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In it, we tell you everything I'd want to know if our positions were reversed. If I had 100% of my net worth in the stock and had been on a desert island for a year, it has everything I'd want to know. We don't leave anything out. You could drown people in information that doesn't make much difference. We explain it in the way we think about it. It's the report I would make to Charlie or he'd make to me if one of us were running the business and the other were inactive.

How to Value Berkshire I'd think about what's there, what are they trying to do, what's it worth if they don't succeed in deploying additional capital, and what it's worth if they do. What are the resources available to keep adding to the collection of businesses? I think you'll find the information [in the annual report] that you need to evaluate Berkshire. Don't take it out to 4 decimal places. If Charlie and I had to write down a number, it would be different but in the same ballpark. What Berkshire will be worth 10 years from now will depend on earnings, the quality of those earnings and the liquid assets we have. We keep working on it, but we're so big. There's no way in the world we can replicate the past, but hopefully we do a reasonable job.

Munger: Quickly get rid of the no-brainer decisions. Just go through the cash and investments, which are easy to value. The insurance operation is very interesting and look at the way the cash is deployed.

While we don't like having excess cash, we like doing dumb deals even less because we're stuck with them forever. You're right that we should be uncomfortable that we have this cash, but [the alternative of doing bad deals is far worse].

The calls we want to get are from people who care about their business, who for tax or family-ownership reasons want to sell to us. They're looking to change the ownership structure, not the operating personality and culture of the company they care deeply about.

Munger: The interesting thing about it to me is the mindset. With all these "helpers" running around, they talk about doing deals. We talk about welcoming partners. The guy doing deals, he wants to do a deal and then unwind it in the near future. It's totally opposite for us. We like to build lasting relationships. I think our system will work better in the long term than flipping deals. I think there are so many of them [helpers] that they'll get in each other's way. I don't think they'll make enough money to meet their expectations, by flipping, flipping, flipping. Buffett: By charging fees, fees, fees. [Laughter] Munger: Warren talked to guy at an investment bank and asked how they made their money. He said, "Off the top, off the bottom, off both sides and in the middle."

They invariably try to sell it quickly to a strategic buyer, which is another way of saying someone who pays too much. Anytime someone calls me and says we'd be a logical strategic buyer, I hang up the phone faster than Charlie would.

We're a one-of-a-kind place for certain owners. They have a problem to solve and only we can offer a good home [for their business]. - he made a niche for himself.

In our shareholder letter and in this meeting, [we try to make clear what our culture is]. We want managers to join us who believe in what we do and make a lifetime commitment to join us. Once they join us, we want to act consistently and be consistent. They see that it works. There are plenty of people who don't believe in our culture and they don't join us. It would be bad to have a mismatch. The nice thing about it is that our culture is so well defined that there are rarely mismatches.

We don't train executives, we find them. If a mountain stands up like Everest, you don't have to be a genius to figure out that it's a high mountain.

Our shareholders are long-term and loyal owners. We have the most honest-to-god attitude of ownership of any public company. People buy it to own it.

The motivation for buying back stock used to be just because companies thought their shares were cheap. Thirty or forty years ago, it was very fertile to invest in companies that were buying back their stock. The most extreme case was Teledyne - we made some money investing there. But that's being swamped today by companies doing it because it's in fashion or to prop up the stock. The SEC has rules to prevent propping up the stock on a daily basis [but companies still try to do it]. We wouldn't do it for those reasons.

I thought we'd have economies of scale, but if anything we've had diseconomies of scale. I could give you reasons, but Rich Santulli knows the business and is addressing it. He works 16 hours a day. There is no one I have greater confidence in to fix this business. High fuel costs are a pass-through but affect the business. I think it'll be profitable before long, but I've been wrong so far.

Buffett: We are best at evaluating businesses where we can come to a judgment that they will look a lot like they do now in five years. The businesses will change, but the fundamentals won't. Iscar will be better - maybe a lot bigger - in five years, but the fundamentals will be the same.

Charlie says we have three boxes: In, Out and Too Hard. You don't have to do everything well. At the Olympics, if you run the 100 meters well, you don't have to do the shot put.

Tom Watson [the founder of IBM] said, "I'm no genius. I'm smart in spots and I stay around those spots."

