Berkshire Hathaway Annual Meeting May 2, 2009

(Notes taken by Professor David Kass, Department of Finance, Robert H. Smith School of Business, University of Maryland)

A one hour humorous film was shown in which there were a series of commercials for Berkshire products and numerous comedy routines. There was one scene of Warren Buffett playing the role of Tiger Woods caddy. After Tiger hits his golf ball too far to the left, Buffett states: You got a little too much right hand in it Tiger. Tiger then swings again, this time successfully, and says to Buffett: You were right. Tiger then demonstrates his ability to repeatedly hit the same golf ball a few inches off of the head of his golf club (as he has done on TV commercials), but Buffett is unable to replicate that. In another scene, Buffett is demoted from Chairman to mattress salesman at Nebraska Furniture Mart partly because Berkshire lost its AAA rating and the board suggested he try something else. He is then assigned the most difficult looking (facial expression and body language) customer on the floor. After this customer rejects several mattress styles, he shows her the Nervous Nellie model. Buffett says this is the perfect model for these difficult economic times. He then shows the customer that there are several stock certificates of Berkshire Hathaway as well as cash under the mattress. The customer immediately insists on buying the floor model of the mattress. When she leaves to pay for it, Buffett removes the securities and cash. Prior to beginning the question and answer period of the shareholder meeting, a slide was projected on the front screen displaying a December 19, 2008 trade ticket showing a Berkshire sale of $5 million of Treasury bills. They were coming due on April 29, 2009. Berkshire sold the bills for $5,000,090.70. Thus, the purchaser was receiving a negative return (losing $90.70) over this four month period. Buffett stated: We may never see that again (negative yields on Treasury bills) in our lifetimes. The format for asking questions was changed this year. Half of the questions were selected by three business journalists: Andrew Ross Sorkin (The New York Times), Becky Quick (CNBC), and Carol Loomis (Fortune). Shareholders had e-mailed 5,000 questions to the journalists, who then selected 25 questions relating to Berkshire and its operations. The journalists alternated with shareholders in the audience in the asking of the questions. The journalists along with Buffett and Charlie Munger were seated on the stage of the arena. 35,000 shareholders were in attendance for the annual meeting setting a new record. (This is compared to previous records of 31,000 in 2008, 27,000 in 2007, and 24,000 in 2006.)

Questions were asked in the following order:

(1) Loomis: Since Buffett has referred to derivatives as financial weapons of mass destruction, will Berkshire be adding to its positions? Buffett: Berkshire expects to make money over time on the equity put contracts it has sold. It will probably lose money on the CDS it sold (on high yield companies). Berkshire recently restructured its S&P 500 put contracts (at no additional cost) with an expiration date of 18 years and a strike price of 1514, replacing them with contracts with an expiration date of 10 years and a strike price of 994. (2) Audience: How can future generations be taught financial literacy? Buffett: The current generation flies to Las Vegas to place negative expected value bets. Therefore, the U.S. is a great country to make money in. We need to make our students literate. Munger: This generation foolishly pays 18% interest on credit cards.

