TheBuffettEssaysSymposiumA20thAnniversaryAnnotatedTranscript

with

WarrenBuffett&CharlieMunger

hostedandeditedby

LawrenceA.Cunningham

TheBuffettEssaysSymposiumA20thAnniversaryAnnotatedTranscript

with

WarrenBuffett&CharlieMunger

hostedandeditedby

LawrenceA.Cunningham

PublishedandDistributedasaJointVenturebyTheCunninghamGroup&

HarrimanHouseCopyright©2016LawrenceA.CunninghamAllrightsreserved

LibraryofCongressCataloging-in-PublicationDataCunningham,LawrenceA.,1962—

TheBuffettEssaysSymposium/LawrenceCunningham.pagescm

Includestranscriptionoflivedialogueandannotation.

PaperbackISBN:978-0-85719-538-8

eBookISBN:978-0-85719-539-5

1.BerkshireHathawayInc.2.Buffett,Warren.3.Munger,Charlie.4.Investments.5.Management

Noonehasamonopolyontruthorwisdom.Wemakeprogressbylisteningtoeachother.

ELENAKAGAN

Aconversationisadialogue,notamonologue.TRUMANCAPOTE

TellmeandIforget.TeachmeandIremember.InvolvemeandIlearn.

BENJAMINFRANKLIN

Contents

PrologueProductionNoteContributorsGreetingsfromDeanDavidRudenstineCorporateGovernanceFinanceandInvestingMergersandAcquisitionsAccountingandTaxationReminiscencesGallerySubsequentStepsNotesfromOmahaEpilogue

IPrologue

ntellectual sparks flew amongWarren Buffett, CharlieMunger, and otherguests at the 1996 symposium to launch The Essays of Warren Buffett:Lessons for Corporate America—then a manuscript few guessed would

become an international bestseller. After governance expert Ira Millsteindeclared that boards must develop strategic plans for acquisitions, Buffettcounteredthat“moredumbacquisitionsaredoneinthenameofstrategicplansthan any other.” When I and a colleague acknowledged including modernfinance theory inour teaching,Mungerchastisedusforpeddling“twaddleandgibberish”—quicklyadding,“Ilikeboththeseguys.”

Thetwo-dayconferenceinNewYorkCitybeganonaSundayinOctober,theday after theNewYorkYankeeswon theWorldSeries.We probed profoundissues of corporate life, topics still being argued about today by shareholders,directors, executives, judges, and scholars. I recently came upon the originaltapes of the conference after an old friend, PeterBevelin, askedme about theevent. I hadnot examined thismaterial in twodecadesbut,when Idid, Iwasstruckbyhowmanyof thequestionswediscussedremainvital today.Plusçachange,plusc’estlamêmechose.

For Buffett, change and continuity have been dominant themes since 1956.Back then, the 26-year-old prodigy formed a partnership to acquire smallbusinessesandequitystakesinlargercompanies.In1965,thepartnershiptookcontrol of Berkshire Hathaway Inc., a publicly-held and struggling textilemanufacturer. The Buffett Partnership soon dissolved, with Berkshire sharesdistributed to the partners,Munger chief among them.Berkshire proceeded toacquireinterests indiversebusinesses, includinginsurance,manufacturing,andretailing.

Under Buffett and Munger, Berkshire has gone through two massivetransformations. In the first, the company went from a failed textilemanufacturerintoaprosperousinvestmentvehicleby1996.Atthattime,assetswerecomprisedof80%marketablesecuritiesand20%inoperatingcompanies.In the second, since 1996, Berkshire morphed into a massive conglomerate.Todayitsassetsarecomprised80%ofoperatingcompaniesand20%marketablesecurities,thoughthelatter’smarketvalueexceeds$100billion.

Performance has been stellar: through 2015, results vastly exceeded

benchmarks such as the Dow Jones Industrial Average or Standard & Poor’s500.From1965to2015, theDowincreased18-foldwhileBerkshire increased12,000times,acompoundannualrateof21%,doubletheS&P.

Despite changing from the partnership to the corporate form, BuffettpreservedBerkshire’ssenseofpartnership.Thelegacyisreflectedinthefirstof15 principles stated for decades inBerkshire’s “owners’manual”: “While ourform is corporate, our attitude is partnership.” The “Berkshire system,” asMungerdubbeditin2015,differssignificantlyfromprevailingpracticesatotherlargeAmericancorporations.

Buffett provides unconventional takes on numerous topics of corporate life,which iswhy his company andwritings have been so fascinating to study allthese years. In governance, theBerkshire emphasis is on trust not control; onmergers, Buffett favors letting shareholders rather than boards make finaldecisions;incorporatefinance,heshunsdebtandattractedlegionsoffollowerstothefieldofvalueinvesting;andonaccountingandtaxation,heshapeddebatesfromstockoptionstomergeraccountingandraisedpublicattentiontoinequalityinhisfamousdeclarationthathissecretary’staxrateexceedshisown.

Buffett’s writings are primarily contained in his letters to Berkshireshareholders, the centerpiece of the symposium. After carefully reviewing allthoseletters,Irearrangedandcollatedthembytopicintoa150-pagebookletforthesymposium:governance,investing,acquisitions,accounting,andtaxation.Atthe symposium, a series of panels examined each, spanningmore than twelvehours.

Soonafter,Ipreparedaneditedversionoftheformalremarksandsupervisedthepublicationof a resulting academicvolumeof 800pages, consistingof 18articles anda transcript of100pages. In the twodecades since, several of thearticleshavebecomeclassicsintheirfieldsandIhaveregularlyreleasedupdatededitionsofTheEssaysofWarrenBuffett:LessonsforCorporateAmerica,whichhasbeentranslatedintoadozenlanguages.

IinvitedWarrentoparticipateinthesymposiumandvolunteeredtorearrangeandrepublishhis lettersbecausemyresearchindicatedthat theywerevaluablebutunderappreciated.Iwashonoredthatheaccepted.Hespenttwodayswithagreatcrowd,whichincludedmanyofmystudents,alongwithadozenbusinesslaw professorswhom I enlisted to speak on the panels.Among thesewasmyown teacher, ElliottWeiss, who first introducedme to Buffett’s writings and

worked closelywithWarren a decade earlier on a national project to improvedisclosureincorporateAmerica.

The symposium also brought together many distinguished people fromBerkshire’sorbit, includingWarren’swifeSusanandsonHoward; their friendand editor of Warren’s annual letters, Carol Loomis; their friend and laterBerkshire director Sandy Gottesman and his wife Ruth, a professor at AlbertEinsteinCollegeofMedicine;Warren’spersonalattorneyGeorgeGillespieandBerkshire attorney Bob Denham; Berkshire executives Ajit Jain and LouSimpson;andlong-timeBerkshireshareholderanddevotee,ChrisStavrou.Twopanelswereledbyothernotablefigures:long-timeBerkshireshareholderLouisLowenstein, former president of Supermarkets General Corporation andprofessor atColumbiaUniversity (also the fatherofBuffett biographer,RogerLowenstein), and Ira Millstein, a distinguished attorney and leader of theNationalAssociationofCorporateDirectors.

Amongmanyothernotablesintheaudienceof150wereBillAckman,BruceBerkowitz, and Paul Hilal, all to become prominent investors; Otis Bilodeau,then a student ofmine atGeorgeWashingtonUniversity and today the globalexecutiveeditorofBloombergTelevision;TheHonorableJackJacobs, thenofthe Delaware Chancery Court and later a Justice on the Delaware SupremeCourt; Marjorie Knowles, an official at TIAA-CREF; and Bob Mundheim,among thosewhoBuffett hand-selected tomanage SalomonBrothers after hebecameitsreluctantinterimchairmanin1991followingabondtradingscandalattheWallStreetinvestmentbank.

Ourdiscussionwasvibrant, soprovidedbelowarea fewhighlightsoneachpanel togivea tasteandprovidecontextforwhatfollowsin thisvolume.Youmightalsoconsider skimming the index to locate topicsof special interest.Ofparticularnotearetheentriesunder“Buffettquips,”“Buffetttutorials,”“Mungerquips,”and“Mungertutorials.”

CorporateGovernanceTraditionally, CEOs of public companieswielded considerable power and theboard tended to reinforce rather than check that power. In the late 1970s, themodelbegantoshiftafter theForeignCorruptPracticesActof1977askedformore oversight fromboards and in the 1990s once the FederalOrganizational

Sentencing Guidelines of 1991 gave corporations credit for adopting formaloversightprograms.

By the time of our symposium in 1996, such regulations forced boards toassume a new role, one focused on monitoring. That meant independentdirectors,oftenapowerfulnon-executivechairmanor leaddirector,alongwithnumerous strong committees, all overseeing elaborate systems of internalcontrol. Since 1996, the monitoring model has become mandatory for publiccorporations, through laws such as the Sarbanes-Oxley Act of 2002 and theDodd-FrankActof2010.

With few exceptions, such reforms applied equally to all public companieswithout regard tospecific features,suchasownershipdemographics,corporatecultures, management structures, or other governance design features. Theyignored a typology of governance that Buffett famously identified which, hebelieves, requiredifferentboard roles: (1) thosewitha controlling shareholderwho is also themanager,which has beenBerkshire’smodel; (2) thosewith acontrollingshareholderwhoisnotamanager,whichwillcharacterizeBerkshireafterBuffett leaves the scene; and (3) thosewithout a controlling shareholder,whichwillultimatelybeBerkshire’spositioninthedecadesafterBuffett’sestatedistributesallhisshares.

Berkshirehasalwayshadanadvisoryboard,notamonitoringone,evenafterallthereformsandregulationsthatsweptacrosscorporateAmericafrom1977to2010.Afterall,Buffett’scontrollingpositionhasallowedhimtonominateandelect Berkshire’s board of directors from the outset. During that time,Berkshire’s board came to assume characteristics quite different from that oftypical public companies today. From the earliest decades, the board includedBuffett’s wife and close friends and, since 1993, his son. A classic advisoryboard,membersmetinfrequentlyandexercisedfewoversightfunctions.

WarrenBuffettatthesymposium

Today,Berkshire’sboardadheres to legal requirements concerning requisitecommittees,independence,andexpertise.Butthesedevicesandlabelsappeartobe form over substance. For one, all directors have close personal andprofessional relationshipswith Buffett and are handpicked by him. Examples:primarybeneficiaryofBuffett’swillBillGates(viatheBillandMelindaGatesFoundation); long-time friend, Sandy Gottesman; and chief Berkshire outsidecounsel,RonOlson. In addition, half the boardmembers are older than sixty-five andmost have served Berkshire for a decade or more—facts that wouldcompel theirdepartureunder typicalage-limitandterm-limitregimesendorsedbygovernancegurus.

Berkshire’s principal parent-level activity is accumulating and allocatingcapital,oftenmakingsubstantialacquisitions.Atmostcompanies,CEOsmightformulate ageneral acquisitionprogramand thenpresent specificproposals tothe board for approval.As IraMillstein noted at the symposium,most boardsadopt strategic plans and oversee their implementation; as Buffett responded,Berkshirehasneverhadone.Theabsenceofaplan,however,enablesBuffetttoseizeopportunities forBerkshire thatwouldbe lost ifpriorboard involvementwererequired.

Buffettshareswiththeboardthegeneralphilosophyofacquisitionsandmightdiscuss large deals with it in advance in conceptual terms. But the board isuninvolved in valuation, structuring, or funding any specific acquisition.Withfewexceptions,theboarddoesnotfindoutaboutanacquisitionuntilafteritispublicly announced. Rather, overtures, discussions, and negotiations are keptconfidential, limited at most to a few Berkshire insiders, typically includingMunger.

Berkshire’sboardhas two regularly scheduledboardmeetings annually, notthetypicaleighttotwelveatotherFortune500companies.Beforeeachmeeting,directors receive a report fromBerkshire’s internal auditing team. Berkshire’sspringboardmeetingcoincideswithBerkshire’sannualshareholders’meetinginMay.DirectorsspendseveraldaysinOmaha,corporateheadquarters,minglingin social gatherings with Berkshire officers, subsidiary managers, andshareholders.ThefallmeetingfeaturesopportunitiestomeetoneormoreCEOsofBerkshiresubsidiaries,eitherinOmahaoratasub’scorporateheadquarters.

One ormoreCEOsmake presentations and exchange ideaswith the directorsandfellowunitchiefs.

AccordingtodirectorSusanDecker,Berkshire’sapproachtoboardmeetings,especiallyinvolvingthedirectorsinBerkshireeventsoutsideoftheboardroom,produces a “strong inculcation of culture.” Cynics might say such anenvironmentpromotesstructuralbiasthatcanimpairtheindependentjudgmentcorporate governance advocates have hailed in recent decades. And it is notflawless—thevastpowerBuffettwieldshasledtoseveralnontrivialacquisitionmistakes, though the net gains from his leadership have been overwhelming.Moreover, the immersion of directors in Berkshire culture flattens the typicalhierarchies of corporate governance, keeping directors in shareholders’ shoes;theiroptimalvantagepoint,whateverthegovernancegurusmightprescribe.

CharlieMunger(gesturing)andHowardBuffettatthesymposium

FinanceandInvestingWhile Buffett has been heralded as a “relational” investor, participants at thesymposiumspentsometimediscussingwhatthatconceptmeans.Buffettnevercalled himself a relational investor and does not believe in the concept. Theconcept, moreover, while fashionable in the 1990s, has been eclipsed by thebroaderandmorepowerfulcategoryofshareholderactivism.

Ontheotherhand,Berkshireanditsshareholdersallseemtobeengagedinagenuine relational investment association,hailedby thepartnership conceptionBuffett minted and repeats. At the symposium, a commentator observed thatBuffett’srepeatedassertionsthatBerkshirewasapartnershipamonghimandallshareholderscouldwellbelegallybindingandBuffettwouldowefellowownersfiduciarydutiesofloyaltyfarmorestringentthanthosecorporatedirectorsoweshareholders.Buffettsaidthatwouldbefinewithhim.SowhileBerkshiremaynotexemplifywhatmostpeoplemeantbyrelationalinvesting,itsmodelisevenmoreprofound,showingthatlong-termgainiscompatiblewithfidelitytofellowshareholders.

Themid-1990swerealsoaninflectionpointformodernfinancetheory,whichportraysstockmarketsasefficientandpriceactivityasthebasicmeasureofrisk.Themodelsweptnotonlytheacademybutmanyintheinvestingandcorporateworlds. Yet it denied the possibility of any given investor systematicallyoutperforming the stock market, as its numerous participants rapidly digestinformationtodrivepricestothebestestimatesofvalue.ThatmadeBuffettananomaly, with devotees of modern finance theory dismissing him as merelylucky. At the symposium, discussion generally treated modern finance theoryskeptically, with a few impassioned opponents too, epitomized by Munger’sdisdainfulcharacterizationsofitas“gibberish”and“twaddle.”

Not only do Buffett and Berkshire depart from conventional wisdom,Berkshire’sothershareholdersarealsoadifferentbreed.Typically,largepubliccompanies see seventy to eighty percent of their shares controlled byinstitutionalinvestors.Decisionsareoftenbycommitteeandbasedonfinancialmodelsthatcanleadtotradingthestockforreasonsunrelatedtothecompany.In contrast,mostBerkshire shares are owned by individuals and familieswhomakeinvestmentdecisionsbasedonBerkshire’sspecificcharacteristics.

Berkshire shareholders have unusually long holding periods. In the pastdecade,shareturnoverhasbeenlessthanonepercentcomparedtothree,four,orfivepercentforotherconglomerates,largeinsurancecompanies,orBerkshire’sformerly-public subsidiaries.At the symposium,whenBerkshire’s sharesweretradingfor$30,000pershare,Buffettstatedthatninetypercentoftheshareshada basis of less than $100—meaning that they had been held for two or threedecades.

Berkshire’s dividend policywas addressed at the symposium.Aside from asmall dividend in 1969, it has never paid one. Buffett repeatedly explainsBerkshire’s policy, which is to retain each dollar of earnings so long as ittranslated into at least one dollar of market value. Berkshire polled itsshareholdersonthispolicyin1984—andagainin2014—withauniformanswer:theyoverwhelminglyendorsedthepolicy,morethanninetypercentaffirming.In1996,afterBerkshirestocktradedat$30,000,someshareholdersneedingcashorwishing tomakegifts,signaled interest in lower-pricedshares.At this time,asBerkshire’s stellarperformancebecamewellknown,demand roseamongnon-shareholdersforamoreaffordablepieceoftheaction.

In1996,inspiredbydemand,twofinanciersdesignedaninvestmentvehicletomeet it. They proposed to create unit trusts that would buy the expensiveBerkshiresharesandthenissuefractionalinterestsatfarlowertradingpricesofaround$500each.Toeliminatetheappealofsuchtrusts,andassociatedfeesthepromoters planned to charge,Berkshire created two classes of stock, onewithfractional voting and economic rights, set to trade at around$1,000per share.The move, aptly called “ingenious” at the symposium, also enabled existingBerkshire shareholders to create liquidity, as thepriceyClassA shares canbeconverted,tax-free,intothecheaperClassBshares.

MergersandAcquisitionsThrough 1996, Berkshire had made only a handful of important acquisitions.Buffett’s involvement in mergers had concerned companies—such as GilletteandSalomonBrothers—inwhichBerkshireownedstockorwhereBuffettwasadirector.Fromthatvantagepoint,theircentralconcernwasmakingsureboardsdid not interferewith shareholder opportunity for obtaining the best value fortheirshares.

Persistent fundamental questions arewhether bidders overpaywith takeoverpremiumsorpickup targetson thecheapand the rolecorporateculturemightplay in a board’s response to an unwanted overture. Above all, the enduringquestionisiftakeoverartiststhenandshareholderactiviststodayaddorsubtractvalue?Aretheyconartists,foolsorvisionaries?

Intheinterveningtwodecades,BuffettgraduallyresignedhisboardpostsandBerkshire’sinvestmentsincreasinglyarefor100%ofcompaniesthroughmergeroracquisitionrather thanminoritystakes.Since1996,Berkshirehasbecomeamajoracquirerofcompanies,layingoutapproximately$170billioninabout40acquisitions,dwarfingthedozenmuchsmalleracquisitionsmadebeforethat.SowhileBuffett’s positions on these perennial topics remain the same—favoringshareholder choice, expecting gaps between price versus value, believing incorporateculture,anddisfavoringhostilebidsandpublicactivism—Berkshire’srolediffersgreatly.

Specifically,Buffettbuiltaconglomerate,thekindofcompanythattakeoverartistsasof1996hadbeenbustingupandthatshareholderactivistssincehavebeen trying to trim. In the earlier era,KohlbergKravisRoberts (KKR)wagedcampaigns to dismantle conglomerates in much the way that Carl Icahn andNelson Peltz do today. But in both eras, Buffett and Berkshire embraced theconglomeratemodel—acquiringtheconglomerateScottFetzerinawhiteknighttransaction in 1986 and by 2006 establishingBerkshire as the greatAmericancorporatecolossus.

True to perceptions in 1996, Buffett has cemented a distinctive trust-basedcorporate culture at Berkshire in the two decades since. At most companies,especiallyconglomerates,corporatetaskstendtobecentralized,withdivisionaland sub-division heads (“middle management”), reporting hierarchies,systematic policies concerning budgeting, personnel, and intricate systems ofprocedures. Such structures require incremental costs in the name of effectiveoversight.

Incontrast,withtheexceptionofabasicinternalauditingfunction,Berkshireeschewssuchstaplesofcorporatelifeasbureaucraticexcess.Berkshiredevolvestheseandallother internalmatters to itssubsidiaries.Homeofficeoverhead isnegligible at Berkshire, with a staff of only two dozen, focused primarily onfinancial reporting and auditing. Each subsidiary maintains its own programsand policies concerning budgeting, operations, and personnel—as well as

conventional departments such as accounting, compliance, human resources,legal,marketing,technology,andsoon.

Berkshireonlyacquirescompanieswithstrongtopmanagementinplaceandthen defers to them with scant supervision. All quotidian decisions qualify:advertisingbudget;productfeaturesandenvironmentalquality;theproductmixand pricing. The same applies to decisions about hiring, merchandising,inventory,andreceivablesmanagement.

Berkshire’sdeferenceextendstosubsidiarydecisionsonsuccessiontoseniorpositions,includingchiefexecutiveofficer.Berkshirerarelytransfersbusinessesbetweensubsidiariesandhardlyevermovesmanagersaround.Berkshirehasnoretirement policy and many chief executives work into their seventies oreighties.Berkshirecultureisdesignedasapermanenthomeforaneclecticmixofautonomous,self-reliantandthrifty,prosperousbusinesses.

