most importantly, Mohnish held it, and as far I could tell, he hadn’t “cloned” the idea from anyone else. If the cloner had gone off script, this had to be really good!

Like an idiot, I was attracted to the novelty of my own discovery and quickly fell in love. In retrospect, I loved that I was clever enough to “know” what Mohnish was thinking, and justified the investment decision ex post to comport with that feeling.

While I certainly wouldn’t endorse the opposite of this rule (only bowl without bumpers?), I think it’s problematic for a few reasons. How can we fight the confirmation bias inherent in starting an analysis where a respected person has finished theirs? How can we avoid the crowd following, mean reverting tendencies that arise from looking to others as a source of investment ideas?

The answer, true believers would say, is obvious: exercise good judgement and work hard to understand the investment. I definitely should have done my own work, started with more skepticism, and only made the investment if it fit with my carefully selected rules. But as I’ll address further down, I’m no longer as confident in my abilities to avoid this trap, even after I’ve spelled out how I think the trap works. More on that later.

Previous Belief #2: It’s OK to Ignore Management

I’ve always had trouble with the idea that value investors can adequately assess management talent. How do they do it? No one ever has been able to explain it well to me, and I therefore think most of these judgements are fraught with biases of all sorts, high error rates, and general silliness.

I’ve always been more comfortable in analyzing the business itself. If the returns on capital are consistently high, the business is evidently good, and management has thus far not been able to kill to the golden goose (not that I don’t believe they might be trying).

So prior to investing in Horsehead, I didn’t know a damn thing about the CEO, the CFO, or anyone else for that matter. I knew Mohnish Pabrai and Guy Spier owned nearly 10% of the business between the two of them, and figured that if they liked this business, management was probably not so bad. Even if they were bad, the business was good, and the superinvestor’s minding the store would keep things on track.

I was wrong. After visiting Delaware and listening to the executive leadership of Horsehead take the stand in their bankruptcy hearings, I was nothing short of appalled. Quite simply, these were people I would never go into business with privately. They were slippery, cunning, and didn’t care at all about the shareholders (it wasn’t even clear they knew any shareholders other than themselves). I underestimated how easily bad managers might be identified by showing up and listening to what they have to say.

Belief update: Bad management is like pornography; you know it when you see it.

Bad management is like pornography; you know it when you see it

Listen to your managers before you get into business with them. If you wouldn’t co-found a new business with a manager, don’t investment with them either. Even after you invest, I think it would be wise to stay in touch and add value where you can.

Previous Belief #3: Diversification is for Suckers

I started off as an efficient markets guy in college. It seemed like a plausible explanation for the silliness I had seen during one summer running papers tickets around an options trading pit in Chicago.  The EMH school taught me that diversification was a free lunch, and therefore a very good idea.

Charlie Munger changed that for me. I think the Kelly formula, the notion of diminishing returns, and basic statistics show that excessive diversification doesn’t help after a certain point. But what, precisely, is that point?

Munger and Buffett often concentrate their holdings in just five ideas. Obviously, they don’t think there is a lot of ignorance to diversify against, and they’re probably right about themselves. The problem is, I don’t have the same level of ignorance as them.  If anything, I think I’ve been too ignorant to know how ignorant I really am at any given moment.

I’ve been too ignorant to know how ignorant I really am

Given that I’ll never “know what I know” precisely, how many stocks should I hold?

I think this is one of those phenomenon where taking a maximalist view is not wise. You need to scale your level of concentration to your sophistication, while also considering the performance dragging effect of spreading your money too thinly. For me, I think that number is 10 – 20 roughly equally sized holdings for a person at my level of sophistication and experience.

Belief update: it’s possible to “diworsify” but it’s also possible you’re not as clever as you think. Weird stuff happens, and some diversification can help when it does. Having 10-20 equally sized holdings now (in my late twenties) and scaling down as I gain confidence is a better path than starting with an extremely concentrated portfolio now and blowing up while I gain valuable experience.

Previous Belief #4: (My) Discretion Can Beat Rules

Charlie and Warren have said that they don’t believe investing can be boiled down to a formula. They argue that discretion and horse sense will lead to better investing outcomes than rules and algorithms.

I no longer believe this to be absolutely true. First, the academic evidence says simple rules beat judgement in almost every imaginable scenario. We should all get a lot more familiar with the work of Paul Meehl.

Furthermore, even Warren and Charlie endorse rules for the truly ignorant, and that rule is called indexing. In one of my favorite turns of phrase, Warren makes the point: “Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.

But how do we reconcile the fact that rules nearly always outperform discretion, but Buffett and Charlie defend their approach as discretionary? I think its partially a problem of language.

Perhaps what Buffett and Charlie call discretion is actually more rule like than 99% of other human behavior. Perhaps a great deal of their outperformance stems not from their creative deviations, but from their iron adherence to many (but not all) of Ben Graham’s better than average rules.

I think much of what Charlie and Warren actually do is a sort of self imposed rule following, but they don’t call it that because they don’t like quants. This confuses the rules versus discretion debate and perversely lowers the prestige of the rule following.

Bottom line: I believe that well selected rules are often better than discretion, even in investing. It’s possible that some geniuses can improve on rules after decades of mastering the nuances of an algorithm, but the truly ignorant should stick to the rule.

Previous Belief #5: Reading Big = Big Circle of Competence

I have worked in aerospace, consulting, software, transportation, and the food industry. I have read lots of books about these industries. I have also read lots of books about industries in which I’ve never worked.

Unfortunately, it’s too easy to confuse knowing something about an industry with knowing enough about an industry.

It’s too easy to confuse knowing something about an industry with knowing enough about an industry

 I am guilty of that with Horsehead. I had no business investing in a metals facility given my level of knowledge.

Belief update: My circle of competence for making discretionary investments is smaller than I thought. It’s probably restricted to food companies and absolutely obvious monopolies.

Previous Belief #6: The Most Important Thing is Showing Up

Trying to be consistently not stupid is its own form of genius. My experience with Horsehead confirms and strengthens this previously strong belief.

