Notes from the 2012 Berkshire Hathaway shareholders' meeting
Brian Gongol

These notes are approximate reconstructions of the direct quotations. They should not be considered precise transcriptions, but are intended to reflect the nature of what was said as accurately as possible.

Q: Advice on China?

MUNGER: Nobody's taking advice on China. We should be seeking theirs.

BUFFETT: We don't talk to CEOs of our invested companies more than about two times per year. If they require that much advice, we would take our money elsewhere.

Q: Why didn't you warn us that Berkshire was overvalued when it was selling at 2x book value?

BUFFETT: If we had our way, we'd sell stock one time per year at our calculation of intrinsic value. We would not advise anyone to buiy our stock above intrinsic value. When we issued the B shares in the mid-1990s, we put a statement on the cover of the prospectus saying that we would not buy the stock at the offering price. We know the intrinsic value of Berkshire today is much greater than 1.1x book value.

GELB: You said not a dime has gone to dividends in last year's letter. Thoughts on book value and dividends?

BUFFETT: The 1.1x multiple over book value at which we will buy back stock is "very significantly undervalued". Our held securities are not going to decline. We would love to buy billions of dollars in stock. If we get the chance to do so, without lowering available cash below $20 billion, we would aggressively do so.

MUNGER: Some people will buy back stock at any price. We would not do that.

BUFFETT: We've been in a lot of board rooms where buybacks were discussed. It's usually done for ego. We would and will only do buybacks to increase per-share book value. As a financial guy, I would love to do it. As a fiduciary for the many holders of our stock, I don't like it.

Q: Views on European and American banks?

BUFFETT: US banks are much stronger than they were a few years ago. Most of the worst on their balance sheets has been resolved. They have lots of liquidity. European banks are "gasping for air" -- which is why Mario Draghi dumped one trillion euros into the markets. That was a huge action. European banks face capital flight. They haven't wanted to raise capital because the prices were bad. The ECB offered money at 1% for 3 years, so they had to take it. I would like to be offered that kind of deal, but my company isn't in trouble. The Federal Reserve and Treasury handled things quite sensibly and helped American banking recover strongly.

MUNGER: European banks remain very highly stressed.

BUFFETT: The difference between American and European banks is like night and day. People trusted Bernanke and Paulsen when they said they could fix the mess. Europe is 17 different countries. As Kissinger put it, "If I want to call Europe, what number do I dial?" The two places are in very different categories.

SORKIN: Coal and natural gas appear to be opposing investments -- as the price of coal rises, the price of natural gas appears to decline. Is holding both MidAmerican and BNSF an elegant hedge?

BUFFETT: MidAmerican really isn't going to benefity much from coal being cheap. They're a regulated monopoly, so prices don't change profits much.

MUNGER: If I had my way, I'd use every ounce of coal in this country before a drop of natural gas. Our natural gas reserves are an extremely valuable resource.

RANSOM: Insurance pricing based upon driver habits is the new big thing. Is GEICO going to adopt it?

BUFFETT: Progressive appears to be the competitor rolling out driver tracking most enthusiastically. Our 51-question online application for GEICO is designed to weed out people with bad habits. I don't see the driver tracking as being a major change, but if it would increase the predictive value of pricing insurance for drivers, we would adopt it. GEICO marketing is working very well, our risk selection is working well, and our retention is working well. It's quite a machine. We carry it at $1 billion over carrying value on our books, but it's really worth more than $15 billion more than that. And even if someone offered to pay that much, we still wouldn't sell at that price.

Q: Business school advice?

BUFFETT: Business schools not long ago used to teach a lot of nonsense about investing.

MUNGER: They're improving.

BUFFETT: From a low base?


BUFFETT: Business schools teach one fad after another in finance. It's hard to resist. Going against the "received wisdom" of your bosses and elders is dangerous. People need to know fundamentals, not modern portfolio theory or options value. Ray Kroc needed to know how to make and sell hamburgers, not options pricing. There is next to nothing in business textbooks about valuing businesses. But making it look hard makes the "high priests" of finance get rich.

MUNGER: Finance people want equations like Black-Scholes so they don't have to think hard.

LOOMIS: Buffett Rule?

BUFFETT: If we're calling for shared sacrifice, including cuts to Social Security, we need to ask for more from people who earn top incomes.

MUNGER: What if people were allowed to give up to 50% of a 30% income tax liability to charity, rather than to the government as taxation.

BUFFETT: I don't know about the proposals currently being pushed through Congress.

