SUMMARY of UNSCRIPTED by A Morris BRK AGM Q&A

UNSCRIPTED BUFFETT & MUNGER AGM COMMENTARIES

(Italics where I think it is particularly interesting)

VALUE INVESTING

And if you know the difference between the businesses that you can value and the ones you can't, you're going to make money.

We basically look for companies where we think we could understand what the future will look like in 5, 10 or 15 years. That doesn’t mean we calculate it to four decimal places—but we need to have a feel for it, and we know our limitations.

If you are looking for the ability to correctly value all investments at all times, we can't help you.

Over time, I've learned more about various businesses, but you would be amazed at how many businesses I don’t feel that I understand well.

You don’t have to be an expert on 90% of businesses, or 80%, 70% or even 50%. But you do have to know something about the ones that you actually put your money into—and if that’s a very small part of the universe, that is still not a killer.

We probably leaned towards things where we felt we were certain to get a decent result, as opposed to where we were hopeful of getting a brilliant result.

Knowing what you don’t know is important; knowing the future is impossible in many cases, and difficult in others. We're looking for the ones that are relatively easy. Then you have to find it at a price that is interesting to you.

They are risking something important for something that isn’t important.

What gives you opportunities is other people doing dumb things.

The world is overwhelmingly short-term focused.

The other thing that is helpful in reverse is to look at what other smart people are buying.

The ideal business is one that earns very high rates of return on capital and can keep using lots of capital at those high returns.

Most great businesses generate a lot of money, but they do not generate lots of opportunities to earn high returns on incremental capital.

You have got to learn what you do know and what you don’t know. Within the area of what you know, you have to purchase it very vigorously and act when you find it. You can't look around for people to agree with you. You can't look around for people to even know what you are talking about. You have to think for yourself. And if you do, you will find things.

Listening to lots of people telling you things is just a waste of time. You're better off sitting and thinking.

There's a lot to be said for developing a temperament that can own securities without fretting. The fretful disposition is an enemy of long-term performance.

Investing is not a business that requires extraordinary intellect. It does require extraordinary discipline.

We have seen a few periods of great opportunities that scream at us, and we've seen a few periods of overvaluation that scream at us. And then 90% of the time were somewhere in between.

I think I developed more courage after I learned I could handle hardship.

If we lose confidence in management or in the durability of the competitive advantage, or if we recognise that we made a mistake, we sell.

The real money is going to be made in the growing businesses, and that’s where the focus should be.

In other words, if we don’t think we know what's going to happen in the future, that doesn’t mean it's necessarily risky; it just means we don’t know. It means it's risky for us. It might not be risky for someone else who understands the business. In that case, we just give up. We don’t try to predict those things.

But we think it is also nonsense to get into situations, or try and evaluate situations, where we don’t have any convictions as to what the future is going to look like.

The business was fundamentally very non-volatile in nature—TV stations and a strong, dominant newspaper, that's a non-volatile business –but it was a volatile stock. That is a great combination from our standpoint.

I would say that the best purchases are usually made when you have to sell something to raise the money to get them, because it just raises the bar a little bit that you jump over in the mental process.

Virtually everything we have done has been reading public reports, and then maybe asking questions to ascertain trade positions or product strengths or something of that sort.

If I were teaching a course on investments, there would be one valuation study after another, with the students trying to identify the key variables in that particular business, and evaluating how predictable they were, because that is the first step. If something is not predictable, forget it. You don’t have to be right about every company. You have to make a few good decisions in your lifetime. The important thing is to know when you find one where you really do know which variables are important, and you think you have got a fix on them.

A really wonderful business is very well protected against the vicissitudes of the economy over time and competition. We're talking about businesses that are resistant to effective competition.

Good ideas are too scarce to be parsimonious with once you find them.

If you own a lousy business, you have to sell it at some point. If you own a group of businesses, you'd better hope some of them get taken over or something happens. You need turnover. If you own a wonderful business, you don’t want turnover, basically.

To some degree, it probably takes more business experience and insights to apply Fisher's than Graham’s.

I like a lot of historical background on things, just to get into my head how the business has evolved over time, and what's been permanent and what hasn’t been permanent, and all of that.

The growth aspects overall of a market are not a big factor with us; it's really a question of figuring out who's going to win what game and who is going to lose what game.

Once we find a group of equities in that range (over 10% pa compound), we just buy the most attractive. That usually means the ones we feel surest about as a practical matter. There are some businesses that possess economic characteristics that make their future prospects far more predictable than others…. We have, over time, become very partial to the businesses where we think the predictability is high.

