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No. of Recommendations: 26
1. Mark from Bethesda, MD: Did compensation plans in Berkshhire's insurance operations have adverse effects on operations? (Note: Questioner did not specifically mention Gen Re, but WEB's response did.)
Compensation plans at GRN did not cause underwriting problems. GRN's problems arose from its inability to walk away from badly priced contracts.
Charlie: Option plans cause a lot of crazy stuff, and they do not enhance operating results.
WEB: We've had people make money on stock options at GRN when its business was bad. (I feel as many do on this board that Ferguson is deep in WEB's dog house, and this could be one of the factors causing his fall to disfavor.)
Cost of capital must be considered in the pricing of options. They should never be priced below intrinsic value.
Charlie: Not good for the country to have so much negative feeling about options.
WEB: But it will be difficult to change the accounting. There's too much pressure from coporate America not to change the rules. This is bad.

2. David from New Jersey: Does the size of float constrain its use?
We always want liquidity and will not be constrained due to size. Lack of enthusiasm for the equity markets is our biggest constraint.

3. Gentleman from Hong Kong: The questioner made some remarks about WEB's Fortune article included with this year's annual report and factors influencing his investment decisions. Q - How does the price of gold affect your thinking?
The price of gold has nothing to do with the value of a business and does not enter into my thinking about valuation.
Charlie: Interest rates are important.
Another Q: If the dollar were devalued, would it affect your projection of 6-7% growth?
I used to try and correlate yields to markets, etc., but I gave up on that. It all goes back to how much you expect to receive from your investment. Investing return is what society gets back. What someone is willing to pay you for your investment in the future is speculation and does nothing for society.
REITs are not as attractive now, as they were 2 years ago when I invested in them. (I'm not sure how he transitioned to this point, or if he just threw it in to point out the importance of yields.)
Charlie: The way markets work encourages Ponzi schemes. Markets are very hard to predict. It's also very difficult to attempt predicting how high a stock will climb before its bubble bursts. This is why you shouldn't short these stocks.

4. Ho Nan, San Francisco: If you are required to expense stock options, isn't this double counting? Will option expensing rules stifle entrepreneurship by discouraging their use?
Expensing options is not double counting. WEB then gave an example showing how there is real expense AND dilution. (I did not copy the example.)
Companies should be truthful about how much it costs to run their businesses. Dell's put options will cost them a lot of money. (I just saw some figures today but can't put my finger on them. I think it was in excess of $1B.)
Neither WEB or CTM are opposed to options. They're opposed to not counting them as an expense.
At this point, Charlie chimed in with his John Doerr quote: "I'd rather make money playing piano in a whore house than accept options as compensation." This got almost as many laughs as some of the great one liners in the movie, such as "Fruit of the Loom's objective is to cover the asses of the masses!"

5. Bob from Rochester, NY: The S&P declined 60% in the 60's and 70's. Can this happen again causing negative returns?
If interest rates rise, stocks prices will deflate. Models of the past can happen again. What's happening in other parts of the world can happen here.

6. Steve, Ann Arbor, MI: (3 Q's) How do I develop a circle of competence? Comment on creative accounting by (mentioning several cos. including KO and ENE). Also invited comments on AW Jones hedge fund strategies of the early 60's.
The Jones strategy was the father of LTCM's model. Go long and short in equal amounts on bonds of similar risk and yield and make money when spreads narrow. If 1 out of 4 of these fail, you lose! You can buy in unlimited quantities but not short unlimited amounts.
Charlie did not agree that all companies mentioned in the question employed creative accounting and feels that there may be some favorable fallout from the ENE fiasco.
WEB: (On KO) There is more value in owning a trademark than in bottling. This does not mean bottling is a bad business. He sees no accounting problem in the way KO accounts for bottlers. (Remember KO accounting bashers - WEB is a member of KO's audit committee.)
On circle of competence: Look at a list of companies. Can you tell what they do? You can tell what KO, MCD, Costco and the like do. If you are unsure, then you don't understand it. WEB then gave an example of an unnamed large finance company that called him to find out if there was an interest. He could understand the individual transactions but not the overall picture and declined investing. (Anyone want to venture a guess as to what company this was? I can't.)

7. Wayne, Sydney, Australia: He refers back to the shareholder proposal to stop contributions to causes supporting abortion and states that population decrease could be an alarming problem. How do you view this critical problem?
Population projections are unreliable and tend to err on the low side. You must make sure you don't overshoot the carrying capacity of the earth.
(Although I disagreed with it, I thought the attorney that presented the shareholder's (2 B shares) proposal did an excellent job.)

8. Irv from Cologne, Germany (Again, I needed Freggel) If the dim prospects you have for market performance come true, what kind of results do you expect for BRK?
4-8% growth is realistic, not 15%. There's nothing wrong with earning 6-7%.

9. Questioner did not identify himself. What do you see in the future for the Lloyds and Farraday agencies (GRN agencies) in the London market?
There is a larger commitment to London with Farraday, but ability and discipline in what they're doing is more important than location. The same is true for investing in equities. Accept risks you understand and price them properly. There is lots of insurance business out there to be had, but all may not be good.
Charlie made a comment here, too, but I did not record it.

10. Lowell from Phoenix: What 2 or 3 things would you include in a course on investing for retirement?

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