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as you guys know warren buffett is one of the greatest investors of all time he has years of experience and results to share with all of us that's one of the big reasons why his annual shareholder meetings are considered the woodstock of value investing every year thousands of investors go there to ask buffett and monger questions about investing and learn from their years of experience today we are listening to some of those questions that were asked by investors that went on to achieve great success themselves hope you enjoy thank you bill ackman from new york new york for the handful of aaa rated companies aig fannie mae freddie mac and mbia are under formal investigation for accounting shenanigans and are in the process of restating their financials like charlie said before i think of a triple a rated company as an exemplar a company that should behave in the with the highest accounting and ethical standards my questions this leads me to are how can investors comfortably invest in any financial service company when even when a decent percentage of the aaa rated companies have false misleading financials and i guess the follow-up question is why don't the rating agencies do some independent due diligence from an accounting standpoint so that they can help serve as a watch on this issue well financial companies are more difficult to analyze than than many companies i mean the it is more if you take the insurance business you know the biggest single element that is very difficult uh to evaluate even if you own the company uh is is the loss and loss adjustment expense reserve and that has a huge impact on reported earnings of any given period and the shorter the period the more the impact can be from just small changes and assumptions uh you know we carry we'll say 45 billion of lost reserves but you know if i had to bet my life on whether 45 billion turned out to be a little over a little under i mean it'd be a i think a long time and uh you could just as easily have a figure of 45 and a half billion or 44 and a half billion and if you were concerned about reporting given earnings in a given period that would be an easy game to play in a bank you know it it basically is what whether the loans are any good and i've been on the boards of banks and that's you know i've gotten surprises it's tough to tell uh it's financial companies if you're analyzing something like wd-40 you know or sees candy or our brick business whatever you know they may have good or bad prospects but you're not likely to be fooling yourself much about what's going on currently but with financial institutions it's much tougher then you can add throw in derivatives on top of it and you know it's it's no one probably knows you know perfectly what some of it or even within a reasonable range the exact condition of some of the biggest you know banks in the world and but that brings you back to the due diligence question of the agencies you you had very high grade very smart financially smart people on the boards of both freddie and fanny and yet you know one was five billion and one was apparently nine billion those are big numbers and i don't think those people were negligent and it's just it's very very tough to know precisely what's going on in a financial institution charlie and i were directors of solomon and charlie was on the audit committee and i forget the size of a few of those things that that you found but you know what that you found but you know what what what wasn't found and that isn't that doesn't mean the people below are crooks or anything like that it just means that it's it's very tough with thousands and thousands and thousands of complicated transactions sometimes involving the computations involving multiple variables it can be it can be very hard to figure out where things stand at any given moment and of course when the numbers get huge on both sides and you get small changes in these huge numbers they have this incredible effect on quarterly or yearly figures because it all comes lumped in those adjustments come lumped in a short period of time so i just think you have to accept the fact that insurance banking finance companies we've seen all kinds of finance company uh both frauds and and just big big mistakes over time uh just one after another over the years uh and it's just a more dangerous field to analyze that doesn't mean you can't make money and we've made a lot of money on it but but it's it's difficult now obviously a geico where you're ensuring pretty much the same thing auto drivers and you get your statistics are much more valid in something like that than they will be if you're if you're taking something that like asbestos liability you're subject to far greater errors in estimation doesn't mean that people aren't operating in good faith but you know i would take just take the asbestos estimates of the 20 largest insurance companies i will bet you they're way off but i don't know in which direction and that's that's sort of the nature of financial companies i wouldn't fault the rating agencies in terms of not being able to to dig into the the uh uh financials and find things that that uh you know all of the companies that you've talked about have had big name auditors and uh our auditors at berkshire how many hours did they spend last year you know i don't know whether what it would be probably 60 70 000 hours uh and i'm sure another you know if you take major banks they're spending more than that but you know can they be certain of the numbers i i doubt it charlie yeah warren is obviously correct that where you've got complexity which by its very nature provides better opportunities to be mistaken and not have it come to notice or to be fraudulent and have it not be found out you're going to get more fraud and mistakes than you are if you're selling a business where you shovel sand out of the river and sell it by the truckload and just as a business that sells natural gas is going to have more explosions than a business that sells sand a business like these major financial institutions by its nature is going to have way more problems and that will always be true and it's true when the financial institutions are owned by governments in fact some of the worst financial reporting in the world is done by governments and governments institutions like government banks in china et cetera so if you don't like the lack of perfect accounting and financial institutions you're in the wrong world two things that i picked up after meeting you is bridge was one and golf was another i was never a good golfer and it was an excuse uh to talk it certainly wasn't about golfing whenever i see something you know take these very low interest rates even negative interest rates i'm always thinking boy i'm looking forward to talking more about