GALLANT: Megacatastrophes?

BUFFETT: It's hard to know. We have 100 years of data on earthquakes and the like, but what does it tell you about the next 50 years? The earthquakes in New Zealand did damage to the country to the population-adjusted equivalent of 10 Hurricane Katrinas. We re-evaluate circumstances with new incoming data, but we remain willing to issue big policies. One is worth $10 billion. Markets vary worldwide.

Q: What are the effects of subsidies on MidAmerican Energy?

BUFFETT: We've entered the solar-energy market in the last six months. The wind subsidy is 2.2 cents per kilowatt-hour from the Federal government, and it lasts for 10 years. That makes wind projects work. It has encouraged development. WIthout subsidies, we wouldn't have done any wind projects. Our solar investment includes a major contract-purchase commitment, but I don't know what kind of subsidies our purchasers get. I don't think solar projects or wind projects are economical without subsidies. You can't use them for base load, either.

MUNGER: Subsidies are a wise way to make the transition away from conventional energy sources.

ABEL: The wind project require a subsidy to make an operating profit. We get benefits on the tax side for constructing solar-energy facilities.

BUFFETT: We have a distinct competitive advantage: We pay a lot of Federal tax, so we can use the full tax benefits of credits. 80% of energy companies use bonus-depreciation methods to zero-out tax liabilities, so they gain nothing from tax credits. This helps MidAmerican Energy.

QUICK: Is the Buffett Rule argument hurting the share price for Berkshire Hathaway?

BUFFETT: In the end, I don't think anyone should have their citizenship restricted by their job. We don't put our citizenship in a blind trust just because we run this company. I don't know the views of other CEOs. But if you disagree with my choice to be outspoken, maybe you should own Fox instead.

MUNGER: Buffett's talk about the tax rule has made me very unpopular at the country club.

GELB: Would you acquire a company for more than $20 billion?

BUFFETT: We considered a $22 billion acquisition last month. We won't use stock at all to make a purchase. We used stock in part to purchase BNSF, but that was a mistake. We simply won't go below a $20 billion cash balance. I would have sold securities in order to make the deal happen, but I liked the securities more than I liked the offer. If you have a $20 billion deal, I have an (800) number. $20 billion is my limit this year. It'll probably be $30 billion next year.

Q: What are you doing to bring jobs back to the USA?

BUFFETT: Of the 270,000 jobs inside our company, there are no more than 15,000 outside the USA. We invested $8 billion last year in plant and equipment, mostly in the United States. Iscar is a global operation. The American market is important for them, but it's not the majority of their sales. We want more business in Korea, Japan, and India. Marmon just bought an Australian company. 10 years from now, it's very likely that we will have many more employees, mostly in the US. There is lots of opportunity remaining inside the US.

MUNGER: You can't "bring back" jobs if they never left in the first place.

SORKIN: How do you feel?

BUFFETT: I feel terrific. I have four doctors, at least two of whom own Berkshire Hathaway shares. Prostate cancer is a minor event.

MUNGER: I resent all of this attention to Buffett's health. I probably have prostate cancer much worse than he does, but I don't even bother getting tested. I want sympathy.

RANSOM: Would you go into the annuity business?

BUFFETT: We won't assume annuities at greater than the risk-free rate.

Q: I'm 26. Do you have any advice for me?

BUFFETT: I'd do the same thing I did, but I'd do it better.

LOOMIS: 95% of the people in this room probably think Berkshire is undervalued. Why?

BUFFETT: There have been 4 or 5 times ever when Berkshire has been significantly undervalued by the market. If you run a business long enough, sometimes it'll be undervalued. Berkshire in 2000 or 2001 was at a very low price. The beauty of stocks is that sometimes stocks are sold at very silly prices. That's how we got rich. Mr. Market makes lots of mistakes. Over the next 20 years, our shares will sometimes be very over-priced. Stick to businesses where the value you get exceeds the price you pay. The stock market remains the best place in the whole world for making money. You have lots of information, lots of choices, and no need to do any real work. You can't do that on the farm. Don't be the "drunken psychotic" like Mr. Market. Be the one to take advantage of him.

Q: What do you think about macroeconomic conditions?

BUFFETT: We never look at macroeconomics when buying a business. I bought my first stock when we were losing World War II. But stocks were cheap. We never look at the macroeconomy. Panic is the time to use your money.

Q: What have been your winners and losers?

BUFFETT: I should have recognized BNSF as a major winner long before I did. GEICO was a huge winner. We bought MidAmerican Energy at $34 a share; today, we value it at more than $250 a share. Iscar has been a wonderful investment.

