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Here is a transcript of notes I took during the annual meeting. This is not comprehensive, this is just what I happened to capture (writing in my horrible freehand) about topics I thought were interesting. The wording is also not exact, please don't interpret anything here as a direct quote from Buffett or Munger. When I did manage to capture their exact wording I put it in quotes "". Comments between [square brackets] are my editorial comments. My apologies for any typos too.

"Q:" indicates a question, "B:" is a response by Buffett, and "M:" is a response by Munger.

Berkshire Annual Meeting 2001

B: Hopes to add "about 40 businesses in the next 14 years", without issuing any new shares

B: 6% cost of float is "very high". About 25% of this cost was of the "pain today, gain tomorrow" variety. Absent a mega-catastrohpe, 2001 cost of float may be below 3%. A mega-cat can be $20 billion or more.

B: Some transactions have costs spread across the life of the float. These costs for Berkshire are currently running at about $300M per year. These are retroactive insurance contracts.

Q: To Munger: what are your most recent mistakes?
M: The worst mistakes are those of omission.
B: We have blown "billions and billions and billions"
M: Don't want to comment on specific opportunities in case another chance with the same company arises in the future. These kinds of mistakes have cost us billions but they don't show up on the income statement.
M: I remember a long time ago, I was offered 300 shares of an oil company [missed the name]. Any fool could see that there was virtually no chance of losing money and a very good chance of making money. I bought the shares, and a while later I got another offer to buy an additional 1,500 shares. I refused because I would have had to sell something. If you trace it through, that cost me about $200-300M over the years. The small inconvenience of selling something caused me to miss a great opportunity.

B: I expect the 3% cost of float [estimated for 2001] to decrease significantly over time.

Q: Are EJA's staffing costs less than the industry average? If so, why?
B: The important number to watch with an airline is the cost per available seat mile. As long as costs are in line with competitors, you'll be fine. The problem with some airlines is that they had a cost per seat mile of say 12 cents, then Southwest air would come in with a cost per seat mile of 8 cents. If your costs are higher than your competitors you'll lose.
B: NetJets service doesn't compete with United, etc. It is not a commodity. It's very service oriented.
B: With regard to pilot compensation, there are other ways to compensate pilots such as allowing them to live where they want and work the schedule they want. We are accommodating to our pilots in this way.
M: The airline unions are really tough. Airline pilots are generally paid well too. This is very tough in a commodity business.
M: Passenger rail travel is also difficult for the same reasons. We hope that NetJets' products are desired more than airline seats. NetJets is NOT a commodity business.
B: If you're in a business that can't take a long strike, you play chicken with the labor unions, because if the business fails, everyone loses.
B: Being weak when dealing with a strike actually puts you in a stronger bargaining position because you have less to lose and can't be pushed very far. For Buffalo News, we met with the heads of the labor unions directly because we knew that ultimately they had control over the fate of the business. I told them that if they struck for a few weeks, we would probably return to a competitive business, but if they struck for a year, we certainly would not. I told them that if they knew the right period of time to strike where they can return just before the business stopped being competitive, they were smarter than me. The frustrating thing for the business owner is that it's out of your hands, it's in the hands of the union leaders.
B: The unions leaders for Buffalo News seemed to understand this and were cooperative. I remember a period during that time when one small union representing about 2% of the work force went on strike on a Monday. The other union leaders came to us very concerned because they knew what might happen. The leaders of the cooperating unions actually worked with the leaders of the striking unions to talk them into coming back to work. They came back on Thursday of the same week.

M: This is not a hog-heaven period for Berkshire. It's become very competitive to be an investor and I don't see any signs of that changing.

B: The internet allowed some people to monetize the homes of others. Lots of money was transferred from the gullible to the promoters.

M: Book recommendation: "Genome"

B: Pension funds are using growth rates of 9% or higher for planning their funding which is probably unrealistic. In a few years these companies will probably report significant shortfalls. It will be interesting to see if they change their assumptions at that time.

Q: Is it reasonable to say that we'll see eventual net margins at EJA of 5%?
B: EJA won't be a mature business for decades. We currently have about 2000 customers, and the potential is in the tens of thousands. We can currently add about 600 customers per year, and this number is constrained by the lack of availability of aircraft. We are already in the US and Europe, and we have plans to expand in to Asia, Latin America, etc. 5% after tax margins may be reasonable, but it's hard to say.