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(3) Quick: Can you comment on Wells Fargo (WFC) and their situation with respect to accepting TARP money? Are these government programs good or bad? Munger: The government was forced to react quickly to the biggest financial crisis in memory. It is unreasonable to expect perfection. The government should be judged leniently under these conditions. He was very critical of bad accounting standards. Buffett: Overall, the government has done a good job. WFC was given one days notice about taking the TARP money, and given one to two hours to sign the agreement. WFC is a fabulous bank among the large banks. We should all read Jamie Dimons (J.P. Morgan Chase) letter to shareholders (Annual Report) explaining the causes of the financial crisis. (4) Audience: Do Buffett and Munger use discounted cash flow analysis in valuing companies? Buffett: You should not need a computer or calculator to evaluate a company. If you need to decide whether the appropriate discount rate should be 9.6% or 9.8%, then forget about it. An investment that is attractive should be obvious. A bird in the hand is worth two in the bush. If your discount rate is 20%, then you should get your cash flows sooner than if it is 5%. Buffett does not use spreadsheets. Munger: People rely too much on the false precision of 2 standard deviations and 3 standard deviations. Higher math will lead to danger in investing. (5) Sorkin: With respect to Moodys, did they have a conflict of interest in issuing their ratings? Why didnt BRK use its large stake in Moodys to influence their behavior? Buffett: Everyone thought that housing prices could not fall, including Congress, bankers, and the American people. It was a huge mistake. Congress likely would have been upset if the ratings agencies had rated these securities lower, as that would have discouraged home ownership. BRK does not tell the management of companies it invests in how to run their businesses. He believes that the rating agency business is a good business since there are few people in it. It does not require a lot of capital, and capital markets will grow over time. However, he does not know what Congress will do. BRK figures out credit ratings for themselves. Munger: The ratings agencies drank their own Cool Aid. They justified their stupidity because everyone else was doing it. (6) Audience: What are your views on the residential real estate market in the U.S. and California? Buffett: Recently there has been increased activity in lower priced houses. There have been 2 million housing starts per year in recent years, but only 1.3 million new households being created annually. This has led to an oversupply of housing. New housing starts are now averaging 500,000 per year. We are reducing excess inventory by 700,000 800,000 per year. The excess supply will be absorbed over the next 2 years. The South Florida market will be difficult for a long time. Munger: Would buy real estate tomorrow in Omaha. (7) Loomis: How did the four investment managers who are possible successors to Buffett do in 2008? Buffett: They did no better than matching the S&P 500. Munger: Virtually all managers got creamed last year. Buffett: But their records over 10 years were better than average. BRK is looking for additional candidates all of the time. (8) Audience: Will the U.S. have a nationalized health care system? Munger: In due time we will probably have a combination of a European nationalized system along with a private system. The government should put off health care reform for a year while we solve our economic problems. (9) Quick: Why not bring in the new BRK CEO now to shadow Buffett? Buffett: The leading candidates (all internal) are running businesses now and allocating capital every day. Munger: They will learn more by running the BRK subsidiaries. Buffett: Does not want a crown prince around.

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(10) Audience: What should students learn to become value investors? Buffett: Last year students from 49 universities and colleges visited Omaha to meet with Buffett, six universities at a time. They should learn how to value a business and that the market is there to serve you. Accounting can also be useful. They should appreciate the importance of durable competitive advantages. If you have a150 IQ, then sell 30 points to someone else. You do not need an IQ above 120 to be an investor. The extra 30 points can hurt you. It is important to have emotional stability. (11) Sorkin: Is there a succession plan for Ajit Jain (the senior insurance executive)? Buffett: It will be difficult to replace Ajit. Ajits replacement would have less authority. The authority comes with the person, not with the position. (12) Audience: What is your opinion of the markets valuation of Berkshires shares? Buffett: There are two components of Berkshires valuation its investments and its earnings. The investments are being underpriced. BRKs intrinsic value has declined less than the price of its shares. BRK was selling for a lower price relative to its intrinsic value at the end of 2008 than it was at the end of 2007. This was also true for most stocks. Munger: BRKs casualty insurance business is the best in the world. So is its utility business and its cutting tool business (Iscar). Buffett: In September the phones started ringing more often at GEICO. It is the fastest growing automobile insurance company. It is the low cost producer. People are now more value conscious than ever. GEICO is the third largest auto insurer with a market share of 8 %. In 1993, when Tony Nicely took over, GEICOs market share was only 2 %. (13) Loomis: Will BRK be paying a dividend in the near future since it is difficult to reinvest earnings at the same rate as before? Buffett: BRK will not be paying a dividend. BRKs book value (proxy for intrinsic value) vs. the S&P 500 has done well over time. However, if BRK sold all the stocks it has bought over the last 5 years, it would have a loss. Wells Fargo will come out way stronger after the crisis is over. In early March, near the market bottom, he mentioned to students who were visiting, that if he were to put all of his net worth into one stock, it would be Wells Fargo. Do not look at a stocks price, look at its business. (14) Audience: What is his opinion of the fiscal stimulus? How should it be spent? Buffett: The funds should be spent quickly and intelligently. For example, the 1930s provided a good example of spending on infrastructure. (15) Quick: Is BRK at a disadvantage when competing with financial institutions that receive government guaranteed debt? Buffett: Although BRK is not in a favored class, they only use borrowed money for their utilities. But other utilities are also not in a preferred class. The cost of funds for Wells Fargo was only 1.12% in the first quarter. Munger: BRK is not regulated as are the banks that are receiving the government guaranteed debt. (16) Audience: What would Ben Graham have said about derivatives? Buffett: He would not have loved them. But he would have bought or sold them if they were mispriced. In the 1930s there were margin requirements (cannot borrow more than 50% on securities). If there was 100% margin, then there was no borrowing. Total return swaps permit 100% borrowing on what you buy. (17) Sorkin: Why have owners of bonds and preferred stock of banks receiving TARP funds been able to avoid losses? Buffett: Preferred stock holders of Fannie Mae and Freddie Mac lost a lot. But U.S. Bancorp and Wells Fargo have lots of common equity underneath with earning power. Therefore, there is no reason for debt holders to lose. Would love to buy all of U.S. Bancorp. and Wells Fargo. (18) Audience: If you were starting a small investment fund, what would you do differently? Buffett: You should focus on what stocks are worth (intrinsic value).