Had I “showed up” mentally and analyzed the company like I know I am able to, I would have been better served (although I’m not saying I would have been able to avoid – see my point about diversification).

When I did “show up” physically, it was to the Delaware Bankruptcy court and I met some amazing people such as Guy Spier and Phil Town. I also learned an incredible amount about the company that prior to bankruptcy, I had not known. It was silly that I had not taken the time upfront to understand the things that ultimately killed me in the end.

Belief update: show up mentally and physically to the things that matter to you.

2016 Berkshire Hathaway Meeting Notes: Q&A w/ Charlie Munger

Transcribed, abridged and edited for clarity by Jesse Koltes

On April 30, 2016, Warren Buffett and Charlie Munger hosted the 2016 annual meeting of Berkshire Hathaway in Omaha, Nebraska. Mr. Buffett and Mr. Munger responded to a wide array of questions for over six hours without the use of notes. Though Mr. Buffett generally answered the questions himself before soliciting Mr. Munger’s opinions, Mr. Munger’s answers were often both complete and incredibly concise.

The following transcript has been edited and abridged to focus exclusively on the comments of Mr. Munger. A video recording of the entire proceedings can be found here.


CAROL LOOMIS: Good morning. I’ll make my very short little speech about the fact that the journalists, and the analysts too, have given Charlie and Warren no hint about what they’re going to ask. So they will be learning for the first time what that’s going to be also.

This question comes from Eli Moises. In your 1987 letter to shareholders, you commented on the kind of companies Berkshire liked to buy: those that required only small amounts of capital. You said quote; “Because so little capital is required to run these businesses, they can grow while concurrently making almost all of their earnings available for deployment in new opportunities.”

Today the company has changed its strategy. It now invests in companies that need tons of capital expenditures, are over regulated, and earn lower returns on equity capital. Why did this happen?


CHARLIE MUNGER: Well, when circumstances changed, we changed our minds.

Well, when circumstances changed, we changed our minds.

In the early days quite a few times, we bought a business that was soon producing 100 percent per annum on what we paid for it and didn’t require much reinvestment. If we’d been able to continue doing that, we would have loved to do it. But when we couldn’t do it we went to Plan B. Plan B’s working very well and in many ways, I’ve gotten to where I sort of prefer it.

JONATHAN BRANDT: Thanks for having me again. My first question is about Precision Castparts. Besides your confidence in its talented CEO Mark Donegan, what in particular do you like about their business that gave you the confidence to pay a historically high multiple? Are their ways Precision can be even more successful as an essentially private company? For instance are their long term investments to support client programs or acquisitions that Precision can make now that it couldn’t realistically have done as a publically traded entity?

CHARLIE MUNGER: Well, in the early days, we used to make wiseass remarks. Warren would say, “We buy a business that an idiot could manage because sooner or later, an idiot will.” We did buy some businesses like that in the early days and they were widely available. Of course, we preferred to do that but the world has gotten harder and we had to learn new and more powerful ways of operating.
A business like Precision Castparts requires a very superior management that’s going to stay superior for a long time. And we gradually have done more and more of that and it’s simply amazing how well it works. I think that to some extent, we’ve gotten almost as good at picking the superior managers as we were in the old days, at picking the no-brainer businesses.


STATION 1 QUESTION: Good morning, my name is Gaspar. I am Spanish and I come from London. I admire you both in many ways. But I would like to know When looking backwards, what would you have done differently in life in your search for happiness?

CHARLIE MUNGER: Well, looking back, I don’t regret that I didn’t make more money or become better known, or any of those things. I do regret that I didn’t wise up as fast as I could have — but there’s a blessing in that, too. Now that I’m 92, I still have a lot of ignorance left to work on.

I don’t regret that I didn’t make more money or become better known, or any of those things. I do regret that I didn’t wise up as fast as I could have — but there’s a blessing in that, too. Now that I’m 92, I still have a lot of ignorance left to work on.


BECKY QUICK: This question comes from Salomon Ackerman who’s in Frankfurt, Germany. He wants to know why Berkshire has significantly sold down their holdings in Munich Re, which is the world biggest reinsurance company based in Germany while sticking with their reinsurance operations within Berkshire, like Berkshire Hathaway Reinsurance, and General Re? Would you reduce exposure to Berkshire Hathaway Reinsurance and General Re if they were listed companies? And he’s hoping that this can bring out some of your insights as to what’s happening in the reinsurance business right now.


CHARLIE MUNGER: There’s a lot of new capacity in reinsurance and there’s a lot of very heavy competition. A lot of people from finance have come over into reinsurance and all the old competitors remain, too. That’s different from Precision Castparts where most of the customers would be totally crazy to hire some other supplier because Precision Castparts is so much more reliable and so much better.Of course, we like the place with more competitive advantage. We’re learning.

Of course, we like the place with more competitive advantage. We’re learning.


CLIFF GALLANT: Thank you. In terms of growth and profitability GEICO really got whooped by Progressive Direct over the last year. In 2015, Progressive Direct grew its policy count by 9.1%, GEICO only 5.4%, and in terms of profitability the combined ratio at Progressive was a 95.1%, and GEICO’s was a 98.0%. Is this a evidence that Progressive’s investments in technology like Snapshot, investments that GEICO has spurned, is making it difficult at a time of difficult loss trends? Why is GEICO suddenly losing to Progressive Direct?

CHARLIE MUNGER: Well, I don’t think it’s a tragedy that some companies had a little better ratio from one period. GEICO has quadrupled….alright quintupled its market share since we bought all of it. I don’t think we should worry about the fact somebody else had a good quarter.

I don’t think we should worry about the fact somebody else had a good quarter.


Greetings to all of you from the Midwest of Europe. I am Norman Rentrop from Bonn, Germany, a shareholder since 1992. My question is about the future of salesmanship in our companies. Warren, you have always demonstrated a heart for direct selling. When we met you in the midst of a tornado warning in a barbershop, you immediately offered to write insurance for us.
We see with the rise of and others a shift from push marketing to pull marketing, from millions of catalogues being sent out in the past, to now consumers searching on what they are looking for. What is your take on how this shift from push to pull marketing will affect our companies?

