[0:00]
QuestionerZone 2 now, we'll, I don't know where zone 2 is, but we'll... Do you feel basically the same about your investment in Guinness now as when you made the investment in terms of the company?
WarrenWell, I wouldn't like to comment on anything that we own in terms of how we rate them as desirability or anything. I mean, whether it's Coke or Gillette or anything, we made decisions at a given time at a given price, which you can figure out by looking at our purchases, but we may be buying or selling, any of those securities right as we talk, and we simply don't think it's in the interest of Berkshire shareholders as a group to be talking about things that we could be buying or selling.
QuestionerOkay. Hi, David Winters from Mountain Lakes, New Jersey. I'm just wondering, World Books had a tough time lately, and I'm wondering if there's things you're doing to try to improve that, and also the Buffalo News has been fabulous, and I'm kind of wondering what's driving the Buffalo News?
WarrenBuffalo News is doing what?
QuestionerHello news is doing what?
WarrenFabulously.
QuestionerYeah, well, right.
WarrenWell, I would say you've got to get credit to Stan Lipsy. I'm not sure where the stands here right now, but who's been running the news. World Book, in terms of unit sales, as we put in the report, have fallen off significantly the last few years. It's actually surprising in a sense how well the profits have held up in because they've done a good job and very good job in that respect. And as we put in the report, we don't know the answer precisely. We are, Ralph Shea has taken some actions, is taking some actions that he thinks will improve the operations. Ralph's record as a manager is absolutely at the top of the list. I mean, I wrote about it in the 1992 report. In 1993, Ralph did even better. I mean, it was fabulous. I think probably may have been 110 or so million pre-tax on 90-some million of average equity capital or something to sort. So it's a fabulous record. record. But Encyclopedia Britannic, as you probably know, ran at a loss last year. The encyclopedia business has been very, has been poor. Could be due to electronic competition, could be due to recruiting problems for salespeople. Obviously can be a combination of many factors. If we knew the answer, we'd have, you wouldn't be seeing those figures right now. But it is a top item of attention for Ralph. He takes anything that's not performing as well as before very seriously.
[2:40]
WarrenAnd we will see what happens. But I don't have a prediction on it. I wish I knew the answer. I don't see any variables to in any intelligent way tell you. We put in the report the best we could do on that. The profitability, like I say, has been pretty good. has been pretty good, but obviously current trends of new sales will catch up with us at some point unless we boost unit sales. I don't think our market share, if you look at print encyclopedias has fallen. I can't be sure of that, but I think that's probably true. But there are an awful lot of encyclopedias going out there as part of a bundled product with computer sales. How are we going to do this? We've got three now. Okay. I'll let you hand the mic to whomever.
QuestionerYeah, you? Lee again from Palo Alto. By Omaha standards, you are a relatively young man. And every year, you point out that Berkshire size now precludes you from making the great relatively small trades which made your reputation. How much thought have you given to breaking up Berkshire into smaller entities? How much what? How much thought have you given? given into breaking up Berkshire into smaller entities, which would allow you to make those nice, small, wonderful trades that you've made from the beginning?
WarrenIt wouldn't. It wouldn't do any good to breaking smaller entities because it still owned, you know, we'd still have 10 billion plus of capital to be responsible for wherever it would be. So we could distribute it out to the shareholders and let them make their own decisions, obviously. any time we thought that we weren't going to get more than a dollar of value per dollar retained, that obviously would be the course to follow. But there's no magic to creating multiple little, I mean, we could call Berkshire 2, Berkshire 3, Berkshire 4, but you still got the problem. There's $10 billion to invest and it doesn't really solve anything. Charlie, do you have any thoughts on that?
CharlieNo, the Berkshire is incredibly decentralized in the in terms of power and decisions resting in the operating divisions. In terms of the marketable security, securities, it's incredibly centralized. And so far, we have not had any big penalty from not being able to do the things that we did when we were young. Eventually, we will reach the penalty.
WarrenYeah, I think we're, there's no question we could earn higher percentage returns working with $100,000, though, than $10 billion.
