10:24

Becky Quick of CNBC says a question about three candidates for CEO successor: What are benefits of bringing in CEO early to give that person a chance to get used to the job? Buffett says he has heard that question before. Buffett says if there was a good way to inject someone into a role that would that person a better CEO for Berkshire, they would do that. But he says the three CEOs are running major businesses right now, and to sit in the office while Buffett is reading or on the telephone -- there is really nothing  to do. He says "it would be a waste of talent." Buffett says the three candidates are 100 percent ready for the job right now. He says the biggest job they will have is developing relationships with potential  buyers of businesss, with  the world at large, with the shareholders. He says that will take time, though not a great deal of time. He says they know how to run businesses, and they probably would do  some things better than  he would.    Munger says a lot of models that have worked well in the world, like Johnson and Johnson, work something like Berkshire and these talents pop up in the subsidiaries.

10:32

A shareholder asks Buffett to explain his investment strategies, like value investing, and how teach young people. Buffett says he brings in college students to talk with them each year. Buffett says he tells them it is important to know how to value a business and to know how to judge the markets. He says there would be nothing about modern portfolio theory or anything like that. He says it is important to know your circle of competence, start small and learn as you go along. Buffett says some accounting principles also are important. And then learn about market fluctuations and learn that the market is there to serve you. And that is not an issue of a high IQ, but rather an emotional stability and inner peace about the decisions you have made. Munger says there is  the basic problem of always having  half the future investors in the world  in the bottom 50 percent.  Munger says largely  people should reduce the nonsense. Buffett and Munger agree that  emotional makeup is more important than a high IQ.  Buffett says he is asked by college students, "what are we being taught that is wrong?" Munger asks how Buffett can handle that question in just one session.

10:36

Buffett is asked how he would replace someone like Ajit Jain in the insurance division. Buffett says you don't, that Jain is unique. But authority does not go to the position -- it goes to the person.

10:46

A shareholder asks how Buffett  views the markets' valuation of Berkshire shares. The market has it down 30 percent, while earnings were not down that far. Buffett says the shareholder put his finger on something there. Buffett says the investments are what they are in the stock market, so he does not have a problem with that side of the equation.  Buffett says the earning power of businesses  were down last year and  will not do as well this year. But they are  by and large good businesses. He says a few of them have problems, others will do very well. Buffett says  Berkshire was cheaper in the stock market last year than  its intrinsic value would indicate, but most companies were in the same  boat. Buffett says over time, both stock price and intrinsic value will increase. And he hopes the operating companies over time will do better. Munger says last year was a bad year for a  float business, making the owner of the float (insurance premiums held by Berkshire that can be invested) appear to be worth less than  the owner will  be worth over time. Munger says Berkshire's casualty insurance business is probably the best in the world. He says other companies in Berkshire's holdings also rank high in the world. Munger says if you think it is easy to get in the position that Berkshire occupies, you are living in a different world than the one that I occupy. Buffett says Berkshire's insurance  business is remarkable,  with remarkable managers. Buffett says with the economic meltdown, like the China Syndrome or something, it hurt jewerly and NetJets and other businesses, American Express, etc. But the meltdown also caused the phones to ring more at Geico.  Buffett says all of a sudden saving money became very important. Buffett says  that builds a lot of value over time. Buffett says Geico is now the third largest auto insurer in the country this year and the fundamentals are in place to  take Geico much higher.      

10:59

A shareholder asks about the federal stimulus bill, saying only 8 percent is aimed at infrastructure. He asks should not more of that bill go to real assets and put numerous people to work? Munger says "Let me answer that one. Yes!" Buffett says that should be the goal. Buffett says anytime government or anything else throws a lot of resources into something, there is a lot of slop. Buffett says the intent though, is to get a lot of money into action and used smartly. Buffett says when the consumer pulls back the way they have, government needs to step in. Buffett also says there will be consequences. "I think we should be doing it, but we shouldn't think its a free ride."

11:04

In response to one question, Buffett says Berkshire is at a disadvantage because the cost of investment for the company is higher than for companies that have received government bailout money. Buffett says the cost of investment is a lot higher than for a company that is in trouble. Buffett says that is just a fact of life right now. He says there are the blessed who have a government guarantee, and others who don't. Buffett says Berkshire will  have to  find ways to adjust. Buffett says the  utility company uses  most of Berkshire's borrowed money. By and large after that, Berkshire uses the float from its insurance premiums, and that cost of borrowing is less than zero over time. Buffett sys he does not have an answer for going    head to head against a company that has a  government guarantee.  Munger says Berkshire is at a funding disadvantage but it is not  regulated like a bank. He says Berkshire should not dwell on this one disadvantage.  

11:09

A shareholder asks what the late  Ben Graham, who taught Buffett a good deal of what he knows about investments, would have said about derivatives? Buffett says he would not have liked them. Buffett says Graham probably also would say if he saw one mispriced he would act on it, but avoid the traps that others might fall into.  Munger says derivatives basically are a dirty business. He says we need less of these kinds of financial instruments.  

11:14

A shareholder asks if starting a smaller investment fund today what do about high returns on some stocks? Reinvest earnings somewhere else or sit on the high returns in the name of value investing? Buffett says he would buy good companies and keep them. And not worry about the stock price.