LarryCunninghamandCharlieMungerduringabreak

AccountingandTaxationBuffett is noted for his lucid accounting explanations in his annual reports,which often include alternative presentations and explanations not required orcontemplatedbyformalaccountingrulesorsecuritieslaws.Atthesymposium,the habit prompted debate about whether shareholders are better served bydisclosure thatsolelyadheres to requirementsorventures thebroaderviewsoftop managers. In 1996, the context highlighted contemporary alternatives ofaccounting for mergers—pooling or purchase—but the broader topic remainslively as rules were changed to regulate non-GAAP disclosures in stringentways,evenasinvestorsdemandsupplementalnon-GAAPinformation.

WhileBuffettdrewattentiontoincomeinequalityina2011NewYorkTimesop-edbythedramaticstatementthathissecretarypaidahighertaxratethanhe,Munger emphatically made the same case for income tax fairness at thesymposium in 1996. Fairness and rationality are fixtures in tax policy debate,whether the income tax itself or the many contentious issues of corporatetaxation.Atthesymposium,topicsspannedfrombasicssuchastherelativeratesappliedtoindividualsversuscorporationsaswellastaxincentivesthatinfluencecorporatedividendpolicy,andtheformandamountofexecutivecompensation.

Taxpolicydebatesraiseperennialquestionsabouttheethicsofcorporatetaxminimization or avoidance. For instance, Berkshire’s conglomerate structureenablesinternalcashreallocationtobusinessesgeneratingthehighestreturnsonincremental capital—without incurring income tax.Some subsidiariesgeneratetax credits in their businesses that they cannot use but which can be used bysistersubsidiaries.Berkshirehasfinancedcorporateinversions,suchaswhentheAmerican iconBurgerKing reincorporated inCanadauponmergingwithTimHortons. Such were the timeless topics of our symposium and to which ourtranscriptcontributesongoingvalue.

*Thesubstanceofthesymposium’sdiscussionresembledthataddressedannuallyatBerkshireannualshareholders’meetings,thoughtheformatdifferedgreatly.Ifirst attended Berkshire’s meeting in 1997, the spring after the symposium,

whichdrewarecordcrowdof7,500—whatWarrenwarnedmewouldbea“mobscene.” Two decades later, I attended the 2015 meeting, which drew some40,000.(Welimitedattendanceatthesymposiumto150.)

At the meetings, the main event is un-rehearsed and un-choreographedbusinessdiscussion,whereBuffettandMungerspendthedayansweringscoresofquestionsfromshareholderswhilesippingCoca-ColaandeatingSee’speanutbrittle.Atthesymposium,thetwoBerkshireexecutivesspentmoretimeaskingquestionsthanansweringthem,andtherewasfarmoregive-and-takecolloquy.ButwealsoservedCokeandSee’s.

LawrenceA.CunninghamNewYork,NewYork

Spring2016

ProductionNote

Along with the context provided by the Prologue, the edited transcript isannotatedwith current commentary by a host of special guests.These includeleading investors and experts on Berkshire and Buffett, many of whom alsoattended the symposium, including Deborah DeMott, Robert Hagstrom, PaulHilal,MarkHughes,EdKitch,DaleOesterle,ShaneParrish,andJimRepetti.

Whilemost of the humorous commentary translatedwell fromvideotape toprint, the transcript nevertheless indicates the presence of laughter when theaudience collectively chuckled. And while the videotapes and correspondingtranscript captured the lion’s share of the colloquy, there were a few gaps insomeofthetapes.

Onastylenote,aswiththeoriginaltranscript,thisoneomitsmaterialwithoutindicating omissionswith ellipses or other punctuation; deletions include bothlengthystatementsthatspanparagraphsaswellasutterancesunworthyofprint,suchasverbalticks,haltingorredundantexpression,andgluewords.

Most photographs reprinted here are from the symposium and, other thanthose provided by the editor and other guests, all are courtesy of thecommunications office of Benjamin N. Cardozo School of Law, YeshivaUniversity,NewYork,wherethesymposiumwasheld,specificallyTheSamuelandRonnieHeymanCenter onCorporateGovernance,which I directed at thetime.

Finally,thankstothosefriendsandcolleagueswhoreviewedandcommentedon this annotated transcript, including the contributors listed above aswell asBillAckman,PeterBevelin,JeffGordon,SandyGottesman,SteveKeating,andAndy Kilpatrick. I’m especially grateful for the continued support and kindwordsabout this transcript fromWarrenBuffett.Aboveall, thanks tomywifeStephanieCuba,foreverythingunderthesun,especiallyourdaughters,RebeccaandSarah.

L.A.C.

WarrenBuffett,SusanBuffett,GeorgeGillespie

SandyGottesman,AjitJain,CarolLoomis

LarryCunningham,WarrenBuffett,DavidRudenstine

CarolLoomis,WarrenBuffett,HowardBuffett,SandyGottesman,AjitJain

SusanBuffett,WarrenBuffett,CharlieMunger,HowardBuffett

Contributors

Ackman,William(ActivistInvestor,PershingSquareCapital)Bratton,WilliamW. (Professor, University of Pennsylvania) Buffett, Warren E. (BerkshireHathawayInc.)Cunningham,LawrenceA.(Professor,GeorgeWashingtonUniversity)Denham,Robert E. (Partner,Munger Tolles &Olson) DeMott, Deborah A. (Professor,DukeUniversity)Eisenberg,MelvinA.(Professor,UniversityofCaliforniaatBerkeley)Fisch,JillE. (Professor, University of Pennsylvania) Gordon, Jeffrey N. (Professor,ColumbiaUniversity)Hagstrom,Robert(InvestorandAuthor)Hamilton, Robert H. (Professor, University of Texas) Hilal, Paul (ActivistInvestor, formerly Pershing Square Capital) Holdcroft, James P., Jr. (BankExecutive)Johnson, Calvin H. (Professor, University of Texas) Kitch, Edmund A.(Professor,UniversityofVirginia)Klein,William(ProfessorEmeritus,UCLA)Knowles,Marjorie(TIAA-CREF;GeorgiaStateUniversity)Lowenstein,Louis(late Professor, Columbia University) Macey, Jonathan R. (Professor, YaleUniversity)Millstein, IraM. (Partner,Weil, Gotshal &Manges LLP)Mundheim, Robert(Partner,Sherman&Sterling)Munger,CharlesT.(BerkshireHathawayInc.)Oesterle,DaleArthur(Professor,OhioStateUniversity)Reed,J.Bradbury(latePartner,Bass,Berry&Sims)Repetti,JamesR.(Professor,BostonCollege)Rudenstine, David (Former Dean, Cardozo School of Law) Simpson, Louis(RetiredExecutive,GEICO)Stout,LynnA.(Professor,CornellUniversity)Weiss, Elliott J. (Professor, University of Arizona) Yablon, Charles M.(Professor,CardozoSchoolofLaw)Currentorrecentaffiliationgiven.

W

GreetingsfromDeanDavidRudenstine

October27,1996

elcomeeveryonetoCardozoLawSchool.ThisisCardozo’stwentiethanniversaryyear,notlonginthehistoryofhousesoflearning,ifyoucompare it to Harvard or Yale or Oxford or New York Institute of

Fashion.Butwhilewe’restillwetbehindourears,ourstoryisremarkable,forinhardly any time, Cardozo has established itself as an important center oflearning, scholarship, and teaching. Today’s symposium is both the latestexpressionofthisgrowingstandingaswellasabuilderofit.

It hardly seems right to dive into The Essays of Warren Buffett, however,without firstmentioning theYankees’ victory last night.After all,Buffett andtheYankeeshaveincommonatleasttheirrespectivedominanceintheirfields.Andlastnight theYankeeswontheWorldSeriesfor thefirst timeineighteenyears.WhenIwasgrowingup,theywonallthetime.Idon’trememberthe1947championshipbecauseIwasonlyfive.Butby1949,IwasinhighgearandlivedanddiedwiththepitchesandhitsastheYankeesrolledthroughthegloryyearsoftheearlyfifties.

As you all know, Casey Stengel was the Yankee manager during thosetriumphantseasons.LikeWarrenBuffett,heattractedattentionbecause,likeMr.Buffett,hewasawinner.Attheendoftheday,monthoryear,youwouldcheckthe standings andhisYankeeswouldbe on top.UnlikeMr.Buffett, however,Mr.Stengeldidnotwriteessays,didnotwritetotheYankees’owners,players,orfans.YethehadplentytosayandasapreludetospendingtwodaysthinkingaboutwhatMr.Buffetthaswrittenoverthepastmanyyears,IthoughtImightquotesomeofMr.Stengel’smostastonishingremarks.

Inaveinthatmighthavecapturedlastnight’sgame,Stengeloncesaid“Goodpitchingwill always stopgoodhittingandviceversa.”Onwhether abstinencefromdrinkinghelpedplayersplaybetterbaseball,Stengelsaid“Itonlyhelpsiftheycanplay.”Onbeingdecisive,thewayyouhavetobeasaninvestor,Stengelsaid“Imadeupmymind,butImadeitupbothways.”Onhisgoodfortuneasasuccessful manager—and perhaps a comment that Mr. Buffett might feelresonancewith—Stengelsaid“Youmakeyourownluck;somepeoplehavebadluck all their lives.” And, lastly, on his future, Stengel said, in the spring of1965,“HowthehellshouldIknow,mostpeoplemyagearedead.”

Conferences don’t just happen.They take a creativemind, a strategic hand,hundreds of hours of organizing work and financial resources. Today’ssymposium is no exception. Professor Larry Cunningham conceived of thisconference,shapedit,andorganizedit.WealloweLarryahugedebt,andthankyou,Larry.WealsowanttothankthestudentsoftheCardozoLawReviewforhelping Larry carry off his ambitious idea for this symposium. They workeddiligentlyandwewouldnotbeherewithouttheirefforts—sothanks.FinancialsupportforthissymposiumcomesfromtheSamuelandRonnieHeymanCenteronCorporateGovernance.TheHeymanshavebeengeneroussupportersof theLawSchoolformanyyears.Wearegreatlyindebtedtothemfortheircontinuing

support and faith in our capacity to do the kinds of thingswe are doing heretoday.

Andlastly,IwanttothankWarrenBuffettforhisessaysandforhispresence.Weallverymuchappreciateyourparticipationandeagerlylookforwardtothenexttwodaysofdiscussion.

CorporateGovernance

PanelOne:ChairedbyIraMillstein(atright,backtocamera)FrontRow:SusanBuffett,WarrenBuffett,CharlieMunger

SecondRow:BruceBerkowitz,PeterHilal,BillAckman,PaulHilal

*Jonathan Macey and James Holdcroft proposed a radical idea: to letshareholdersofapubliccompanyannuallyvotebyproxy in favorofdirectingtheboardeither to replace incumbentmanagementorput thecompanyup forsale.

BOB DENHAM: This proposal seems to me a particularly interestingexample of what I see as a dangerous strain in corporate governance reformproposals.It’sastrainthatweseeincorporategovernancereformbyseparatingpowerfromresponsibility.Andthisproposalcouldinvolveaparticularlyradicalseparationofpowerfromresponsibility.Theshareholderswouldhavethepowertohanga“forsale”signonthecompanybutwouldnothavetheresponsibilitytocarrythatout.

And,ofcourse,inmanysituationsit’snotthebestwaytosellacompanytoput a for sale sign on it.That can destabilize employees and customers and itmaynotbeagoodprospectforsellingacompanyunderthecircumstancesthatled shareholders to put that for sale sign on. By separating power fromresponsibilityinthisway,Ihavetroubleimaginingwhyanysanepersonwouldserveonaboard.

HOLDCROFT: We think actually the contrary here—that this bringsresponsibilityinlinewiththedecisionmaking.Theshareholdersaregoingtobethe oneswhowill have the gain or loss based on the actions of the directorseitherway.Sothisisallowingthemtomakethedecisionswhentheythinkit’sappropriate.

BOBMUNDHEIM: Iwasgoing to ask the samekindof question thatBobDenhamdid.Forexample,assumetheshareholdersofabrokeragefirmhungupa for sale sign. What happens to the people inside during the period whilethey’retryingtosellit?

MACEY:Some companies are going to be better to sell than others, and itwouldbeperfectly reasonableannually for thedirectors,when they’resendingoutthissolicitationwhichwouldhavethevotingoptionsthatwe’reenvisioning

to say: we recommend you don’t sell the company, and it would have theseterribleconsequences.

And if your analysis is right, then you have this brokerage firm and therewouldbethisnightmarishproblemandallthesepeoplewouldbeleavingduringtheperiodofthesale, thatthisfirmwouldlosealotofvalueif itweresoldinthis very bad way. And all I’m saying is if that’s true, it’s going to be thedecisionmakershere—theshareholders—whobearthatcost.

MUNDHEIM:Thedirectorsmightnotbe able tomake that statement if, infact,duringthatperiod,theyaretryingtosellthecompany.Idon’tknowthatintheproxystatement,consistentwithsecuritieslaws,theycansayitwouldbeadreadfulthingtosellitandthenshortlythereafterannouncethesale(laughter).

MACEY:That’sright,andyouhaveasimilarpoint ifyouhavesomereallygreat piece of information that a company has and you force the sale of acompany. But wewould certainly in our proposal give the board of directorssignificantleewaywithrespecttotimingsothatevenif theygotthisvote,andthekindofspecialfactsyou’redescribing—likethey’realreadytryingtosellthecompany or there’s some piece of corporate information that’s not public thatwould have a radical change on the price and you couldn’t let that out at anauction—thosearereallyeasychanges.

PAUL HILAL: We sell companies on a daily basis, and we go to greatlengths,alwaystomakesurethattheofferprocessiskeptconfidential.Becauseeventhepossibilitythatmyclientwouldbeupforsaleisaterrornotonlyfortheemployees—causing defections and the circulation of resumes—but alsosuppliersandcustomers.So,onewouldargue thateven thepotential thateachyear the entire company can be put up for sale or the senior managementstructurecouldbesweptoutwouldinandofitselfcompromisethecorporationorpreventitfromachievingfullvalue.

Theproposal thatyoulaidout juxtaposesanalternativefor thisshareholder-firstregime.Rightnowtheshareholdersofawidelyheldcorporationhavelittledirectinfluence,buttheyhavethealternativeofsellingtheirsharesandwalkingfromamanagementteamtheydon’tsupport.

Yourproposalwouldgive thedispersed shareholdergreater direct influenceand control, inviting thequestion: does the shareholder knowenough tobe soempowered?Aren’t you pointing to a failure of the representative system thatdependsuponelectionofsavvy,deeplyengagedboardmembers?Isn’tthepoint

heresimplythatthoseboardmemberssometimesfailtorepresenttheinterestsoftheirconstituents?Soperhapsabetterremedywouldbeattheboardlevel,ratherthanincreasingthedirectinfluenceofshareholderswhomayormaynotbebestpositionedtoexercisethatinfluence?

MACEY:I think it’s important to think for justasecondabout the fact thatevery year companies are sending out proxy solicitations, every yearshareholdersarevoting,andwehaveaverystrongempiricalrecordthatshowsoverwhelminglythatmanagementiswinningtheseproxycontests.Theycontrolthe proxymachinery andwe’re even having corporate disruptions of the kindyouandDeanMundheimsuggest.You’regoingtogetexactlywhatweobservedtoday,whichiscompaniesaren’tgoingtobesold.Andourproposalisdirectedatwhatweregardastherarecase.

IRAMILLSTEIN:Warren,Ithinkthepointthey’remakingisagoodoneinasense. If you were the sole shareholder or major shareholder of one of thesecompanies and youwanted to changemanagement, you could change it, or ifyouwantedtosellthecompany,you’dsellit.Andwhatthey’retryingtodoisfindawaytogetthisdispersedownershiptobeabletodowhatyoucandoasthesoleowner.Thereal issueiswhetheryoucantranslatesoleownershipintodispersedownershipandgetactivity.Doyouhaveaviewonthat?

BUFFETT:Well,atBerkshirewearethesoleshareholderofoursubsidiaries.Ineffect,weactasyouwouldhopeaboardofdirectorswouldactrepresentingdispersed shareholders.We justhavea coupleofproblems.Wehavea capitalallocation problem where the managers of the businesses would probablyallocate capital differently thanwewould atBerkshire, becausewedon’t careabouttherelativesizeofthesubsidiaries.Wecareabouttherelativeprofitabilityoftheshareholdersofthatsubsidiaryineffectinaggregate.

Wealsohavetheproblemofdealingwithwhetherwehavetherightmanagersandmostofthetimewedo.Thebiggestproblemisnottheterriblemanager.Thebiggestproblemisthemediocremanager—andthat’strueeverywhere.Thatisavery difficult thing to deal with, and I’m not sure how you deal with it. AtBerkshirewecandealwithit,butIwouldsayit’smymostdifficultproblem.

MILLSTEIN: For dispersed owners it must be even more of a difficultproblem—howdoyoufindthatmediocremanagerwhoisoftenverywellhiddeninthefirstplace?

BUFFETT: It isveryeasy todo ifyou’re runninganathletic team.Butourproblems are really very similar. I would say that the biggest factor causingboards to act as they would act in our situation where we own 100% isembarrassment.Ifyouembarrassbigshots,theywillbehavebetter.Andinthatrespect, probably the press has donemore to cause boards to behave as theyshouldthananythingwecandreamup.

*Melvin Eisenberg argued that boards should maintain internal controls toassure corporate compliance with law and company policy. Jill Fisch arguedthat prevailing corporate governance talk favors a one-size fits all system ill-suited to the variety of firm-specific characteristics—citing Berkshire as acompanybetteroffbydefyinggovernancetrends.

MarjorieKnowles

MARJORIEKNOWLES:Iwouldliketocommentontwosidesofthis.First,it’snotclearfromMaceyandHoldcroftwhattheproposalissupposedtocure.Was it supposed tocure the fact that takeovers take too longor toaddress thefact thatmost institutional investorsareveryconservative?Iunderstand ifyouthink it would go faster if shareholders could vote on whether to put thecompanyupforsale,butthesecondproblemseemstoremain.

It is always a problem to lump shareholders together because they are sovaried inboth theirpurposesandprocesses. Ican tellyoufromTIAA-CREF’sexperience that in terms of identifying underperforming companies and thendoingsomethingaboutthem,thesituationismuchmorecomplexthanthepressoften makes it seem.We have found it not easy to identify underperformingcompaniesinawaythatisusefultoustotakecorporategovernanceaction,andIdon’tthinkthat’sforthereasonsyoumentioned,ProfessorFisch.

Letme explain it a little bitmore.One of the themes that I always tellmystudents is the chorus from a Statler Brothers’ song: “Life gets complicatedwhenyougetpasteighteen.”(Laughter.) I think thesituationwith institutionalinvestors identifying underperforming companies and then doing somethingusefulaboutitisanimportantsubject.Idon’tthinkjustputtingthesethingsontheproxystatementisawaythatismostuseful.

It’smuchmore useful to distinguish among types of institutional investors.Forexample,corporatepensionfundsarenotoriouslyconservative—thatis,non-activist.Publicpensionfundsmaybemoreactivistbutlessontheperformancesidethanonthegovernanceside.Wetendtofocusontheperformanceside,andwe have found that there are a range of informal routes to dealwith, none ofwhichhavetodowithputtingthesethingstoshareholdervotes.

Mysecondpoint, Iwould like torespondtowhatyousaid,ProfessorFisch,about not finding a correlation between corporate governancemonitoring andperformance.I’mnotsurethat’swhatweshouldbelookingfor,althoughIthinkthe empirical evidence and the anecdotal evidence is that good corporategovernanceismostimportantforcompaniesintimesoftransitionorcrisis.AndI haven’t seen good studies that measure that. Jay Lorsch’s studies of howboards actuallywork show that governance norms come into playmostwhencompaniesneedanewsuccessionplan,forexample.

SoIwouldsaythatbyfocusingoncorporategovernancenorms,weintendtohelpcompaniesplanbetterfortimesofcrisisratherthanincreasethestockpriceover five years,which iswhatmost business school studies study. [AtTIAA-CREF],wearelong-terminvestorsandwearemuchmoreconcernedaboutthelong-term improvements in corporate performance rather than the short-termmeasurementsthatI’veseeninthestudies.

MILLSTEIN:We’retryingtocomparetwomodels.OneisaBuffettmodelofsignificant ownership and really paying attention to what’s happening withmanagement, and the TIAA-CREF model which is the epitome of the largepublicinstitution—whichowns1600companiesandreallycan’tpayattentiontoall of them. It’s impossible, but that is theway theworld isgoing.Whenyoutrack through the twenty-five largest companies, you find virtually the sametwenty-fiveinstitutionsowningvirtuallythesametwenty-fivecompanies.Now,asanantitrustlawyerthatgivesmegreatconcern,butIseemtobetheonlyoneintheroomwiththatconcern!However,that’safactoflife.HowdoesTIAA-CREF begin to identify Warren Buffett-type concerns amongst its 1600companies?