I can't be an intelligent owner of a business unless I know what all the other businesses in that industry are doing. So, I try to get that information out of a report. ….I want to be able to intelligently evaluate how our managers are doing, and I can't do that unless I know the industry backdrop against which they're working.

The way you learn about business is by absorbing information about it, thinking, deciding what counts and what doesn’t count, and relating one thing to another. That’s the job. …that’s where it begins and ends.

We've had our share of flu epidemics (severe market drawdowns), but you don’t want to spend your life waiting around for them (to buy).

We tend to go into businesses that are inherently low risk, and are capitalised in a way such that the low risk of the business is transformed into a low risk for the enterprise. The risk beyond that is when you pay too much for them; that is usually a risk of time, not loss of principal, unless you get into a really extravagant situation. Then the risk becomes the risk of you, yourself, whether you can retain your belief in the real fundamentals of the business and not get too concerned about the stock market.

What costs us money is when we do not properly assess the fundamental economic characteristics of the business.

If you understood the future of the business perfectly, you would need very little in the way of a margin of safety.

The biggest thing to do is to understand the business and to get into the kind of business where, by their nature, surprises are few.

I think that most people get very few, what I call, no-brainer opportunities, where it is so damn obvious that the investment is going to work. And since there are very few and they may be separated by periods of years, I think people have to have the courage and the intelligence to step up in a major way when those opportunities come by.

If a business gets to the point where we think the industry in which it operates, or its competitive position or anything, is so chancy that we can't come up with a figure, we don’t try to compensate for that by having some extra margin of safety.

What we really want to do is buy great businesses, which means it's going to earn a high rate of return on capital employed for a long period of time, and where we think the management will treat us right.

The big thing you want, at a minimum, is to protect yourself against that insanity in market prices and volatility wiping you out. (margin loans)

Where you really want to be is in businesses that are going to be good and better businesses ten years from now. And we want to buy them at reasonable prices.

Time is the enemy of the poor business, and it is the friend of the great business.

If you want a system to determine what is a good business and what is a bad business, just see which one is throwing the management easy decisions time after time after time.

But as you're acquiring knowledge about industries in general and companies specifically, there isn’t anything like first doing some reading about them, and then getting out and talking to competitors, customers, suppliers, ex-employees, whatever it may be. You will learn a lot. But that should be the last 10-20%.

We believe in post-mortems at Berkshire---And I think you're a better manager or investor if you look at every one of the decisions you’ve made, of importance, and see which ones worked out and which ones didn’t, and what is your batting average.

Some companies are easy to write stories about, and others are much tougher to write stories about. We try and look for the easy ones.

When we speak of errors of omission, of which we've had plenty and some very big ones, we don’t mean not buying some stock where a friend runs it or we know the name and it went from one to a hundred. That doesn't mean anything. We only regard errors as being things that are within our circle of competence… what's an error is when it's something we understand, and we stand there and stare at it, and we don’t do anything.

We would be happy if we could buy common stocks where our expectations over a long period, from a combination of dividends and capital gains, were going to be 10% pa, pre-tax, and we would probably settle for a little less than that.

VALUATION AND INTRINSIC VALUE

And if we don’t have the faintest idea what the future stream (of cash flow) is going to look like, we don’t have the faintest idea what it is worth….And we are more concerned with the certainty of those numbers than we are with getting the one that looks absolutely the cheapest, but based upon numbers we don’t have great confidence in….To figure out that answer, you have to understand something about the business…and if you attempt to assess intrinsic value, it all relates to cash flows.

So people who have a lot of (investment) opportunities tend to make better investments than people who don’t.

But I don’t look at the primary message of Graham as anything to do with formulas. There are three important aspects to it. One is your attitude to the stock market. (Chapter 8 Intelligent Investor-Mr Market)…The second principle is the margin of safety, which again, gives you an enormous edge and actually has applicability far beyond the investment world. and the third is looking at stocks as businesses.

So, it would not bother us in the least to buy into a business that was currently losing money for some reason that we understood, and where we thought that the future was going to be significantly different.

A business with something glorious underneath, disguised by terrible numbers that cause cutoff points in other people's minds, is ideal for us, if we can figure it out.

We do not want to go below a certain threshold of understanding.

If you’re right about the companies, you can hold them at pretty high values.