MUNGER: 80% of our businesses have increased their market strength.

BUFFETT: Any mistakes have been cases where I mistook the future competitive position of a company, and did so badly. It's not the fault of the managers. Ajit Jain has created tens of billions of dollars in value for this company out of nothing but brains and hard work.

QUICK: Who will manage the derivatives portfolio after Warren Buffett?

BUFFETT: There won't be much of a derivatives book after I'm gone. There's not even much of one while I'm still here. Our utilities are required to use some derivatives. BNSF used to hedge on diesel prices. Some of our businesses will have small derivatives positions, but there are unlikely to be any major derivatives investments by my successors. Collateralization rules have changed, and I don't think the worst-case scenario makes them worthwhile.

MUNGER: We went into derivatives because we have better credit than anyone else, so we got better terms than anyone else.

GELB: How do you value your insurance businesses?

BUFFETT: GEICO's intrinsic value is much, much greater than its net worth plus its float. That's not the same for all of our insurance operations. But GEICO has a positive underwriting profit and it's growing. We would love to buy operating businesses priced at 9x to 10x pretax earnings. We would consider higher multiples of earnings if we knew the company well. EBITDA is nonsense.

MUNGER: I don't even like to hear the word "EBITDA".

BUFFETT: It's basically "EBE": "Earnings before everything."

Q: Why has Berkshire's share price done worse than an investment in gold recently?

BUFFETT: At the time we took over this company, gold was $20 an ounce and Berkshire was $15 a share. Look at their prices today. Over 50 years, Berkshire, stocks, and farmland will do better than gold. It's very hard for an unproductive asset to grow more than a productive asset. If you say anything about gold, it arouses passions. If you've made a decision rationally with the right facts, you don't care what other people say about you. Gold bugs get emotional, not rational.

SORKIN: Why did you buy JP Morgan shares for your personal account but not for Berkshire?

BUFFETT: I like Wells Fargo better than I like JP Morgan, but I can't buy personally what Berkshire buys. My personal account includes my second-best ideas. My best ideas go to Berkshire.

MUNGER: I like to buy and hold. I don't care what Buffett does with his small money.

BUFFETT: I like Wells Fargo much, much more than JP Morgan.

RANSOM: Your organization chart is "challenging". Are you sure you're using capital in the best way?

BUFFETT: Our property-casualty insurance companies can do more than our life-insurance companies with their money because of regulations. Most of our operating businesses have more cash than they need, but I won't do anything that would cause me to lose sleep. There is a fair amount of logic to where the money goes. If we make a big acquisition, we might have to move some money around.

MUNGER: Excess cash is an advantage, not a disadvantage.

Q: Shouldn't Berkshire try to increase the stock price to make acquisitions easier?

BUFFETT: Berkshire without a dividend has sold at or above intrinsic value about as often as it has sold below that value. A dividend wouldn't help. Our goal is to see the market price land close to intrinsic value. Most of the time, it'll do that, bobbing above and below. But we prefer to buy in cash, not stock. We don't want to dilute our existing shareholders' ownership interest. Nobody wants the stock value to be higher than I do, because I want the maximum philanthropic value returned from it. I want x vaccines, not 80% of x. There are times when people have been very excited about Berkshire, and times when they have been very depressed.

LOOMIS: Was the Omaha World-Herald purchase a personal indulgence?

BUFFETT: Newspapers have three problems: Two difficult to overcome, one possibly worse. Everyone wants to be informed. 50 years ago, newspapers were the primary source for most of what we wanted to know. Now that same information is available elsewhere, on a more timely basis, and free. Newspapers have to be the primary source, somehow, for something. Newspapers have lost primacy in many areas, but they still have some primacy, mainly on local issued. They have to keep that. They are still expensive to distribute. It's not a good business plan to charge somewhere for something you give away elsewhere. There is a future for newspapers in places with a sense of community. The business is not as good as it was 50 years ago, but it's still strong. You must cover local issues well. Omaha and Buffalo have strong senses of community. We may buy more newspapers.

MUNGER: Bill Gates ruined much of our encyclopedia investment, but it still makes a profit.

BUFFETT: We may still buy papers in places with a strong sense of community.

GALLANT: Are there other sectors where technology could change your business prospects?

BUFFETT: isn't going to affect Nebraska Furniture Mart. Maybe other businesses, but not the Mart. GEICO does a lot of business online. Amazon has lots of happy customers, and that's a big competitive advantage.