KNOWLES:I’mgladtohaveanopportunitytoexplainaboutthiscompany,whichIadmirealot,butyou’reabsolutelyright.Theoverwhelmingmajorityofour stock portfolio is passively invested or indexed. A comparatively smallproportion is actively managed, and if we want to find out more aboutcompanies we would ask our analyst.We have found, and the Robert Pozenstudiesshow,thatitmaynotpayformostlargeinstitutionalinvestorstoputalotoftimeandresearchintofindingproblemsthattheythengoaboutfixing.

Wehavefound,however,thatwithacoupleof“underperformingcompanies,”to the extent they can be located and measured effectively, working withmanagement is our best way to go. And not just then, but for the life of thecompany. In fact, in our experiencemost underperformingmanagements havesomestoryand thequestion iswhetherouranalysts think theirstory isagoodoneand therefore thatwe should stickwith them.We’re toobig togoaroundsellingveryoftenandthat’sourrealproblem.Wehaveusedthewithholdingofvotes when we think a board of directors is being really irresponsible. Thencomesthehardquestion:sincewetendtobealarge,public,butquietcompany,doweholdapressconferenceornot:AndIthinkthatgoesbacktothepointMr.Buffetthasraised.

MILLSTEIN:Whenitreallygetsbadyouputtheflashlighton,right?Mel?

EISENBERG: Idon’twant to rainon the teapartybutyousaidyouagreedwith Jill. I don’t thinkyoudidand Idon’t agreewithyou (laughter).Becauseyousaid thatyouagreedthateverycorporationshouldbeable tohaveitsownboardstructure,butIthoughtIheardJillsayingthatacorporationshouldbeableto decide it doesn’t want an independent board. [Jill Fisch nodded.] Andaccording to the summary you gave us of the newNACD report, one thing acompanyshoulddoistohaveanindependentboard.

MILLSTEIN:Absolutely.

EISENBERG:Okay,soIjustwanttomakeclearthatwedon’thaveasmuchharmonyashasbeenrumored,numberone.Ialsodon’tagreewithyouinthat—or the report, I should say—when it says that the board should do anything itwants(beyondindependence, Iguess).Because, forexample,asyoucould tellfrommyearlierpresentation,Iwouldberathershockedifaboardsaidwewashour hands of internal controls. At this corporation, we decide we’re notinterestedininternalcontrols.Idon’tseeit.Iwouldbesurprisedifaboardsaid,atthiscorporationwedon’tapprovemajorcorporateplansandactions.Uh-uh.Anything the corporation—executives—want,we rubber stamp.So, either youreally don’tmeanwhat you say—you have of course twoweeks to change it(laughter)—buteitheryoureallydon’tmeanwhatyousayorIdisagreewithitprettyprofoundly.

MILLSTEIN: No, I mean what I say. I wouldn’t think for a minute that areasonably intelligentboardwoulddoanyof the thingsyou suggest.Wehavetwenty-three pages of suggestions in the report, andwe say that if you rejectthemyououghttotelltheshareholderswhy.So,inmyview,ifaboardweretoreject doing the kind of auditing youwant and tell its shareholders why theywere no longer going to audit, theywould be removed relatively rapidly.Wethinksunlightandanexplanationofwhytheboardisdoingwhatit isdoingisthebestwaytogetatit.AndIagreewithWarrenthatnoreasonablyintelligentboardwhichisdiligentandknowswhatitsfunctionis,isgoingtorejectdoingthe things you suggest—I have a lot more confidence in these people than Iguessyoudo.Ithinkthey’lldotherightthing.

EISENBERG:Whoisyou?

MILLSTEIN:You.

EISENBERG:Me?

MILLSTEIN:Y-O-U,yes.Youwant to regulate themand tell themwhat todo?

EISENBERG:InsomecriticalaspectsIwouldsayyes,aboarddoeshavetoapprovemajorcorporateplansandactions.

MILLSTEIN:That’sbylaw?

EISENBERG:No,bylawitjusthastoapprovedividendsandsoon.

MILLSTEIN:Virtually everything that’s everwritten tellsboardswhat theyought to be doing, and it isn’t dictated by legislation, and boards are doing itanyway.Nowyoudon’tneedtogomuchbeyondwherewearenow.Theyknowwhatthey’resupposedtodo.

EISENBERG:Hereweareperhapsnotindisagreement.

JEFFGORDON:Theremaybeverybigcosts associatedwith requiring theauditingstaff [MelEisenberg]proposed,bothmonetaryandotherwise. In lightofwhatJillFischwassayingabout flexibilityandcostsandbenefitsandwhatIra Millstein was saying about board responsibility, what are your views,ProfessorEisenberg,onhavingsuchastafftoenabletheboardtodowhatyoudescribeitshoulddo?

EISENBERG: I am not talking about legal rules at the moment. I am nottalkingaboutstatuteswhichsaytheboardhastohaveresponsibilityforinternalcontrolsorhowit’stobeexecuted,becauseIagreewithsomeofthethingsthathavebeensaid.Forexample, thepublicity thing—Ithink thecorporatecultureaspectisreallymoreimportant.

Ithinkpracticeandtheoryweremovingtogetherinthisreconceptualizationoftheboard.And I thinkwhenyougetacorporateculturewhichacceptscertainnorms, that’s reallyprobablymore important than legal rules.So,numberone,I’mjusttalkingabout,asIsay,rulesofcorporateculturethatIwouldliketoseeinplaceatthemoment.

Havingsaidthat,IguessIwouldliketoseearuleofcorporateculturethat,atleastwhereyouhaveaninternalauditingstaff,hasthemreporttotheboard.Idonothavedataontheprevalenceofinternalauditstaffs,andImaybeincorrectinsayingthatmostlargepubliclyheldcorporationshavethem,althoughthat’smyimpressionfromtheempiricalstuffI’veseen.

CurrentCommentary“Most boards and executive teams welcome well-thought-throughshareholdersuggestions,andactinshareholders’bestinterestwithdeliberatespeed.Everyonewinswhenboardsandmanagementworkwithsophisticatedshareholders. In some regrettable cases, only the credible prospect of the‘flashlight’—typically a proxy contest—and the potential embarrassmentfrom facts that light reveals, suffice to cause the incumbents to act.Shareholdersshouldspeaksoftlybutcarryabigflashlight!”–PaulHilal

MUNGER: If the Macey-Holdcroft proposal were adopted and theshareholdershadaneasyproceduralwaytoforcethesaleofacorporation,youwould find that at certain times practically every corporation inAmericawasworthmoretoitsshareholderssoldoutthancontinued.So,theproposalswouldjust pass like crazy. It would be one of the most effective proposals everadopted. So, when you examine the consequences of the proposal, you get ahugeconcentration.

Thenifyoucarryitonestepfurther—whichanyproperanalysiswould—youwouldexaminetheconsequencesoftheconsequences.AndallthemanagersofAmericancorporations—seeingtheshareholdershavingthispowertoactintheirown interest to force sellout after sellout—topreventbeingdisplacedand soon,wouldgointogreatvoluntaryconcentrations.

So,you’re talkingaboutaproposalwithveryprofoundmacroconsequencestotheAmericaneconomyandsocialsystem.Everybodywouldwanttobesobigthat they’dhavepowerful interests ineverycongressionaldistrictandsoforth,so the shareholders couldn’t force a sell outmerely because theywere worthmore soldout thancontinuedas is. Itwouldbe avery shockingandpowerfulproposal,and I’mnotsure ifyoureally think throughwhatwouldhappenyouwouldvoteforit.

CharlieMunger,HowardBuffett

BUFFETT: As a stockholder, I’m really only interested in the boardaccomplishingtwoends.Oneistogetafirstclassmanagerandthesecondistointerveneinsomewaywheneventhatfirstclassmanagerwillhaveintereststhatarecontrarytotheinterestsoftheowners.

Ithinktherearegreatdifficultiesinachievingbothofthoseends.I’vebeenadirector of, counting them up, seventeen publicly owned companies, notcounting ones which we control (which probably shows a very dominant,masochistic gene) (laughter). But over that time I’ve wrestled with just thesecoupleofproblemsandtheremaybeprocessesthatwouldimprovethem.

The first one: getting the first class manager. I have never seen in thoseseventeen cases—and I’mnot awareof it inother cases—where aquestionofmediocrityorworseandtheevaluationofchangehasbeenmadeinthepresenceofachief executive. It justdoesn’thappen.So, I thinkabsolutely tohaveanychance of having that one solved, you have to have regular meetings ofevaluationofchiefexecutives,absentthatchiefexecutive.

If theyare rumpmeetingsor somethingof thesort—if they’renot regularlyscheduled—there is just toomuch tension created.Because a boardmay be alegalcreation,but it’sasocialanimal.It isverydifficultforagroupofpeoplewithoutaverystrongleadertoallofasudden,spontaneouslydecidethatthey’regoing to hold somemeetings elsewhere and discuss whether this person whomaybeaperfectlydecentindividual,reallyshouldbebattingclean-up.

So,Ithinkthereshouldbealotofemphasisonprocessintermsofevaluationof a CEO. I don’t know how you create a greater willingness on the part ofdirectorstoreallybouncesomebodythattheywouldbounceiftheyowned100%ofthecompanyoriftheirfamilywasdependentontheincomefromthebusinessandsoon.IjusthavenotseenitincorporateAmerica.

Ifyougetthatfirstclasschiefexecutive—whichisatoppriority—hedoesn’thavetobethebestintheworld,justafirstclassone.AndImayagreewithJillto some extent—you may be able to turn a five into a five-and-a-half orsomethingbyhavinghimconsultwithlotsofotherCEOsandgetalotofadvicefromtheboard.Butmyexperienceisthatyoudon’tturnafiveintoaneight.Ithinkyou’rebetteroffgettingridofthefiveandhavinghimfindsomethingelsetodoinlifeandgoingoutandacquiringaneight.

CurrentCommentary“Buffett is famously savvy at finding first class chief executives forBerkshire’ssubsidiaries.Inthetwodecadessincethesymposium,however,hehashadtoproveequallyadeptatreplacingthemwhennecessary,thoughusuallywithoutfanfare.Whilecircumstancesvaryandlittleissaidpublicly,in that time CEO changes occurred at Benjamin Moore, FechheimerBrothers, The Pampered Chef, Johns Manville, Larson Juhl, and NetJets.Notoriously, David Sokol, a Berkshire troubleshooter who ran its energybusiness andwaswidely seen as a potential successor toBuffett, resignedafter buying stock inLubrizol before pitching it as aBerkshire acquisitioncandidate.”–LarryCunningham

The secondproblem is: evena first class chief executivehas some intereststhatare inconflictwith theshareholders.One ishisorherowncompensation.Thesecondonegetsintotheacquisitioncategory.Therearepsychicbenefitstoanexecutiveof runningabigger showor justhavingmoreactionorwhateverthatcanbeinconflictwiththeshareholders,eventhoughthatexecutivemaybefirst class in other respects. The nature of acquisitions is that they get to theboard at a point where if you turn them down you are rejecting the chiefexecutive,youareembarrassinghiminfrontofhistroops,you’redoingallkindsofthings.So,itjustdoesn’thappen.

I have seen board after board approve deals that afterwards the boardmemberssay,“youknow,Ireallydidn’tthinkitwasaverygoodideabutwhatcouldwedoaboutit?”Andthereshouldbeabettermechanism.ButI’mnotsurewhat it is. There should be a bettermechanism, though, for a board tomakethose important decisions where a first class chief executive can have anabsolutelydifferentequationthantheshareholders,weighingallofthepersonaleconomicandnon-economicconsiderations.

There should be a mechanism that enables the board to bring independentjudgment on those in a way that doesn’t put the CEO in a position virtuallywhere he or she has to resign or is embarrassed in front of the troops.And Iwouldwelcomeanydiscussiononthosematters.

Thecompensationquestionwherethefirstclassexecutivecouldbeinconflictwiththeowners,IthinkitgetsabusedsomebutIdon’tthinkthatitamountsto

thatmuchwhencomparedwith theother twoquestions—getting the rightoneandalso thequestionofacquisitions. I think itcostsshareholderssomemoneythat’sunnecessary,andIthinkthatalotofthecompensationschemeshavebeenquite illogical, but I don’t think that they are overwhelming in terms ofevaluation.

KNOWLES:IjustwantedtorespondtotwopointsMr.Buffettmadebecausethey are useful. I think it’s quite clear that the most important thing aboutprocessis tohaveit inplacebeforeproblemsemerge.Most lawyersknowthisand have towarn clients about it.Good corporate governance standards—likeTIAA-CREF’sandGeneralMotors’—havethatprocessinplace.

Onthesecondpoint,IthinkAmericancorporatecultureputsuntowardfaithinthe law. We’ve done the exercise of comparing the various definitions of“independentdirector”andlawstudentscouldwritelotsofpapersonthat.TheNewYorkStockExchangehas one,TIAA-CREFhasone, theAmericanLawInstitute has one—there are lots of definitions of “independent.” But none ofthemget at the fact that humans are social animals and there’s awhole set ofvaluesthatthelawcannottakeintoaccount.

Lookat therangeofdefinitions.Yetnoneof thosedefinitionsincludebeingoncharitableboardstogether,orwithspousesoncharitableboardstogether,orbeingscoutleaderstogether,orthetraditionalexampleofplayinggolftogether.AndsounlesstheindependencestandardsaretakenwiththelimitedvaluethatIthink they have—we all bow to them,we all insist on them—butwe have tounderstandhumannatureandnotputtoomuchfaithinthelawtohedgearoundthesedangers.

MILLSTEIN:As far as acquisitions andmergers are concerned, thegeneralconsensusseemstobethatiftheboardlearnsitsbusiness—whichisrareenoughthese days—but if the board really learns its business—and, by the wayindoctrination and learning the business is something we at the NationalAssociation of Corporate Directors also recommend heavily—and then getsinvolved in the strategic plan and business plan in a much deeper way,emergency acquisitions and spur of the moment “good ideas” are much lesslikely to be brought to the board. Because if a board does contribute to anintelligentstrategicplanandbusinessplan,it’splanningaheadonwhatitintendstodo.Andifitdecides—itandmanagementdecide—tomakeanacquisition,itshould be planned in advance, not something that walked in yesterday and isvotedontoday.

BUFFETT:Iwouldsaythatmoredumbacquisitionsaremadeinthenameofstrategic plans than any other. Iwould be verywary if a boardwent throughsomeelaborateprocesswhereastrategicplanwasreviewedingreatdetailandthentheyendorseitandthenthemanagementwentontomakeacquisitionsandthentheycameandsaid,“butwemadeitinaccordwithastrategicplan.”

MILLSTEIN:YourbasicargumentthataggrandizementofthecorporatesizeisnotthegameissomethingthatIwisheverybodywouldbelieve.Buttheworldisn’t there yet, so size is still important. It has to dowith compensation, jets,planes—alltheothernicethingsthatgoalongwithbeingabigcompany.Whenweconvinceeverybodythatthatisn’ttherightwaytogo.I’llleavethattoyou.You’remakingaprettygoodtrackrecord.

BUFFETT:Onjetplaneabuse(we’regettingclosertotheplanebusinesssoIhavetobealittlecareful)(laughter)andoncompensation,Icanturnpurpleinmeetings.1 But in the end, the big, dumb acquisitions are going to costshareholdersfar,farmoremoneythanalloftheotherstuff.

*DeborahDeMottarguedthatforrelationalinvestingtomeetitspromise,largeminority block holders must be obliged act as fiduciary agents for othershareholders,whichisneitherprevailinglawnorfeasiblepractically,notinginpassing that people often cite Berkshire as an exemplar of therelationalinvestor.

BUFFETT:CanImakeonecomment?There isnothingDeborahsaid that Idisagree with. Charlie and I, to my knowledge, have never used the word“relational” in describing our investment strategy, either in print or atshareholdermeetingsoranywhereelse.Charliecanyouthinkofany?

MUNGER:No.

BUFFETT:Wedon’tthinkofourselvesthatway.Wesaywearetryingtobuyinto businesses with excellent economics, run by honest and able people at adecentprice.Webuyveryfewsecurities,sowelookatitas“focused”investing.Buttherelationshipaspectisnotakeypartoftheinvestmentstrategyatall.

Wewill tend tohavebigblocksbecausewe’vegota lotofmoney.Webuyvery few stocks, so thatwould be an aspect of it, andwe stick around a longtime.Sowedogettoknowthepeopleinthebusiness.

Butwe’veneverusedthatterm.Idon’tknowwhereIfirstsawit,butitmaywellhavebeenusedinmarketingcertainfundsthatweresetupandpretendedtocopyuswhentheyweren’treallycopyingwhatwedidatall(laughter).Ithinkthat’swhereitcomesfrom.Wedon’treallyassociateourselveswithit.

Whatwe are looking for are exactlywhatwe’ve been seeking for decades.Whenwehadwaysmallerfunds,itwasthesamething.Whenweboughtstockstwenty years ago, we bought relatively few stocks. We didn’t end up as apercentageofthecompanyaswedonowbecausewedidnothavethefunds.Wetendedtohaveaboutthesamerelationships,orlackofthem—insomecaseswenevermetthemanagementsandinothercaseswehaveknownthemwell.

But I think that the termhascome tomeansomethinga littledifferent thanwhatwedo. I think that alsopeoplehavea commercial interest in associatingwith us because they’re trying to market something that perhaps had largemanagement fees attached to it (laughter).But to the casual observer itmightlooklikethesamething.ButIdon’tdisagreewithanythingyousaid.Charliehassomethingtosay,though.

MUNGER:Idon’tthinkit’struethatthereissuchathingastruerelationshipinvesting.I’llbetthereispracticallynoneofit.ThereisverylittleofthetypetheduPontsgavewhentheywentintoGeneralMotors.Commonsensesayswe’relike that inpart,and it’s true,weare like that inpart.Theywent infora longtime, and they planned to be constructive, and I don’t think they made theinvestmentsotheycouldsellpaint,althoughtheydidsellsome.AndIthinkthatGeneralMotorswasbetterforhavingtheduPontsthere—waybetter.

But there’s tons of relational investing in the venture capital partnershipsserving on the edge of technology in the SiliconValley. There’s tons of it. Ithink theyhope tobe constructive, but theywill also take action if theydon’tlikewhat’sgoingon.Theyhavemorecomplicatedlegalproblemsthanwedo.They’remoreactiveinthemanagement.They’remoreinterestedinsellingsmallblocksorbuyingmore.Theyhavewaymoreoftheproblemsthatyou’retalkingabout.

BUFFETT:They’remore interested in an exit-strategy.And if you’remoreinterestedinanexit-strategy,you’regoingtohavemorelegalproblems.We’relooking for a non-exit-strategy.Wewant to go into things where we’ll neverwanttoexit.Imeanit’sverysimple.Butifyouareinasituationwhereyouareboth active and looking for an exit-strategy, you’re going to have moreproblems.You’regoingtohavemoreconflicts.

CurrentCommentary“Stock selection and portfolio management are the keys to investmentsuccess. Warren popularized the concept of “focus investing,” a portfoliomanagementapproachthatconcentratesone’sbetsonthosestocksthathavethehighestprobabilityofbeatingthemarketoverthelongterm.”–RobertHagstrom

EDKITCH:Deborah,youtriedtoapplyordiscussedapplyingamodelofacontrol block as an agent for the other shareholders in the context of theBerkshireportfoliocompanies,andcorrectlyobservedthatunderpresentlawthemodelwasinapplicable.Butitdidstrikemethatthereisonecompanyinwhichthe control block holder has assumed an agency obligation for the othershareholdersandthat’sBerkshireHathawayitself.Becausethelettersrepeatedlysaythat“wearepartnersvis-a-vistheothershareholders.”Andwiththat,that’s

enoughtocreateapartnershiprelationship.AndwouldyouthenconcludethatastoBerkshireHathaway itself, the control blockdoeshave theveryobligationsyouarespeakingof?

BUFFETT: Could I sell my control block at a premium to somebody andleavetherestoftheshareholdersbehind?

DEMOTT: I think that Ed’s observations actually are susceptible to twodifferent lines of response. There is a venerable line of partnership cases inwhichpersonsassertthatapartnershiprelationshipexiststoinduceotherpeopleto do things, typically to extend credit. And I’m not sure that that’s theconsequenceintheBerkshireHathawaystatements—

KITCH: These are in writing. It induced people to buy and hold shares ofBerkshireHathaway.

DEMOTT: We also know that current law does not—absent some veryunusualcircumstances—requirethepersonwhosellsthecontrolblocktosharethepremiumwithothershareholders.