 Well, I would say that we failed so thoroughly in retailing when we were young, that we pretty well avoided the worst troubles when we were old. I think net Berkshire has been helped by the Internet. The help at GEICO has been enormous and it’s contributed greatly to the huge increase in market share. Our biggest retailers are so strong that they’ll be among the last people to have troubles from Amazon.

ANDREW ROSS SORKIN: Great to see you today. Got a lot of questions on this particular topic and this question is particularly pointed one. Warren, for the last several years at this meeting, you have been asked the negative health effects of Coca Cola products and you’ve done a masterful job of dodging the question by telling us how much Coke you drink personally.

Statistically, you may be the exception. According to a peer reviewed study by Tufts University, soda and sugar drinks may lead to 184,000 deaths among adults every year. The study found that sugar sweetened beverages contributed to 133,000 deaths from diabetes, 45,000 deaths from cardiovascular disease, 6,450 deaths from cancer. Another shareholder wrote in about Coke, noted that you declined to invest in the cigarette business on ethical grounds despite one saying, “It was a perfect business because it costs a penny to make, sell it for a dollar, it’s addictive, and there’s fantastic brand loyalty”. Again, removing your own beverage consumption from the equation, please explain directly why we Berkshire Hathaway shareholders should be proud to own Coke?


CHARLIE MUNGER: Well, I like the peanut butter brittle and I drink a lot of Diet Coke.

And I think that people that ask questions like that one always commit the one error that’s really inexcusable. They measure the detriment without considering the advantage. Well, that’s really stupid. It’s like saying we should give up air travel through airlines because 100 people die a year in air crashes or something.

And I think that people that ask questions like that one always commit the one error that’s really inexcusable. They measure the detriment without considering the advantage. Well, that’s really stupid. It’s like saying, we should give up air travel through airlines because 100 people die a year in air crashes or something. That’ll be crazy. The benefit is worth the risk and every person has to have about eight to ten glasses of water every day to stay alive. And that’s pretty cheap and sensible. And it improves life to add a little flavor to your water, a little stimulation, you know, a little calories, if you want to eat that way. There are huge benefits to humanity in that and it’s worth having some disadvantage. We ought to have almost a law at… like, Donald Trump where…where these people shouldn’t be allowed to cite the defects without sighting the offsetting advantage. It’s immature and stupid.


GREG WARREN: With coal fired and natural gas plants continuing to generate around two thirds of the nation’s electricity and renewables accounting to less than 10 percent, there remains plenty of room for growth. At this point, Berkshire Energy which has invested heavily in the segment is one of the nation’s largest producers of both wind and solar power. And yet, it still only generates around one third of its overall capacity from renewables.

As you noted earlier, MidAmerican recently committed another $3.6 billion to wind production which should lift the amount of electricity it generates from wind to 85 percent by 2020. You also have…the company overall pledging to have around $30 billion of renewable longer term. The recent renewal of both wind and solar energy tax credit has made this kind of investment more economically viable and should clear the path for future investments.

Eliminating coal fired power plants looks to be the main priority but natural gas fired plants are also fossil fuel driven and are also exposed to risk of energy crisis. Is the end game here for Berkshire Energy to get 100 percent of its generation capacity converted over to renewables? And one of the risks and rewards associated with that effort…after all, the company operates in a highly regulated industry where rates are driven by an effort to keep customer costs low while still providing adequate returns for the utilities.


CHARLIE MUNGER: Yea, I think we’re doing more than our share of shifting to renewable energy and we’re charging way lower energy prices to our utility customers and other renewable…If the whole…rest of the world were behaving the way we are, it would be much a better world. I will say this about the subject though and that is that I think people who worry about climate changes [being] the major trouble of earth don’t have my view. I think that we…I like all this shifting to renewables but I have a different reason. I want to conserve the hydrocarbons because eventually we’re going to use every drop [of fossil fuel] feedstocks and so I’m in their camp but I got a different reason.


ADAM BERGMAN: Good morning Mr Munger. My name is Adam Bergman. I’m with Sterling Capital in Virginia Beach. In your 2008 shareholder letter, you said, derivatives are dangerous. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks. So, my question for you is, how do you analyze and value companies, like, Bank of America, Merrill Lynch and other commercial banks that Berkshire has investments in relative to their significant derivative exposures? Thanks.


CHARLIE MUNGER: Well, we’re in the awkward position where I think we’ll probably make about $20 billion out of derivatives in just those few contracts that you and I did years ago. All that said, we’re different from the banks. We would really prefer if those derivatives had been illegal for us to buy. It would even be better for our country.

We would really prefer if those derivatives had been illegal for us to buy. It would even be better for our country.


DAN CHEN: Hi Charlie. Great to see you. This is Cora and Dan Chen from Talguard Investments of Los Angeles. This annual meeting reminds me of the magical world of Hogwarts of Harry Potter. This arena is our Hogwarts. Warren, you are headmaster and professor, Dumbledore. Charlie is our headmaster direct and full of integrity. The magic of long term concentrated value investing is real. Yet, similar to Harry Potter, the rest of the world doesn’t believe we exist.

Your letter to me has changed my life. Your Secret Millionaires Club has changed my children’s lives. They go to class chatting about investing. My question is for my children watching at home today and the children in the audience. How should they look at stocks when every day in the media, they see companies that they have made a time of their life, go IPO, they’re dilutive and they see they see a lot of very short term span…the cycle is getting shorter and shorter. How should they view stocks and what’s your message for them? Finally, I would love to thank you in person and shake your hand personally today. I repeat what I said last year. Thank you for putting…setting the scenes for my generation, to want and for my children’s generation too with the Secret Millionaires Club. I truly walk amongst giants. Thank you.


CHARLIE MUNGER: No, I think that your children are right to look for people they can trust in dealing with stocks and bonds. Unfortunately, more than half the time, they will fail in a conventional answer. So, you…they really have to…they have a hard problem. If you just listen to your elders, they’ll lie to you and make…and spread a lot of following.


