BERKSHIRE HATHAWAY ANNUAL SHAREHOLDER’S MEETING

MAY 2, 2O15

PREFACE The Berkshire Hathaway Annual Shareholder’s Meeting is an amazing experience. Where else can you find two of the smartest guys in the world answering any question you can think of – from investing to how to make friends – for 8 straight hours? Because video or audio recording is not allowed during the event, the vast amounts of knowledge dispensed by Warren Buffett and Charlie Munger at these meetings is usually hard to come by unless you’re there in person. I attended the recent 2015 shareholder meeting and took very careful notes for the entire 8 hours, and have consolidated them here for you. Warren and Charlie spoke a lot and they spoke fast, so I’ve provided direct quotes where possible – otherwise I’ve paraphrased as accurately as I could. I learned a terrific amount at the meeting. I hope that you’ll learn a terrific amount too. -Vintage Value

On 3G Capital... “How can Buffett support 3G Capital’s aggressive cost cutting and “employee right-sizing”? Buffett: The 3G people have built wonderful businesses and they’ve done so by employing only the people

they need. I hope that Berkshire companies aren’t being run with any more people than they need. Years ago the railroad industry employed 1.5 million people. Today the industry employs only a few hundred thousand even though they are handling more volume and are doing it better.

“Is 3G’s management method congruent to Berkshire’s and what would Berkshire look like if it was 3G and not Buffett and Munger running the company?” Buffett: There might be some consolidation if 3G ran the company, but Berkshire’s run as efficiently as

possible. Even though some managers have more people than they need, it’s something that I tolerate – I don’t support it.

On evaluating companies as investments… “Can Buffett and Munger name 5 characteristics of a company they look for in order to predict earnings 10 years in the future?” Charlie: There’s no fixed formula. And we’re always adapting. Buffett: It’s very different for different businesses. There are lots of things going through my mind – but

it’s more to stop us from investing.

But there is one thing: that the seller wants to be in partnership with us.

On talent versus luck… “Would Buffett be able to repeat his success with insurance companies today?” Buffett: I was lucky 3 times:

1. When I was 20 years old, Geico’s Lorimer Davidson spent 4 hours explaining the insurance business to me

2. For 5 minutes every year, Jack Ringwalt would want to sell his company, National Indemnity. I called him at the exact right time in 1967 and convinced him to sell National Indemnity to Berkshire.

3. I hired Ajit Jain (current head of Insurance at Berkshire Hathaway) in the mid-1980’s. Charlie: “We’ve been lucky – but we made our luck by being curious and seeking wisdom.”

On culture… “How can we as outside investors judge Berkshire Hathaway’s culture after Warren and Charlie are gone?” Buffett: “Berkshire’s culture runs as deep as any large company” and it’s been reinforced over the years.

It’s a “vital part of Berkshire to have a clearly defined and a deeply embedded culture” and I expect it will “continue and become even stronger.”

“It’s a virtual certainty that it will continue after me and Charlie.”

Charlie: “Berkshire could do even better without us.” “Can you give tips on how you were able to build Berkshire’s culture?” Buffett: Culture starts from the top, you must be consistent, and it takes a long time. It’s also easier in

smaller firms. In the same way that a child sees what you do and say, you must embody your culture and your employees will follow.

On Coca-Cola… “Berkshire owns a lot of companies that benefit from sugar consumption (e.g., See’s Candies, Coca-Cola). Is there a trend away from sugar consumption and if so will it hurt Coke?” Buffett: These trends do exist, but Coke has a marvelously wide moat. We won’t see anything

revolutionary but all food and beverage companies will adjust. There will be more Coke consumed in the future than today.

“In the last 30 years, a quarter of all the calories I’ve consumed have been Coke. If I’d eaten broccoli and Brussel Sprouts, I don’t think I’d live as long because I wouldn’t be as happy. When you go into Whole Foods, you don’t see smiles on the faces of the people there.”

Charlie: “Sugar prevents premature softening of the arteries.”

On the current and future market level… Buffett: It all has to do with the interest rate environment. Profits are worth more when the government

bond yield is 1% versus 5% - so what is the opportunity cost of holding bonds versus investing in stocks? How long will interest rates prevail? If rates go up then stocks will look very expensive.

“We’ve never made an acquisition or turned one down based on macroeconomic factors.”

“We know we don’t know what the next 12 months will look like. But we’re holding companies for 100 years.”

“Any company that employs an economist – now that’s one employee too many.”

Charlie: “The trouble with making all these pronouncements is people gradually begin to think they know something. It’s much better to think you’re ignorant.”

“If people weren’t so often wrong, we wouldn’t be so rich.”

On networking… “Can you give advice to someone who wants to network with influential people?” Buffett: I didn’t know any famous or influential people when I was getting started. “Do the best you can

and play the hand you’ve got.”

On failure… “Warren, what has been your biggest failure?” Buffett: There have been many, but one that comes to mind is Dexter Shoe, where I watched $400 million

go to $0, and I paid in stock. But we’ve always been very cautious with Berkshire – because it’s not just Charlie and my net worth but our family and friend’s net worth.