Munger: A foreign correspondent, after talking to me for a while, once said: "You don't seem smart enough to be so good at what you're doing. Do you have an explanation?" [Laughter] Buffett: Was he referring to me or you? [Laughter] Munger: I said, "We know the edge of our competency better than most." That's a very worthwhile thing. It's not a competency if you don't know the edge of it.

You didn't have to have a high IQ or a lot of investment smarts to buy junk bonds in 2002, or certain other things after Long-Term Capital Management blew up. You just had to have the courage of your convictions and the willingness to act when everyone else was terrified and paralyzed. The lesson of following logic rather than emotion is obvious, but some people can follow it and some can't.

How Buffett Would Manage $1 Million Today We formed our first partnership 50 years and two days ago, on May 4, 1956, with $105,000. If we were starting again, Charlie would say we shouldn't be doing this, but if we were, we'd be investing in securities around the world. Charlie would say we couldn't find 20, but we don't need 20 - we only need a few that can pay off very big. We'd also be buying [stocks in] smaller companies. If we were planning to buy [entire] businesses, we'd have a tough time. We'd have no reputation and only $1 million. Charlie started out in real-estate development because with only a little capital, brain power and energy, you could magnify the returns in real estate unlike in other sectors. I'd just do it one foot in front of the other over time. But the basic principles wouldn't be different. If I'd been running a little partnership three years ago, I'd have started out 100% in Korea. Munger: You should find something to invest in and then compare everything else against that. That's your opportunity cost. That's what you learn in freshman economics, even if it hasn't made it into modern portfolio theory. That's why modern portfolio theory is so asinine.

Charlie started out in real-estate development because with only a little capital, brain power and energy, you could magnify the returns in real estate unlike in other sectors.

I'd just do it one foot in front of the other over time.

Buffett: Ben Graham said you're neither right nor wrong if you're investing with the crowd - you're right if your facts and reasoning are right. Once you have the facts, you have to think about what they mean. You don't take a survey.

You should focus on what's important and knowable. There are many things that are important but now knowable, like [whether there will be] a nuclear attack tomorrow. You can't focus on those.

As Ben Graham said in chapter 8 of The Intelligent Investor: The market is there to serve you, not instruct you. If it does something silly, it gives you a chance to do something. It just sets prices. If it doesn't give you an opportunity, go play bridge and come back the next day. And the nice thing is that the prices will be different.

At that time, there was [an unprecedented] 30 basis point spread between on- versus off-the-run 30-year Treasuries. All you have to do [in such situations] is make sure you can play out your hand under all circumstances. If you can and you have the right facts - and you let the market serve rather than instruct you - you can't miss.

Munger: It would be one of the most irritating experiences in the world to do a lot of work to uncover a fraud and then watch it go from X to 3X and watch the crooks happily partying with your money while you're meeting margin calls. Why would you want to go within hailing distance of that?

Buffett: I don't think there's a bubble in agricultural commodities like wheat, corn and soybeans. But in metals and oil there's been a terrific [price] move. It's like most trends: At the beginning, it's driven by fundamentals, then speculation takes over. With copper there was a little shortage and then people got worried [and then the price skyrocketed]. As the old saying goes, "What the wise man does in the beginning, fools do in the end." With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant. Once a price history develops and people hear that their neighbor made a lot of money on something, envy sets in and that impulse takes over. We're seeing that in commodities - and housing as well. Orgies tend to be wildest toward the end. But you never know when it will end.

It's like Cinderella at the ball. At the start of the party, the punch is flowing and everything's going well, but you know that at midnight everything's going to turn back to pumpkins and mice. But you look around and say, 'one more dance,' and so does everyone else. Everyone thinks they'll get out right at midnight. This is what's happening with copper today, Internet stocks in 1999 and uranium stocks in the 1950s. The party does get to be more fun - and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice.

Munger: We didn't get where we are by owning non-interest-bearing commodities. It's a good habit to trumpet your failures and be quiet about your successes. Buffett: Well, we have a lot of to trumpet then! [Laughter]

I read five newspapers every day. Charlie does too.

But we have a method of coping: we just put it in the "too hard" basket. If something is too hard, we move on to something that's not too hard. What could be more simple?