Hi Charlie. I’m Ken Martin. I’m an MBA student from Tuck School of Dartmouth. My question is about college tuition and the problem of rising student debt balances. In the past, prominent philanthropists have founded institutions that are now prominent research universities in our country. Why is this not a bigger part of today’s philanthropic debate?…the founding of new colleges were not new supply in higher education part of the solution of this problem?


CHARLIE MUNGER: Yea, I think that if you expect a lot of financial efficiency in American higher education, you’re howling at the wind…Well, I do a lot more than Warren does in this field. And I’m frequently disappointed.

But monopoly and bureaucracy have pernicious affects everywhere and universities aren’t exempted from it. But, of course, they are the glory of civilization.

But monopoly and bureaucracy have pernicious affects everywhere and universities aren’t exempted from it. But, of course, they are the glory of civilization. And if people want to give more to it, I’m all for it.


Thank you, Warren. This is from a shareholder, asked to remain anonymous. If Donald Trump becomes the President of the United States and recognizing your public criticism of him and your public support for Hillary Clinton, what specific risks, regulatory policy or otherwise, do you foresee for Berkshire Hathaway’s portfolio of businesses?


CHARLIE MUNGER: I’m afraid to get into this area.


MICHAEL MOZIA: Hi, my name is Michael Mozia. I’m from Brooklyn, New York and I’ll be starting at Wharton Business School in the fall. In an interview with Bloomberg Markets recently, Jamie Dimon defended the role banks play in financial markets, saying, banks aren’t markets, the market is amoral. You’re trained to the market. A bank is a relationship but banks, namely investment banks have struggled as regulators have favored market based solutions. And many of those relationships investment banks have worked so hard for have proven to be less lucrative especially compared to the growing fixed costs of supporting them…In the marketable securities portfolio, do you feel good about the going forward prospects of the investment banking companies, especially as Wells Fargo moves into that business?


It’s not the investment banking that draws you to Wells Fargo. Well, that’s horrible. It’s the general banking that…I think generally we fear the genre more than we love it.


CAROL LOOMIS: In the conclusion of a book, Dear Chairman, which you recommend in this year’s annual letter, a new book you recommend, the author argues that “the life’s work of great investors is inevitably reabsorbed into the industrial complex with little acknowledgement of their accomplishments. He then, argues that Berkshire Hathaway will be eventually be targeted by activist investors if it trades too sharp a discount to intrinsic value. Do you agree with this assessment and have you considered installing corporate defences that might future generations of activists from trying to break up Berkshire Hathaway?


Well, I think we have almost no worries at all on this subject and that most other people have a lot of fairly justifiable worry. And I think that helps us. So, I look forward on this subject with optimism.


JONATHAN BRANDT: Leasing has quietly become an important contributor to Berkshire’s earnings with its several leasing units, logging about $1 billion in combined annual pre-tax income. Can you talk about Berkshire’s competitive advantage is in its various leasing businesses, including containers, cranes, furniture, tank cars and rail cars. Are there other leasing businesses you’d be interested in entering, for instance airplanes or commercial auto fleets? Plane leasing companies, in particular, seemed to sell for reasonable prices and are often available?


CHARLIE MUNGER: I think you’ve said it pretty well. We’re well located now but we…I don’t believe we’ve got huge opportunities.


ZONE 7 QUESTION: Good morning Charlie. I am …from the Philippines. Warren, my wife and I sent original paintings to your office two days ago. We hope you like them. Today…sorry…today, Berkshire’s size ensures that it faces competition from numerous businesses. If you had a silver bullet, which competitor would you take out and why? And sorry, you…and can’t say Donald Trump.


CHARLIE MUNGER: And we’re not targeting competitors for destruction. We’re just trying to do the best we can everywhere.


This question comes from Sugar Land, Texas. He writes, my wife and I have the vast majority of our net worth invested in Berkshire and in shares of the Sequoia Fund. Mr Buffett, you have endorsed the Sequoia Fund on more than a few occasions. Recently, the Sequoia has been in the news because of its large position in Valeant Pharmaceuticals. Mr Munger has termed Valeant business model highly immoral. Mr Buffett, do you agree with Mr Munger’s assessment. Have your views about Sequoia changed?


Well, I totally agree with you that Sequoia, as reconstituted, is a reputable investment fund and the manager, as reconstituted, is a reputable investment advisor. And I’ve got quite a few friends and clients that use Ruane Cunniff and I’ve advised them to stay with the place, as reconstituted.
So, we think the whole is fixed. Valeant, of course, was a sewer and those who created it deserved all the opprobrium they got.

Valeant, of course, was a sewer and those who created it deserved all the opprobrium they got.


MATT CLAIBORNE: Hi, my name is Matt Claiborne from Columbus, Ohio. And thank you for putting this on for all of us. My question is, you’ve said before that your job will be divided into parts for your succession. One of which will be, is the responsibility of maintaining culture by having Howard as non-executive chairman. What is the plan for how Berkshire will maintain its culture when Howard no longer fills the role and what should shareholders watch for to make sure that the culture is being properly maintained decades from now when I’m your age?


I’m even more optimistic than you are. I’ve never noticed it. I really think that the culture is going to surprise everybody by how long it lasts and how well they do. They all wonder why they ever made any fuss over us in the first place. It’s going to work very well.


ANDREW ROSS SORKIN: It’s a bit of a multi question. About two dozen men and women work with you, Warren, at our corporate office. I see from last year, the quality of the pictures have been improved in the annual report. So, congratulations on that. However, looking at it, there’s something that comes to any one’s attention and it’s the lack of diversity among the staff. A 2015 analysis by Calvert Investments found that Coca Cola is one of the best companies for work place diversity while Berkshire Hathaway was one of the worst. You’ve explicitly stated that you’ve not considered diversity when hiring for leadership roles in board members. Does that need to change? Are we missing any investment opportunities as a result? And do you consider diversity, however defined, of company leadership and staff when analysing the value of a company that you may want to purchase?