On the power of incentives… The question was about Henry Singleton, who founded the conglomerate Teledyne Industries. Buffett: There is a lot to be learned from Singleton. Charlie: Singleton – who could play chess blindfolded at just under the grandmaster level - was a lot

smarter than Warren or I was. But Warren’s done a lot better than Singleton. Buffett: The problem was that Singleton had very clever incentives for his key executives, but that caused

people to go too far [Teledyne hit a rough patch in the early 1990’s after two lawsuits were brought against the company by whistleblowers under the False Claims Act].

Charlie and I really believe in the power of incentives and in avoiding hidden incentives. Many good people have misbehaved trying to meet their CEO’s forecasts – or their own forecasts, in which case it’s a problem of ego.

On having a good brand… Buffett: A strong brand is very potent stuff. If you have a terrific brand and protect it, it’s a very valuable

asset.

On value investing… “Many Chinese investors laugh at value investors and think it doesn’t apply to China. Can value investing be applied to all markets?” Buffett: “Value investment principles do not stop at borders.” No matter where I am, I’d always apply the

principles I learned in The Intelligent Investor. Charlie: China speculates too much and would be way better if they copied Berkshire. Buffett: We do the best when people operate very foolishly – even if that may not be the greatest thing

for a society. If a young investor is able to stand back and view stocks as businesses, and buy when stocks are cheap… well it’s a very easy game if you can control you emotions. All the speculation in China should create great opportunities for value investors.

Charlie: “Value investing will never go out of style. How can there be anything else besides value? Who

doesn’t want value when they buy something?”

On the United States… “You have a lot of optimism about the U.S. economy…” Buffett: America will always continue to prosper because of the American people (but this can all be

nullified by terrorists and “CNBC” – chemical/nuclear/biological/cyber attacks).

“On a probability basis, the luckiest person on Earth is the baby being born in the U.S. today.”

Charlie: Yes, but we shouldn’t get too smug – China has come up very fast.

“Nothing is more important than close collaboration between the U.S. and China.” Buffett: “Charlie, would you rather be born today or before?” Charlie: “It’s interesting now – but it’s always been interesting.”

On business versus investing … “It seems that there will be two people running Berkshire in the future – a CEO and a CIO.” Buffett: I would not want to put someone who has solely had investing experience in as CEO. I’m a better

business man from investing and a better investor from business. But at the same time, I’ve also learned a lot about operations from operations.

Charlie: Berkshire’s wholly owned subsidiaries are getting increasingly more important than its

investments.

Charlie: “I don’t like being an example for people who get rich by being shrewd and passively owning stocks. That’s not enough of a life. That is taking more than you give – you should do something more.”

Buffett and Charlie: Building Berkshire has been way more fun.

On hedge funds… [In 2008, Buffett bet $1 million of his own money that an S&P 500 stock-index fund would outperform the cumulative returns of five funds handpicked by Protégé Partners LLC, a New York money manager, over the course of a decade. Mr. Buffett disclosed at Berkshire’s recent annual meeting that the Vanguard 500 Index Fund Admiral Shares is up 63.5%, while the Protégé funds are up by an average of 19.6%.] Buffett: I said in 2008 that fees would not be overcome by managerial brilliance. Over the past 7 years

hedge fund managers have done very well for themselves but hedge fund investors have paid a very big price.

On marriage… Charlie: “Don’t look for someone with intelligence or humor. Look for someone with low expectations.”

On character… Buffett: Ted [Weschler] and Todd [Combs] are both very smart about business and investments. On top

of that, they both have qualities of character that are terribly important to me and Charlie. When I gave up my partnership I knew 20 people with great track records. But I chose Bill Ruane (who runs the Sequoia Fund) because he was a terrific investment manager and a terrific human being.

“Charlie and I run into more dysfunctional people with 160 IQs than any other type of people.” Charlie: “Solomon gave us a head start on that.” Buffett: “A lot of people are incapable of functioning day-after-day despite occasional moments of

brilliance.” Charlie: “Trustworthiness is more important than brains.”

You should try to get the best reputation you can over a long period of time. Hardly anything is more important than behaving well as you go through life. And we try to behave better as we get more prosperous.

Buffett: “When you get old, you’ll get the reputation you deserve. Even if in the meantime you can fool some people.”

On inflation… “Will there be an onslaught of inflation when the Fed raises interest rates?” Buffett: “We’re operating in a world that Charlie and I don’t understand very well.” But Berkshire can

operate in any economic environment better than any other company. If economic turbulence occurs, we’ll be very well prepared and others won’t.

Charlie: “It’s like we’re just swimming on the surface; we’ll let the tide take us where it wants.” Buffett: The best businesses for inflation are the ones where low continuous investment is needed. For

example, real estate is good because it only requires a one-time cash outlay. Utilities and railroads are bad, because they’re very heavy-capital intensive. Brands – like See’s and Gillette – are wonderful things to own during inflation.

Charlie: “If inflation gets out of control, you don’t know how it’s going to go.”

On making friends… “I’m in 7th grade – how do you make lots of friends and get people to like and work with you?” Charlie: “The only way I could was to get very rich and very generous.” Buffett: Both Charlie and I were very obnoxious growing up.