KITCH: I knowofnoother company inwhich a control blockhas actuallysaidtotheothershareholdersthatweareinapartnershiptogether.

BUFFETT:Ifyouhadsomethoughtthatyoumightbehaveinthatway,thenit would be crazy to say things like that. That’s obvious. You’re weakeningwhateverfactualcaseyouwouldhaveobviouslylateron.So,ifyouweretohaveanyintentof, inanywaytakingadvantageoftheothershareholders, itdoesn’tpaytogoaroundsayingthingslikewe’repartnersandthisisapartnershipandallthat(laughter).

MUNGER:Ifyousaythelawisthatthecontrollingshareholderdoesn’thavetosharethepremium,Ithinkthat’sprobablytrueifyoulookatcases.ButIcanrememberacoupleofjusthorriblecaseswherethecontrollingshareholdersoldtoaknowncrookoraknowndisreputabletypeandgotapremiumbecausetheotherguy(thebuyer)wasgoingtobehaveterribly.That’swhyhewasgoingtopaythepremium.Iwould,ifIwerestillpracticinglaw,bewillingtotakeoneofthosecasesonacontingent fee. Idonotconsider that safebehaviorbecause Idon’tthinkthehornbooklawcanbethatyoucansellyourcompanytoanyjerkyouwanttoforapremium.

IraMillstein,WarrenBuffett,SandyGottesman,DeanDavidRudenstine

1.Editor’sNote:BerkshirewasacquiringFlightSafetyInternationalatthetime.

FinanceandInvesting

BillKlein,LynnStout,LarryCunningham,CharlieMunger,BobHamilton,BillBratton

*BillBrattondiscusseddividendsandreinvestmentpolicyandreviewedstrategiestoamelioratesuboptimaldividendandreinvestmentpolicy,includingmandatorypayout,enhancedshareholdermonitoringandstepped-updisclosure.

BUFFETT: About a dozen years ago, we at Berkshire had a ballot inconnectionwithourannualmeeting—notaspartoftheofficialproxystatementbut sent along with it—where we asked our shareholders to vote on variousalternative dividend policies. Andwe had a high response andwe gave themmaybe either three or four choices. Would you advocate that for publiccompanies?

BRATTON:That’s an interesting question.You’re just suggesting a poll toinformmanagers.That is avery intriguingprospect. I seenothingwrongwiththepoll.

BUFFETT:Thepollpresumablywouldbeaprecatoryoperationanditmightwellbe—andprobablywouldbe—accompaniedbymanagement’sviewastotherecommendedcourse.Wedidn’tdothat,butweprobablygaveafewhintsoverthe years (laughter). I’m just curious as to what you might think the generalexperiencewouldbeamong theS&P500andwhetheryou think that itwouldleadtochangesinbehaviorordoyouthinkitwouldbeagoodthing?

CUNNINGHAM: What were the results of that poll? I would expect theshareholdersprobablysaidthedividendpolicythatyouhaveinplaceisterrific,thatit’sworkingwell,andthatit’spartoftheBerkshiremenu.

BUFFETT:That’sright.It’saself-selectedgroupofshareholders,atleastforthosewhoreadEnglish(laughter).Weaskedthesamethingaboutourcharitablecontributions program in the same poll. We were interested in how theshareholders felt about the old policies.We had told them the reason for ourdividendpolicy, but to someextent itwas for information abouthowwellwethoughtwe’dgottenacrossthepoint.

We gave them a no-dividend and low-pay dividend (around 20%) option.Charlie andmyvotes didn’t count.By shares I thinkwe found about 93-94%

agreed;maybe by number of shareholders itwas 90%agreedwith the policy.Butit’saself-selectedgroup.Thereisnoquestionaboutthat.

Butamoreinterestingquestionwouldbe,whatwouldhappenifyoudiditatacompanythat’spayingoutathirdorsomethingofthesort, ifyougavethemachoicebetweentwothirdsandzero?

Iwouldmentiononepointthat,intermsofourinvestingcompanies,wehaveno impact and have tried to have no impact on dividend policy.We have nottriedto, infact—therewasoneexceptionmaybetwentyyearsago,twenty-fiveyearsago.

BRAD REED: [Directed toMunger, who was chairing this panel.]Wouldyou please describeWesco’s dividend policy, and second, would you discussbriefly your views of the relative efficacy of stock repurchases as opposed todividends?

MUNGER:Wesco’sdividendpolicy is thatwhich theminorityshareholdersprefer,atleasttheonesweknowwhoinvitedusin.So,wearejustdeferringtothewishes of the verymuchminority shareholders.Now you can say, “that’seccentric,”andyou’reright.

Regardingcommonstock repurchases, ifyou’regettingmore intrinsicvaluethanyourcashisworth,why,ofcoursethatgetstobeveryattractiveasauseofcorporatefunds.Alternatively,ifyouhaveabetteruseforthefundsintermsofthevalueyougetthanrepurchase,youshouldusethealternativepurpose.

Everythingshouldbedoneintermsofopportunitycost.Opportunitycostissosimple.Ifyou’regoingtomakeanewinvestment,youropportunitycostofthenewinvestmentiswhateverthenextbestchoiceyouhaveavailableis.Now,yougothroughlifelikethatinsteadofwiththisgibberish(laughter),allIcansayisitworksbetter.

BUFFETT:AtBerkshire,incidentally,wehaveaboutthreeorfour80%-plusownedsubsidiarieswherethebalanceisownedbyafewpeople,asopposedtoWescowhere theminority interest is owned by a greatmany people. In eachcase,we tell the owners of the 20%or less interest that they set the dividendpolicy.It’suptothem.Wehavenotaxconsequencestousintermsofdividendpolicy, they have tax consequences. They have a lot of other considerationswithinfamiliesandallofthat,andtheysetthedividendpolicy.

Ineffectwesay,“ifyoujoinusandyoukeep20%orlessofyourcompany,the dividend policy ismore important to you than it is to us.” Because ifweleaveexcessmoneyinthecompanythatcan’teffectivelybeusedinthebusinessand therefore is employed in investments, the resulting profits from thoseinvestmentsmaybesubjecttohigherstateincometaxratesandmayhavesomeother disadvantages to us. But we say that, net, we’re willing to make thatagreementwith them,andwe’ve followed it for15years incertaincompaniesandwillkeepfollowingit.ButwedonotsitdownannuallyandfigureoutwhatisbestforBerkshireHathawayintermsofthat.

MUNGER:Youwillnotfindthatinyoureconomicmodels(laughter).

CurrentCommentary“It will be interesting to see if negative interest rates affect Berkshire’sdividendpolicy.”–ShaneParrish,FarnamStreet

BILLKLEIN:Attheaggregatelevelitisopportunitycostandthenthatbringsus back to the question ofwhose opportunity cost? Is it some sort of abstractcorporatenotionofopportunitycostwhichinturnwouldrequiretheassumptionoratleastthepresumptionthatBerkshireHathawaywouldretainallitsearningsand thenchooseamong thevariousalternative investmentsavailable to it?Butyou could then ask, well, wait a second now, why are we thinking aboutBerkshireHathaway’sopportunitycostsratherthanabouttheopportunitycostsofourshareholders?

MUNGER:Becausewe’rerunningBerkshireHathaway.

KLEIN:Yes,butyoualsohavethepowertodecidetodistributethatmoneytotheshareholdersandthenletthemmakethedecision.

MUNGER:Wetoldyouwhenwe’lldothat.That’sinalltheBuffettletters.

BUFFETT:If it translates intomore thanadollarofmarketvalue then theyhavetheoptionoftakingthefulldividendoutandgettingmorethanthedollarthan theywould have gotten ifwe sent it to them directly to use inwhateveropportunityisavailabletothem.

MUNGER:ThebreakpointthatIcouldn’tgetfrommyquestion,we’vegiveninBerkshire’scase.Wesayourbreakpointiswhenwegetsowecan’tdelivermorethanadollarofmarketvalueperdollarretained,wewillstartdistributingthemoneytotheshareholdersinsteadofretainingit.That’sourbreakpoint.

BUFFETT:Wemightdistributemorethan100%oftheearnings.

MUNGER:You’redamnright.

QUESTION:Berkshire’s share price implies tome that the share pricewassubstantially undervalued over time, and the company had a fairly low debtlevel.Whydidn’tBerkshirerepurchasestockoverthecourseofitshistorywhenthatwouldhavebeenanattractivealternative?Weretheotheropportunitiesthatgreat?

MUNGER:Ifyoulookattheotheropportunities,they’velookedprettygood(laughter). If you take 1973-74, I would argue that what we were buyingelsewherewasquiteremarkable.

BUFFETT:Wewishyoucoulduseamorerecentexample,Charlie(laughter).

MUNGER:Whatyougetelsewhereisnotsogoodanymoreeither.

CurrentCommentary“Berkshire has been undervalued formost of the past 50 years, invariablybelowtwicebookvalue.Compare that toabondwithanequivalentrateofreturn—a 19% coupon—which invariably trade above twice par.Why notBerkshire? For one, few investors ever believed Berkshire could keep itgoing.Worse,fewunderstandthepowerof“float”ordeferredtaxes,whichmakesbookalowestimateofBerkshire’sintrinsicvalue.WhileBerkshire’scurrentvastscalemakesa19%coupontoohigh,intoday’slow-interestrateworld, Berkshire’s stock price is still low compared to value. Berkshireremainsunderappreciated.”–MarkHughes,LafayetteInvestments

CurrentCommentary“Berkshirehasbenefittedfromthereportedhighrateofreturnascomputedfromtheinceptiontothepresent.Thisisanattributeofhighratesofreturnintheearlyyearswhena relativelysmallamountofmoneywas involved.As

Berkshirehasgrown,itsreturnshavegottencloserandclosertotheaverage.But the inceptiontopresentrateofreturncalculationbenefitsfromthefactthatitisanaverageoftheannualreturns,andisnotweightedbytheamountofassetsundermanagement.Myownviewisthatsimplymanagingthisverylargeenterprisewithoutlargelossesisasignificantachievement,butitdoesnotsoundasimpressiveasbeatingthemarketaveragesconsistently.”–EdKitch

*Larry Cunningham reviewed modern finance theory and contrasted it withBuffett’s philosophy. Munger, chairing the panel, challenged the validity ofteachingmodernfinancetheory,suggestingitwasboth“trivialandtwaddle.”

MUNGER:SupposeIamrunningabigpensionfundthathasnetcashflowscomingineveryyear.Very,verylong-termobligations.AndIdecidethatwhatIwilldoisprogramabunchofcomputerstokeepthefundcontinuouslyinvestedin very high beta stocks, very volatile stocks.Andmy computers do that andthey do that year after year for twenty years.When it’s all done, do I have aperformance that is two, three, four, five percentage points above the averageperformanceofthestockmarket.Yesorno(laughter)?

LOU SIMPSON: Charlie, I think you asked a very interesting question. Iknowwhatmyanswerwouldbe,butIwouldbeinterestedinwhatyouranswerwouldbetothatquestion.Yourunahigh-betaportfolioinablackboxandyouhaveusedalloftheacademicmeasurementsofvolatility.Attheendoftwentyyearswhenyoutotaluptheresults,whatdoyouthinkyouendupwith?

MUNGER: If you talk aboutBerkshire, I think the resultwould be far lessthanwhatwegetusingourmethods.AndIamdeeplysuspiciousoftheideathatastrategysosimplewouldworktoproducealargeadvantage.Ithinkifpeoplebelieve therewould be a huge advantage—two to three percentage points perannumovertwentyorthirtyyears—theyshouldbelieveinthetoothfairy.

QUESTION: [Directed to Munger/continued.] You’ve been talking aboutwhatshouldbetaught—referringtosomeofwhatProfessorBrattondiscussedasgibberishandwhatProfessorCunninghamdiscussedastwaddle—

MUNGER:Bytheway,Ilikeboththeseguys(laughter).

QUESTION: [continued] You had a conventional law school educationyourselfandyetyoucameoutandbecameaverysuccessfullawyerandworkingwithMr.Buffettalltheseyears.

MUNGER:Itdoesn’tdoapositiveharm(laughter).

QUESTION: [continued] What would you suggest should be taught then?You said you do things different in Berkshire than all these theories that aretrying to put in perspective some kind of teaching model. What should betaught?

MUNGER: You have 150 pages in front of you, and we’ve worked prettyhardatlayingitout.2

EDKITCH:As amember of the teachingprofession, Iwould like to say akindwordforthetrivial.Myexperienceintheclassroomhasbeenthatstudentsoftenreportthatsomeofthemostimportantthingstheylearnarewhatseemstome are trivial, but are quite news to them. I remember thatwhen I learned inclass that a stock split was not really an important or beneficial event forshareholders, it was quite a revelation to me. I think it’s an utterly trivialproposition. But if you haven’t heard of it, it’s actually very useful to havesomeonetellyou.

MUNGER: I would accept that and I would argue that what Berkshire hasdone has mostly been using trivial knowledge. And it’s the fact that weconcentratesomuchontrivialknowledgethatenablesusto—

KITCH:Thenwouldyouadviseourstudentsthatif theyfocusonthetrivialpoints we’re making, that in the end they may end up with several milliondollars(laughter)?

MUNGER: Yes (laughter). I think the answer is that if you absorb theimportantbasicknowledge—whichatleastforthebeststudentsisveryeasytoassimilate—and you absorb all the big basic points across a broad range ofdisciplines,onedayyou’llwalkdownthestreetandyou’llfindthatyou’reoneoftheverymostcompetentmembersofyourgeneration,andthatmanypeoplewhowerequickermentallyandworkedharderareinyourdust.So,yes,byallmeansteachthebigimportantpoints.Andthefactthatthey’renearlyobvious,ifthey’reimportantenough,youprobablyshouldevenrepeatthem.

BillAckman

BILLACKMAN:Volatility is a goodmeasure of risk if you don’t look atsecuritypricevolatility,butatbusinessvolatility.Forexample,ifyoulookatthebusinessesthatBerkshirehasinvestedin—likeGilletteorCoke,businesseswithafranchisethat’simpenetrable.Thesearebusinesseswithunderlyingeconomicshaveverylowvolatility.AndifyoulookattheconsistentearningsIthinkthatvolatility is a goodmeasure of risk. The problem is, looking at security pricevolatility is not a goodmeasure of risk.And I think that themodel should beadjusted to look at the underlying economics of the business as opposed towherepiecesofpapertradeandexchangeonadailybasis.

CUNNINGHAM:Right,andthatimplicatestheefficiencyassumption.Therewould be a direct link between underlying business volatility and stock pricevolatilityiftheefficiencyhypothesisweretrue.

MUNGER:Isn’tittruethatalotoftheconfusioncomesfrompeoplesayingrisk,whichhad anordinary conventionalmeaningbefore these financial typesgrabbedtheword,andtheydon’treallymeanriskinaconventionalsense,theymeanvolatility.

CurrentCommentary“Oneof the top ten lessons fromWarren andCharlie is understanding thedifference between business volatility and stock price volatility.Along theway,academicskidnapped these two terms in thenameofefficientmarkethypothesis. Being businessmen, Warren and Charlie never bowed to theIvoryTowertheoristsandthathasmadeallthedifference.”–RobertHagstrom

CUNNINGHAM:Yes,theymeanstockpricevolatility,notbusinessvolatilityeither.

BUFFETT:Whenbetameasuresvolatility—orrelativevolatilityIshouldsay—to then make a jump and call it risk—they ought to, throughout the entireliteraturewhenbetaistalkedabout,justsay“relativevolatility.”Ithinkitwouldbringawholedifferentcomplexiontotheargument.

CUNNINGHAM: I think that’s right and I think it comes back—all thisultimately comes back—to the efficiency story: that stock prices fully andaccuratelyreflectallrelevantinformationaboutthesecurity.

MUNGER:How could anybody really believe that?You could believe thatit’sroughlysowiththeimportantvariations,buthowcouldanybodybelievethatitwasstrictlyso?

CUNNINGHAM: That’s why proponents respond with breaking theefficiency story into threeversions: the strong form, semi-strong formand theweakform.Andtherearealotofpeoplewhobelieveinthesemi-strongform.

MUNGER:Webelieveintheweakform.

CurrentCommentary“Berkshire’s investment behavior repeatedly demonstrates the value ofknowing the difference between business volatility and stock marketvolaitity. Amid the financial crisis that began in 2008, for example, whilemany were paralyzed, Berkshire made numerous lucrative investments,includinginBankofAmerica,GeneralElectric,andGoldmanSachs.”–LarryCunningham

LarryCunningham,CharlieMunger

*Bob Hamilton explored Berkshire’s 1996 recapitalization, designed to thwartefforts tomarket Berkshire shares, then priced in excess of $30,000, at a lowprice that would increase trading, by offering a new class B with fractionalvoting and economic rights that would trade at a lower price.Hamilton readBerkshire’sprospectusdisclosure,includingcautionarystatementsfromBuffettandMunger thatBerkshirestockwasnotundervaluedand theywouldnotbuyBerkshirestockatcurrentprices.

MUNGER: It is an interesting story.You can argue that it demonstrates animportantprincipleoflaw:youdon’twantthejudgesrunningtheprisonsorthedetailedoperationsofthecorporationsofAmericaorwhatnot,andyetyouwantcertain standards of behavior that are so awful that you want judges orlegislaturestointervene.

Betweenthatinterventionpointandthebestpossiblebehaviorshouldbeabigarea,andyouwantabigareawhereit isn’t illegalinthesensethatcourtswillintervene,butwhereyouallowroomforalotofbehaviorthat’salotbetterthanthe minimum standards. And I would argue that this prospectus was just anexample of behavior that was better than the minimum standards of thecivilization,andtotheextentthatanybodywantstomakeitanexampleforlawstudentsoranybodyelse,Iencourageit.

QUESTION:Withrespecttopricingofstock,whatwouldbetheeffectifMr.Buffettdied?HowwouldyouexpectBerkshire’sstockpricetoreact?

HAMILTON:Itwillhaveaneffect,that’sforsure.Anditwouldprobablybe,atleasttemporarily,verynegative.

MUNGER: This is not a subject that one of our members likes exploring(laughter).

BUFFETT: It won’t be as negative for the holders as it will be for me(laughter).

*Lynn Stout explained a model of stock market behavior, which instead of

assumingpurely rational actors, embraces thepossibilityofvariedparticipantswithdifferentassessmentsandbeliefs.

MUNGER:Lynn,what isyourpersonalopinionof thosepeoplewhowouldexpectinefficiencies(mispricing)tooccurbecauseofcertainstandardcognitivedefectsofhumankind?

STOUT:They’reright.

MUNGER: I certainly agreewith that and thatmeans you have to listen topsychologistsifyouwanttopredictstandardpatternsofirrationality,doesn’tit?

STOUT: This is the problem of the mathematician-economist versus thenaturalscience-economist.Oneofthereasonsthatefficientmarkettheoryinitsconventional sense rose to the pinnacle that it did, was there was a group ofeconomistswhoreallywantedtobemathematiciansanditgavethemachancetoplaywithGreeklettersandshowwhatgoodmathematicianstheywere.

In theprocess they forgot thenatural scientist’s [mission]which is thatyouought to try tocomeupwithmodels that actuallypredictwhathappens in theworld.Andifinfactyouwanttocomeupwithmodelsthatpredictwhathappensintheworldthen,yes,indeedweshouldbelisteningtothepsychologists.

MUNGER:Sowereallyhaveanextremeexamplehereofa lotofnonsensewhichiscreatedbythepsychologicalphenomenonintheproverb:“Tothemanwithahammereveryproblemtendstolooklikeanail.”

BILLACKMAN:We’veheardalotofdiscussionabouthowinstitutionsandindividuals use index funds. But to the extent that more and more capitalbecomesindexed—andifyouthinkaboutindexfundmanagersasreallybeingacomputer,thenintermsofthevotingofsharesforinstance—themorestockthatisheldbypeoplewhodon’tcareaboutindividualcorporations,themorethereisa significant societal detriment tohave capital in thehandsof peoplewho arejust seeking average performance. The result is that the more capital that isindexed,themoreitinflatesthepricesofcompaniesintheS&P500andleadstopoor capital allocation and maybe detrimental owner performance over timebecausesomecompaniesgetmorecapitalthantheydeserve.

MUNGER:Youareplainlyright.Ifyoupushedindexationtotheverylogicalextremeyouwouldgetpreposterousresults.

STOUT:But,empirically,theportionofequitycapitalassetsthatareindexedislessthanthirtypercentofthetotal.

ACKMAN:That’swhatisofficiallyindexed.Thereisanenormousamountofcapitalthatisunofficiallyindexed.

MUNGER:It’scalledclosetindexation:youkeepthefeebutyoudelivertheindex.