Generally speaking, I think if you’re sure enough about a business being wonderful, it's more important to be certain about the business being a wonderful business than it is to be certain that the price is 5% or 10% too high. I originally was incredibly price-conscious. We used to have prayer meetings before we would raise our bid one eighth. But that was a mistake. And in some cases, a huge mistake; we’ve missed things because of that.

Ben Graham used to say you can get in more trouble in investments with a good premise than with a bad premise, because the bad premise will shout out to you immediately as being fallacious, whereas a good premise will work for a while.

The best thing to do is buy a stock that you don’t ever want to sell.

CAPITAL ALLOCATION

We would love to buy BRK at 120% of book, because we know it's worth a lot more than that.

When you have a wonderful business, we favour using funds that are generated out of that business to make the business even more wonderful. And we favour repurchasing shares if they are below intrinsic value.

MANAGEMENT and BOARD of DIRECTORS

I think you judge management by two yardsticks. One is how well they run the business. you can learn a lot about that by reading about what they’ve accomplished and what their competitors have accomplished, and seeing how they have allocated capital over time.

The second thing is you want to figure out how well they treat their owners.

We basically have the attitude that you can't make a good deal with a bad person, so we just forget about it. We don't try and protect ourselves with contracts or get into all kinds of due diligence.

There's nothing wrong with incentive systems, but you’ve got to be very careful what you incentivise.

People say they want their management to think like shareholders. It's very easy to think like a shareholder when you are one; you'll think exactly like a shareholder. It's not a huge psychological hurdle to get over if you actually write a check to buy the stock.

What really bothers me is when companies pay a lot for mediocrity, and that happens all too often. We have no quarrel in our subsidiaries, for example, paying a lot of money for outstanding performance.

The minute the business starts requiring capital, we tend to put a capital factor into this compensation system….(Managers) do not have control over market prices. We would have something that would tie to what we thought was under the control of the individual managing the business.

There are more problems with having the wrong manager than with having the wrong compensation system. It is enormously important who runs (our companies); any compensation sins are generally of minor importance compared to the sin of having somebody that’s mediocre running a huge company.

There are two things: the quality of the business and the quality of the management. If the business is good enough, it will carry a lousy manager.

In terms of the overall level of compensation, the real sin is having a mediocre manager; that is what costs owners very significant amounts of money over time. If a mediocre manager is paid a relatively small sum, it's still a great mistake—and if they're paid huge sums, it’s a travesty. It's almost impossible to pay the outstanding manager a sum that’s disproportionate to their value when you get a large enterprise.

The history Charlie and I have had of persuading decent, intelligent people, who we thought were doing unintelligent things, to change their course of action has been poor.

If you really think you’re in with people who have a good business, but they’re going to keep doing dumb things with your money, you'll probably do better to get out.

When people want to do something, they want to do something. And they didn’t rise to become the CEO of a company to have some shareholder tell them that they’re idea is dumb. That is just not the type that gets to the top…..I would say it's better to be in with a management you're in simpatico with, than to be in a great business with a management that’s bent on doing things that don’t make much sense to you.

The one reason you can't give for any action at Berkshire, as far as I’m concerned, is that everybody else is doing it. If that’s the best you can come up with, something’s wrong. But that happens in security markets all the time. It's very difficult to tell a huge organisation that you shouldn’t be doing something that well-regarded competitors are doing, particularly when there's a lot of money in it.

The real job of the board of directors is to come up with the right CEO and to prevent him or her from overreaching.

I think the other thing that the board should do is really bring some independent judgment in on major acquisitions.

I think culture has to come from the top. It has to be consistent, it has to be part of written communications, it has to be lived, and it has to be rewarded when followed and punished when not. And then it takes a very, very long time to really become solid.

BERKSHIRE HATHAWAY

We've done a lot of that, scrambling out of wrong decisions. I’d argue that’s a big part of having a reasonable record in life. You can't avoid making wrong decisions. But if you recognise them promptly and do something about them, you can frequently turn the lemon into lemonade.

The ordinary result when a big publicly held corporation buys another corporation is that, maybe two-thirds of the time, it’s a terrible deal for the buying corporation, and yet people have taken an enormous time doing it. We've bought all these businesses, taking practically no time doing it, and on average, they’ve worked out wonderfully. Why is that? The answer is we wait for the no-brainers. We are not trying to do the difficult things, and we have the patience to wait.

It isn’t that complicated if you wait for the fat pitch. And the fat pitch doesn’t have to be somebody else doing something dumb or anything like that.

