This is the best transcript I have read on the 2008 Berkshire Hathaway Annual Meeting.  My favourite question/answers:

Q5: Would you use stock options to enter a position in a public company?

WB: If you want to buy or sell a stock, you should buy or sell a stock. We sold puts on Coca-Cola once, but usually it is best to just buy stock. Using option technique is an idea where you get to buy a stock cheap. Four out of five times you may get it right and one time you may miss the opportunity to buy. We virtually have never used options to enter or exit a position. We have sold long-term equity put options described in our press release. We don't get involved in fancy techniques.

CM: If I remember right, a public authority was wondering if they should set up an option exchange market. Warren was alone in the opinion of opposing it. You wrote a letter saying it wouldn't do any good to throw out margin rules in this fashion. It doesn't serve the country. I always thought Warren was totally right. Turning financial markets into gambling markets to enrich the croupiers doesn't make sense.

WB: A University of Chicago Graduate student asked me once, what are we being taught that is wrong? In business school the amount of time spent teaching option pricing is total nonsense. You only need two courses, (1) how to value a business, and (2) how to think about stock market fluctuations. The thing is that instructors know the formulas and you don't, so they have something to fill the time. It has nothing to do with investment success-what matters is buying businesses at the right price. If you were teaching Biblical studies and you could read the Bible forward, backward, and in four different languages, you would find it hard to tell everyone that it comes down to the Ten Commandments. The priests want to spend a lot of time preaching. You must have an attitude where you aren't influenced by the market. You need a mindset, and you need to have the attitude to divorce yourself from letting the market influence you.


Q23: New York. With small sums of money, what strategies would you pursue?

WB: If I were working with small sums of money, it would open up thousands of possibilities. We have found very mispriced bonds. We found them in Korea a few years ago. You could make big returns but had to be of small size. I wouldn't be in currencies with a small amount of money. I had a friend who used to buy tax liens. I'd look in small stocks or specialized bonds. Wouldn't you say that, Charlie?

CM: Sure.


Q26: New York City. American Express and Washington Post were big positions for you. How do you get confident enough with that [smaller] level of diversification?

WB: If we were running only our own money, putting 75% of our net worth in a single position is not a problem if it is something we really have high confidence in. Putting 500% or more of your net worth in a position is a problem. Several times I have had 75% of my non-Berkshire net worth in a situation. You will see things where it would be a mistake not to act. You won't see them often, and the press and your friends won't be talking about them. Wouldn't you say, Charlie? 75% is not a real significant amount?

CM: Sometimes, I have had more than 100% in an individual investment.

WB: You just had a good banker. Look at LTCM- they put 25x their money in things that had to converge- but couldn't play out the hand. There are people in this room with more than 90% of their worth in Berkshire. I saw things in 2002 in junk bonds that would have been worth going heavily into. You could have bought Cap Cities in 1974-selling for one-third the property value, with the best manager, and in a good business. You could have put 100% in Coca-Cola when we bought it and that wouldn't have been a dangerous position.

CM: Students learn corporate finance at business schools. They are taught that the whole secret is diversification. But the exact rule is the opposite. The ‘know-nothing' investor should practice diversification, but it is crazy if you are an expert. The goal of investment is to find situations where it is safe not to diversify. If you only put 20% into the opportunity of a lifetime, you are not being rational. Very seldom do we get to buy as much of any good idea as we would like to.


Q35: San Francisco. In 2002, you invested in Petro-China and all you did was read the annual report. Most professional investors have more resources at hand. Wouldn't you want to do more research? What do you look for in an annual like that? How could you make the investment only on a report?

WB: I read it in the spring of 2002, and I never asked anyone else their opinion. I thought it was worth $100 billion after reading the report. I then checked the price, and it was selling for $35 billion. What is the sense of talking to management? It doesn't make any difference. If the market value was $40 billion, you would need to refine the analysis. We don't like things you have to carry out to 3 decimal places. If someone weighed somewhere between 300-350 pounds, I wouldn't need precision-I would know they were fat. If you can't make a decision on PetroChina off the figures, you go on to the next one. You weren't going to learn more if you thought their big [oil] field was going to decline out slightly faster, etc.

CM: We have lower due diligence expenses than anyone in America. I know of a place that pays over $200 million to its accountants every year, and I know we are safer because we think like engineers-we want margins of reliability. It is a very dicey process.

WB: If you think the auditors know more about an acquisition, then they should run the business and you should take up auditing. When we got the call on Mars-Wrigley-I wasn't going to look at labor costs or leases. The value of Wrigley does not depend on the value of the lease or an environmental problem. There is a whole lot of trivia that doesn't mean anything. I never made an investment that would have been avoided due to conventional due diligence. We would have lost deals. On big deals, people rely more and more on process. When people want a deal, they will come to us. Mars only wanted to deal with Berkshire- there were no lawyers involved and no Directors involved. I got a call, it made sense, and I said yes. There was no material adverse change clause. Our $6.5 billion will be available regardless, even if Ben Bernanke runs off to South America with Paris Hilton. [eruption of laughter] That assurance is worth something. If you say, ‘I'll do it, but I need X, Y, Z, etc.'- that is costly.


Q61: Pharma? How do you value the pipeline of drug companies?

WB: Unlike many businesses, when we invest in pharma, we don't know the answer on the pipeline, and it'll be a different pipeline 5 years from now anyway. We don't know whether Pfizer or Merck, etc, have a better chance, or which of those will come out with a blockbuster. But we do feel we have a group of companies bought at a fair price that, overall, will do well and should offer chances for decent profits. These companies
are doing very important things. I could not tell you the potential in the pipeline. A group approach makes sense. It is not the way we would go at banks. If you buy pharma at a reasonable multiple, you will probably do okay 5-10 years from now.

CM: You now have a monopoly on our joint knowledge of pharmacology.

WB: He gets cranky at the end of the day. [laughter]