GORDON:But there is no necessary connection between indexing and badcorporate governance. CalPERS [California Public Employees’ RetirementSystem] has a huge index fund but it is very vigorous about corporategovernancepreciselybecauseitsays,“wearen’tgoingtosell—weareinthereforthelongterm.”TheyareabitlikeCharlieandWarreninthatrespect.Theysay, “we are in it for the long term and therefore we have to look at thecompaniesthatareunderperformingandseewhatwecandotofixthemintheirindexfund.”

So, in fact, there is an argument that having ownership through financialintermediaries that are indexed is a far more effective means of corporategovernance than having shares owned by individual shareholders for whomcollective action problems of corporate governance intervention areoverwhelming.

MUNGER:Well,ladiesandgentlemanyouhavejustheardaverysubtleandprofoundlycorrectpoint.

OESTERLE: A quick response to Lynn Stout on takeover premiums.Assumingthatyouarecorrectthattheinframarginalshareholderdeterminestheultimate takeover premium, that still leaves youwith one takeover price—theonetakeoverpriceoftheinframarginalshareholder—thatgivesalotofwindfallgainstoeveryoneelsesoyoustillhaveanetsocialgainevenunderyourtheory.

Pointtwo:theinframarginalshareholder’spositiononwhytheyareoptimistic—your argument is circular.Why they are optimistic might be related to thepowerofthebargainingprocessthattheyhavevis-à-visbidders.So,Icouldbethat inframarginal shareholder and believe that we can extract the last dollarfrom this bidder and that’s the reason I’m so optimistic and demand the

premium. So, your argument doesn’t explain much to me, and I think it’scircular.

CurrentCommentary“It was Charlie who educated the Berkshire faithful on the dangers ofcognitivedefectsindecisionmaking,nowpopularlyreferredtoasbehavioralfinance. Ifyouwant tobestunderstand thesourceofmispricing,studyandlistentothepsychologists.”–RobertHagstrom

STOUT: There is a rational expectations aspect to the tussle between thebidder and the target and I think you’re right that part of that is going topotentiallycausesomeinflationin thevalue that isattachedbythe targetoncetheyknowthebidderisinterested.Butsincebiddersdohaveotheroptionsandsince they won’t pay infinite prices and target shareholders know that, eventhough that isa feedbackmechanism, theargument isnotcircular.That isonemorefactor,butitdoesnotdestroythebasicpoint.

I agree completely with your first observation which is that, if in fact thetakeoverbidderpaidthepremiumpriceofthemostoptimisticshareholderinthefirm to every shareholder in the firm that would clearly be a source of largesocialgain,atleastmeasuredexante.

Where the puzzle comes up for me is the interesting case—which is notunusual—where the firm does not pay the reservation price of the mostoptimistic investorbutpays thereservationpriceof the investorwhoowns thefifty-firstpercentile—theygoupthecurveenoughtobuythefirsthalf.So,thepeopleinthefirsthalfofthecurve,manyofthemgetabenefit.Unfortunately,the people on the last part of the curvewill, under conventional statemergerrules,oftenbeforcedoutatapricetheydeemistoolow.So,actuallymeasuringthe gain when you are setting the price by the fifty-first percentile becomesmuchmessierandIamveryagnosticinthosesituations.

MUNGER:Ifyouhaveacorporation100%ownedbyoneownerandheholdsanauction,don’tyouoftengetaveryirrationallyhighprice?

STOUT:Winner’scurse?

MUNGER:Yes.

STOUT:Yes.

MUNGER:Andthatdoesn’thaveanythingtodowithyourexplanation.

STOUT: It is related.You can’t have awinner’s curse unless you presumethatpeopledisagree.Iflogtheheterogeneousexpectationstheorybecauseinpartitisausefulwaytogetpeoplestarteddowntheroadoflookingatphenomenalikethewinner’scurse.

MUNGER:Can’t youget awinner’s cursewhenyou’vegot awhole lot ofbidderscompeting?Onesays:Afterall,it’sworth100totheotherguy,andI’vealreadydecidedtodoit,sowhynotbid101?Andtheotherguythinks,well,it’sworth 101 to him.Don’t you get a psychological process that creates a lot ofsocial proof and a lot of idiocy that really isn’t related to normal supply anddemandcurves?

STOUT:PersonallyIstayawayfromSotheby’s.

MUNGER:It’spsychologicalidiocyyouarefearing.

STOUT:Yes.

MUNGER:Wedon’tgotoauctionseither.

MUNGER:Lynn, if youwere playing bridge and you announced that yourstrategywasgoingtobetocountthediamondsandheartsbutnotthespadesandclubs,wouldyouconsiderthatarationalwaytoplaybridge?

STOUT:Well I’mata tremendousdisadvantageherebecause I’vebeen toobusyfiguringoutGreekletterstolearnbridge.Butassumingit’slikeothercardgames,ifIweretodothatIthinkthatwouldn’tbetoosensible.

MUNGER: If theworld ismultidisciplinary, does it make sense to explaintheseoccurrencessolelyintermsofeconomicswithoutanypsychology?

STOUT:Usetherighttoolforthejob.

MUNGER: But isn’t reality multidisciplinary, so that you have to use thetoolsofallthedisciplinestosolvethecomplexproblems?

STOUT:Yes,andbewillingtopickandchoosedependingonwhichseemtoworkbest.

MUNGER:Butyoucan’thaveawholeareawhereyousay,“Idon’tcarrythattoolkitandjustdothebestwithwhatI’vegot.”Thatisn’ttoorationalawaytohandleitisit?

STOUT:I’mguilty.

MUNGER:Weallare.

GORDON: But Charlie, at the end of the day, you don’t expect yourshareholderstoaskwhethertheyarehappy.Youaskthemtolookatthebottomline. The Buffett Essays are all about essentially focusing on ways to bringeconomic reality to bear on the running of a business. Insofar as psychologyenters the picture it is something to be avoided, driven out and hopefullypatientlywadedthrough.

MUNGER: Driven out of supervising a bunch of subordinate managers?Psychologydrivenout?How?

GORDON:You’redealingwithpeopletobesure,butinmakinginvestmentsdon’tyoutrytoweightoutthepsychologybeforeyoubuy?

MUNGER:Yes,wedon’tgotoauctions.I’mlikeLynn,I’mafraidofmyownidiocy.

CurrentCommentary“Tosolvecomplexproblems,Charlie tellsus tobemultidisciplinary inourthinking. The introduction of the major mental models into the world ofinvesting may be Charlie’s single greatest contribution for helpingindividualsbecomebetterinvestors.”–RobertHagstrom

2.Editor’sNote:Symposiumparticipants receiveda150-pagecollectionofBuffett’s letters toBerkshireshareholders,subsequentlyrevisedandpublishedasTheEssaysofWarrenBuffett:LessonsforCorporateAmerica.

MergersandAcquisitions

DaleOesterle,JimCox,LarryCunningham,JeffGordon,CharlesYablon

*JeffGordonexaminedcommentsBuffettmadein1985aboutgivingshareholdersthe ultimate decision whether to sell compared to recent cases where courtsdeferred to director decisions to sell even when director independence wasdoubtful.Tobegin thecolloquy,ProfessorGordonasked if thatmadesense toBuffett,aswellasthefollowingquestions.

GORDON:Ihavetwo[other]questionsforWarrenBuffett.First,doyoustillretain your skepticism about the independence of directors in the context of acorporation faced with a hostile bid, and if so, what do you think about theDelawarejurisprudenceandthecurrentcorporatelawreformsthatrelyonthem?Second: with merger and acquisition activity now at a record high—mostlythroughstock-for-stockexchanges—howdoyoufeelaboutthisinlightofyourconcernabout thecasinosocietyand thepotentiallydebasedconsideration thatstockmightwellbecome?

BUFFETT:Iwouldsaymyviewsontheonesyouquotedfrom1985arestillveryclosetowhereIam.Imeanmyheartstilldoesbelongtotheshareholder.Iseeproblemswithnegotiatedvaluewhereyouget a situation like1974wheretherewasn’t a company I knowof thatwasn’t selling at half of its negotiatedvalueorlessandtherewouldhavebeenaturnoverattheverybestcompaniesenmasseandeveryshareholderbehavingintheirrationalinterest.Thatbothersmebut I don’t have any great answer for it, and in the end, I come back to theshareholder.

I think the directors are far from independent judges of the merits of anunsolicited tender offer. So they are far from the best solution.ButCharlie isprobablymorefamiliarwiththecasesthanIam.

MUNGER:ThisisoneoftherareoccasionswhereWarrenandIhaveaveryslightdifferenceofopinion.Iamlesstroubledbynotallowingjustacascadeofacquisitions in America. I totally agree that for the ordinary little family thatownsatheater,thattheshareholdersoughttodecidewhetherthetheaterissold.Butonceyouget intogreatbigsocial institutions that,givencertain laws,willcascade in waves of acquisitions and huge agglomerations, that bothers meenough. So, I think that it’s appropriate to have laws in the civilization thatpreventit.

CurrentCommentary“ItisremarkablehowrarelyWarrenandCharliehaveexpresseddifferencesof opinion on business policy, particularly given their political differences,withWarren slightly left of center and Charlie slightly right. ButWarrenhintsoftenaboutthegreatvalueoftheirmorefrequentdifferencesofopinionover Berkshire acquisition decisions, as Charlie vetoed so many ideasWarrenbelievedinthatWarrendubbedhimthe‘abominablenoman.’”–LarryCunningham

QUESTION: Do you think most stockholders have the ability to make anassessment about a sale? For example, if you look at the balance sheet of acorporationandyouseelargeamountsoffixedassetsthatarecarriedatcostlessaccumulated depreciation that might differ significantly from current marketvalue, or you look at the income statement and there are other factors wheretherecouldbesomedifficultyon thepartofmostpeople in trying tomakeanassessment.Anditwouldappeartomethatofthemillionsofshareholderswhoare just buying hoping that the stock will go up, that most of them lack theabilitytomakeanadequatedetermination.

GORDON: For myself—and I think I find support in this in some of theBuffett essays—a legal rule that relies on the incompetence or gullibility ofshareholdersseemstomeimprobable.Weletpeoplebuystockwithoutalicenseand in the ordinary course they can sell it too. So the starting point thatshareholders are unable to assess a bid coming over the transom against theirhopesandexpectationsforthecompanyinwhichtheybuystockandthestockprice,itjustseemstomeaslightlystrangeviewgiventhatweletshareholdersbuystockandsellitintheordinarycourse.

BUFFETT: Let me postulate this. Company A, a very large company, issellingat$100a share.CompanyB is some rather smallercompanysellingat$80 a share. Company A decides that there are benefits of joining up withCompanyBsotheyofferashare-for-shareexchange.CompanyBshareholdersarehappythey’regoingtoget$100ashareforthisdealandtheyvoteitandtheinvestmentbankersblessit,etcetera.

Andsay thatextravaluepresumablycomes from thesynergy thatwouldbeachievedfromputtingthesetwoentitiestogether.Themarketisefficient,we’llsay,aboutevaluatingeachoneon theirown,butputting them togethercreates

enough synergy so that an efficient market also will say that the resultingcompanyisworth$102,justtopickafigure.

Nowlet’sturnitinsideoutandassumethatCompanyA’sdirectorsaresittinginadirector’smeetingonedayand incomeCompanyB’s investmentbankersandtheysay,we’llofferoneshareofCompanyB(the$80stock)foreveryshareofCompanyA(the$100stock).Ifthattransactionwentthroughitwouldhaveexactlythesamenumberofsharesoutstanding,thesamebusinesseconomiesofthetwoandeverythingelse.

But I think you will find no one who would say that Company A’sshareholderswithstockat$100ashareshouldacceptthis$80ashare,althoughpresumablyitwouldbeworth$102justthesameway,becausethesamenumberofshareswouldbeoutstanding, thesameeconomieswouldberealized,andsoon.Whatshouldthedirector’sbehaviorbeinbothofthoseillustrations?

GORDON:Inthefirstcase,ifI’mfollowingthiscorrectly,theacquirerisineffectpayingtheshareholdersofthetargetapremiuminthevalueofthestock.

BUFFETT:Taking one share of this newCompanyAB,which presumablywillsellatleastatthepriceofCompanyAstockwhichwas$100.HowshouldCompanyA’sdirectorsfeelaboutmakingthatofferassumingthatthesynergiesarerealandeverythingelse?Doyouhaveanyproblemwiththat?

GORDON:Attheendofthedaytheshareholdersofthetargetcompanyaregoingtoendupwithstockthatitisreasonabletobelievewillbegreaterinvaluethanthestockthattheyarenowholding.Thatwouldseemtobeamovethatthedirectorscouldreasonablyapproveof.

BUFFETT:I’mfocusingthoughprimarilyhereonCompanyA’sdirectorsinapprovingthisoffer.

GORDON: You mean Company A’s directors having $100 a share stockofferingitinastock-for-stockexchangefor$80?

BUFFETT:Right.

GORDON:ItcouldbethattheyhaveaviewthatCompanyB’sstockisinfactundervalued in theuse forwhichCompanyAmight put it.And so, therefore,assuming that there are going to be synergy gains associated, it’s notunreasonable togive to theshareholdersofBadisproportionateshareof thosesynergygainsinordertogettheBcompanyboardtoagreetogoalongwiththeacquisition.

BUFFETT:Let’ssayBwalksinandoffersthesameshareofthiscombinedAB,butBjusthappenstobetheacquirernowandAisthetargetcompany.How

doyouthinktheAdirectorsshouldrespond?Sameexactfactsofoperations.

GORDON:ExceptinthatcasetheAshareholdershavea$100persharestockandthey’rebeingofferedstockthat’s$80asharewith thespeculationthat thestock they’ll end up with is $102 a share. I would be a little bit nervous inexchangingsomethingthatIknowis$100ashareforsomethingthatmightbeworth$102ashare,butknowingthat,essentially,I’mforsuregettingsomethingthatthemarkethasvaluedatonly$80ashare.

JeffGordon

BUFFETT:Youknowthedealisn’tgoingtogothroughforamonthortwomonthsorsomethingofthesort,bythetimeitgetsallthroughwindingitswaythrough theshareholdervotesandHart-Scott-Rodino.What Iam just trying todetermine is whether the identical transaction should get a different responsefromtheACompanyboard.

GORDON: If A is moving forward, then presumably I guess what you’resayingisthat,ifAthensatisfiesitself,theAboardhasthesamecertaintyinbothcases that therewill be the realized synergy gains. It’s a very interesting case(laughter).Theproblemisthatitmightbehardtopersuadetheshareholdersthat,infact,thetwocasesarethesamecase.

BUFFETT:The second casewould changeB’s name toA after themerger(laughter).

MUNGER:Warren’ssecondclassofcasesisaveryinterestingcase.It’swhatIcallanullclass—ithasnomembers(laughter).

BUFFETT:Butitillustrateseitherthatthemarketisnotefficientordirectorswillbehavedifferentlybasedonwhethertheyaretheacquiringcompanyorthetargetcompany.

FISCH: Just in case you think that Mr. Buffett’s second hypothetical isfarfetched, there really is a class. The recent Chase-Chemical merger bears astriking resemblance to that second scenario in which the $80 stock is beinggiventothestockholdersthathad$100stock.Clearlyyouhaveasynergythere,but distribution of gains and whether the directors should have gone forwardwiththatraisespreciselythisissue.

GORDON:LetmeaskoneofMr.Buffett(laughter).WhataboutwhatIseeasawedgebetweenintrinsicvalue—whichweunderstandwhatyoumeanbythat—andnegotiatedvalue—whichI’mnotsurewhatyoumeanbythatorwhattheconnectioniswithintrinsicvalueorwhetherittroublesyouthatnegotiatedvaluemightbehigherthanintrinsicvalue.

BUFFETT: Negotiated value is where a transaction will take place todayunderallthenormaleconomicassumptionsandcircumstances—awillingbuyerand a willing seller, et cetera. Intrinsic value can differ materially fromnegotiatedvalue.Negotiatedvaluerepresentshopesandfearsandintrinsicvalue—admittedly,nooneisgoingtoknowitprecisely.

Buttheintrinsicvalueisifthecompanyitselfwereabondandyoucouldseeall the couponsprintedoutbetweennowand judgmentday, if youdiscountedthose back at government bond rates since youwould know the certainty, thesame certainty that youwould have on a government bondwhat that numberwould be. Those numbers differ. I would say that now negotiated values onbalance relative to intrinsic values are probably higher than they were ten orfifteenyearsago,butthat’sjustafunctionofthedifferentkindofenvironmentwe’rein.Theymovearoundalotovertime.

GORDON:Butdoesittroubleyou?Inyour1985remarksyouseemedtobethinkingthatitwasaproblemthattenderofferswere—

BUFFETT: In 1974, for example, I would have said it was a problem thatnegotiatedvalueswouldhavebeenbelowintrinsicvalues.It’saproblemforusinbuyingbusinessesnowwhennegotiatedvaluesmaybeaboveintrinsicvalues.Butintermsofthesocietalproblem,thefactthateverymanagement—nomatterwhatkindofajobithasdone—getsturnedout,they’regoingtogetturnedoutina timewhennegotiatedvaluesarewellbelowintrinsicvalues. It justmeansthat an auctionmarket is underpricing assets—good,bador indifferent—and Idon’tliketheconsequencesofthatintermsofwhatitmeansforwhatIwouldcallanorderly,well-developedmanagementofbusinessesovertime.

CurrentCommentary“Berkshire’s acquisition strategy is distinct: never hostile, usually all cash,andoftenbelowintrinsicvalueassellersacceptlesseconomicconsiderationbecausetheyattributevaluetotheintangiblesofBerkshireculture,includingmanagerialautonomyandacommitmenttopermanentownership.”–LarryCunningham

*Dale Oesterle defended as neglected national assets the raiders in leveragedcash acquisitions of the 1980s by showing that they produced substantial netsocial gains but were allocated less than their share of those gains due tovariousfederalandstatelaws.

GORDON:Dale,acoupleofquestions.First,given thatM&Aactivity is infactatahistoricalhighrightnow,whatdoesthatsaytotheessentiallyempiricalclaim you’re making that the set of constraints has inhibited bidder activitybelowsomeoptimallevel?

OESTERLE: The kind of bidders that I’m looking at are cash bidders inleveragedacquisitions.Theyarenot inthisnewwave.Youdon’thavealotofcashbiddersandyoudon’thavehighleverageinalotofthesenewacquisitions.Whatwehave is stock swaps, and the reasonwehave a lot of stock swaps isbecause thestockmarket isatanall-timehigh.Andmyexplanationof that is,when you’re dealing with stock swaps you don’t disadvantage bidders to theextentthatyoudoincashoffers.

So, to the extent that high stock prices go away and we don’t have theadvantageofusingstockinacquisitions,whetherornotyou’llseearesuscitationofthecashmarketinleveragedacquisitionsisreallyupforgrabs.Ithinkyou’vedisadvantagedbiddersinthestockswapstoo,butthedegreeofthedisadvantageis not nearly as substantial as it is in the cash offers, particularly because theWilliamsActdoesn’thavetheimpactthatithasinthesestockswaps.

DaleOesterle

GORDON: Let’s distinguish between hostile bidders and other biddersbecauseitseemsthatinthecontextofthestockswapwhereyou’reresultinginamergerofequals,infact,thepartiestogethercancreatebarrierstotheincursionbyathirdpartythatpreservesmoreof thegainsforthefirstbidderthanundertheopenmarketauctionregime.So,whynotsaythatthingsaregoingjustfine,evenwithrespecttotheappropriateincentiveforbidders?

OESTERLE:This iswhere you and I disagree. In theTime-Warner line ofcases,you’reworryingaboutTime[whereas]IworryaboutWarner.Andifyoutake it from the perspective ofWarner, you have a different take. Again, thestock swap cases represent a different case. I think bidders are simply lessdisadvantagedinstockswapcaseswhichareusuallystatutorymergersthathavefull shareholder votes. You don’t get too many stock tender offers in theseacquisitions.You’retalkingaboutthedifferencebetweenastatutorymergerandacashtenderoffer,andthat’swheretheimpactis.

GORDON:Dale,letmeaskyoutoaddressCharlieMunger’scommentearlierwhich is his concern about the cascade effect associated with an unregulatedmarket in corporate control. Notwithstanding the level of regulation thatobtainedthroughoutmostofthe‘80s,therewasahighdegreeofactivity.Whatshut itdownwasprobably thecollapseof the junkbondmarketwhichwasn’tnecessarilyfor regulatoryreasons.Areyouatallconcerned thatmoving in thedirection thatyouwantwould lead to thecascade thatCharlie seesas sociallyconcerning?