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(19) Loomis: Are Buffett and Munger Berkshires sustainable competitive advantage? What is Berkshires business model? Buffett: Berkshires culture and business model is its sustainable competitive advantage. The managers of the businesses that Berkshire buys continue to run their businesses with minimal input from Buffett and Munger. Munger: Many subsidiaries of large corporations are run poorly by centralized headquarters. The stupidity of the corporate world will give Berkshire an advantage in the future. (20) Audience: Why does Berkshire plan to hold stocks forever? Buffett: Berkshire sells stocks plenty of times. But when in doubt, Berkshire will hold the stock. We will sell if the business is expected to lose money permanently or it has labor problems. Berkshire will sell when a competitive advantage disappears. If we find something more attractive, then we will sell. For example, we invested $6.6 billion in the Mars acquisition of Wrigleys, but sold $2.2 billion of Johnson & Johnson to maintain target cash levels in September. When we ask CEOs what they would do differently if they owned 100% of their companies, we get back long lists. But the managers at Berkshire would not do anything differently. They run their companies as if they own 100%. Munger: Berkshire has legs (will last a long time). (21) Quick: Should investors buy the stocks that Berkshire buy s? Also, why doesnt Berkshire webcast its meetings? Buffett: Does not plan to webcast the meetings. It is not the same. People do buy the stocks that Berkshire buys. Munger: It is smart to buy the stocks that Berkshire buys. (22) Audience: How will inflation affect younger generations? Buffett: Inflation will affect younger generations. Fixed dollar investments will be hurt the most. The best protection against inflation is your own earning power. If you are the best teacher, or whatever, you will command earning power and get your share of the national economic pie, regardless of the value of the currency. The second best investment is a good company, because people will give up their own earnings to enjoy whatever product that company is making. Munger: You should become a brain surgeon and invest in Coca-Cola. (23) Sorkin: What is the outlook for newspapers and the Washington Post? Would Berkshire buy another newspaper? Buffett: Berkshire would not buy another newspaper at any price. Permanent losses are possible. The Washington Post has good education and cable businesses, but it has no good answers for the newspaper business. (24) Audience: What will be the impact of consumer spending changes on Berkshires businesses? Buffett: The housing market should stabilize in about two years. This will help Berkshires businesses that are tied to housing. The high end of the retail market has been hit hard. This will last a long time as consumers save more. The retail real estate industry (shopping centers) will be hit hard for a long time. Since service businesses require less capital, they will do better. The South Florida real estate market will be bad for an extended period of time. (25) Loomis: What is Berkshires policy about buying back i ts own shares? Buffett: Companies buy back their own shares as a signal of a buy recommendation. In the 1970s and 1980s many companies were undervalued, so share buybacks made sense. But more recently, companies have bought back shares at twice todays prices, but these same companies are not buying back their shares today. In 2000 and 2001 we thought Berkshires share price was too low and said so. The stock then went up and we did not buy any shares.

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(26) Audience: What impacts have a chaotic market had on Berkshires investment decisions? Buffett: When intrinsic value is changing rapidly then opportunity cost calculations are more challenging, although they can be more rewarding. In September and October he had to sell some Johnson & Johnson shares to have the cash to invest in attractive situations (Goldman Sachs and General Electric preferred stock). (27) Quick: What is the rate of return on advertising at GEICO? Buffett: It is difficult to measure the rate of return on advertising. GEICO spends $800 million per year on advertising, which is more than the combined spending of State Farm and Allstate (the two larger automobile insurance companies). This compares to GEICOs spending on advertising of only $20 million in 1995, the year that Berkshire acquired GEICO. He wants to spend more on advertising. GEICO has established a brand name. A brand is a promise. Consumers ask for Coca-Cola, not RC Cola. GEICO is earning a great return on its advertising. They are getting more than their moneys worth. They are the low cost producer of a $1,500 item. (28) Audience: Can you discuss the business model and competitive advantage of banks? Buffett: Wells Fargo has the best competitive position of the big banks. Their model is different from the others. They took a $600 million charge for amortization during the last quarter for tax advantages only. No analyst picked up on it. Washington Mutual was highly leveraged and heavily exposed to housing. If your debt to equity ratio is 20:1, you had better be right. He was wrong with respect to his investment in Irish banks. Munger: New bank regulations would not be needed if we had better accounting practices.