that one thing that's fun is you have a very optimistic view about things i think if i'm sort of neutral in terms of optimism or pessimism and i look at the facts around me i look at what's happened in my lifetime you know put three of me and end and you're back before the declaration of independence was written that progress in in three lifetimes like mine is it's mind-blowing since i've known you you've always been good at taking finance things and making them simple do you think that came naturally or did you learn over time just answering questions about finance decade after decade i started teaching a course when i was 21 years old at the university of omaha i did that because i was terrified of public speaking earlier and i've taken the dale carnegie course and i felt i just had to get out there and start talking standing up for two hours in front of a class helped me and learning to explain things well it's amazing how you've gone through market periods that are utterly different and yet your basic rules about what what to do remain unchanged yeah the rules work they're not the easiest to apply they won't tell you exactly when to buy or sell obviously but you'll never do anything stupid if you follow some fairly simple principles when you get a chance to buy something of extraordinary value whether it's a farm or an apartment house or a piece of a business or an entire business the time to do it is then and not worry about whether you could do it a little cheaper a month later two months later warren makes unique compensation agreements for the people who work for him and having thought through how do you incent good behavior what's the best thing for the long term i've learned a lot of how you think about compensation basically i want them to i want the paint brush to be in their hand and then when they paint something that they think is beautiful and i think is beautiful i want to cheer like crazy for well good afternoon mr buffett and good afternoon mr munger my name is monish pabrai and i'm from the chicago area mr buffett i'd like to thank you for all your insights over the years i'm especially amazed at the pace at which you answer my letters point by point i have a question for you related to circle of competence i have a notion that both mr munger and yourself understand the kleiner perkins model of early stage venture capital investing and currently they're focused on the internet space extremely well my notion is that i think it is well within your circle of competence to understand what they do just like you understand your circle of competence to understand what they do just like you understand what your managers that sees candy or executive jets do so the question is that with the internet i think we're seeing a change that has not been seen in the last 500 years as humans we haven't seen something that is as dramatic and as profound that's going to come upon us if let's say a john doe at kleiner perkins approached you and said that they were starting let's say a billion dollar early stage or later stage internet investment fund that kleiner would manage would you consider that would you consider participating in that investment to be within your circle of competence if it were offered at terms that looked attractive i i agree with the first part of what you said i mean i'm not sure that it'll necessarily will be the most important thing in the last 500 years in the in the commercial world but it could well be and if it isn't it's right up there i mean it is it is we talked about this last year and maybe even the year before i mean it is a huge development but and i would say that charlie and i both understand the process of of early investment slash promotion uh probably as as well as anyone we haven't participate in it there's certain things we don't even like about it but we do understand it right shirley and i would say that no we we would not have an interest in investing in in the fund we do not necessarily regard the internet there's no question if you're in the early stages of promotion and you particularly you've got a success reputation as a successful in that but in this case it wouldn't make much difference because the whole field has gone wild you will make a lot of money selling to the next stage and the next stage in the next stage but in terms of picking out businesses that are going to do wonderfully as businesses out of stocks for a while but as businesses i i don't think it's necessarily so easy uh in in the internet world and i i would say that if you were to uh ask some very top names in the field to name the next five companies out of the shoot and the next 10 companies out of the shoot and predict that one of them will earn say the 200 million dollars i used as a threshold six or seven years from now i'm not so sure they they if they gave you a list that they would name a single one that doesn't mean they might not make a lot of money by being early investors in them because they sell out to the next group and so on but in the end they have to succeed as businesses and a few will succeed as businesses the internet will have a huge impact on the world but i'm not so sure that that makes it an easy investment decision charlie well at least that makes it an easy investment decision charlie well at least it's not an easy investment decision for us and that's what we're looking for yeah we will never turn our money over to somebody else uh you know if we're going to lose your money as berkshire shareholders we're going to lose it ourselves and we're going to come back and look in the eye and tell you how we lost it we are not going to say this game is too tough so we'll give our money to somebody else you can give your money to somebody else and you don't need the intermediaries of me and charlie to do it for you so we we get approached all the time i had a call you know within the last couple of days on something you you would know very well about participating in some funder and they always have you know it's always stage one stage two stage three and the idea is we get some more people to come in later at twice the price and maybe the fact that our name is involved and it will cause people to pay even more and all that sort of thing we're not in that game and we're not going to turn the money over to someone else to manage it's your money you gave it us to manage we'll manage it if you decide you don't want us to manage it you decide who you give it to it we're not going to be intermediaries on it and if uh if we don't understand something ourselves we're not we're not looking for any anybody else to to do it for us the world doesn't work very well that way anyway i mean it usually end up in the hands of the promoters and not the hands of the people who really know how to make money
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