Warren has improved since he passed the retirement age. In other words, in this field, at least, you can improve when you’re old….you get an enormous advantage from practice in this field…

The ideal business is one that takes no capital but yet grows; there are a few businesses like that, and we own some.

I don’t want to be with people who are asking how I did versus the S&P 500 last month. I sold securities for three years, and I just didn’t want to be in that position where, essentially, they thought maybe I could do things that I couldn’t do.

Probably the best investment was getting Charlie as a partner.

The biggest judgment you have to make is how well capital will be deployed in the future.

Owning a group of good businesses is not a terrible business plan.

I think our business plan makes nothing but great sense: to own a group of great businesses. Diversified, with outstanding managers, and conservatively capitalised.

In economics, whenever somebody tells you something, the first question to ask yourself is, “And then what?”

One thing to remember: in the end, the owners of businesses, in aggregate, cannot come out any better than the businesses come out.

(So we give managers) The consistent message is that not only should they behave in a way that conforms with the laws, but they should behave in a way where, if a story were written by an unfriendly but intelligent reporter and published the next morning in their local paper, they would have no problem with their neighbours and family reading it.

M&A—oftentimes they're ignoring, in our view, what really counts, which is evaluating the people they're getting in with and evaluating the economics of the business. that’s 99% of the deal.

It's almost impossible to make a wonderful buy in a negotiated purchase. You will never make the kind of buy in a negotiated purchase that you can in a weak stock market.

The record of BRK, to the extent it's been good, has not been because we've done brilliant things, but because we've done fewer dumb things than most.

But I predict that the day that BRK declares a dividend, the stock price will go down----and it should go down, because it’s an admission, essentially, that a compounding machine has lost its ability to continue on that course.

Every time I look at a business, I look at the ease of entry. (by competitors)….And in terms of people trying to break into what isn’t a huge market, I decided that there was a pretty good-sized moat around it…. you've got very small markets that aren’t really too attractive to anybody with any sense to enter, and fanaticism in service.

INSURANCE BUSINESS

When you are selling insurance against very infrequent events, you can totally misprice them but not know about it for a very long time.

The thing to remember is that the earthquake does not know the premium you received.

You don’t find out who has been swimming naked until the tide goes out.

Just like we buy securities, to the extent that we have the cash available, if they make sense, but we have no interest in being in the stock market just to be in it. We want to own securities that make sense to us.

Then we have a huge attitudinal advantage in that we have no need—none—to write more business, the same amount of business, or even something close to the amount of business that we wrote this year. There are no insurance volume goals at BRK at all. That is not true at most insurance organisations.

It’s the cost of the float and the amount of growth of the float.

The casualty insurance business, by its nature, is not a terribly good business. You have to be in the top 10% really, to do well in it.

ACCOUNTING

When the accounting confuses you, I tend to forget about that company. It may well be intentional; in any event, you don’t want to go near it. We have never had any great investment results from companies whose accounting we regard as suspect. It’s a very bad sign.

Accounting can offer you a lot of insight into the character of the management.

When you don’t have a product where revenues and expenses are being matched up on something close to cash in the short term, you have the opportunity for people to play games with numbers.

You should not have a system that causes people to, for example, worry about quarterly earnings. I have no idea what we are going to earn next quarter.

Businesses do not meet expectations quarter after quarter and year after year. It just isn’t in the nature of running businesses. And, in our view, people who predict precisely what the future will be are either kidding investors, themselves, or both.

In terms of what the management is doing and what the underlying economics are, forget about goodwill. In terms of evaluating the job we're doing in allocating capital, you have to include goodwill, because we paid for it.

I don’t think amortisation of goodwill makes sense. I think write-offs of goodwill make sense when you find out you’ve made the wrong purchase and the business doesn’t earn commensurate with the tangible assets employed plus the goodwill. But when looking at businesses as to whether they are good, mediocre or poor businesses, you should look at the return on net tangible assets.

CIRCLE OF COMPETENCE

It's better to be well within the circle than to be trying to tiptoe along the line. And you will find plenty of things within the circle. It's not terrible to have a small circle of competence…You stretch the boundaries by working at it, including practice.

I think a great strategy, for the great mass of humanity, is to specialise.

I'm no genius, I'm smart in spots, and I stay around those spots.

We don’t think we have a great ability to predict where change is going to lead. We think we have some ability to find businesses where we don’t think change is going to be very important.