Investing Based on Big Trends Buffett: We don't play big trends like demographic trends. They just don't mean that much. There's too much money to be made year to year than worry about trends that take ten years to play out. I can't think of one investment we've ever made based on a macro or demographic trend. Munger: Not only that, but we've missed the biggest commodity boom in history - and we'll continue to miss things like this! Buffett: But we'll search for new ways to fail! [Laughter] -

Charlie and I do not know enough about the [ethanol production] business to evaluate it. We've been approached many times and they're quite popular, but trying to figure out the economics of an ethanol plant will depend on government policy and a lot of other variables we're not good at predicting. It's also a very hot area for investors right now, and our general experience is that we don't participate in things that are hot and easy to raise money for.

Ethanol could prove to be an exception, but I'm not sure how you gain a significant competitive advantage with any particular ethanol plant.

Munger: My attitude is even more hostile than Warren's. I know just enough about thermodynamics to understand that if it takes too much fossil-fuel energy to create ethanol, that's a very stupid way to solve an energy problem. [

He trusted you, Warren, and I think that mattered.

If you buy a house for $300,000 and take a $270,000 mortgage, you're going to stay there and continue to make your mortgage payments, even if the market value of the house falls (unless something bad happens to you like losing your job). But if you have investors and speculators holding the properties - effectively day traders in the condo market - that kind a speculation can produce a market that can move in a big way. First the buying and selling stops and then the market reopens.

Buffett: In the boardroom, it's partly a business situation and partly a social situation. The key is: Do they think like owners and, even if they do, do they understand enough about business that their decisions are any good? We've been on many boards and I've never seen any difference in behavior based on the nature of the votes that got them there. But I think you'd be blown away by the difference in savviness and whether people think like owners.

But you can't pay 2 and 20 [2% annual management fee and 20% of the profits, standard for private-equity and hedge funds

The whole concept of the house advantage is an interesting one in modern money management. The terms of the managers of the private partnerships look a lot like the take of the croupier at Monte Carlo, only greater. Buffett: Is there anyone we've forgotten to offend? [Laughter]

Buffett: That's a terrific question. If you run a copper company and it's at $3.50/lb., you could be the village idiot and coin money. But if it's at 80-90 cents/lb., which is what it's been for most of my life, there can be tough times. If we owned a copper-mining company in its entirely, we'd base compensation on costs of production, which management has control over, rather than things based on market prices, which they don't control. Costs won't fluctuate a lot. Compensation should tie to what is under the control of management. Try to understand what management can have impact on.

If oil is $70 per barrel, I don't think management has anything to do with it - in fact, they denied they did in front of Congress. I'd measure the cost of finding new reserves over time - the ability to discover and extract oil at low unit costs. Some firms are much better at this than others.

It's not rocket science. But a complicated, confusing system works to the advantage of people who have their hand on the switch.

Incidentally, the SEC wants more transparency in pay, which is a good idea, but it can become a shopping list. One CEO sees the other getting his haircuts paid for and he wants it too…

Munger: I think much of [how bankruptcy is handled] is pretty horrible. It's a situation where courts themselves have gone into the business of bidding to attract bankruptcy proceedings. They've found that if they develop a process in which they over-pay people (lawyers, etc.), they can attract the most cases. It's so upsetting to watch that I don't follow it as much as I should. I'm an old man and I don't like to have an upset stomach.

It is certainly true that in the last 5 to 10 years, the disparity in income has widened significantly and the tax breaks for the wealthy have been extraordinary. I've said in the past that most of the members of the Forbes 400, myself included, pay a lower percentage of their income in taxes than their receptionist. This wasn't true decades ago and it's wrong in a rich society. In 2004, my tax rate was the lowest of the 15 people in my office - and I'm not taking advantage of any tax shelters - and it's even lower in 2005. That's crazy. I don't think the American people understand that, and if they did, they wouldn't be very happy about it. I don't think the average American has participated in the growing wealth of the country over the past 10 years.

Philanthropy Buffett: You have to pick the things that are important to you. For many people, it's their church or their school or schools generally. To some extent, you should give to whatever gives you the most satisfaction. I like to think of things that are important but don't have natural funding constituencies, but for most people there's nothing wrong with giving to things that give them satisfaction. You don't have to be as objective about that as you are when picking securities. I'd go where my gut told me.

Our country can easily handle the Social Security issue. It astounds me that a government running a $300-400 billion deficit now is worried about a $100 billion deficit decades from now. We produce more every year as we go along. There's always a debate over how to split the pie, but it's a huge and growing pie so we can take care of older people.

What you see is what you'll continue to get.