Years ago, I did some work for the Roman Catholic Archbishop of Los Angeles. And my senior partner pompously said, you know, you don’t need to hire us to do this. There’s plenty of good Catholic tax lawyers. And the Archbishop looked at him, like, he’s an idiot and said, Mr Peeler, he says, last year, I had some very serious surgery and I did not look around for the leading Catholic surgeon. That’s the way I feel about board members.


When Berkshire authorized the share repurchase program, originally ended up buying back shares at prices no higher than 10 percent premium to the firm’s most recent book value per share. A figure that was subsequently increased repurchase share at prices no higher than 20 percent premium to book value. There’s been relatively little share repurchase activity during the last four and a half years. Even as the shares dipped down below the 1.2 times book value threshold during both January and February of this year, if you base it on a buyback price calculated on Berkshire’s book value per share at the end of 2015. A number that had not yet been published when the stock did dip that low.

Given your belief that Berkshire’s intrinsic value continues to exceed its book value with the difference continuing to widen over time, are we at a point where it makes sense to consider buying back stock at a higher break point that Berkshire currently has in place and would you ever consider stepping in buying back shares that did dip down below 1.2 times book value per share even if that prior years’ figure had not yet been released?


CHARLIE MUNGER: Well, you’ll notice that elsewhere in corporate America. These buyback plans got a life of their own. It’s gotten quite common to buy back stock at very high prices that really don’t do the shareholders any good at all. I don’t know why people exactly are doing it and I think it gets to be fashionable.

We’re always behaving a lot like what some might call the Episcopal Prayer. We prayerfully thank the Lord that we’re not like these other religions who are inferior and I’m afraid there’s probably too much of that in Berkshire but we can’t help it.

We’re always behaving a lot like what some might call the Episcopal Prayer. We prayerfully thank the Lord that we’re not like these other religions who are inferior and I’m afraid there’s probably too much of that in Berkshire but we can’t help it.

CAROL LOOMIS: This question comes from New York. Mr Buffett, you have expressed concern about cyber, biological, nuclear, and chemical attacks but preventing catastrophe is not getting enough attention. For example, a bill passed the House unanimously to harden the electric grid against the high altitude nuclear exposure. Not too many bills passed unanimously these days but then, the bill got bottled up in the Senate. Have you considered funding…wouldn’t it be a good idea for you to consider funding a lobbying and educational campaign and counteract industry lobbyists who are often more interested in short-term profits?


We haven’t been very good at getting the government to follow any of our advice?

STATION 10 QUESTION: Hello. Hello, Mr Buffett and Mr Munger. Thank you so much for your insights, teaching and being great role models. I am a violinist based in New York City. My question to both of you is really apt to psychological biases. Through Berkshire’s operations, you get a very good read on macroeconomic factors. Yet Berkshire does not make investment decision based upon macroeconomic factors.

How do you control the effect of information, such as knowing macroeconomic factors or the anchoring effect of knowing stock prices because after a while, it’s hard not to once you’ve analyzed them before. And how does that influence your rational decision-making, whether you should ignore it or whether you should try to use it in a positive way?


CHARLIE MUNGER: Well, there hardly could be anything more important that the microeconomics, that is business. Business and microeconomics are sort of the same term. Microeconomics is what we do and macroeconomics is what we put up with.

STATION 10 QUESTION: The anchoring effect…I mean, how do you deal with that as well?

CHARLIE MUNGER: Well, we’re not anchored to what we’re ignoring. We try to avoid the worst anchoring effect, which is always your previous conclusion. We really try and destroy our previous ideas.

We try to avoid the worst anchoring effect, which is always your previous conclusion. We really try and destroy our previous ideas.


BECKY QUICK: Warren, just a quick request. Would you please stop using CNBC as an acronym for mass destruction? This question comes from Matt Bandy in Dallas, Texas. He is asking about Seritage Growth Properties. He says, in December 2015, you filed a personal 13G evidencely….evidencing a roughly eight percent ownership position in the real estate investment trust, Seritage Growth Properties which to my knowledge is not parallel as a Berkshire investment. Alternatively, in September 2015, Warren filed a personal 13G evidencing ownership in Phillips 66, which is parallel as a Berkshire investment.

My question is, how do you decide when making a personal investment for your own account versus an investment for Berkshire. I understand market cap in ownership sizing are the likely factors but does it still to invest for the shareholders’ benefit in a company, like, Seritage that might have a significant upside and where are you putting your personal to work?


Well, part of being in a position, like, that we argue by, you really don’t want conflict of interest or even appearance of it. And it’s been 50 or 60 years. When have we embarrassed Berkshire by some sort of side position?

Both of us have practically nothing of significance in the total picture outside of Berkshire. I’ve got some Costco stock. I’m director of Costco. Berkshire has got some of Costco stock. There are two or three little overlaps, like that but basically, Berkshire shareholders have nothing to worry about regarding some conflict that Warren and I are going to have. We’re not going to do it.


CLIFF GALLANT: One of the great financial characteristics of Berkshire today is its awesome cash flow. While a simple earnings, less capex, [04:45:39] yields and annual free cash flow calculation, I figure, of around $10 to $12 billion, in reality it seems to be much higher, closer to $20 billion. I think part due to the changes in deferred asset year to year. What is the outlook for free cash flow and can investors continue to expect similar dynamics going forward?


CHARLIE MUNGER: Well, there are very few companies that have ever been similarly advantaged. In the whole history of Berkshire Hathaway we’ve lived in a torrent of money and we were constantly deploying it and dispersed assets and we were wising up as we went along. That’s a pretty good system. We’re not going to change it. What you’ve got to do is be aversive to the standard stupidities. If you just keep those out, you don’t have to be smart.

What you’ve got to do is be aversive to the standard stupidities. If you just keep those out, you don’t have to be smart.


BRUCE WANG: Thank you so much for your generosity and sharing your life accumulation of knowledge in financial capital to …humanity. Thank you for that. And Berkshire managers, thank you for building important companies and securing our financial futures. Thank you guys. This is Bruce Wang from [inaudible], traveling west from Orlando, Florida. Last year, you kind shared with me the importance of getting the best reputation you can and behaving well. This year, I like to ask in preface with…Bill Gates wrote, Warren’s gift is being able to think ahead of the crowd. It requires more than taking his aphorisms to heart to accomplish that although Warren is full of aphorisms well worth taking to heart.