On Wall st, if someone tells you the business is going to change a lot, they see it as a great opportunity. We don’t think it’s a great opportunity at all: it scares the hell out of us because we don’t know how things are going to change.

So, we will do our best to enlarge the circle of competence of the people at BRK so that we don’t miss so many. But we will miss a lot in the future, like we have missed a lot in the past. The main thing to do is to find things where our batting average is going to be high. And if we miss the biggest ones, that really doesn’t bother us, as long as the things we do work out ok.

It is a tricky thing working out whether technological change will or will not destroy some business.

We're looking for the absence of change to protect ways that are already making a lot of money and allow them to make even more in the future. So we look at change as a threat.

But there’s a whole group of companies, a very large group, that Charlie and I don’t know how to value, and that doesn’t bother us. There are all kinds of financial instruments that we just don’t feel we have the knowledge to evaluate. And it might be a little too much to expect that somebody would understand every business in the world. When I say understand, my idea of understanding a business is that you’ve got a pretty good idea where it's going to be in ten years. I just can't get that conviction with a lot of businesses, whereas I can get it with relatively few, but I only need a few. You only need six or eight calls, something like that.

It may also be that, even though it's less predictable, there's a whole lot more money to be made, so that if you're right, the payoff is much larger. But we are perfectly willing to trade away a big payoff for a certain payoff…..different people understand different businesses. The important thing is to know which ones you do understand and when you're operating within your circle of competence.

But the degree of disparity in results among larger tech companies in the future is likely to be very, very dramatic. And if I had the skills to pick the winners there, I would do a lot better than if I had the skills to pick the winners in the major integrated oil field.

We are looking for……durability of competitive advantage, and whether our opinion might be better than other people's opinions in assessing the probability of that advantage.

The problem is, if I think something requires a miracle, I tend not to bet on it.

This is not like Olympic diving, where they have a degree of difficulty factor, where you can do some very difficult dive, the payoff is greater than some very simple dive. That’s not true in investments. You get paid just as well for the simplest dive, as long as you execute it right…We look for one-foot bars to step over rather than seven-foot or eight-foot bars to try and set some record by jumping over. You get paid just as well for the one-foot bars.

We try and figure out why that castle is still standing, and what's going to keep it standing or cause it not to be standing five, ten, twenty years from now? What are the key factors? How permanent are they? How much do they depend on the genius of the lord in the castle?

Charlie and I try to distinguish between businesses where you have to be smart once and businesses where you have to stay smart.

What really tells you something is if you know how to figure out how wide the moat is and whether it's likely to widen further or shrink on you over time.

We are enormously risk-averse. We are not risk-averse in terms of losing $1 billion if there is an earthquake in California today. That doesn’t bother us as long as the maths is in our favour. But in terms of doing a group of transactions like that, we are very risk-averse. In other words, we want to think that we've got a mathematical edge in every transaction. And we will do enough transactions over a lifetime so that, no matter what the result of any single one, the group expectancy gets almost to certainty.

When we look at businesses, we try to think of what can go wrong with them. We look for businesses that are good businesses now, and we think about what can go wrong with them. If we can think of a lot that can go wrong, we just forget it. We are not in the business of assuming a lot of risk in businesses. That doesn’t mean we don’t do it inadvertently and make mistakes, because we do. But we do not do it intentionally, willingly, or voluntarily go into situations where we perceive a really significant risk that the business is going to change in a major way.

So you don’t necessarily want to equate the prospects for growth of an industry with the prospects for growth in your net worth by participating in it.

MR MARKET

And your job is to remember that (Mr Market) is there to serve you, not to advise you.

The important thing is that you make your decision based on what you think the business is worth.

You shouldn’t buy stocks unless you expect, in my view, to hold them for a very extended period, and you are prepared financially and psychologically to hold them the same way you would hold a farm and never look at the quote—you don’t need to pay attention to it.

And frankly, some people are more subject to fear than others.

You should do something you understand yourself. If you don't understand it yourself, you're going to be affected by the next person you talk to. You should be in a position to hold.

The market is generally fairly efficient. It's fairly efficient in pricing between asset classes, and it's fairly efficient in terms of evaluating specific businesses.

ECONOMICS AND INVESTING

If we’re right about a business, and we think it's attractive, it would be very foolish for us not to take action because we thought something about what the market was about to do or anything of that sort. Because we just don’t know. And to give up something that you do know and is profitable for something that you don’t know and won't know, it just doesn’t make any sense to us.