MUNGER: The Internet is not just slightly terrible, but really terrible for most retailers.

Q: Leverage and the Berkshire model?

MUNGER: Our model is very difficult to duplicate.

BUFFETT: We've been very consistent. I wrote down 13 or 14 principles 30 years ago and can still follow them. Wall Street can't pressure us. It took a long time to get private business owners to see the value in selling to us. I don't see anyone who can compete.

QUICK: How do you vote as a shareholder on the equities you own within Berkshire?

BUFFETT: We generally avoid voting against management. We will when they make egregious mistakes, but we try to invest mainly where we like the maangement and where we don't want to change them. That would be like marrying someone, hoping to change them.

GELB: Do you want to get into primary commercial insurance?

BUFFETT: We've bought into medical malpractice insurance. If we can find a quality company in commercial lines, we would buy it.

Q: [Says he's Whitney Tilson] Is the price floor also a ceiling?

BUFFETT: It's not a ceiling, but it's also not truly a floor. 1.15x book price would not be a crazy price, either, but I don't think 1.1x book is a ceiling, either. Chaotic markets will happen from time to time.

SORKIN: Thoughts on Wal-Mart and the scandal in Mexico?

BUFFETT: They might get fined, but I don't see a change in their fundamental earnings structure. In any big business, you don't worry whether someone is doing something wrong, you worry whether it's big and whether it's material. You can do a lot to try to mitigate bad behavior, but you simply can't prevent it altogether.


Q: Using Charlie's method of inversion, if you won't tell us what to buy, will you tell us what you wouldn't buy?

BUFFETT: New issues. They're hyped, they come with a 7% commission, and the seller chooses when to enter teh market. It's almost impossible for that set of ingredients to make something the cheapest opportunity in the market. Just don't make big mistakes.

MUNGER: If something comes with a large commission, don't even read it. Look at things other smart people are buying.

GELB: Are you concerned about falling under the provisions of the Investment Company Act of 1940?

MUNGER: That's not going to happen.

BUFFETT: I read the act 20 times before I set up my partnership. We are a million miles away from those conditions now.

MUNGER: We need our financial heft in order to sustain our operating businesses.

Q: How long will it take for China to create a big, great company like Coca-Cola?

MUNGER: China has great companies already. Just no great brand names yet.

BUFFETT: China hasn't exported any fast food companies yet to the United States.

SORKIN: Are any other technology companies "inevitable"?

BUFFETT: Google and Apple are extraordinary companies. They have fantastic returns on capital and great strengths. I do not get to the level of conviction on them that would cause me to buy their stock, but I definitely wouldn't short them, either.

MUNGER: IBM is easier to understand than Google or Apple.

BUFFETT: We couldn't have predicted the change in Apple stock 5 or 10 years ago, and we can't forecast it 10 years into the future, either.

RANSOM: How do you manage political risk?

BUFFETT: BNSF runs itself. I've been to the headquarters once. I talk to the manager once every three or four months. In the railroad industry, economics are on our side. Trains have three times the efficiency of trucks. Railroads now carry 42% of inter-city freight. That's not going down. They have to be involved in politics due to their competitors and customers, but broadly speaking, it would be very dumb for the nation to get in the way of railroads doing what they need to invest. Railroads pay their own way.

MUNGER: Doubling the freight capacity of the railroads by raising tunnel heights and increasing bridge capacities was enormously helpful. Our main challenges aren't political.

BUFFETT: Railroads are just fundamentally a good way to move heavy things.

Q: [no question from section 4]

LOOMIS: Is the comparison between Berkshire's book value and the S&P 500 fair?

BUFFETT: It actually puts us at a disadvantage. We would look 35% better if measured on price, not book value.

Q: How do you coordinate risk management across business segments?

BUFFETT: We don't coordinate anything deliberately across segments. Any gains we would make from forcing coordination among our companies would cost us in terms of goodwill with management, which needs to feel it has complete control over its own operations.

Q: Forest resources companies look strong and could complement other Berkshire companies. Are they on your radar?

BUFFETT: We don't think about how one subsidiary might affect or benefit another. We haven't seen any forest-products companies that were attractive enough yet.

MUNGER: Most forest-product companies are pass-through entities. That puts us at a disadvantage, since we pay corporate taxes.

QUICK: How do you measure risk?

BUFFETT: It makes me nervous to see someone who measures risk in "three-sigma" terms.

MUNGER: It's horrible.