Q: Will growth in float be 10% far into the future?
B: Float should grow by about $2.5B this year. Total float of the P&C insurance industry isn't much more than $300B. Aggregate float for the industry won't grow by 10%. Growth in float is only good if the cost is low. We don't think that growth in float by 10% over the next 25 years will happen, but we've been surprised by how it's grown up to this point.
M: This is only for low cost float. Higher cost float might provide more growth. However keeping it low cost is the name of the game.
B: There is an unlimited market for dumb insurance.

Q: Any plans to expand GEICO into Europe or Asia?
B: Having a successful business that is the low cost operator, you look for every opportunity to expand it. GEICO has about 4% of the market in the US, there is room to grow. We've looked into expanding the business into Europe and Asia "a lot". It seems that it's better to put the energy into the US operations.

Q: Is your exposure to the asbestos liabilities of your businesses capped?
B: We have not put a lot of money into companies with significant asbestos lawsuits. We've invested in USG but it is a tiny fraction of Berkshire's net worth. In retroactive insurance, in some cases we are assuming the liabilities from existing asbestos claims. Some auto insurance is written uncapped, for example in the UK. But in reinsurance, it's usually possible to cap it somehow.

B: Actuarial expertise improves with more experience. State Farm has more experience than anyone. For example, people with bad credit are worse drivers than those with good credit. Why? Who cares? The fact that there is a correlation is significant to how you price policies.

Q: How much slower would the growth in book value of Berkshire have been without the leveraging action of no-cost growth in float? 5-6% slower?
B: That number seems a little high. I've never done the computation [thinks about it for a minute], it's conceivable that it's that high but I'm not sure, you'll have to do that calculation yourself. That would be about 25% of our growth over time.

B: Efficient Market Theory [EMT] is the theory that nobody knows anything about investing.

B: We hope to buy about 2 or so private companies per year.

Q: Can you comment on your sale of Freddie Mac and any new risks in the industry?
B: We did not sell because of a fear of more government regulation, maybe the opposite. We just felt that the risk profile had changed.

Q: Do you think that as a broad trend, the "moats" in American business are becoming harder to create or harder to defend?
B: Good question. Charlie and I may differ on this point. I don't think that the quality or sustainability of moats in American business has changed much in the past 30-40 years. Certain industries are more prone to rapid change though.
M: I'd say it's getting harder to find predictable moats.
B: Well there you have it.

Q: Can you give us some more details on the financial services business?
B: Good question. The financial products business is made up of General Re Securities, a couple of other operations, a structured settlement business, some trading businesses (fixed income related, including arbitrage). Frankly, Charlie and I don't know all, or a large part of, what goes on in that business. There are 17,000 outstanding tickets in General Re's business. However we are very comfortable with Mark Bern [sp?] who manages this business. He's very smart and very trustworthy.
B: We made a lot of money in non-derivatives financial products business last year which is under my direct control. If we add anything else, I'll be running it.
M: I'd call that business "oddball pastimes of Warren Buffett". I'm sure the results will be irregular [crowd laughs]. I like those businesses quite a bit less than those that are in them [another laugh].
B: We regard that business to potentially be dynamite.
B: Compensation in that industry is generally a problem. It's practice to compensate people up front for deals about which you won't know the results for 10-15 years. This is similar in part to what happened with Long Term Capital Management.
M: The derivatives business, the accounting is improper. It front-ends too much income. It's an intrinsically improper system. The whole system of accounting in that business is far too optimistic.
B: Mark's way of accounting for the business is substantially different than the norm.

Q: Lou Simpson has the authority to manage over $2 billion of funds totally autonomously. What are his qualifications that got him into this position? Would Simpson be qualified to negotiate the purchase of a private business?
B: Lou is smart, careful, high-grade, and experienced. He can negotiate a purchase of a private business, but I hope he doesn't have to any time soon [crowd laughs].
B: It's worth pointing out that some transactions are reported by the press as being done by me when in fact it's done by Lou, or vice versa.