If you are in the right business, you'll end up doing fine. We don’t think about when something will happen; we think about what will happen. its not so difficult to figure out what will happen. It's impossible, in our view, to figure out when it will happen. So we focus on what will happen.

2008-I did not predict what stocks were going to do in the short term, because I never know what they're going to do. But I do know when you're starting to get a lot for your money, and that’s when I believe in buying.

No, we don’t try to pick bottoms. We don’t have an opinion about where the stock markets are going to go tomorrow, next week, or next month.

It's very hard for an unproductive investment to beat a productive investment over any long period of time.

We are just looking for decent businesses. We try to think about two things: things that are important and things that are knowable. There are things that are knowable but not important. We don’t want to clutter up our minds with those. So, we say, “What is important and what is knowable?

We’re not predicting the currents that will come, just how things will swim in the currents, whatever they are.

If we are right about the business, the macro factors are not going to make any difference. And if we are wrong about the business, macro factors aren’t going to bail us out.

We always try and focus on what's knowable and what's important. Currency might be important, but we don’t think it's knowable. Other things are unimportant, but knowable. What's knowable and important about KO…the product is extraordinarily inexpensive relative to the pleasure it brings to people.

All investments are laying out some money now to get more money back in the future. There are two ways of getting the money back: one is from what the asset itself will produce. That’s investment. One is from what somebody else will pay you for it later on, irrespective of what the asset produces, and I call that speculation.

Regarding inflation, in the investment world, it's tougher. Charlie and I think the best answer is to own fine businesses that will be able to price in inflationary terms and will not require huge amounts of capital investment to handle the larger dollars of sales.

The worst kind of business is one that makes you put more money on the table all the time and doesn’t give you greater earnings.

But very, very seldom would we have any opinion on what any given commodity would do.

See’s Candies, Coca-Cola, and Consumer Brands

What pond you jumped in was probably more important than how well you could swim.

And, Warren and I, instead of behaving the way people do in a lot of places, listened to the criticism, and we changed our minds. That is a very good lesson: the ability to take criticism constructively.

It makes more sense to buy a wonderful business at a fair price than a fair business at a wonderful price. …..Overall, we kept moving in the direction of better and better companies, and now we've got a collection of wonderful businesses.

That’s true, too. But it shows how continuous learning is absolutely required to have any significant achievement at all in the world.

The ideal asset is a royalty on somebody else's sales during inflation, where all you do is get a royalty check every month, and it's based on sales volume….That kind of business is real inflation protection, assuming the product maintains its viability.

And if there's any secret to BRK, it’s the fact that we're pretty good at ignorance removal.

We sort of know a great investment idea when we see it. It would tend to be a business where, for one reason or another, we can look out five, ten or twenty years and decide that the competitive advantage that it has at present will last over that period. It will have a trusted manager who will not only fit into the BRK culture but who is eager to join the BRK culture. And then it will be a matter of price. When we buy a business, we're essentially laying out money now based on what we think it will deliver over time. The higher the certainty with which we make that prediction, the better we feel about it.

The first rule of fishing is to fish where the fish are.

If you just stay out of a bunch of terrible businesses, you're off to a very great start. We've tried them all.

There are some industries that are never going to have barriers to entry. In those industries, you'd better run very fast because there are a lot of other people who are going to be looking at what you're doing and trying to figure out your weaknesses or what they can do a little bit better.

I think the bottling business is a perfectly decent business. it isn’t a wonderful business because it's very competitive.

We liked buying businesses where we feel that there's some untapped pricing power.

It's not a great business when you have to have a prayer session before you raise your price a penny; you are in a tough business then. And I would say you can almost measure the strength of a business over time by the agony they go through in determining whether a price increase can be sustained…You can learn a lot about the durability of the economics of a business by observing the price behaviour.

The business does not know how much you paid for it; it's going to earn based on its fundamentals.

GEICO and US Auto Insurance

The low-cost producer in a huge industry is going to do very well over time.

Progressive has a wonderful direct operation competing with GEICO, and we are the two slugging it out over the years. It’s a better system, and better systems win over time.

OTHER TOPICS

I would worry, frankly, if I sold a bunch of things right at the top, because that would indicate that, in effect, I was practising the bigger fool approach to investing, and I don’t think that can be practised successfully over time. I think the most successful investors, if they sell at all, will be selling things that end up going a lot higher, because it means that they’ve been buying into good businesses as they’ve gone along.