OESTERLE:Charlie,Idon’tknowhowtohandleaquestionlikethatbecauseit seems tome, cascades are always bad, I guess, unless you’re talking aboutrivers and waterfalls. It seems to me that acquisitions are good if you createvalue for peoplewho are participants in them and they’re not so good if youdon’t.Andthenumberinanygivenperiodisalmostirrelevant.

Inperiodswhereyouhavetremendoustechnologicalchange—whichisIthinkadescriptionofthe‘80s,asalotofindustriesweremovingveryfastinthe‘80sandincumbentmanagersweresimplynotkeepingup—thatyouwouldexpecttoseealotofacquisitions.Andinaperiodwhereyoudidn’thavealotofindustrychange,youwouldn’texpecttoseealotofacquisitions.Butitseemstomethatthequalityoftheacquisitionsarewhatyou’relookingatandnotthenumberinanyperiodoftime.AmIbeingunfairtoyourpointthere?

MUNGER:Take the simple case of the current era.Does society have anyinterest in how much horizontal combination there is? Assume stocks go upanother 50% and the JusticeDepartment standards are relaxed,which iswhattheyarenow.Theyallowhugeamountsofhorizontalactivity.Ifyousay,IjustlookatthestockmarketandIseeshareholdersgettingquotationalchangesaftereachtransaction,thereforethere’salotofsocialgood,Idon’tfollowyou.

I say, the social good takes a much wider calculus. And there are veryinterestingquestionsabouthowmuchhorizontalcombination theworldwants.AndIdon’tcometoaperfectconclusiononthis,buttherearedangersthatIseegoingoninmyhead.

Ontheothersidethough,Iseeawholelotoffinancialpromotersgettingveryrichwithsoft,whitehands,andtheirmajorcontributionistosellonedivisiontoacompetitorandsqueezealittlebloodoutofanother.Andthatmaybesociallydesirableanditmaynot.

BUFFETT:Whichsidedoyoucomedownon(laughter)?

MUNGER:Generally,I’mnot infavorofasocialsystemwhichthrowsjusthugerewardstopeoplewhoinventnothing,don’timprovethefactoriesordon’tinvent better systems and so forth. Of course, you can argue that I’mcondemningmyself(laughter).AllIcansayisit’salmostintentional.

CurrentCommentary“Thisdiscussionaddressed“promoters,”notfinancial intermediaries,whichmaybemoreprominentnowin2016.”–DeborahDeMott

OESTERLE:Theantitrustconcernsarereal,butit’saseparateissue.Whetherornotyoushouldallowmergerswithinthesameindustry,wehaveanantitrustlaw,howit’sinterpretedissortofwhatourelectedofficialsaresupposedtodoforus.Theycangetitrightorwrong.Butitseemstomeregulatingthedivisionofgainsbetweenbiddersandtargetsoughttobeneutralofyourantitrustpolicyunlessyourantitrustpolicyissoinfirmthatthisissortofasecondbestsolutiontoadecentantitrustpolicy.

MUNGER:Thatwouldbeaprettygoodidea.

OESTERLE:Ihopethat’snottrue.Ihaven’tgivenuponantitrust.

MUNGER:Thenyoudon’thaveasufficientlycynicalviewofhumannature(laughter).

CurrentCommentary“ThepointImadeinmydiscussionswithMr.Mungerstillstands.Wehavetoomany laws that interferewith leveraged acquisitions.They do not stopthem,buttheyaffecthowpartiessplitthegains.Targetfirmshareholdersstilltake the lion’s shareof theacquisitionsprofits.Thishasmanyeffects.Thelaws discourage bidders, encourage target boards to spend substantialresources discouraging acquisition offers and/or shareholder requests, andstimulate a hedge fund industry to spend funds to overcome the stubbornresistanceofreluctantboards.Evenbrokeredgovernmentbailoutsaremademorelikely.Theseareallsociallosses.”–DaleOesterle

*ChuckYablonexploredtheroleofcorporatecultureinmergers,speculatingthatBuffett regards personal character as a significant factor in culture andreferencingcontemporary takeovercases, includingTime-Warner.Yablon thensupposedthatBuffett’sapproachtotakeoversissimilartothatofDelawarelaw,including board responses akin to that in Time-Warner, such as rejecting amuchhigherallcashbidinfavorofastock-for-stockmergerorinfavorofabidofhalf cashandhalf stock.He imaginedBuffettasaJusticeon theDelawareSupremeCourtandposedthreequestionsaboutahypotheticalhostiletakeoverscenario.

YABLON: Three basic questions: Did the target management engage in areasonabledeliberativeprocess?Does theirconclusion thatwhiteknight’sdealoffersmore long-termvalue for shareholdersmake economic sense in light ofknown and reasonably anticipated business positions? And, three, have thepeopleonthetarget’sboardshownthemselvestobetrustworthyinthewaytheyhavecomportedthemselvesinthisandpriorbusinesssituations?

It is only if all three of these criteria can be shown to be satisfied by apreponderance of the evidence I submit, that Justice Buffett will be likely toupholdmanagement’sdecisiontoresistthehighercashoffer.Ialsosubmittheyare not a bad set of criteria to apply in such situations, andwho knows, theycouldevenbeDelawarelaw(laughter).

BUFFETT: The equity component makes it very tough, particularly if youhavetaxpayingshareholderswhomightbeabletogetatax-freeexchangeonthesecondhalf.So,thecashofferIthinkisfairlyeasytodecide.Ithinkyoureallydogetintojudgmentinthecaseyoupostulatedwithequity.Icouldseemyselfas a shareholder of the target preferring either case depending on the specificprospectsoftheacquiringcompany’sstockanddependingonthetaxbasisofagreatmany of the shareholders. So, I think I could go eitherway in the caseinvolvingequitysecurities.

MUNGER:ButdoyouwanttheDelawareSupremeCourttouseitsbrilliantjudgmentaboutinvestmentperformanceandmakethatdecision,ordoyouwanttosay,thisiswithinthebusinessjudgmentrule?

YABLON:Ordoyoucreatesomekindofenhancedbusinessjudgmentwherethe Delaware Court asks fairly searching questions about how managementconductedtheirinvestigationtoreachtheconclusion?

BUFFETT:Havingseentheprocess,Iworryaboutrelyingonit(laughter).

MUNGER: The process of hiring experts who follow the rule of “WhosebreadIeat,hissongIsing,”andthenrelyingonthat—iftheDelawareSupremeCourtthinksthat’stherightwaytorule,well,they’rewrong.

BUFFETT: If I’mgoing topay$5million to somebody if theygiveme theadviceandthedealgoesthrough,thenIthinkIprobablyoughttopay$5milliontosomebodyelsewhoseadviceI listentowhogetspaidthe$5milliononlyifthedealdoesn’tgothrough(laughter).

GORDON:Except,actually,IthoughtwhatJusticeBuffettsaidwasactuallyatvariancewiththeruleyouproposebecausewhatIheard[him]sayisthat,itought tobe amatterof shareholder choice.And theproblem thatwe seewithtargetdefensivetacticsisthatitispreciselyinrespecttotheboard’sdecisiontotakethematterawayfromshareholderchoicethatthelegalissuegetsjoined.

YABLON: Although what Justice Buffett just said was, sometimesshareholder choice doesn’t work precisely because different shareholdersmay

havedifferentpreferenceswithrespecttothesameoffer.Iftheoffersarecloseenough,thenthequestionisdoyoudefertoamanagementdecision?

CharlesYablon

BUFFETT:AssumetherewereatakeoverofferforBerkshire.Closeto90%of our shares are held by people with a tax basis of under $100 a share(laughter). They might have different feelings about weighing two differentoffers,oneofwhichconstitutedasecuritytheywereperfectlyhappytocontinueowningandwhichwastax-free,versusonewhichwas5%higherforcash.

GORDON:That’s trueassuming that therewereashareholderchoice in thematter.Why not assume that shareholders wouldmake the rational choice asopposedto,andthisistherub,leavingittoBerkshire’sboardtoessentiallyfendoff the choice that, on your hypothesis the shareholders would dis-preferanyway?

BUFFETT:Iwouldnotlikeitifthedirectorsmadeadecisionthat90%oftheshareholderswereunhappywith.Theypresumablymightgettoactonthattoo.

GORDON:Okay,soitsoundstomelikeifI’mmaybeputtingwordsinyourmouth, that Justice Buffett rejects the proposed standard, because again itsubstitutessomesetofprocedures,tests,judgmentsmadebythetargetdirectorsoverthesameweighingandbalancingmadebythetargetshareholders.

MUNGER: I’mnot sure if that’s totally right (laughter).Think that throughfromtheviewpointofthecorporationthatismakingthemergeroffer,halfcash,halfstock.Nowif thatautomatically triggersanauctionwhere thecompanyissimplyknockeddowntothehighestbidder,whointhehellwantstobeinthosetransactions?So,again, ifyouthinkthroughtheconsequencesofaruleof lawcarefully enough, you’re likely to come to some conclusions about what theappropriateruleis.Iregardthoseconsequencesasquitepernicious.

Aruleoflawthatsays,Ican’tgooutandsayhalfcashandhalfstockwithouttriggeringanauction—IwouldregardthatasaverysillyruleoflawandI’mnotatallsurethatit’sthelawofDelaware.Ithinkmaybethecorporationcanmakethat kindofmerger andput the thing to vote and carry it all theway throughwhetherit’svoteddownornot,andIthinkhecouldbindhimselfnottolistentoanybodyelseuntilthewholevotingprocesswasover.Theotherpersoncansaywe’regoingtomakeacashofferifyouturnusdown.

YABLON:They’dprobablyhavetodosomelistening.

MUNGER:What?

YABLON: I think they’d probably have to do some listening to alternativeoffers.

MUNGER:Dosomewhat?

YABLON:Idon’tthinktheycouldbindthemselvesnottolistentoalternativeoffers.

MUNGER:Ithinktheycouldbindthemselvestolet theshareholdersdecideandnot to listen toanythingelseuntil thevote isover.At least I’vewrittenacontractthatsaidthat(laughter).

AccountingandTaxation

CalJohnson,EdKitch,LouLowenstein,ElliottWeiss,JimRepetti

*Elliott Weiss discussed the accessibility of The Buffett Essays, especially forstudents learning accounting and valuation, including to develop anunderstandingofthelimitsandmalleabilityofthesetools.

BUFFETT: What bothers me, in addition to everything that has just beenenumerated,isthatIseetheauditorsencouragingit.AndIsaytomyself:Thereareonlysixofyouwhohavetogettogetherandagreewe’renotgoingtoplayaround this way and there will be a stigma attached to anyone that has acertificatefromanyonebutthosesix.3Soitdoesn’trequiresomehugebraveactoftheauditingprofessiontogetbetterfinancialreporting.Butitdoesn’thappenandineffecttheybecomeconspirators.

ThereisnoquestiontheleewayIhavetoreportearningsasCEOofBerkshireis enormous. I don’t knowhow to quantify it precisely, and someof itwouldcatch upwith you later on, in terms of insurance reserves, for example. In aninsurancecompany,thelong-tailbusinessinparticular,youcanpaintanypictureyouwant,foraperiodthatprobablyencompassesenoughtimetoeitherbuyoutthepublicortoeffectamajorpublicoffering.

SIMPSON:On thequestionof pooling andprotectingpoolingby satisfyingthe technical requirements—the implication tome is that companies think themarketisstupidandtheyreallydon’tlookatrealeconomics,butonlythepurelycosmeticaccountingofit.Maybethisisnaive,butIthinkthemarketdoes,oversome period of time, look at real economic earnings and that companies arefooling themselves if they think that theycandoall thesecosmeticaccountingthingsandhavethemarketbelieveit.AmInaive?

MUNGER: I can answer that in part, sharing my love of biology andpsychology.They’vedonevery interestingexperimentswithmonkeys inzoos.They create a systemwhere themonkey can do things to get a token and thetokencan immediatelybeexchangedforabanana.Themonkeysoon learns towork justashard fora tokenashe formerlydid forabanana.Youcanhardlythinkthatcorporatemanagementsaregoingtobemuchbetter(laughter).

BUFFETT:Incertainkindsofmarkets—includinginthelate1960sforsureandmaybesomemorerecently—thereisafeelingamongpeoplewhoareeither

verysmartorcynicalthattheywouldratherbuyintomanipulatedearningsthanreal earnings because there ismore certainty ofmanipulated earnings comingthroughon target for some timeand theywillgetoutbefore it all collapses. Isawthatfirsthandinthesixties.Therearepeoplewhothinkitisrationaltoplayalongwith a game that isn’t going to be discovered until they are out of it. IwouldsaythatIagreewithLou[Simpson]practicallyall thetime,butalotofmoneycanchangehandsduringtheperiodofmanipulationbeforeiteventuallytarnishesthereputationoftheNationalStudentMarketingsoftheworld.

LOU LOWENSTEIN: Arthur Wyatt, a very distinguished accountant atArthur Andersen, reported some years ago on off-balance sheet financing. AtSupermarketsGeneral,wepaidhardcashtopushfinancingoffthebalancesheet—beforeIbecamePresident.It’sendemic.Thedebtistherebutwedon’twantiton the balance sheet. There was a study that he reported on: 40% of thesecurities analysts—andmaybemore importantly of loan officers—missed theoff-balancesheetfinancing.Ifyoucanfool40%ofthepeopleallthetime,that’snotbad.

AtGE,JackWelchiseverdevotedtoincreasingearnings-per-share.Oneyear,earningswerereallydownexceptforanadjustmenttotheassumptionsunderthepension plan and the liquidation of a LIFO reserve which very convenientlyproduced up earnings instead of down earnings. Of nine securities analystreports,onlyonenotedthatfact.Eightofnineisnotbad.Jackwasawinneronthatone.

Theearnings-per-shareexperienceof the1960swas—andBenGrahamusedtowriteonthis—thatifyouissuedconvertiblepreferredsandwarrantsnobodypaidanyattentionuntiltheywereexercised.Thatwasstupid,butthosewerethenumbers that everybodywas looking at it. In a rational world that would nothappen,butintherealworld—guyswanttogoouttohavelunch,theywanttochasegirls,gotobaseballgames—it’sanimperfectworld,asLouwellknows.

WEISS: Picking up onWarren’s comment, particularly about the insurancebusiness, it strikesme that—I’m not a financial analyst and I’m not formallytrained inanyof theseareas—but it seems tomeasanobserverofbusinessesthat virtually every corporation haswithin its financials one ormore accountsthatarehighlyjudgmentalinnature.Inthecaseofinsuranceitisfairlyeasytoidentifythis—howdoyouestimateyourlossreserves.Ordealingwithinventoryinaretailingbusiness.Thisisoneoftheissuesthattheaccountingsystemhastodealwith.

Thistakesusbackinadifferentwaytooneofthethemesofdiscussionoverthepastcoupleofdays:Howmuchconfidencedoyouhave in the integrityofthepeoplewhoareputtingout thenumbers?Theyhave tomake judgmentsofsome kind. There is no number that one can find that is the objectively rightnumberofwhatyour loss reserves are inyour reinsurancebusiness.There’s arangeofreasonablenessthere.Itultimatelycomesdowntothequestionoftrustandintegrityofthemanagersmakingthoseestimates.

BUFFETT:Whatbothersme,Elliott,isthatpeopleofgenerallyhighintegritywhoyouwould trust inanysituation—youcouldmake them the trusteeunderyourwill—butithasnowbecomethenormtofeelthatasamanagerofamajorcompany it is up to you to play the accounting game, particularly the onessuggestedtoyoubyyourveryauditor.

For example, what’s happened with restructuring, what’s happened withpurchase accounting adjustments? I have seen significant cases where theauditorscometomanagementandsay,hereisthewaytodothisatthispointsothatyoucanreportbetternumberslateron.Andnobodywillpayattentiontothenumbersforthisperiodbecauseofthisorthatgoingon.

Itisthedegreetowhichthehighgradepeoplehaveeitherbeenco-opted,oracquiescedorwhateverwordyouwanttopick.Andthat’sverytoughtocleansethe system of because you don’t have good guys and bad guys anymore. Sixfirmscouldgettogetheranddoit.

CurrentCommentary“The auditing profession would have done well to heed Buffett’s hopefulprescriptions.Instead,as thisexchangeoccurredin1996,accountingfraudswereunderwayatEnron,GlobalCrossing,Qwest,andWorldCom.Withinafewyears,whentheseandotherswereexposed,ArthurAndersencollapsed,theSarbanes-OxleyActrestructuredtheauditingfunction,auditcommitteeswieldednewfoundpoweroverauditors,andthePublicCompanyAccountingOversightBoardwascreated.”–LarryCunningham

*

CalvinJohnsonpostulatedthatfinancialaccountingstandardsareindispensableto properly functioning capital markets and stressed that the entire disciplineshouldbededicatedtotheinterestsofinvestors.WhilesayingBuffettisusuallyon thesideofaccounting for investors,JohnsoncriticizedBuffett’saccountingfor Berkshire’s acquisition of Scott Fetzer as a pooling and how BerkshireaccountedforinventoryofWorldBookencyclopedias.

LOWENSTEIN:IwasquitepreparedtocometoWarren’sdefenseonthisbutrather than accept the second or fifth best, Warren, tell me why you are soinfatuatedwithpooling,ifinfactyouare.

BUFFETT: No I am not. We always use purchase accounting because,basically, that reflects the realityof the situation. In fact, I’mnot sure thatweeverusedpoolingaccounting.

MUNGER:Wehadapartialpoolingwaybackwhen.

BUFFETT:Right.

MUNGER:Butbasicallyweusepurchaseaccounting.You’rereferringtothealternativecomputationthatwemake.AndI thinkamanagement isentitledtotell its shareholders—and indeed should—how it looks at the substanceof thesituation. So, we’re using the kind of accounting you’d want in our GAAPreportsandwefurnishalternativefiguresandwesay,thisisthekindofstuffwelookatandwethinkthey’reimportantandthisstrikesusasperfectlyrational.

BUFFETT: In most cases I would say the premium we pay above the netassetsrecordedonthebooksofthepredecessorcompanyoverwhelminglyisforwhatwecalleconomicgoodwill.Wedon’tevenlookattheplants.Wedidnotlook at the plants ofScott Fetzer beforewebought it.Wedid not look at theplantsofH.H.Brownbeforeweboughtit.Ihavenotlookedattheplantssince—I have never seen the plants at H.H. Brown. We don’t think in terms ofappraisingphysicalassets.

Wethinkintermsofeconomicgoodwill.Webelievethateconomicgoodwillshouldallbeplacedonthebalancesheetasapurchase.Weeventhinkthatifwegive stock that has greater intrinsic value, that it ought to be placed on at ahigherpricethanmarketprice.

In terms of the inventory onWorld Book we use LIFO, so we are alwayschargingcurrentcostsout—wehavenothadanyLIFOreductionthathascaused

any of that to flow into income. We use current costs on a LIFO basis—obviouslylastinisfirstoutandthat’sbeenreflected.

Ifwehadourchoice inaccounting forScottFetzer—whichwedidn’thave,firstyouhadtoallocatetocertainassetsthepremiumwepaidandtheresidualisgoodwill—wewouldsayit’sallgoodwill.TheplantaccountofScottFetzerontheirbooksbeforepurchaseaccountingadjustmentsstraightthrough—theplantaccountislessnowthanitwaswhenweboughtthefirm.So,essentiallywehavenotbeenfacedwiththeproblemofthefactthatthereplacementvalueismuchhigher.Theplantaccountis$49millionnow—itwasconsiderablymorebefore,plusitmakesmoremoney.

What we were buying was economic goodwill. Fortunately, the economicgoodwill has not deteriorated at Scott Fetzer. In our view, to attribute $50millionofthepurchaseprice,let’ssaytoplantandequipment—ifsomeonetellsusthatisthereplacementvalue—thatjustisn’tthewaywelookatit.Nowwemay be required to put it on our books that way but we also want to tellshareholdershowwelookatit.

JOHNSON: Certainly the purchase method was mandatory for GAAPpurposesandyoudidreportitthatway.I’lltakeyourclarification.Mycriticismswere of the alternativemethod inwhichyouwere lookingyearningly atScottFetzer’s old asset accounts andwishing Berkshire could use them and sayingtheywerereallygreat.

BUFFETT:Thatisjustthewaywelookatit.

JOHNSON:Iagreewithyouthatgoodwillshouldnotbedepreciated.Ispentayeartryingtoensurethatitwouldnotbedepreciatedfortaxpurposes.Ididanamicusbrieffor theSupremeCourtandwentbackintoCongress.AndIheardfromeveryone that thatwaskindof right, thatgoodwilldoesnotdepreciate, itappreciates.Notwithstandingmybestefforts,theyallowittobewrittenoffoverfifteenyears.Ithinkthatisaterribleeconomicdecisiontoallowwritingoffoverfifteen years something thatwe know is appreciating. I kind ofwish you hadjoinedthosehearingsaswellasthesecuritieshearingsbecausemaybetwoDonQuixotescouldhavedonesomegood.