And he also added that, I’ve never met anyone who taught in business in such a clear way. Warren, what elusive yet obvious to you truth has allowed you to get ahead of the crowd and build a clear mental framework to produce a historically significant institution powerhouse brand. And Charlie, same to you, what obvious truth presents itself so clearly to you but many would fervently disagree with you upon?


CHARLIE MUNGER: Well, it’s just a few simple tricks that work well and probably you’ve got a temperament that has a combination of patience and opportunism in it. I think that’s largely inherited although I suppose it can be learned to some extent. Then I think there’s another factor that accounts for the fact that Berkshire has done as well as it has is that we’re really trying to behave well. I had a great-grandfather, when he died the preacher gave a talk and he said, “None envied this man’s success so fairly won and wisely used”. Now that’s a very simple idea but it’s exactly what Berkshire’s trying to do.

There are a lot of people who make a lot of money and everybody hates them and they don’t admire they earned the money. Its not particularly admirable making money running gambling casinos and we don’t own any. We’ve turned down businesses including a big tobacco business. So, I don’t think Berkshire would work as well if were just terribly shrewd but didn’t have a little bit of what the preacher said about my grandfather. We want to have people think of us as having won fairly and used wisely. It works.

[04:55:20]Think of how lucky you were [Warren] to have your Uncle Fred. Warren had an uncle who was one of the finest men I ever knew. I used to work for him too, you know? A lot of people have terrible relatives.

Warren’s a Democrat but he came from different antecedents. I worked for his grandfather, Ernest and he was earnest and when they passed social security which he disapproved of because he thought it reduced self-reliance and he paid me $2 for ten hours work. There was no minimum wage in those days on Saturday and it was a hard ten hours

At the end of the ten hours, I came in and he made me give him two pennies which was my contribution to the social security and he gave me two one Dollar bills and a long lecture about the evils of Democrats and the welfare state and the lack of self-reliance and it went on and on and on, so I had the right antecedents too. I had Ernest Buffett telling me what to do.


ANDREW ROSS SORKIN: Warren and Charlie, you’re famous for making a deal over a day or two with nothing more than a handshake. You pride yourself on a small overhead of doing the due diligence mostly yourself. Other successful acquisitive companies use teams of internal people, outside bankers, consultants and lawyers to do due diligence, often over many months to assess deals. Speed may be a competitive advantage. You’ve done some amazing deals but does your diligence process also put us at greater risk? And if you’re ever gone, how would you recommend Berkshire change how we approach deal making?


CHARLIE MUNGER: Well, when you start to think about it, business quality usually counts on something more than whether you crossed the T in some old lease or something and the human quality of the management who are going to stay are very important. And how are you going to check that by due diligence, you know?

And I think I don’t know anybody who’s had a generally better record than Berkshire in judging business quality and the human quality, the people who are going to lead the business after it’s acquired. And I don’t even would have been improved at all by using some different method. So, I think the answer is that, for us at least, we’ll go ahead the way we should.


GREGG WARREN: Warren, the announcement earlier this month that Ajit Jain would be taking over responsibility for all Berkshire’s reinsurance efforts once Tad Montross retires from General Re has raised some questions about, not only in leadership structure but succession planning. Given the state of the reinsurance market, it makes sense to have Ajit overseeing both businesses especially if the pricing environment is expected to be difficult for another 10 years.

And there are duplicative efforts that can be streamlined. Given this move and the change of responsibilities in several of Berkshire’s subsidiaries in the last few years, I was just wondering if you could give us some color on how succession planning is handled at the subsidiary level and any insight you could give us into what led you to finally decide to have Ajit oversee both of Berkshire’s reinsurance arms and whether or not it would change the amount of work you’d be doing and especially inside of the business would be greatly appreciated.


CHARLIE MUNGER: Well, there’s an upper side to that. Not only can the able people usually do a lot more, but the unable people by and large you can’t fix. So…I think you’re forced to use our system if you have your wits about you…Warren and I once reached the decision, we wouldn’t pay more than X dollars for something and the man who was a subordinate to both of us who was working on it just said, “You guys are out of your minds. This is really stupid. This is a quality operation. You ought to pay up for it.” We just looked at one another and did it his way. We don’t pay any attention to titles.


STATION ONE QUESTION: Hello Mr Buffett. Hello Mr Munger. Thank you for taking my question. With Berkshire Hathaway being so well managed, why doesn’t it have the highest credit bond rating?


CHARLIE MUNGER: I’m going to take that one, okay.

The rating agencies are wrong. And set in their ways. 

The rating agencies are wrong. And set in their ways.


CAROL LOOMIS: Questions continue to come in about the financing and working relationship that Berkshire formed with 3G a couple of years ago and this is one of those questions.

While 3G has been very successful in cutting costs and increasing margins at Kraft Heinz, the company has seen volumes and revenues decline. As a long-term investor, how do you judge when a management is cutting muscle as well as fat? Can a business increase revenues, while cutting costs? And I forgot to say this came from Rick Smith in New York City.


CHARLIE MUNGER: Yeah and sometimes when you reduce volume it is very intelligent because you’re losing money on the volume you’re discarding. It’s quite common for a business not only to have more employees than it needs, but it sometimes has two or three customers that could be better off without. And so, it’s hard to judge from outside, whether things are good or bad just because volume is going up or down a little. Generally, speaking I think the leanly staffed companies do better at everything, than the ones that are overstaffed. I think overstaffing is like getting to weigh 400lbs when you’re a normal person. It’s not a plus.


JOHN GORRY: Good afternoon Mr Buffett and Mr Munger. I’m John Gory from Iowa City, Iowa. When interest rates go from zero to negative in a country, how does that change the way that you value a company or a stock? Do you choose a high valuation because the discount rate is low or on the other hand, do you choose a low valuation because the cash flow is likely to be poor?