My advice is to look at the people you like – friends, teachers – and ask yourself, ‘Why do I admire those people?’ Copy their qualities. Write down the people you like and the people you don’t like and why.

On philanthropy… “Can you talk about your view on philanthropy versus giving to your children?” Buffett: I said I’ll give away 99% of my wealth and will leave enough to my kids so that they can do anything

they want to do, but not so much that they can do nothing. “Charlie says there’s no Forbes 400 in the graveyard.” I have assets that I just don’t need, but they have great utility for other people.

I could buy 10 houses – a hotel to live in even. But me and Charlie, we like simple lives. Would 10 houses or a hotel really make us any happier?

“How can corporations make a better impact to their stakeholders?” Buffett: I’m much more of a believer in individual philanthropy than corporate philanthropy. Shareholders

should determine how to use their money. It’s a partnership. “I’ve never given up ‘going to a movie’ or ‘spending time with my family’ to charity. I’ve only ever

donated ungodly surplus. So it’s people… who are volunteering in places like Africa and South America that I really respect.”

On the Euro… “Did the Euro currency have an overall positive or negative effect on Europe?” Charlie: “I don’t have the thinnest idea.” The Euro had a noble purpose, but it’s flawed. “You shouldn’t form a business partnership with your thriftless, drunk brother-in-law.”

Buffett: The fact that it wasn’t perfectly designed doesn’t mean it should be abandoned, just that the flaws need to be worked out. Look at the U.S. Constitution. For example, it could have worked with the U.S. and Canada...”

Charlie: “…but not with the U.S. and Argentina.” Buffett: “Praise by name, criticize by category, Charlie.” Charlie: “I think I’ve offended enough people…” Buffett: “There might be 2 or 3 you missed in the balcony!”

On activism… “How will Berkshire be able to combat activism?” Buffett: If it’s run right, there won’t be any premium if people wanted to break up the company. The best

defense is performance. But so much money has been pouring into activist funds lately. Charlie: Activists are telling companies to buy their stock for more than it’s worth. Buffett: There’s an easy rule – repurchase shares when the stock is selling for less than it’s worth. Don’t if

it’s not. It couldn’t be any simpler. Charlie: “I don’t think it’s a great age – this age of activism.” Buffett: “Care to explain?” Charlie: “I can’t think of any activists I’d want to marry into the family.”

On saving money… Charlie: “If you don’t know how to save, I can’t help you.” Buffett: “Habits need to be formed early on – Chains of habit are too light to be felt until they are too

heavy to be broken.” By saving my money, “I was $9 or $10k ahead when I came out of college.” [That’s the equivalent

of $88-97k in today’s dollars]

On purchase multiples… Buffett: “I would rather buy 10-12x in a bad year than 8x in a good year.”

On the internet… “What is your view of the internet?” Charlie: “I hate multitasking. I’m so stupid I have to think very hard on one thing at a time.” Buffett: The internet has changed my life – I play bridge on it and use it for search. I would rather give up

the plane than the internet. Try rounding up partners to play bridge on a snowy day. Now my partner doesn’t have to be in

the same room as me to play bridge. The internet has definitely improved life. Charlie: “If I was your partner, I’d think life had improved too.”

On income inequality… Buffett: It’s a big issue. “Everyone who’s willing to work should be able to have a decent life,” but that

doesn’t always happen.

On higher education… “How can I deal with the high tuition of going to college?” Charlie: The average family does it by going to a cheaper school or with subsidies.

“There’s a big tendency to raise prices to what can be collected, and then rationalize that it’s worth it.” People say college educated people are smarter and do better – maybe they do better because they were smarter before they went to college. Without some big incentive, higher education will keep raising tuition.

On China… Charlie: I’m very high on what’s going on in China. They’re cracking down on corruption now. “They’ve

even shot a few people – that really gets people’s attention!” I give the Communist Party a lot of credit for copying Lee Kwan Yew. Buffett: The people of China are the same people that were there 40 years ago. It does show you the

power of human potential when you find a system that unleashes it. The U.S. and China will continue to be the world’s superpowers for as far as the eye can see.

On starting out… “How were you able to persuade your early investors to buy in? Buffett: My family and friends just had faith in me. Then it just unfolded after that. “If you just avoid being

a perfect idiot, have a good character, and do it day after day, it’s amazing the results you get.” “What made you successful when you were investing with small funds?” Buffett: I had a great teacher, exceptional focus, and the right sort of emotional qualities. And I enjoyed

the game. It’s an easy game, but it does require a sort of emotional stability.

On what matters most… “What matters to you most?” Charlie: My grandfather used to say, ‘Your main duty is to become as rational as you can be.’ I think

rationality is our moral duty. Berkshire is a temple of rationality. If you have ignorance and keep it… well “it’s dishonorable to stay stupider than you have to be.”

Buffett: This may sound disingenuous, but what matters to me most is that Berkshire does well. One

million or more people are now involved with the company in some way. We’re building something every year that’s better than last year. And we hate losing someone else’s money (individually, it doesn’t bother us). So even though there might be short-term fluctuations in the market price, I really care about continuing to increase Berkshire’s long-term value.