BUFFETT:Weonlybuyitifwethinkitisgoingtoappreciate.

JOHNSON: In the twenty-first century it is going tobe all goodwill.We’regoing to see less and less steel and more and more silicon. We’re changing

elements. If we don’t get goodwill accounting right, then you are basicallywritingoffthecostofcorporatestockoverfifteenyearsandthatdoesn’tmakeabitofsense.

But the remedies aren’t the same. I agreewith you that goodwill should benon-amortizable.Buttherewasn’tmuchgoodwillintheWorldBookacquisitionso that the premium purchase price, over Scott Fetzer’s books, was really allallocabletotheplantandequipmentaccounts.

BUFFETT:Wediditasrequired.Inourview,itwasallgoodwill,butitwasrequiredtobebrokendownbasedonFIFOvalueofinventory,appraisedvalueof property, plant and equipment, and residuals and some of it even went todeferredtaxliabilities.

Whatwearetellingshareholders is thoseare theruleswefollow,but inourviewwepaidtheentirepremiumforgoodwill.Wealsothoughtthatthegoodwillwouldnotdepreciate invalueor elsewewouldnothavebought it in the firstplace.Andthatwasthewaywewouldkeepthebooks.Butitisn’tthewaythebookswerebeingkeptsoweexplainedwhatwethought.

CUNNINGHAM: I have twoquestions.Lou just toldus a fewminutes agothatFASBinthenextfewyearswillbelookingatabolishingpoolingandthatitwould rest in peace.Calvin, do you think that is likely?My other question iswith respect to depreciating goodwill: Is the issue whether it depreciates orappreciatesinvalueoristheissueoneofcostallocation?

JOHNSON:IagreewithBuffettthatgoodwilldoesnotordinarilydepreciate.Idon’tthinkhereallymeanstosaythatWorldBook’sfactoryandinventorywereworthlessorcost-freetohim.

LOWENSTEIN:Butaccountantsdealwithitascostallocationaswedowithcostofplantand the like.Anddepreciationdoesn’t reflect thechange invaluebutsimplyallocationofcostovertime.

JOHNSON: Amortization of goodwill is only at 1/40—2.5% over each offortyyears.So,itisdepreciable,butnotverydepreciable.Myviewisthatthereis goodwill; goodwill is a perfectly fine concept. In the next century allcompanies are going to be goodwill. These software companiesmay have noassets—justabunchofemployees,designs,leases;theyhavenoassets.Theyareworth$2billion.It’sallgoingtobegoodwill.Itisreal.Nothingfakeaboutit.

Partofitmaybethepovertyofthebalancesheet.Intheory,abalancesheetshould be awealth statement or a savings account. From a balance sheet youshould be able to tell what next year’s return on capital is going to be. Theaccountantshavegonesofarawayfromanyloyaltytothebalancesheetthatthebalancesheetisgarbage.Justmiscellaneouscoststhathavenotbeenwrittenoff.Thatmeansthatwheneveranyoneelsebuysthecompanytheyaregoingtohavelargeamountsofcostgreaterthanbookvaluethatisgoodwill.

CUNNINGHAM: It sounds like this ties into your arguments aboutintroducingpresentvalueandsimilarconceptsintoGAAP.

JOHNSON:Yes,Iwishinvestmentbankerswouldwrite therules insteadoftheaccountants.GAAPisrealjunk.GAAPisnexttoworthlessforinvestorsandthereisn’tanybodyworkingtoimproveit.

MUNGER:Oh,butifyougotoinvestmentbankingaccounting—whichexistsin all the private prospectuses in the world—if you are disgusted withconventional accounting, you ought to see investment banking accounting:EBDA—earningsbeforedeductinganything(laughter).

LOWENSTEIN:ElliotttalkedaboutGAAPbeinganobstacletobeovercomeandothershavesaidthatinonewayoranother.ThewholeinstitutionofFASBhascomeunderattackandhasincreasinglyforanumberofyears.Effortstotiltthe membership of FASB to a more pro-business stance, encouraged by thetriumphonthestockoptionaccountingissue,andmostrecently,whentheFEIcameforwardwithaproposalthatwouldhaveleft theagendaforFASBunderexternal review sympathetic to the business community. I find it daunting—itcertainlyisinconsistentwithCalvin’sprincipleofloyaltytoinvestors.Isanyoneelsetroubledbythis?

BUFFETT:Inthe1890stherewasabillintroducedintheIndianalegislatureto change the value of pi to 3.2 and the legislator explained it by saying that3.14159wastoodifficultfortheschoolchildrenofIndianatoworkwithandhethoughtthiswouldsimplifythings(laughter).4

JOHNSON:I thinkprobablyforeveryFASBissuethatmanagementwoninthe last years, if the investor groups had won, that would be a grandimprovement. Iget a feeling thatwe reallyaregoing tohave to throwout theFASB GAAP figures; they are so far removed from being of any help toinvestors.Ontheotherhand,everycompany,eventheonesthatminimize,haveto spend$300,000 ayear for their accountants and there is awhole system in

place.Maybetheansweris thatGAAPissocorruptedbymedievaltheoryandmanagementinfluencethatit’snotworthitandweoughttostartoveragain.

Ontheotherhand,atsomepoint,youactuallyhavetoprovideinformationforinvestors. Investors can’t intuit the stuff; they can’t breathe it by putting theirhandsonadocument. In theend theyneedaccurate informationanalyzed inawaythatmakessensewithinthetheoryofinvesting.Theinformationhastofitintothemodel.AndIdon’tknowwhetherthat’sgoingtobethroughFASBorinspiteofFASB,andIsuspectitwillhavetobeinspiteofFASB.

ButIalsothinkthatthecountrycriesforit,thatthisisacheapwaytoimproveproductivityinthiscountry.Ifyou’retalkingaboutalittlegeniewhocanmovemountainswith the flipof thewrist, thatgeniewouldbe togetout somedatathat is helping investor decisions instead of helping to increase managementcompensationandgetting them toCYA. Idon’tknowhow it’sgoing tocomeout,butIdothinkit’simportant.

BUFFETT: I agree with that, but the interesting thing is we find financialinformation—evenaspresented—isenormouslyuseful.Andwehaveboughtinthe last year and a half four businesses—we’re in the process of buying thefourth—where all we had was financial information plus our ability to thinksomeabouttheeconomiccharacteristics.Weaccept—Ishouldn’tsayweacceptpreciselythenumbers—butthenumbersasgiventousfromGAAPaccountingare of sufficient utility to us so thatwe canmake a judgment about buying abusinesswithouteverseeingwhetheraplantexists.

LOWENSTEIN: The whole hostile takeover movement in the 1980s wasobviouslypremisedonnothingmorethanthepublishedfinancials.

BUFFETT:We do it every day.We have spent billions of dollars utilizingpublicfinancials.Buttherearealotoffinancialswewouldn’tutilize.

*EdKitch laudedTheBuffettEssays for theirextendednarrativeexplanationofaccounting figures, better illuminating simple measures such as earnings pershare, but surmised that other corporations do not follow suit because ofsecuritieslaw’sendorsementofGAAPandrisksofliability.Buffett’sresponse,alsoexcerptedinthePrologue,beganthedialogue.

BUFFETT:Ican’trecallinthelast15yearsanywhereinouranalysiswehaveactuallyevenmentionedearningspershare.We’rerequiredtostateearningspershareinthefive-yearsummarybyeithertheSECorGAAP.Butforthereasonsyou’vementioned,somuchattentionispaidtothefigurewhichIthinkhasgotvery,very limiteduseand is far lessuseful than lookingat the resultsunitbyunit.SoIhavenever,thatIcanremember,Ihaveneverusedearningspershareinthetextofanannualreport.

COMMENT: If you were to summarize all the problems we’ve beendiscussingoverthelasttwodays,itcouldfallunderthecategoryofshort-termshenanigans.Youcansummarize theBuffett-Mungerphilosophyasnotonlyacommitment to the long term, but a commitment to permanent ownership.Would a solution be if you changed the tax laws such that permanent ownerswouldberewarded?

Now, this has been suggested before in a number of venues.Warren oncesuggesteda100%capitalgainstaxongainstakenwithinoneyear.Othershaveproposed adjusting capital gains depending on how long a security was held.Warren and Charlie’s example has shown the great merits of permanentinvesting. Perhaps all our energies could be devoted towards introducinglegislationthatwouldrewardpermanentornearpermanentinvestments.

KITCH: I don’t think you would necessarily have to enact legislation. It’squite clear that you can see in the organic structure of Berkshire Hathawayeffortstoinduceshareholderstohold.Forinstance,BerkshireHathawayisquiteunusual in trying to lure its shares out of street name and into registeredownership.For example, youonly can take advantageof the charitable givingplan if you register your shares. The securities industry, of course, has beenpushingtogetridofregisteredshares—let’skeepeverythinginbookaccountsatthebrokeragefirmsandsoon—because,ofcourse,itmakesthemeasiertosell.

COMMENT: That’s the specific example of Berkshire which, of course, iscompletelyadmirable.Butintermsofdoingsomethingthatcanbedonewiththestrokeof a pen to begin tomake corporateAmerica conform to theBerkshiremold.Butasfarastakingsomesortofapracticalfirststepthatdoessomethinglikeataxonshort-termcapitalgains.

JIM REPETTI: That has been discussed in the past, and I think there’s aproblemwiththeassumptions.Iwouldarguethatpeoplewhoareinvestingfortheirownaccount shouldalwayswantmanagement tobe taking the long-termperspective.BecauseifIaminvestingformyownaccount,IknowthatthepriceI can sell this security at is going to be determined in part by the purchaser’sperspective of the longer-term prospects of the company. So, you wouldnormallyexpectinvestorstowantmanagementtotakethelong-termaccount.Ihave suggested in the past that the real problem is with management—theproblemisn’twiththeinvestors,exceptfortheinstitutionalinvestorswhomaynotbeinvestingfortheirownaccount.

LOWENSTEIN:Warrenmadeaproposal like this someyearsagoand thengave up on it. I’ve had the insensitivity, stupidity, to keep reiterating theproposal in various forms. Nancy Kassebaum, Felix Rohatyn, and Keynes, Ithink,was the first tosuggestapenalty for short-term trading. Ifyou lengthenthe investor’shorizonyouchange for thebetter thepressuresonmanagement.AsJimsaid,thereareafewguysdownonWallStreetwhoprobablydon’tquitesee it thatway,and judgingby the flowofPACmoney, theyprobablyhavealittlemoreinfluencethanwehave.

CurrentCommentary“Concern about the short-term perspective of corporate management andsome money managers continues today. The tax system has proven to beineffective in imposing a long-term perspective. Instead. we need to findbetter ways to align management’s interests (i.e. compensation) with thelong-termbestinterestsofinvestors.”–JimRepetti

FISCH:People are talking about twodifferent thingshere though.The ideathatwewantmanagementstohavelongtime-frameperspectivesandyouwantinvestors to investwith the idea that they’reconcernedabout long-termprofits

doesn’tmeanwewanttoprecludetradingandwewanttogetridofliquidityinthe securitiesmarkets, and someof these proposalswould threaten to do that.Thewhole reason people arewilling to putmoney into the capitalmarkets isbecausetheyofferliquidityaswellaslong-termprofitability.Andyoupreventalotofthecapitalthatwehavetodayfromgoingintotheseformsofcompaniesifyousayyoucan’tgetyourmoneyout.

LOWENSTEIN: Iwould suggest that that raises the question of howmuchliquidity is enoughandatwhatpoint thegreasecauses thewheels to skidandlosedirection.Wehad14% turnoveron thebigboard in theyear1960, and Idon’t thinkanybodywascomplainingabouta lackof liquidity.Nowit’sabout70-75%whenyou take theoff theboard trading,andwheredoyoustop?Thecostsofliquidityarevery,veryhigh.

CurrentCommentary“NYSEshareturnoversubsequentlyrosetoashighas138%in2008,beforesinking back to 1996 levels in 2012 followed by an uptick thanks tofrequencytrading.”–LarryCunningham

FISCH:EvenforBerkshireHathaway, thepointof listingon theNewYorkStockExchangeisrecognizingthatinvestorsbenefitfromliquidity.Youwantalong-term shareholder class, but you know that your investors sometimes aregoingtohavetogetout,theyneedtogetsomecashback,theyneedtosendtheirkidstocollegeorwhatever.

LOWENSTEIN:I thoughtitwas,andWarrencananswerthis, itwasnotsomuchtheincreaseinthevolumeoftrading—itlooksprettytinystilltome—butgettingthedealersoutofthewayandgettingintothetrueauctionmarket.ButWarren,whydidyougotothebigboard?

BUFFETT:Wedidn’t think themarketwouldnecessarilybemoreactiveatall. In fact, the daywe listed I said to JimmyMcGuire, the specialist, “Iwillconsider you an enormous success if the next trade in this stock is about twoyearsfromnow.”Andtheydidn’tseemtogetenthusedaboutthat(laughter).

Andanythingwebuy—whenwebuyCoca-ColaorGillette,whateveritmaybe—ourmindset is thatwewouldbehappytoownthatsecurity if theyclosed

downtheExchangeas theydid in1914. Ifwearen’thappyowningapieceofthat business with the Exchange closed, we’re not happy owning it with theExchangeopen.

Nevertheless, liquidityisaverymildplustous.It’snotaminus, it’samildplus toBerkshireshareholders.But if it’sgoingtobeahugeplus toBerkshireholders,thenwehavethewrongshareholders.

CurrentCommentary“Happily owning a stock even when the Exchange is closed speaks toWarren’s belief that it is the advancement of long-term intrinsic value notshort-term stock price that matters most in growing business value overtime.”–RobertHagstrom

LOWENSTEIN: JohnMaynardKeynes inTheGeneral Theory in that veryshortbutveryinsightfulchapteroninvesting—Chapter12,18pages—hadsomewell taken comments on liquidity, and I really recommend them to thosewhoaren’tfamiliarwiththem.

JOHNSON:Wespenda lotofmoneyin the tax lawworryingabout lock-ineffect.Wespendalotofbillionsofdollarsoftaxgiveawaysinordertocomeinwith the rough-hewn anti-lock-in remedy of capital gain preferences. Nowyou’retellingmethatwe’vespent80yearswastingourmoneybecauselock-inisgoodinsteadofbad.Andinasense,wealreadyhaveveryintenseincentivestoholdontoyourproperty.Wehaveastepupinbasisatdeathandwehaveaneffectivetaxratethatgoesdownthelongerthatyouholdontoproperty.Thatisgenerally conceived to be a serious problem to be overcomewith capital gainpreferences.Notasolution.

Ialsowantedtotakeissuewiththisideathatweneedtohavemorenarratives.We need numbers and a guiding North Star. A map abstracts out most factsabout the land. It has none of the local character, none of the richness of theculture,noneoftheGodswholiveinthewoodsexceptforacoupleofpiecesofdata—North, South, East, West. On topographical maps you can find outwhetheryou’redealingwithwaterorsandandthat’saboutit.That’swhatmakesmapssocomparable.

Ihavetoworkveryhardtoteachmystudentsthatfinancialanalystsabstracttheinvestmenttosuchadegreethatwedon’tevenknowwhetherit’sagumballmachineorawidgetfactoryorannuityunderneath.Weare,infact,tryingtogetdataoutofthisinordertoabstractit.I thinklifeinall itsfullnessprovidesnoanswertoanyriddle,it’sjustanabsoluteincomprehensiblemushofjunk.Whenyou finally come up with figures, then you finally get something that’sworthwhile.

MUNGER:Ithinkyouunderstandthemushbetterifyoulookatitfromtwoorthreeviewpoints.Takeabuilding.Ifyoulookatitfromthetopandthesideandmaybeanarchitect’splan,youunderstandthebuildingmuchbetter thanifyoujusthaveoneview.So,I’mafraidthatrealityismessy.Andifyouwanttounderstand it you’ve got to be able to handle the whole mess. Einstein said,“Everythingshouldbemadeassimpleaspossible,butnomoreso.”

*

JimRepettigaveacomprehensivereviewofcorporatetaxlaws,especiallythoseinvolving management and shareholder relationships, such as goldenparachutes,repudiatingthosethatsubsidizemanagerialinefficiency,suchasthecapitalgainspreferenceanddifferentialcorporateversusindividualtaxrates.

LOWENSTEIN: Does that mean you would like to see elimination of thecorporatetaxasissometimesproposed?

REPETTI:Oneof theproposals thathasbeenmade tochange the tilt in theplayingfieldhasbeentoeliminatethetaxondividends—thatis,toretainthetaxon corporate income at the corporate level, but eliminate the tax on thedistributions of those earnings to stockholders. That would certainly put a lotmorepressureonmanagement,maybetoomuchpressure.Thatwouldbetiltingtheplayingfieldintheotherdirection.

I also think that there may be some revenue concerns. Even though thecorporatetaxonlyaccountsforabout12%nowofourtotalfederalreceipts,thatwould be a 12% shortfall thatwewould create ifwe eliminated the corporatetax.Idon’twanttotiltthefieldonewayortheother,Ijustwantalevelplayingfield.

CurrentCommentary“In 2003, the tax rate for capital gains and dividends became equal.Economists cannot agree whether this parity affected corporate dividendpolicy.”–JimRepetti

MUNGER:I think thereareabsolutelydispositiveanswers tosomeof thesequestions.Ifyou’regoingtorunademocracy,you’vegottohavesomegeneralregardforthelawwhichatleastisnothorriblyresentful.

Theguywhohas$5million individend income,paysno income tax.Yetataxidriverworking90hoursaweekispaying30or40%oftheincomeintaxes.

It’s so unendurable that any program that contemplates it, whatever itstheoreticalmerits,isanon-starter.So,Ijustdon’tthinkyoucouldevenconsiderthat kind of an answer. The system has to pay some attention to egalitarianinstincts.

REPETTI:Youmeaneliminatingthetaxondividendincome.Youthinkit’sjustpoliticallyimpossible?

LOWENSTEIN:Thealternativethatmightbridgethosetwo,ofcourse,isonethat sometimes discusses eliminating the corporate tax and having a flow-throughtaxofcorporateearningstaxedtotheshareholders.

MUNGER: I would argue on the other hand that we want to live in acivilization—so long as we’ve got private capitalism—with substantialaccumulations of corporate earnings. That is the great engine of the futuregrowthof theeconomicpie,and it’smuchsimplerandsurer tobe there if thepeoplethatearnitjustkeepit.AndsoIthinkyouwantacivilizationwheretheincentives in place leave at least half of what corporate America earns on itsstockroutinelyaccumulated.

REPETTI:Ithinkyourcompanyhasthebestsolution,regardlessofhowwechange the tax—the law; your returns are so great that stockholders wouldnormallyelectto—

MUNGER:ItwouldbeahugemistaketoassumethatBerkshireHathawayistherightmodelforallAmerica.Itwouldbeanabsolutedisasterifeverysinglecorporation in America suddenly tried to turn itself into a clone of BerkshireHathaway.

LOWENSTEIN:Charlielikestosayhalfoftheworldisbelowaverage,andforthecompanieswhoarehappilyyearafteryearearning8%onshareholders’capital,BerkshireHathawayisnottheone.

BUFFETT:We would follow the same dividend policy if we were owned100%by a tax-free institution.But that’s not necessarily the casegenerally incorporateAmerica.

CurrentCommentary“President Obama’s proposed 2016 budget estimated that corporate taxeswould constitute 13.4% of total tax revenues that year. Yet concern hasgrownabout the impactof aU.S. system thatdefersU.S. taxonprofitsofforeignsubsidiariesuntiltheearningsarerepatriated.ManyworrythatU.S.multinationalssimplykeepprofitsoffshoretoavoidU.S.tax.DebateragesastowhethertheU.S.shouldgiveuptryingtotaxforeignearningsbyadoptinga‘territorialtax’orinsteadendthedeferralofU.S.taxonearningsofforeign

subsidiaries. In addition, low corporate tax rates in other counties createpressureontheU.S.toloweritscorporatetaxrateasa‘racetothebottom’isdeveloping.”–JimRepetti

JOHNSON:IthinkthatgoldenparachuteslegislationwasanotherexampleofCongressfightinginfavoroflocalindustryandentrenchedmanagement.Iknowthat in form this was a penalty on extraordinary severance paid to the targetmanagement, and it sounds like it’s a penalty on the target and on somethingthat’s pro-target instead of pro-shark. But I think that the understood motiveapartfromthepoliticalrhetoricofitwas,infact,togetridofanextraordinarilyusefulpro-sharktechnique.