Berkshire Q1 2009 Earnings: Buffett: Berkshires operating earnings were $1.7 billion in Q1 2009 vs. $1.9 billion in Q1 2008. Its insurance and utility businesses were relatively unaffected by the recession. Book value per share declined by 6% in the first quarter. The CDS contracts it has written suffered a worse loss in the quarter.

(29) Sorkin: Is BYD a venture capital investment or a value investment? Munger: Does not believe there is any investment that is not a value investment. Every investment relates to earning a lot from the initial investment. BYD is not an early stage venture capital company. It is not unproven or speculative. They have achieved a leading position in lithium batteries which are used by every utility company in America and the world. They then entered the automobile business and now have the best selling car in China. CEO Wang Chuanfu is hiring the smartest engineers in China. They now employ 17,000 engineers. This is the best investment he has ever been associated with. (Note: Berkshire has purchased a 10% stake in BYD, which is the largest allowed by the Chinese government.) (30) Audience: How will inflation affect the U.S. dollar? Buffett: The purchasing power of the dollar will decline over time. This is also true of other currencies since governments around the world are running large national deficits to offset the contraction taking place in their economies. Munger: Some inflation is okay, but runaway inflation is bad. (31) Loomis: What impact will the lowering of Berkshires credit rating from AAA have? Buffett: Berkshire is still a AAA credit in his mind. Munger: The next change from Moodys will be an upgrade.

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(32) Audience: What is the potential for building wind farms at Mid-American Energy? Buffett: Mid-America is the largest wind-farmer in the U.S. Wind blows only 35% of the time in Iowa, which is the biggest wind using state. Mid-America is a net exporter of electricity. They have kept rates down through a wind tax credit. Constellation Energy was about to receive a ratings downgrade that would have forced them into bankruptcy. Dave Sokol (Mid-America) flew into Baltimore (home city of Constellation Energy) the same day with a firm cash offer. This is an example of Berkshires durable competitive advantage. They also bought a pipeline on two hours notice from Dynegy. Berkshire has the money, can move fast, and has managers who can deliver. (33) Quick: What is your opinion of the non-disclosure in the Bank of America and Merrill Lynch deal? Buffett: Merrill would have gone under without the deal. The government did not want the deal to blow up. Once there was a signed contract, the Treasury and Bank of America acted intelligently. (34) Audience: What has been (or will be) the effect of government intervention on Berkshire? Munger: New rules will be coming, but it is hard to predict their impact. There has been and will be a lot of lobbying pressure from financial institutions. Buffett: The House of Representatives proposed 90% tax on AIG executive bonuses is an example of uncontrolled fury. (35) Sorkin: Does Berkshire target a specific rate of return? Buffett: It is impossible for Berkshire to average 20% a year in the future (compound growth in book value) as it has in the past 40 years. He would be satisfied beating the S&P 500 by a few percentage points a year. Book value is a good, but understated, proxy for intrinsic value. Munger: The best days for Berkshire are ahead. (36) Audience: How do you view investments in China? Buffett: Berkshire will continue to invest in China. He would have bought more than 10% of BYD if they were allowed to by the Chinese government. China will hold dollar assets as long as they have a trade surplus with the U.S. Munger: China has had a successful economic policy. If they lose a little purchasing power, it will be trifling. China will be very hard to compete with in the future. (37) Loomis: Can you evaluate the General Re acquisition? Buffett: The acquisition of General Re was a mistake. He thought it was the General Re of 15 years earlier. The company has now been cleaned up and he believes it has a great future. (38) Audience: How does Berkshire view labor contracts? Buffett: He does not believe in contracts. He does not want relationships based on contracts. Compensation of employees differs by subsidiary. (39) Quick: Has Berkshire considered spinning off companies to unlock more value? Buffett: They are not planning to spin off any subsidiaries. If they have great businesses they want to hold on to them. Their structure allows them to move cash within the company without any tax consequences. Munger: Spinoffs create fees for Wall Street. (40) Audience: Do you have any comments on the problems in the student loan industry? Munger: There have been scandals in this industry. He does not know much about the business. Buffett: He was approached about a deal concerning Sallie Mae, but he passed on it. (41) Sorkin: Are GE and Goldman Sachs attractive businesses or were the available securities attractive? Does the fact that these companies have a history of managing earnings worry them? Buffett: Many companies have managed their earnings over the past 15 years. This is not unique to GE and Goldman. These are good companies whose securities were made available under extraordinary circumstances. The terms of the deals were good and he knows the CEOs. He has done a lot of business with Goldman over the years. Berkshire has also done a lot of business with GE (buying wind turbines).