BUFFETT: We look all the time for the worst-case scenario and then build in a magin of safety. I'm not interested in explaining to my family members who might have 80% or 90% of their net worth in this company why I took an excessive risk. It's our job to look for worst-case scenarios and insure against them. You can't calibrate risk with advanced mathematical computations. Your returns as shareholders are probably penalized 99 years out of 100 due to our excess conservatism, but one year out of 100, we will survive when others won't.

MUNGER: Very smart people make very bad decisions with math because, to the man with a hammer, everything looks like a nail.

BUFFETT: My original art budget was $7 for photocopies of a financial history magazine illustrating the Panic of 1901.

MUNGER: Risk management has improved, but it's still very imprecise. We roll our eyes at one another when risk-control people start talking.

GELB: What's going to replace your investment in Swiss Re when it expires this year?

BUFFETT: We don't do business based on what's expiring. The Swiss Re expiration is a non-event in terms of any future strategy. Money coming in doesn't change the independence of our future decisions.

MUNGER: We're very charitable about losing insurance volume if it doesn't pay to write it new.

Q: What are the risks of Fannie Mae and Freddie Mac?

BUFFETT: They're a mess. We haven't reached an agreement yet as a country about how to fix them. There is no certainty that government guarantees actually reduce risk in the mortgage market. Serving a pro-housing mission and a pro-profit mission at the same time came into giving us trouble.

MUNGER: Canada's banking system was sounder and more decent on housing. In the US, the government participated in the folly. It was disgraceful. A big mistake. It's the duty of government to step on crazy booms, using sound policy. But once we were into it, the government had only one choice: to nationalize Freddie and Fannie.

BUFFETT: Congress and the Fed were both complicit. "We have more problems when Charlie wins an argument, but it's more fun."

SORKIN: How are you compensating Weschler and Combs?

BUFFETT: We care more about their process than about their one-year results. These two are perfect. They each get a $1 million annual salary plus 10% of the amount by which they beat the S&P 500 index, on a rolling three-year basis. The bonus will be 80% from their own efforts and 20% from their partner's performance. That way, they're encouraged to share with one another, not compete. They each had $1.75 billion to manage at yearend, and we added $1 billion to each portfolio on March 31. I have asked them only to tell me the names of new purchases, just to ensure that I don't have any insider information on those potential investee companies that would get us into legal trouble. Their universe of investments is much, much larger than mine since their portfolios are much smaller. Todd substantially outperformed the S&P index.

MUNGER: 90% of the investment-management industry would starve under our compensation formula. Each of these men could make much more money elsewhere, but at a far worse quality of life.

RANSOM: GEICO's combined ratio was over 100 last year. Why?

BUFFETT: We were statutorily forced to put extra reserves aside for Florida. It was a one-time-only event. In the first quarter of this year, the combined ratio was 91. The company is doing well on every metric.

Q: What data do you use to evaluate environmental and financial sustainability?

BUFFETT: Everything we can. BNSF just has good fundamental dynamics.

Q: How do you motivate employees?

BUFFETT: We ask what motivates us, even though we don't need the money ourselves. We get to "paint our own painting every day." Doing that with other people involved is more fun. We also like applause. If it works for us, why wouldn't it work for others? Compensation is rarely ever a problem. I can't push passion into a person. I just have to make sure they don't face a structure that takes it away.

MUNGER: Every one of our companies is different, so every one has a different compensation structure.

BUFFETT: In every case, we try to make sure compensation comes from performance.

MUNGER: We ignore compensation consultants. For them, prostitution would be a step up.

Q: What would it take to get America's economy growing at 4%?

MUNGER: A lot.

BUFFETT: If the population grows at 1% a year, and the GDP grows by 2.5% a year, then GDP per capita would quadruple every century. 2.5% may be a slow rate of growth for getting out of a slump, but it's huge over the course of a lifetime. It's up 6:1 over when I was born. Our country is not a mess. Our politics may be a mess, but our output is terrific.

MUNGER: We have a very mature economy, a big social-safety net, and major competition from abroad. I expect 1% real per-capita GDP growth over the next 20 years.

BUFFETT: That rate would make each generation 25% better-off than their parents.

Q: Would you donate to a super-PAC?

BUFFETT: No. I wish the Citizens United decision had never happened. The idea of super-PACs is wrong. We have enough of a push towards plutocracy; we don't need to make it worse.

MUNGER: I think we got pretty good candidates for President this year, considering the process.

Q: [Identified himself as Glenn Tongue] Why is the price-to-book value of the company declining?