Yea but I don’t think anybody really knows much about negative interest rates. We’ve never had them before and we never had periods of stasis, like, 20…except for the Great Depression. We didn’t have things like happened in Japan…a great, modern nation playing all monetary tricks, Keynesian tricks, stimulus tricks, and mired in stasis for 25 years. And none of the great economists who studied this stuff and taught it to our children understand it either, so we just do the best we can

No, and our advantage is that we know we don’t understand it. If you’re not confused then you haven’t thought about it correctly.

No, and our advantage is that we know we don’t understand it. If you’re not confused then you haven’t thought about it correctly.


CLIFF GALLANT: You’ve long stressed the importance of taking a long term view when investing and over the decades, your substantial returns in American Express seems to support your point. You’ve talked in the past about the ability of American Express to reinvent itself overtime. But today, it seems to be a company that doesn’t have alternative businesses and its brand doesn’t seem to have the same cache as it once did. Shouldn’t a prudent investor like Berkshire periodically reassess its reasons for owning an investment?

CHARLIE MUNGER: A lot of great businesses aren’t quite so great as they used to be. The package goods business for the Procter & Gambles and so forth- General Mills. They are all weaker than they used to be at their peak.

Auto companies…oh my God. When I think of the power of General Motors, when I was young, and what happened. They wiped out all the shareholders. I would no more have predicted that when I was young, General Motors loomed over the economy like a colossus. It looked totally invincible. Torrents of cash, torrents of everything…

I think anybody in payments probably who’s an established long time player, with an old method, has more danger than used to exist. It’s just there’s more fluidity in it.


MIKE KELLY: Hi Mr Buffett. Hi Mr Munger. I’m from Arizona. My name is Mike Kelly. My family run some cattle ranches down in Arizona and that’s kinda what my question pertains to. I’m curious on your thoughts as it relates to the expanding global population and investing in cattle, and if you think it’s wise? Thank you.


CHARLIE MUNGER: I think it’s one of the worst businesses I can imagine, for somebody like us.

Yea. Not only is it a bad business but we have no aptitude for it.

Oh, yea, yea…they have one good year every 20 years or something.

MIKE KELLY: I know you guys like steak.

CHARLIE MUNGER: But not all in cattle.

CHARLIE MUNGER: Somebody has to occupy the tough niches in the economy. We need you.


ANDREW ROSS ROSKIN: Warren and Charlie. The first part is for Charlie, second part is for Warren. Charlie, you clearly understand the power of incentives. How do you apply this at Berkshire when designing compensation formula? Without naming names or dollar amounts, please illustrate for us with examples…of a couple of examples of Berkshire’s operating managers get paid for performance in different industries? The second part is for Warren, which is, you once said, you’d write about how we should compensate the next Berkshire CEO. Can you describe exactly how we should do it now?


CHARLIE MUNGER: I wouldn’t worry about the next CEO but the…When it comes to assessing incentives, the systems are different and what they’re trying to adapt to is the reality of each situation. And the basic rule on incentives is you get what you were awarded for, so if you have a dumb incentive system, you get dumb outcomes. And…and one of our really interesting incentive systems is at GEICO, and I’ll let Warren explain it to you because we don’t have a normal profits type incentive for the people at GEICO.

It’s simple but other people might reward something like just profits. And so, the people don’t take on new business that they should take it on because it hurts profit. You’ve got to think these things through and, of course, Warren is good at that, and so is Tony Nicely.


CHARLIE MUNGER: And maybe an undertaking power. God knows where they get the plan.


CHARLIE MUNGER: And he…he wanted more bad examples. A lot of the bad examples of incentives come from banking and investment banking. And if you reward somebody with some share of the profits and the profits are being reported using accounting practices that cause profits to exist on paper that aren’t really happening, in terms of underlying economics, then people are doing the wrong thing and it’s endangering the bank and hurting the country and everything else.

That was a major part of the cause of the Great Financial Crisis, is that the banks were reporting a lot of income they weren’t making, and the investment banks were too. The accounting allowed for a long time a lender to use as his bad debt provision his previous historical loss rate. So, an idiot could make a lot of money by just making loans at high interest and accruing a lot of interest, and saying ‘I’m not going to lose any more money on these because I didn’t lose money on different loans in the past’. That was insane for the accountants to allow that and…literally insane. It’s not too strong a word. Yet, nobody is ashamed of it. I’ve never heard of an accountant that’s ashamed of it.

We want it simple and right and we don’t want to reward what we don’t want. If you got to have…those of you with children, just imagine how your household would work if you constantly rewarded every child for bad behaviour. The house would be ungovernable in short order.


MARCUS DOUGLAS: Good afternoon Mr Buffett and Munger. My name is Marcus Douglas. I’m an investment adviser from Houston, Texas. Where I’m from, there a lot of people losing their jobs mostly due to the sharp decline of crude oil prices. My question pertains to the overall state of the union, more so [05:49:24]. Keeping in mind that crude oil is primarily bought and sold in American dollars, do either of you believe the major fluctuations in the supply of crude oil influence the US’s future monetary policy decisions?


CHARLIE MUNGER: Well, my answer would be ‘not much’.


CAROL LOOMIS: The question is from Larry Lapowitz of Boston. The year in the balance sheet for manufacturing service and retailing operation shows total current assets of $28.6 billion, of which cash and equivalents are $6.8 billion. Meanwhile, total current liabilities are $12.7 billion, implying net working capital of $15.9 billion. It has become increasingly common for companies, like, Apple and Dell to finance their businesses via their suppliers…in some cases with negative working capital. Why is it necessary for these Berkshire businesses to have so much working capital, particularly so much cash? More generally, how do you think about efficiently managing the working capital of a business segment so large sprawling and decentralized as this one?


CHARLIE MUNGER: Yea, I think it’s hard to do that brutally, when you’re rich and your supplier isn’t, and think that your supplier don’t love you. And so, I think there is something to be said for leaning over backward to have a win-win relationship with both suppliers and customers…always. Yea and we don’t need it. Let somebody else set the record on that one.