(42) Audience: What is the outlook for the U.S. and world economy? Buffett: The world economy works well. We will live better in the future. He has no idea where markets will be over 1 - 2 years. We have had bad years wars, recessions, the Great Depression. In the 20 th Century there has been a sevenfold increase in the standard of living in the U.S. The 35,000 in attendance at todays annual meeting would have comprised 1% of the U.S. population in 1790. We are much more productive today. Munger: He is cheerful about the economic future. We will harness energy from the sun, turn sea water into fresh water, and preserve carbon resources. (43) Loomis: Is Berkshire worried about the underwriting standards at Swiss Re? Buffett: Swiss Res insurance underwriting is fine. Berkshire is satisfied with its 20% share. (44) Audience: How do you develop compensation packages for capital intensive subsidiaries? Buffett: The cost of capital and return on capital should be considered when structuring a compensation package. CEOs frequently select the compensation committee and dominate the process. The compensation committee then acts like a cocker spaniel wagging its tail. CEOs do not want a rational compensation structure. Irrationality pays more. The entire board of directors should act directly in setting the CEOs compensation. Munger: The board of directors should not be paid. Otherwise, it s you pay me and I pay you. (45) Quick: What is the worst case scenario for Berkshires insurance business? Munger: A catastrophe loss that costs $2 - $3 billion pretax. Would not trade Berkshires insurance business for anyone elses. Buffett: Berkshire would have to pay 3 4% of a $100 billion loss based on its current market share. Concerned about the possible nationalization of the automobile insurance industry as was done in New Zealand. This is a low probability event that could happen if there is high inflation in insurance rates and the American people become sufficiently angry to put pressure on Congress. (46) Audience: How should Berkshire shareholders outside of the U.S. hedge against a slide in the U.S. dollar? Buffett: Berkshire derives some of its income from the international operations of its investments such as Procter & Gamble, Coca-Cola, Kraft, as well as from ISCAR. Berkshire does not set a goal of a certain percentage of earnings coming from abroad. He looks at potential investment opportunities as they occur. Munger: Both sides of the Atlantic have problems. (47) Sorkin: What are your views with respect to temporary or permanent layoffs at Berkshire? Buffett: Berkshire has closed of its brick manufacturing plants since fewer houses are being built. There are now fewer people at the Buffalo News, which is permanently contracting. There have been layoffs at Benjamin Moore Paint, Acme Brick, and Berkshires te xtile operations. However, GEICO is adding 1,000 jobs. (48) Audience: What can be done to curb excessive executive compensation? Buffett: If the top six investment managers would speak out with respect to the most egregious cases, the targeted CEOs and their boards of directors would be embarrassed. The directors do not want to be embarrassed. The current setup is the honors system the shareholders have the honors and the executives have the system. Munger: A money manager earning $20 million per year is not likely to speak out about other executives excessive compensation. (49) Loomis: How does Berkshire evaluate potential managers? Buffett: Berkshire usually buys companies with excellent management in place. Berkshire has no mandated retirement age. (Buffett is 78 and Munger is 84.) Sometimes managers need to be removed. This is the only part of his job that he does not like.

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(50) Audience: What is Buffett doing with his own portfolio now? Buffett: He has recently bought equities and bonds. He likes it when things are cheaper. However, there were much better buying opportunities in 1974. There was a different interest rate situation then (higher interest rates in 1974). That was the best time period for buying. Munger: The current period is nothing like 1973-74. We should not wait for another 1973-74 to invest. When you can get a lot for your money, you should buy. (51) Quick: How do you identify capital intensive businesses that overstate earnings because they understate depreciation? Buffett: Utilities earn a decent rate of return. You do not get rich or poor from utilities. Outside of utilities, there are no guaranteed rates of return. He prefers non-capital intensive industries. Munger: A lot of moats have been filling up with sand recently such as newspapers. (52) Audience (Warren Buffetts great nephew): What can we do to improve the economy? Buffett: We can increase the number of household formations. Buffetts great nephew then proposes marriage to the woman sitting next to him. She accepts.

Meeting adjourned.

Professor David Kass Department of Finance Robert H. Smith School of Business 4412 Van Munching Hall College Park, Maryland 20742 dkass@rhsmith.umd.edu