MUNGER: The market doeesn't do what you want, when you want it. If the short-term orientation turns you on, then you're probably not welcome in this room. The margin of safety in buying Berkshire shares has grown.

Q: Why won't you distribute a dividend?

BUFFETT: If I can create more than one dollar in net present value for every dollar coming in, we're going to keep it. If you want cash, you're better-off selling shares than asking us to pay a dividend. The last few years have been better than anticipated for opportunities to expand our capital investments.

MUNGER: MidAmerican could have the opportunity to spend $100 billion in ten to twenty years, at a very high rate of return. You can see why we don't get excited about dividends. We'll think about it when we're older.

Q: How would things be different if you were just starting out?

MUNGER: Berkshire has gained enormously as Warren has learned more.

Q: How do you minimize mistakes?

BUFFETT: We always look for the worst-case scenarios.

MUNGER: Learning from other people's mistakes is much more pleasant.

BUFFETT: I'm absorbed by reading about financial disasters. Many mistakes are the result of not understanding how people behave.

Q: How do you build barriers to entry in the markets where you have businesses?

MUNGER: We buy barriers. Building them is tough.

BUFFETT: If you gave me $10, $20, $30 billion to knock off Coca-Cola, I couldn't do it.

MUNGER: Our great brands aren't anything we've created. We've bought them. If you're buying something at a huge discount to its replacement value and it's hard to replace, you have a big advantage. One competitor is enough to ruin a business running on small margins.

Q: What's the market for BYD's electric cars?

MUNGER: It's a very interesting startup.

BUFFETT: What percentage of cars in 2030 will be electric?

MUNGER: Not many. Subsidies would help.

Q: How do you value insurance businesses?

BUFFETT: The economic value of an insurance business comes from using float as a low-cost source of funds. GEICO will grow and have an underwriting profit, and have growing float "as far as the eye can see". It's the low-cost producer in its market. Ajit's business is very different. He has to be smart on each deal. You can't look up the probabilities in a book. Over time, you learn whether you have the right person evaluating the risks.

MUNGER: We're in a low-return environment. We used to be able to produce 20% to 30% returns on float. I'm not sure if we will see that again.

BUFFETT: Our earnings power is being depressed by Ben Bernanke, probably with good reason.

Q: How would energy independence affect the current-accounts deficit?

BUFFETT: Our picture has changed a lot over the last three or four years. We were an oil exporter in the past. Maybe we should've held onto our reserves and used Saudi oil instead.

MUNGER: That would have been much better. The single most precious resource in America is our hydrocarbon reserves. I'm a puritan: Suffer now to get benefits later...because that's how adults behave. We should be using other people's reserves if they are willing to sell them. Energy independence is a stupid idea. If we'd been energy-independent long ago, we would have zero left today.

BUFFETT: This is Charlie's version of saving sex for old age.

MUNGER: We can still use the energy when we're old.

Q: What do you think of pay abuse at Liberty Mutual?

MUNGER: Mutual companies are rarely abused like this.

BUFFETT: The tax code influences how this goes. There may be forces that lead democracy toward plutocracy, so some remedies may be in order.

Q: Are you concerned about sovereign debt?

BUFFETT: The world has seen many examples of sovereign-debt default. You see a big reallocation of wealth when it happens. It doesn't go away; it gets reallocated. I would much prefer a world that gets its fiscal house in order, but the counterargument is that governments could make things much worse by contracting spending during a recession. Low interest rates are the equivalent of a massive fiscal stimulus. That will have to change soon. We would obviously avoid the medium- and long-term government bonds of any country right now. We have to get spending down to 21% of GDP, and revenues up to 19%. But that requires both parties working together. Neither one wants to compromise first for fear of looking weak.

MUNGER: Everyone wants St. Augustine's policy: Lord, give me virtuous fiscal policy, but not quite yet. It's way more valuable to spend on things that will last, not just dumping money from trains. I would massively invest in infrastructure, but we also need more sacrifice, patriotism, and civility in our politics.

Q: What is your ideal corporate tax rate?

BUFFETT: Last year, the rate was 35%, but the actual average rate paid was about 13%. Corporate profits, balance sheets, and liquidity are not the problem in the economy. We are spending money where we see opportunity. Tax rates aren't the problem. They were much higher in the past. The tapeworm on American industry is medical-care costs, not really taxes. Both parties probably agree that we need a lower nominal rate, but one that is applied more evenly.

MUNGER: A value-added tax is coming someday, and it probably should. It varies less than income taxes and matches human nature better, since it takes the money off the top.