We kind of mentally rub our own noses in our mistakes. That is a very good mental habit.

The ability to borrow enormous amounts of money, combined with a chance to get either very rich or very poor quickly, has historically been a recipe for trouble at some point.

(regarding derivatives), We would obviously care very much about the counterparty.

A lot of things correlate in the securities world that people don’t expect to correlate.

US Airways has a cost structure that is non-viable in today's airline business…There isn’t any question that the cost structure is out of line. I think the cost structure could be brought into line, but whether it will be is another question. Looking backwards, the answer is to avoid businesses that need to solve problems like that.

(on options)..On balance, I don’t think it’s as useful a way to spend my time as just looking for securities to buy outright.

There are just basic business problems you see with certain industries that you don’t see with others.

(Movie Business) But this is a different world: the number of eyeballs and the time spent watching are not going to increase dramatically, and you’ve got a bunch of companies that don’t want to quit. Who knows what pricing will do in the future is kidding themselves.

People feel better on the second floor of an elevator that has just come from the first floor than they do when they're on the 99^th floor coming down from 100. It's particularly the case where they’ve been in a business where the profits were automatic, because they start questioning whether they really have the ability to make a lot of money, absent this favoured position. And that’s not something they’ve had to dwell on before. So, it can make them uncomfortable. (addressing the newspaper business)

We like banking if we've got somebody in charge who is going to run them right.

I think each company, each individual, has to draw its own ethical and moral lines, and personally, I like the messy complexity of having to do that. It makes life interesting.

It's going to arise much more often than people think. Markets are made by people who get scared and get greedy.

If you hand me a revolver with six chambers and one bullet and you say, “Pull it once for $1m, and I say no, and then you say, What is your price? The answer is that there is no price.

What's two percentage points more in any given year when you run the risk of real failure?

You never get into a position, obviously, where the other fellow can call your tune. You have to be able to play out your hand under all circumstances. But if you can play out your hand, and you’ve got the right facts, and you reason by yourself, and you let the market serve you and not instruct you, you can't miss.

(pharma) As a group, I think they are good businesses. I do think it's very hard to pick a winner. So, if I did buy them, I would buy a group of leading companies.

The idea of asking investment bankers to evaluate the business you're going to buy strikes us as idiocy. If you don’t know enough about a business to decide whether to buy it yourself, you'd better forget it.

Why anybody sells Wells Fargo at $9 when they owned it at $25 and the business is better off, is one of the strange things about the way markets behave. But people do it. They get very affected by looking at prices….they let the price tell them how they should feel.

It’s the nature of securities markets to occasionally promote various things to the sky, so that securities will frequently sell for 5-10X what they're worth, and they will very, very seldom sell for 10% or 20% of what they're worth. Therefore, you see these much greater discrepancies between price and value on the overvaluation side.

Over the years, I've probably had a hundred ideas of things that I thought to short, and I would say that almost every one of them turned out to be correct. And I would bet that if I’d tried to do it, I probably would have lost money.

So, I think it's way less likely that if you scan a hundred IPO’s, you're going to come up with something cheaper than scanning a hundred companies already trading in the auction market; it is more of a negotiated sale. And negotiated transactions are very hard to get bargains from…. you're way more likely to get incredible bargains in an auction market.

Generally speaking. I think very often when you're looking at a distressed situation and buy the bonds, you should have bought the stock. You're looking at a promising area.

If you have a choice on Wall Street between being a great analyst or being a great salesperson, salesperson is the way to make it. If you can raise $10B in a fund, and you get a 1.5% fee, and you lock up people for 10 years, you and your children and your grandchildren will never have to do a thing, even if you are the dumbest investor in the world.

Charlie and I have made some big mistakes because, in effect, we have been unwilling to look afresh at something. That happens. But I think the annual report is a good feedback mechanism. Reporting on yourself and giving the report honestly, whether you do it through an annual report or some other mechanism, is very useful.

I think it also helps to be willing to reverse course, even when it's quite painful.

A FEW POINTS TO MAKE

There's something therapeutic for me from reading Buffett, maybe like some people feel when they read the Bible, it clears things up, makes you feel better. I first came across Buffett in the late 1980s, and he was the first to explain to me, through his writings, that the stock market was not a random chocolate wheel. That was very useful learning.

As many know, BRK has recorded all AGM Q&A sessions since 1994. I've listened to them all and considered doing a summary. The task is truly monumental; we are fortunate that someone undertook the task and produced a useful finished product.