11:19

A shareholder says Berkshire's competitive advantage is Buffett and Munger. Buffett says that is not true. He says Berkshire's competitive advantage is a business model that is hard to copy. Buffett says for example shareholders hold onto Berkshire stock, with little turnover. He says there is no other company in the country that has the ability to do that now, or the ability to adopt that model in any big way. Buffett says any new CEO will be dedicated to that model in the future.  Buffett says  managers and shareholders  joining the company are immersed in that culture.  Munger says a lot of corporations in America are run stupidly  with profits each quarter guiding decisions. Munger  says  that is not the case with Berkshire.  

11:29

Buffett is asked why people shouldn't just invest in  companies that Berkshire invests in, and not in  Berkshire itself?  And why is the meeting not Webcast? Buffett says the meeting could be Webcast, but there is a lot to be gained with face-to-face contact. He says people come to see each other and Berkshire products. Buffett says in terms of buying securities Berkshire buys, a lot of peple do that. He says, though, that they don't have free float. If they had $58 billion then they would be at the  same level as Berkshire. Munger says generally they would be smart to copy Berkshire's investment moves. Munger says "I think  you have a very good idea." Buffett says he  used to look at Graham's moves and he got ideas from them.  

11:32

Buffett is asked about inflation. He says the country will have inflation, and people holding government debt in the form of bonds will pay for that. Buffett says a good deal of that debt is being held by the Chinese. Buffett says the best protection against inflation is your own earning power. He says 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, Buffett says, is in a good company. He says people will give up their own earnings to enjoy whatever product your company is making. Munger suggest becoming a brain surgeon and investing in Coca Cola instead of government bonds.

11:39

Buffett is asked at what price does it become compelling to invest in newspapers, and at what point does it become not a good investment? Buffett says newspapers problems have been accelerated by the financial crisis, but it is not the cause of newspaper problems. Buffett says he would not buy a newspaper stock at any price. He says they could well suffer endless losses. He says there was a time when they had pricing power and they were essential to consumers and advertisers. Now they have lost that essential nature, sports scores and other facts can be found elsewhere. Buffett says nobody liked buying ads in the newspaper but they did so because they worked. Buffett says that no longer is the case. Buffett says he will retain ownership of the Buffalo News however, and has been urged to do so. Buffett says Berkshire has worked with the unions in trying to have economi model that keeps making a little money. Buffett says as long as not face endless losses, and no union problems, we will stick with the compnay. Buffett says the Washington Post has some good businesses (and Berkshire has stock in the Post) but it does not have answers to the newspaper business. Buffett sys no one has found a new model for newspapers. Buffett says the Buffalo News is among newspapers playing out the game for as long as it can. Munger says loss of newspapers is a national tragedy. They have kept government honest and etc. and as they disappear what replaces them will not be as desirable as what the nation is losing. But he says, "such is life."

11:42

Buffett says retail is hit hard, but consumers will not spend a lot over the next few years. Berkshire's retail businesses will not do well for a period of time. Retail real estate like shopping centers will struggle, Buffett says. Buffett says the government urged people to save for years, and now that they are saving government is not pleased. Buffett says Berkshire's construction related businesses also will struggle, particuarly in some parts of the country like Florida,  more than in some  other parts of the country.

11:47

Buffett is asked about Berkshire buying back its own shares. Buffett says most of repurchasing of shares recently has been foolish because the stocks were too expensive. Buffett says many companies did so to send out unjustified buy recommendations, though they would not admit that. Buffett says only in about 2000 did Berkshire think it might be worth buying back its own shares becuase it was demonstrably lower than intrinsic value. Buffett says that situation does not exist now. Buffett says 90 percent of repurchase decisions recently have not been  for the good for the stockholder.

11:47

A shareholder says the new q-and-a format is very good and this one of the best annual meetings he has attended.

11:52

The same shareholder asks about opportunity costs of recent decisions made by Berkshire. Buffett says the situation recently has been fluid and fast moving. He says one key is Berkshire keeping a lot of cash around. But he says Berkshire got a lot of calls, and one of them was from Goldman Sachs, with a $5 billion investment. But that deal might not have happened even a week earlier than the call came in. And Berkshire actually sold some stock to remain comfortable cash-wise. Buffett says Berkshire was faced with the opportunity cost question in several situations that happened very quickly. Buffett says if something happened chaotic next week, it might move on some deals. Buffett says it also is hard to move billions of dollars from one holding to another. Buffett says he does live the opporuntity to make those kinds of decisions. Buffett says he had not faced in quite some time the kind of opportunities it saw last year.  .

12:08

Buffett says one mistake he made this year was buying into  some Irish banks that were into  some bad investments that he overlooked. Along the same lines,  Buffett says there  were a lot of signs that some  banks in the United States were making bad decisions around the U.S. housing market that relied on high degrees of leverage. Buffett says people looking closely could have seen those signs. Buffett says with Freddie and Fannie for example, it was pretty clear what was going to happen. Buffett says generally speaking for people that don't spend a lot of time on their investments, they will have a lot of trouble separating financial institutions. Munger says there is another problem: General accounting principles allow banks to show high earnings based on foolish investments. Munger says that kind of accounting should not be allowed. Munger also says a  lot of new regulations coming down the pike would not be needed simply if good, current accounting rules were better followed.      

12:09

The meeting is on lunch break.