JONATHAN BRANDT: Most American corporations separate out supposedly, one time restructuring costs, whereas Berkshire doesn’t. Berkshire’s reported operating earnings are therefore, in my opinion, of higher quality. Have you ever calculated how much higher operating earnings on average would be if Berkshire separated out plant closing costs, product line exits, severance pay, and similar items? Is it a material number or does Berkshire not incur much in the way of these types of costs, typically, because most of your acquisitions are standalone?


CHARLIE MUNGER: Let me take that one. That’s a question like asking, “Why don’t you kill your mother to get the insurance money?”

That’s a question like asking, “Why don’t you kill your mother to get the insurance money?”

We don’t do it. We’re not interested in manipulating those numbers. We haven’t had a restructuring charge ever, and I don’t think we’re about to start.


CHARLIE MUNGER: And you’re talking about… We like to advertise our defects.


STATION FIVE QUESTION: This is Martin from Germany. I’m a fixed income manager. We launched the…with Henry Lieber Fund and…Yea…yea…the volume is about $600-$650 million. We are 4.1 percent hedged this year. [06:00:28] my question is about fixed income If I look in your annual report, it’s about the volume of $25 billion. If I add, let’s say, the CDS, you are selling the CDS and it’s about the volume of about seven to eight billion. So, my complete question is, the premium on your CDS is about 31 basis points at the end of the year, so marked-to-market, it’s probably at the high teens or twenties. So, would you consider unwinding this position? Are you allowed to do it? In the annual report you say no, but probably you can make exactly the contrary trade on it. That means you are buying protection. Is that a philosophy, which you stand behind, could you do that from the ethic point of view, when the premium are extremely low, which is at the case…that the spreads are, as I said, between 15 and 20 basis points?


CHARLIE MUNGER: Well, the truth of the matter is we don’t pay much attention to trying to get an extra two basis points by being gamey on our short-term things and that credit default position is a weird, historical accident. We don’t pay much attention to it either. It will go away in due course.


BECKY QUICK: This question comes from Tom Hinsley, a long time shareholder from Houston, Texas who says, over the years, you have been effusive in your praise of Ajit Jain and his contributions to Berkshire. In the 2009 Chairman’s letter you write, if Charlie, Ajit and I are sinking in a boat and you can only save one of us, swim to Ajit. My question is, what if we don’t get to Ajit in time? Please comment on the impact on National Indemnity in Berkshire and whether or not there is another Ait in the house?


CHARLIE MUNGER: Yes, Ajit has a longer shelf life than we do. He’d be particularly missed.


CLIFF GALLANT: Thank you. Low to negative interest rates are something that’s been discussed a few times today, and you’ve mentioned its implications for a return on float. I was wondering how should shareholders value the 25 percent of the float that’s been created by retrocession reinsurance where the business is booked at an underwriting loss and, at times, has adversely developed.


CHARLIE MUNGER: Yeah, we’re willing to pay a little money now to have just the certainty of having a lot of money available, in case something really attractive comes up, in a bit difficult time…It’s an option cost, right.


Warren, Todd and Ted now had been at Berkshire for several years. What have been their biggest hits and failures, specifically? And what have they learned from Charlie and Warren? And what are the biggest differences between you and them?

CHARLIE MUNGER: Again, I’ve got nothing to add.


ANDREW ROSS SORKIN: The biggest hits and failures, I think they specifically wanted to know in terms of investments and try to understand the way you think perhaps. I think the question was more…I think my…the implication was, the way they think and the way you think. Are there differences?


CHARLIE MUNGER: And we don’t want to talk about specific hits and failures.


Good afternoon Mr Buffett and Mr Munger. My name is Jeffrey [06:18:52] from Cranford, New Jersey. I just have a simple question. How would you explain IBM’s move?


No, I don’t either.


CHARLIE MUNGER: Yea, it’s obviously coping with the considerable change in the computing world and…and it’s big and interesting, and God knows whether its gonna work flawlessly or very well. I don’t think Warren knows either.


CHARLIE MUNGER: Yea, yea, yeap. But it’s a field where a lot of intelligent people are trying to get big in.


CHRISTIAN CAMPOS: Hello everybody. Good afternoon. My name is Christian Campos. I’m from New York City. I’m a senior accounting major at Baruch College, part of the City University of New York. And Mr Buffett, in your annual shareholder letters and during interviews, and even today, your sense of humour always shines through. Where does your sense of humour come from? Please tell us Thank you.


CHARLIE MUNGER: I think if you see the world accurately, it’s bound to be humorous because it’s ridiculous.

I think if you see the world accurately, it’s bound to be humorous because it’s ridiculous.


RICHARD MILLER: Good afternoon Mr Buffett. I’m Richard Miller in the Creighton Theology Department here in Omaha and I study climate change and its social effects. I just wanted to make you aware that Berkshire is operating within a larger economy and that the most important climate analysis, economics analysis, from Nicholas Stern indicates that on our current path, by the end of this century, 30 percent loss in global GDP is possible.

The other issue is when we talk about doing something about climate change, doing something means to avoid major sea level rise, we need to reduce emissions globally starting today…seven percent per year.

The only time we’ve ever reduced emissions over…over a 10 year period in a growing economy was in the 1990s in England and we reduced at one percent per year. So, we’re talking about a completely different thing than President Obama’s gradual move and we need to do something. We need to do massive transformation immediately. And with your large global holdings, you are a world significant figure on this, not just about this particular shareholder resolution. Thank you for your time.


CHARLIE MUNGER: Well, yes. We’re in Omaha, which is considerably above sea level. And we have no big economic interest in this subject and our insurance companies, we don’t write much of that catastrophic insurance that we used to write many years ago. So, we’re asked as a corporation to take public stance on very complicated issues.

We got crime in the cities. We got a hundred…we got a thousand complicated issues that are very material to our civilization. And if we spend our time on the meeting public stance on all of them, I think it would be quite counterproductive. And I don’t like the fact that the people that constantly present this issue never discuss any solution except reducing consumption of fossil fuels.

So, there are geoengineering possibilities that nobody is willing to talk about. And I think that’s asinine. So put me down as not welcoming.