Q: How is the Finova deal turning out, now that they're up against the wall?
B: They are worse than up against the wall, they're in chapter 11. They were highly leveraged and ran into financing problems, and the problems compounded due to the leverage. I think there were attempts to sell the company prior to the bankruptcy, and they sold of some small pieces, but they didn't find a seller for the whole thing. Their bonds started to sell at an attractive price, and by attractive I mean they were below asset value. We bought bonds worth $1.428B in face value. It became clear that they had to declare bankruptcy, partly because they wouldn't use cash to pay their immediate claims. We joined with Leucadia to make a bid. They're in chapter 11 now, the court hearing is pretty soon.
B: If our bailout plan is approved, a significant additional investment would be required. Leucadia brings a lot to the party with regard to managing the assets through bankruptcy and maximize their value. I think our position will work out fine.
M: It was an interesting transaction. I wish there were more of them. Seems to be a clean and proper way to clean up a corporate mess.
B: Berkshire has more money on the line than anyone else, and we want the greatest realization of capital. The difference between doing it wrong or right could be measured in the billions.

Q: Why do you consider The Gap to be undervalued at the moment?
B: This is an example of what I was saying earlier. That was 100% Lou Simpson. I've never even read The Gap's annual report. Lou can look at smaller securities, he can work with $100-200 million opportunities. I'm looking for something I can put $1-2 billion into. So there are a lot of things that Lou sees that I just never look at.

Q: [From a woman, asking Buffett to direct the answer to her husband]. Would it be fair to say that if a shareholder made a major purchase at Borsheim's, it would be like taking money out of one pocket and putting it into another? [crowd laughs]
M: When buying jewelry for the lady you love, you shouldn't put too much into the financial calculations.
B: I've never bought a piece of jewelry for someone and regretted what happened afterwards.

Q: Walter Scott is on the management team at Level 3. Can you comment on that company?
B: Scott and Crowe are two excellent businessmen, but I don't know a lot about that industry, and if I did, I couldn't comment on it.

Q: How do you know when you have a "big idea"?
B: You just know. I can't tell you what the neurological events are that tell me I'm having a big idea but I just know. We've had relatively few, maybe 25. Charlie?
M: If you took the best 15 ideas away from Berkshire, nobody would be here.
B: Yeah we seem to get one every year or two. I knew GEICO was a great idea the first time I heard about it.
M: The game is to know a good idea when you see it. I don't think any school can teach you to recognize a great idea. "Opportunity comes to the prepared mind".

Q: At one time, it seemed that Kellog and Campbell's had sustainable competitive advantages, but that doesn't appear to be the case any more. Can you comment on how this happened?
B: Kellog just pushed pricing too far relative to the moat they thought they had. Campbell's fits less well into today's lifestyles than it did 40 years ago.
B: Consider Coke. About 30% of the US per capita consumption of liquids is soft drinks, about 1/8 of the world's consumption of liquids is Coca-Cola products. Over the next 100 years, I expect per capita consumption of Coke products to increase. This would be a very hard trend to reverse. It would be possible to push price too far, and this would have an effect on that growth.
B: Everyone is talking about Starbucks, but per capita coffee consumption is decreasing, not increasing. The price of Coke has roughly doubled in 70 years, this is far less than virtually any other product.

M: [Discussing branding] The "muscle power" of the Costco and Sam's brands has gotten extreme. I've been told that Haynes is co-branding their pantyhose with Costco.

Q: Do you ever engage in selling securities short? Can you comment on the practice?
B: It's an interesting item to study because it's ruined some people (i.e. Bob Wilson). Being short something where your losses are unlimited is very different than being long on something you've already paid for. It's tempting because you'll see more securities that are overvalued than undervalued. However it's a tough business because the losses are unlimited, and the people promoting [the overvalued stocks] are somewhere between promoter and crook. You can run out of money before they run out of ideas. It is very painful to hold a security short as the price keeps escalating. I had one arbitrage situation in June 1954, but there was a technical wrinkle, and for a while it was very unpleasant. It isn't possible to make big money in shorts because you can't expose yourself to the risk in a big way.
M: It isn't worth the irritation of being short something that someone else is promoting.

Q: If you were strongly convinced that a company like Pepsi or Proctor & Gamble was going to grow its earnings much faster than Coke or Gillette, would you sell your position and buy the other company?
B: Well first off it would be really tough to convince us. But, being on the board of directors of a company, it would be nearly impossible to trade in the underlying security. Everyone would think we were privy to some inside information.
B: We won't sell one of our wholly owned businesses unless they're going to lose money for as far as the eye can see or if there are labor troubles.
M: I think the fact that our loyalty attracts private companies more than compensates for the lack of gains we could make from the advantageous disposal of [some of the poor performers].

Q: Can you comment on how to calculate the intrinsic value of Berkshire?
B: The biggest question is how the capital will be deployed and the returns on that capital. It's relatively easy to value the company right now. The question is what will be done with the money that is generated.

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