When I listened to the commentary, years flew by. Some of the concerns from the questioners now seem laughable, remember Y2K, but it shows that there are always concerns for people to fret over. My conclusion was that many of these investors did the right thing and left Buffett to manage their money. Secondly, Buffett's focus is quite narrow, and he repeatedly says this, but it doesn’t stop investors from questioning a broad range of stuff. Fair enough. If you want an opinion, Buffett's is better than most, but it's still an opinion that is outside his wheelhouse.

The author minimises some of the issues that were a big deal at the time, such as the stock split, but are not significant over the fullness of time, IMO. That’s a good thing.

In my opinion, there is a notable change in tone from the earlier years compared to the later years. Earlier commentary was more pointed and critical. The change was in line with changes within BRK around the turn of the century. After the acquisition of General Re, Buffett noticeably changed strategy, IMO. BRK became much more an owner of businesses than an investor in listed securities. We see capital continually being deployed into fully owned businesses, many in basic industries, large investments in the rail and utilities businesses, as well as growing the insurance business. These all strike me as steady growers bought at good prices rather than trying to position for higher growth. Stock picking became a lower-order issue. Buffett states that size limited his ability to put more into listed securities, and we can take him at face value on that. There is no doubt that the character of the company changed, from an asset allocation viewpoint, IMO.

Having worked in several dysfunctional equity teams, I consider the partnership between Buffett and Munger truly extraordinary and speaks volumes to the character and understanding of the two gents. Investing is hard and stressful, and for them to continue such a long-term and successful union of like-minded and able investors is mind-boggling to me. It shows that a small team with a strong process and philosophy can easily beat a larger team. That makes sense to me.

Over a long period, Buffett has been incredibly consistent. The same lessons and focus are repeated over and over. Buffett has discovered his winning method and is loath to abandon it, whatever the market throws up at him. The support of Munger through these periods is critical. I was not surprised at all when Buffett decided to retire not long after Charlie passed. Munger was irreplaceable to Buffett.

Buffett takes bets against the market, as we all implicitly do. What stands out is that he plays where he thinks he has an informational advantage and where he has a level of certainty in the future, thus gaining conviction. The market is short-term focused, and Buffett can wait it out.

Although Buffett states that he has moved more towards quality over time, and that is true, he was starting at a very low level. Even in the later years, we see a large focus on value, so Buffett is attempting to get both a rating and an earnings improvement.

Buffett is extraordinarily transparent and consistent. He states his philosophy, and it can be seen in action, wins and losses. In that way, it is very hard to say luck has played any real role in his returns. The positions always appear considered and logical, even when they don't work out.

Buffett's style lends itself to concentration. That is because he wants to know everything there is to know about his investments, and he wants them to be quality and at a good price. By definition, these are rare events, and when they appear, he can't afford to miss them and has to bet big. The biggest differentiator, IMO, is the level of certainty he requires before he invests; this alone is a large constraint. By certainty, I mean confidence around the cash flows of the business.

Predictability plays a huge part in Buffett's process compared to other investors. Other investors I see put numbers into spreadsheets that have little basis in reality; they are just plucked from pure guesswork.

Over the decades, I have seen people who have been regarded as genius investors, in their time, come and go; some are now almost completely forgotten. It is very difficult to adapt to the changes in the investment environment over long periods of time. I would say much more difficult if you had been successful in those earlier periods. What is perhaps surprising in this story is not that Buffett has struggled from time to time but that he is still relevant at all. Making money in the 1950s was very different to this century; the fact that Buffett is still making good returns is extraordinary.

When thinking about BRK, you can't forget the insurance business. The float gives them investment leverage without debt. Of course, they have built that business through skill and capital deployment. However, it has had the effect of juicing up returns. That helps.

I suppose the criticism is that he has not taken enough risks or tried hard enough to expand his circle of competence in this century. Also, criticism could be that he did not deploy cash in pullbacks like C19, and deployed into debt-like instruments in the GFC. Of course, in hindsight, we have had an extremely forgiving market, especially since the GFC. Buffett has seen hard times and steers a path to survive cataclysms, for that is his style. BRK is built for steady but predictable and low-risk growth; maybe BRK is lower risk than the market.

What can retail investors take away? To me, it's quite clear: know your strengths, play to them. Understand the inherent risk you are taking from several viewpoints. Stay focused, do the work and have conviction in your process. Stay patient and enjoy the ride, the challenges, wins and losses, the game goes on as long as you do.