REPETTI: I like golden parachute payments if they’re approved by thestockholdersafterfulldisclosuretothestockholdersofthefacts.Ifyoustartwithamodelwhere you have a separation of ownership from control, you have toassume that some of the bidding companies are themselves not seeking tomaximizeprofitsbutaretryingtoachieveotherobjectivesthatmaybeharmfulto thestockholdersof the targetcompany in the long term.And in thatsortofsituationitmaymakesensetotrytoallowmanagementtoentrenchitself.Again,Ibelieveincorporatedemocracy.Ithinkifthestockholders,afterthey’vebeentoldwhat is good for themorwhat’s not good for them, after they’ve spokenthenletthechipsfallwheretheymay.

MUNGER:HowdoyoufeelaboutwhatIregardasbyfarthemostimportantofthetaxprovisionsthatdeterredtakeovers—intermsofpracticalimportanceIthink it dwarfs all the others. That’s when Congress repealed the GeneralUtilitiesdoctrine.5Thatreallychangedthearithmeticoftakeoversinawaythatdiscouraged takeovers. If you want to write-off the assets and get future taxbenefits,theexistingCcorporationisgoingtohavetopayahugetaxatitslevel.Thatwasprofoundlyananti-takeoverprovision.Areyouforitoragainstit?

REPETTI: I was in favor of that because it seemed to me that balancingagainstanyconcernsyoumayhavehadaboutthetakeovermarket,thatitmadesensefromataxpolicyperspectivethatitwasconsistentwiththewayweweretreatingothercorporatetransactionsoutsidethepurchasesituation.Forexample,whenacorporationdistributesanappreciatedassettoastockholder,thattriggersataxatthecorporatelevelaswellasatthestockholderlevel.

MUNGER:Theychangedthatatthesametime.

REPETTI:Right.

MUNGER:Howaboutyou,Cal?

JOHNSON:This is an extraordinarily interesting story, becausemostof theacademics love itandsay that it cameoutof theAmericanLawInstitute.TheAmerican Law Institute has a good government tradition going back to the1930s.Itreallylookedlikeitcameoutoftheacademy.Whenin1986Congresspassedthis,allthepointy-headedacademicsweretakingcreditforit,celebratingthatfinallyCongressispayingattentiontotheAmericanLawInstitute.

The reality of it is thatCongress passedGeneralUtilities repeal in 1986 topreventtakeovers.ItwasawaytopenalizethosemanagementsthatdidwanttosellouttoWallStreet.It’sjustanotherindicationthatCongressisverymuchinfavorofMainStreetasagainstWallStreet.

MUNGER: How would you have voted on the change if you were inCongress?

JOHNSON:I’vegotanotherdifficulty,andthatisatmyheartI’mataxman,andmyfirstloyaltyistogetthetaxsystemright.JimandIareinagreementonrepealofGeneralUtilitiesbeingright.I’mnotdoingyourbusiness.Myloyaltyistothestateofthetaxsystem.

CurrentCommentary“CorporationsstillstrugglewiththeimpactoftherepealofGeneralUtilities.Yahoo’sill-fatedattempttospinoffitsvaluableAlibabastockin2015wasmotivatedbythetaximpactoftherepealofGeneralUtilities.”–JimRepetti

CharlieMunger,ElliottWeiss

CurrentCommentary“I now think Buffett’s greatest accomplishment is building a giantconglomerate while successfully projecting a public image of a down-to-earth, folksy, regular guy persona. Buffett’s whole approach to publicrelations and regulatory affairs has been quite different from the usualpractice. He does the most important part himself. He goes and talks toregulatorypersonnelface-to-face.TheOmahalocationhelps,andthecounty-fair style shareholder meetings help. And indeed, his willingness toparticipateinthiseventwaspartofthisapproach.”–EdKitch

3.Editor’sNote: In1996, the auditingprofessionwasdominatedby sixmajor firmsand soon shrank tofour,thankstothe1998mergerofPriceWaterhouseandCoopers&Lybrandandthe2002dissolutionofArthurAndersen.4.Editor’sNote:SeeScottL.Miley,3.1415=Pi=Hard,HeraldBulletin(Anderson,IN),March14,2015(noting that the proposal was based on work by an amateur mathematician, Edwin Goodwin, but wasquashedbyaPurdueUniversitymathematicsprofessor,ClarenceWaldo,whodisprovedthepostulate).5.Editor’sNote:Thereferenceistoa1935U.S.SupremeCourtcase,GeneralUtilitiesCo.v.Helvering,296U.S.200(1935),holdingthatcorporationsrecognizenogainorlosswhentheydistributeappreciatedpropertytostockholders,subjecttovaryingexceptionsandlimitationscourtsdevelopedoverthedecades.Allof that,dubbedtheGeneralUtilitiesDoctrineandseengenerally toencouragecorporateacquisitions,wasrepealedin theTaxReformActof1986,so thatcorporationsgenerallydorecognizegainor lossonmostdistributionsofappreciatedpropertytostockholders.Exceptionsremainforliquidationsandspin-offsofcontrolledsubsidiaries.

WReminiscences

ehadawonderfulsymposiumandthewholeweekendwasatreat.Youget a sense of the intellectual discourse as well as the good humorfrom this transcript. Themany off-the-record occasions enriched the

gatheringaswell,includingduringmeals,breaks,andinformaloutings.

After corresponding with Warren for many months in planning thesymposium,IfirstmethiminpersonthatweekendwhenIhostedadinnerforallguests at Il Cantinori, an Italian restaurant in Greenwich Village. When Iintroducedmyselfbynameandextendedmyhand,he said, “Oh,nice tomeetyou,youarethefellowwhorearrangedmyletters.”

Afterdinner,agroupofusprofessorswentoutfordrinksalongwithCharlie,at theTempleBar in theEastVillage—wherepeople’sheads turned.Thenextmorning, when we reported that to Warren, he joked: “If people recognizedCharlie, it must have been a gay bar.” Meanwhile, earlier at breakfast, DaleOesterlesatwithMunger,andforthelongesttime,didnotknowwhohewas.

Walking to the conference later withMunger, he toldme hewas trying todeterminewhyBuffetthadagreedtoletmerearrangeandpublishhisletters,asIapparentlywasnot the first person to conceiveof such an idea.We surmised,however, that itwasdue to trust-based relationships:mycolleagueand formerDeanMonroePricecontactedoneofWarren’sbestfriends,BobDenham,whopresented theproposal forme. I also enlistedhelp frommy friend and formerboss atCravath, Swaine&Moore, SamButler,whomWarren had known fordecades—hewasonGEICO’sboardwhenBerkshireboughtitsfirststake.

Another mutual friend is Cravath partner, George Gillespie, Warren’spersonalestatelawyerandfellowdirectorforyearsontheboardofWashingtonPost Co. To the symposium George carried with him an updated version ofWarren’swill for signing.WhenGeorge askedme for a roomwhereWarrencoulddoso—andformetobeawitness—Warrenquipped:“Ifyou’regoingtobeawitness,thenIguessyou’renotinit.”

WeputMungerup,alongwith theprofessors,atTheGramercyParkHotel,then an old family business whose luster had dimmed—years later it wasrenovated into a world class hotel. Munger described the hotel as “totallyadequate.”The secondnight, Samuel andRonnieHeymanhosted a dinner for

ourguestsandfriendsoftheUniversity.IleftwithMungerandtookacabbacktoGramercy.Afterwehoppedin,Mungerleanedbackandsighed:“I’veneverbeeninaroomwithsomuchmoneygatheredinit.”

During the conference thenext day,mynephew Justingot tomeetWarren.Justinwasonlya13-year-oldsodidn’tknowexactlywhoWarrenwas,sayinghesignified“lotsofzeroes.”

Yearslater,BillAckmanremindedmethatthisiswhenhefirstmetWarren.Apparently, in lineat the lunchbuffet,BillbeganchattingwithWarren’swifeSusan.Thetwoseemedtohititoff,withSusan,oneofthemostgraciousladiesI’veknown,invitingBilltositathertable.

ItwasJeffGordonwhohadtheideatoofferBerkshire-themedproductsatthesymposium.BesidesservingCokeandSee’speanutbrittle,wedistributedcopiesof The Washington Post both days. In a salute to Salomon, we followedinvestment banking practice of memorializing important transactions with a“deal toy”—such as a miniature prospectus inside a Lucite cube.We put thesymposium program inside one of those for all participants. A week later,Debbie Bosanek,Warren’s assistant, toldme he cheerfully brought it into hisofficetouseasapaperweight—soIsentheronetoo.

My student assistants and I had coordinated many logistical details for theweekend, but after the symposiumended onMonday,we realizedwe had notmadearrangementstogettheBuffettfamily(Warren,Susan,andHoward)totheairport. They said they would simply get a taxi and the three of them, withluggage,ambledouttoFifthAvenueinManhattannearrushhourtohailone.

I insisted thatwe could easily get them a town car for the trip butWarrendeclinedsayingthecabwouldbecheaper.Isaidwe’dspringforitandwouldn’ttellanyoneabouttheindulgence.Howardquicklyintoned:“ButI’lltell.”Theyall got in the cab.Ever since, I’ve always thought,Howardwillmake a goodchairmanoftheBerkshireboardsomeday.

L.A.C.

LuciteCubewithSymposiumProgram

GALLERY

PeterHilal,WarrenBuffett,PaulHilal,CharlieMunger

CharlieMunger,BillAckman,ChrisStavrou

WarrenBuffett,JustinCunningham,LarryCunningham

LarryCunningham,GeorgeGillespie

GeorgeGillespie,HowardBuffett,AjitJain

AjitJain,SusanandWarrenBuffett,CharlieMunger

MarjorieKnowles,SusanBuffett,DeborahDeMott

LeahSpiro,CharlieMunger

TSUBSEQUENTSTEPS

heyearafterthesymposium,wepublishedTheEssaysofWarrenBuffett:LessonsforCorporateAmericaasastand-alonepublicationcarvedoutofthe symposium volume. We offered it at Berkshire’s 1998 annual

meeting,atBorsheim’sonSunday,thankstoCEOSusanJacques.

Belowaresomephotosofmeandmyteam,includingmynephewJustinandmyresearchassistant,DanaAuslander,laterasuccessfulhedgefundexecutive,settingupand selling.Asyoucan see,wehadourownkioskandTheEssayswastheonlybookofferedforsale.

LarryCunningham,MattMcMerdo,JustinCunningham,DanaAuslander,AnnieRusher

BelowisapictureofWarrenwhenhereturnedtomyschoolafewyearslaterto teach one ofmy classes.At front left ismy student,AndrewSole,whowentontobecomeasuccessfulvalueinvestor.

Press interest in The Essays, including the symposium, has always beenstrong,thoughitgrewconsiderablyovertheyears.Amongearliesttreatmentswas a 1998 interview inForbes, reprinted below, followed by a kind notefromWarren referencing it.Thedateof the letter isearlier than thatof themagazineduetothatoldtraditionofprintmagazinesbeingissuedaheadoftheirprintdateinordertoextendtheirshelflife!Copieswouldalsobesenttosubscribersimmediatelyonpublication.

Forbesarticle,April6,1998

LetterfromWarrenBuffett,March23,1998

Subsequent to the original 1997 edition, The Essays of Warren Buffett:LessonsforCorporateAmericawaspublishedinneweditionsin2001,2007,2013,and2015.Coverimagesfollow.

2015

Thanks to Warren’s encouragement, starting with an inquiry he receivedfrom China, I arranged for the translation of The Essays into Chinese,French, German, Greek, Japanese, Korean, Portuguese, Russian, Spanish,Thai,andVietnamese.Selectedcoverimagesbelow.

WhenwefirstsoldTheEssaysatthe1998Berkshireannualmeeting,itwastheonlybookofferedthere.By2015,TheBookworm,anOmahabookstore,had itsownexhibit at theBerkshiremeeting,where it offers for sale someforty titles, all handpicked byWarren. BesidesThe Essays, Iwas honoredthat another of my books was included, Berkshire Beyond Buffett: TheEnduringValueofValues.BelowisaphotowhereIstoodattheBookwormexhibitduringthelunchbreakautographingin2015.TheHudsonBookstorein Omaha is also a big seller of books concerning Buffett and Berkshire,includingmybooks.

INotesfromOmaha

fyou’veneverattendedaBerkshireannualmeeting,go.AbigdrawremainsWarrenandCharlie’sSaturdayQ&Awithshareholders,nowlive-streamedon the internet. The Q&A explores diverse topics, but attend multiple

meetingsandyou’lldiscover thateverythingturnsonafewfundamentals.Thedayaftermy fifthmeeting,CharlieMunger summed it up tome: “Soyougotanotherdoseofthecatechism.”

YetifBerkshireSaturdayislikegoingtochurch,therestoftheweekendfeelslike a festive family reunion. Make new friends and catch up with old onesduringthemanyprofessionalandsocialgatheringsstuddingtheweekend.Herearemyhighlightsfromtheannualpilgrimage:

1. Talks: U. Nebraska/Bob Miles Summit (Thursday); Creighton U.Roundtable(Friday).

2. Events:Andy&PatKilpatrick’sparty;WhitneyTilson’sreception.3. Spectacle:ScoresofBerkshiresubsidiariessellingwaresatdiscounts in

thearena’svastexhibitionhall.4. Scene:BerkshireCEOs strolling the lobbyof theHiltonasLizClaman

broadcasts.5. Outings: Minor League Baseball (Friday night); Borsheim’s (Sunday

afternoon).6. Restaurant:V.Merz(everyyearwhenpayingourcheck,wereservefor

thenextyear).7. People:MeetingmyloyalreadersfromOklahomatoIndia!8. Personalmoment:Op-edintheOmahaWorldHeraldmeetingedition.9. Book distributionmethod: John Petry and Joel Greenblatt bought 5000

copies of The Essays after founding Value Investors Club in 2001,distributed free from the back of a U-Haul truck parked outside themeetinghallentrance.

10. Family:SharingtheweekendyearafteryearwithmywifeStephanie!

A

Epilogue

lotchangedatBerkshirefrom1996to2016,especiallyavastmultiplicationin size from a company comprised mainly of minority common stock

positionstoaconglomerateboastingscoresofwholly-ownedbusinesses—tensolargethattheywouldqualifyasFortune500companiesstandingalone.

1996 2016

Bookvaluepershare $20,000 $150,000

ClassAshareprice $35,000 $200,000

Marketcapitalization $60 $320

Bookvalueofmarketablesecurities $30 $120

Bookvalueofoperatingassets $2 $500

Netearnings $2.5 $20

Wholly-owneddirectsubsidiaries 15 60

Acquisitioncostofdirectsubsidiaries <$5 >$170

Shareholders’equity $25 $250

Float $7 $85

Directors 6 12

Employees 33,000 350,000

Employeesatheadquarters 12 25

Annualmeetingattendance 7,000 40,000

Berkshire:1996v.2016Dollarsinbillionsexceptpershareamounts.Manyfiguresareaveragedor

roundedforsalience.

BerkshirehasgeneratedenormousexcesscashoverthepasttwodecadesthatBuffett andMungerdeployed tobuildacorporate fortress. Its strengthderives

from how Berkshire finances operations and acquisitions: primarily throughretained earnings, with leverage contributed by insurance float and deferredtaxes.

Berkshire generally does not use banks or other intermediaries. In the fewcaseswhereBerkshirehasborrowedfunds,mostlyforuseofitscapitalintensiveandregulatedpublicutilityandrailroadbusiness,loansarelong-termandfixed-rate.UseoftraditionaldebtcouldjuiceBerkshire’sresults,butborrowedmoneyisalsocostlyandcreatesriskofdefaultalongwithcollateraldamage.

When insurance underwriting is done with discipline over long periods oftime,theamountoffloatcangrowtolargeproportions.AtBerkshire,floatrosefromamere$7billionin1996to$84billionin2016.Thankstoitslongholdingperiods,Berkshire’sdeferredtaxeshaveaccumulatedtonearly$58billiontoday,makingthetotaloftheseunconventionalleveragesources$142billion.

Unlike float (or deferred taxes), bank debt comes with covenants, statedinterest, and due dates. And loans are marketed by an agent whose interestsconflict with those of borrowers, whether concerning a loan’s size, duration,cost, or covenants. Berkshire’s self-reliance provides the leverage benefits ofdebt(moreassetsdeployed)withoutthecosts,constraints,andconflicts.

The other great example of Berkshire’s self-reliance concerns acquisitions.Whereas most corporations use a strategic plan to scout for and vet targets,Berkshireawaitspossibilities,rejectsmostthatarepresented,andseizesontheattractiveonesopportunistically.Itpublishesstrictacquisitioncriteriaforall tosee,includingarequirementthatoffersincludeaprice—andthereisrarelyanyhagglingoverpriceinaBerkshireacquisition.

Similarly, in typical acquisitions, as negotiations of the terms of agreementproceed, accountants test a company’s controls and financial figures whilelawyers probe contracts, compliance, and litigation. Such examinations areusuallydoneatcorporateheadquarters,alongwithmeetingswhereprincipalsgetacquainted and tour facilities. The process can take months and generatesignificantfees.Berkshire—proudly—doeslittleofthat.

Buffettsizespeopleupinminutes;dealsaresometimesreachedinan initialphone call, often in meetings of less than two hours and invariably within aweek. Formal contracts are completed promptly. Deals—including thoseinvolvingbillionsofdollars—canclosewithinamonthoftheinitialcontact.Theprocess does not reflect lackof informationbut ratherBuffett’s andMunger’s

prodigiousbusinessreading,whichhasyieldedbroadknowledgeandfamiliaritywithmanycompanies.

Moreover,theyhavedisciplinedthemselvestostickwithareasofexpertise,soif they lack understanding they know it and pass. It is not an accident thatBerkshire hasn’t purchased a high-tech business. To paraphrase RobertHagstrom’sthoughtfulcurrentcommentaryforthisannotatedtranscript,bewareyourcognitivedefects.AndtoparaphraseCharliefromthesymposium,beafraidofyourownidiocy.

Many people are interested in replicating Berkshire Hathaway, from thecurrent leadership of Google to smaller insurance companies such as MarkelCorporation,whichhasconsciouslymimickedthemodelquitesuccessfullyonalesserscale.ManyBerkshiresubsidiariesarethemselvesconglomerates,genuinemini-Berkshires including not only Marmon Group and Scott Fetzer butBerkshireHathawayEnergy,MiTek,andPrecisionCastParts.

Business people dream of creating conglomerates in Berkshire’s image inmuchthesamewayproverbialliterarytypeswanttowritethenextbest-sellingnovel.Anditcanbedone,ifnotonthesamescaleortothesamedegree.MoremodestaspirationswouldemulatesomeofBerkshire’sprinciplesandpractices,especially those of self-reliance as well as autonomy, decentralization,permanence,andtrust.

Adapting the Berkshire model can create a competitive advantage versusrivals in the acquisitionmarket, from strategic buyers to private equity firms.GE, forexample,cannotofferautonomyorpermanence. It isveryacquisitive,butnearlyaspronetodivestitures—formerCEOJackWelchbecamefamousforclosingorsellinganysubsidiarythatfailedtoleaditsindustryandhissuccessor,Jeff Immelt, executed a significant divestiture program at GE. Private equityfirmsareinterventionistbystrategyandshorttermbydesign.Theycreatefundswithten-year lives(fivetosow, thenfivetoreap)andimmediatelyalter targetmanagers,cultures,workforcesandproductionfacilitiestopreparethecompanyforresale.

Ifnothingelse,everypubliccompanyshouldlearnfromBerkshirethevalueofa long-termoutlook.Whenpubliccompanymanagersarehoundedbyedgyanalystsandcertainactivistshareholdersaboutresultsinthecurrentquarterandyear-to-date, the pressure to focus on the short-term is intense. Cutting costs

todayandmaximizingrevenuenoweasilyentailasacrificeinfutureeconomicgain.

Despite Berkshire’s outsize growth over the past two decades, Buffett’sphilosophyremainedfirm.Ifweheldanothersuchsymposiumtoday,wewouldinclude all the same panels and discussionwould closely resemble that of theoriginal. We would add panels to discuss Berkshire’s scale along with itspeculiar system of governance, approach to acquisitions, and deepdecentralization. We would have panels featuring Berkshire subsidiaries andtheirmanagerstodiscusstheiroperationsaswellasBerkshireculture.

The symposiumwould span four days instead of two; we would serve notonlyCoca-ColaandSee’sbutalsoDairyQueenandanythingthatmightrequireHeinz condiments. Given that Berkshire today is a microcosm of corporateAmerica,thevarietyofmementoswecouldoffergoeswellbeyondLucitedealtoys, and might include apparel, jewelry, or party favors. If the same peopleparticipatedagain,oneconstantyoucancountonisaconsiderabledoseofwitandwisdom.