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Despite worries about inflation, an economy stuck in slow-growth mode and stifling health care costs, Warren Buffett and Charlie Munger remain optimistic about their company's growth and the nation's future.
Judging from the occasional applause, that's just what the estimated 35,000 people wanted to hear when they came to Omaha's CenturyLink Center Saturday for Berkshire Hathaway Inc.'s annual shareholders meeting.
“We like our system,” said Munger, vice chairman of Berkshire.
“You haven't convinced me yet to start selling the stock,” Buffett, chairman and CEO, told Palm Springs, Fla., investment adviser Douglas Kass, who became one of the meeting's official questioners because of his view that Berkshire faces serious problems.
Kass didn't ask the only challenging questions during the meeting's five-hour question-and-answer session.
Buffett had to explain why Geico, Berkshire's auto insurance subsidiary, doesn't use driver-monitoring software to determine coverage and rates, whether one of Berkshire's companies is a pyramid scheme, how his successor could continue managing wide-ranging Berkshire companies with a tiny corporate staff and whether his newspaper purchases are good for shareholders.
Asked about the most serious challenges facing U.S. business, Buffett cited rising health care costs and Munger listed the high-stakes, insurance-like investments known as derivatives.
Buffett said health care costs more than 17 percent of the American economy, a higher share than in foreign countries, and represents a significant cost to Berkshire Hathaway, just as with other businesses. He said he didn't know how the federal Affordable Care Act would affect Berkshire's businesses, but managers for each company are working on the matter.
Buffett said he also didn't know how the Federal Reserve would safely reverse the steps it is taking to keep interest rates low and stimulate the economy. He called the Federal Reserve's policies “a huge experiment” without a clear ending.
“It really is uncharted waters,” he said. “It certainly has the potential for being very inflationary.”
People who rely on cash investments such as certificates of deposits are “huge victims of low-interest policy,” he said.
He said he sees “slow progress” in the U.S. economy and some recovery in housing prices.
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Yet when it came to Berkshire, Buffett and Munger said the Omaha investment company's future is bright, even though they said, as they have in the past, that it won't grow as rapidly as it did years ago.
Berkshire remains not only the best choice but often the only choice for owners of excellent businesses who want a permanent home for the companies they have created, Buffett said. “I think it will remain one of a kind.”
Munger, who owns more than $1 billion in Berkshire stock, said he tells his family members, “Don't be so stupid as to sell that stock.”
“That goes for the Buffett family, too,” Buffett said.
A shareholder asked Buffett “what can go wrong” with Berkshire after he is no longer there.
“It's something we worry about all the time,” Buffett said, but the key is preserving Berkshire's “culture,” especially its reliance on the managers of its subsidiary companies to run their own businesses with no central-office interference.
If anything, he said, Berkshire's culture has “intensified year after year after year,” and Berkshire's board of directors is “in solid agreement” about the person who would take his job if needed.
That person, who has not been identified, likely will need help in dealing with Berkshire subsidiaries. He said he has made his financial assistant, Tracy Britt, chairwoman of four small Berkshire companies.
But the large company will remain the CEO's responsibility, Buffett said, and the Omaha headquarters staff, which has 24 people, won't interfere with managers' decisions.
If anything came into Berkshire that did not fit within that overall culture, he said, “it would be rejected like a foreign tissue.”
Buffett said he doesn't know what his two investment officers, Todd Combs and Ted Weschler, buy or sell until he sees a monthly report, and he doesn't interfere with their decisions. “They've bought things I wouldn't buy,” he said, but they have been successful, and he gave them $1 billion more of Berkshire's assets to invest earlier this spring.
Buffett said Berkshire plans to build a commercial property-casualty insurance business, beginning with four top executives of American International Group who joined the company last month.
He said he considered buying an existing company in that business but decided it would be just as profitable to start one within Berkshire. The four executives came to Berkshire with the idea, rather than Berkshire seeking them out, he said.
“We were ready to enter the field,” he said. “We've got the right people.”
Buffett said he expects the new business to gain a significant share of the commercial insurance market within about five years.
Asked about the energy business, Buffett said railroads haul petroleum faster than pipelines and will be hauling coal for a long time. He called on Matt Rose, CEO of Berkshire's BNSF Railway, and Rose said the railroad carries 650,000 barrels of oil a day and may reach 1.4 million before long.
Journalist Andrew Ross Sorkin questioned whether profits from the newspapers acquired by Berkshire would measure up to profits by its other divisions.
Buffett said he expects Berkshire's newspapers to return about 10 percent after-tax profit each year, partly because of some favorable tax policies, which would bring Berkshire about $100 million a year. That's a “decent return,” he said.
“I think what you're saying is, it's an exception and you like it,” Munger said to Buffett.
Becky Quick of CNBC asked about a report questioning the fairness of the purchase of the H.J. Heinz Co. by Berkshire and a Brazilian hedge fund. Buffett discussed how the transaction happened and said “it was an absolutely fair deal” that would give Berkshire a good profit.
“That report was totally wrong,” Munger said.
Fortune editor Carol Loomis quoted a comment by Buffett in 1999 that corporate profits would be limited to about 6 percent of the overall economy, but profits have been about 10 percent in recent years. Does that mean corporations are making too much money and corporate taxes should be increased?
Buffett said American businesses have done “extremely well” and recovered from the 2008 credit crisis, but they probably won't keep up their rate of profit.
“Just because Warren said something 20 years ago doesn't mean it's a law of nature,” Munger said. He said it's a problem if the U.S. corporate tax rate is much higher than the rates in competing countries.
Sorkin asked whether Berkshire's Pampered Chef division, which sells kitchen products at home parties, is a multilevel marketing scheme much like an herbal remedy company that is under scrutiny.
Buffett said legitimate companies like Pampered Chef make profits on sales to end users, while illegitimate companies emphasize sales to distributors who may never find end users. “I think there's likely to be more flim-flam in selling magic potions than pots and pans,” Munger said.
Buffett said he expects Geico to gain 1 million new auto insurance policies this year, two-thirds of the entire industry's increase. The new policies would add $1.5 billion to Geico's value.
Two questioners wondered by Geico doesn't use driving-monitoring software to help determine what drivers to ensure and how much to charge them, like Progressive Insurance.
Buffett said Geico's system for deciding on insurance coverage is working. “You can go out any time Charlie is talking and get a quote,” he said.
Berkshire shareholders added Meryl Witmer, 51, to the board of directors. She is a manager with Eagle Capital Partners, a New York City investment company. She is one of three female members of Berkshire's 13-member board.
John and Sue Schlembach, shareholders from Austin, Texas, said Buffett, 82, and Munger, 89, seemed “in top form” during the meeting, as they had observed in the three or four other meetings they have attended.
“No lessening in abilities,” Sue Schlembach said. “Last year there were questions about health, and this year, nothing about health.”
Philip Rich of Lincolnshire, Ill., who has attended more than a half-dozen of the meetings, said Buffett “is what he is. It's amazing he could answer so many questions off the top of his head.”
Staff members Paige Yowell, Emily Nohr and Russell Hubbard contributed to this report.
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.
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