[5:49]
WarrenBut yeah. But it hasn't hurt us as much as we thought it would as size has increased. But your universal opportunity shrinks. But it shrinks no matter. I mean, you can set it up in 20 bank accounts or one bank account, but the universe still has to fit the $10 billion in aggregate. Now, how are we doing this? Do we have another zone over there?
OtherNo.
QuestionerMichael Bunyaner, New York City. Two questions. One, last year you discussed in your annual world. report your investment in General Dynamics, and you also gave your proxy to the company and its management. This year, it appears you have sold the stock. This year what? This year, it appears that you have sold the stock in General Dynamics. What has changed that you sold 20% of your stake? This is clincher number one, and I have number two.
WarrenProbably inappropriate to be talking about what we're buying or selling. except to the extent that we have to make a public announcement, which on something like General Dynamics, we've got 13G requirements if we change by more than 5%, and we also have, as long as we own more than 10%, we have monthly reporting requirements under Form 4. We think the management of General Dynamics has done an absolutely sensational job. Obviously, also, it isn't the kind of business basically that we have a 20-year view on or something of the sort. So the shareholders of General Dynamics have been extraordinarily well served by the management of that company. And we're thankful because we've prospered accordingly.
QuestionerBut should I take from this comment that you have changed your view about the business itself?
WarrenPardon me?
QuestionerShould I take from your comment that you have changed your view about the business itself?
WarrenNo. I think you can take my comments and say just what I've said.
QuestionerOkay. No. Question number two. Could you-
WarrenI think we want to get people a chance around the room. And then in the zone you're in, when a second question comes along, we'll be fine. But we want to get as many people in this hour as we can because this is the hard core here. Zone 1?
QuestionerIt appeared to me that in 1993, the variation between the stock price for the high and the low was much greater in years than years. in the past. Would you mind commenting on that?
WarrenWell, there was more volatility in the price of Berkshire last year. And as I put in the annual report, the stock overperformed the business last year. Now, over any 10 or 20 or 30 year history,
[8:39]
Warrenevery year the stock is going to perform a little differently, at least, in the business. I mean, it may slightly underperform or slightly overperform. We would prefer that those variations be as small as possible. But there was more variability last year than historically has been the case, although we've had one or two other years, we've had a few years like that. We, our best way to handle that is to give all the information we can to shareholders and prospective shareholders and follow policies that we think will induce the investment oriented with long time horizons to join us and not to encourage other people. But occasionally, you know, we can't guarantee that result. one of the things was interesting to me. I don't know whether it was three months ago or when, but I happened to be talking to the specialist, terrific specialist, Jimmy McGuire. He had to leave, but he was here earlier in the session. And I think at the time the stock was around 16,000 or something like that. And he had some rather significant stop-loss orders on the books at 15-5 or thereabouts, involving some hundreds of shares. And that, to me, it was a significant that, you know, we have some people that, in my view, are not really the kind of owners that we would like to attract, because why somebody wants to put an order to sell something for 15,500 that they don't want to sell it 16,000 is beyond me. But the idea of people using stop loss orders with Berkshire obviously tells me that we've got some people in that that are using it as a trading vehicle of some sort or have some totally non-investment type calculations in their mind. I don't think we have very many of them. But obviously, if we have enough people like that, you will have a more volatile stock than if you have a whole bunch of people who look at it as something that they're going to hold for the rest of their life. And the stock did go down at that time and hit 15,500, and I think it was close to 300 shares, which is $4.5 million worth of stock. And somebody made a decision, apparently, or some small number of people, made a decision that they wanted to sell something at $15,000. $15,500 that they could have sold for $16,000. The lower it went, the better they liked it, apparently. I mean, the better they liked the sale. Which, you know, it's always struck me as like having a house that you like and you're living in,
[11:09]
Warrenand, you know, it's worth $100,000 and you tell your broker, you know, if anybody ever comes along and offers $90, you want to sell it. I mean, it doesn't make any sense for me. But it has, I would say that there has been some small, I think relatively small tendency for people to get, relatively few people, but because, get more interested in the price of the stock than in terms of, and thinking of it in terms of whether it's going to go up or down in the next six months than might formerly have been in the case. I think we're unusually well blessed in that respect in that we've got people who basically want to own for a very long time. But to the extent that you get people who were owning it because they think the stock market is going to go up or something of that sort is going to happen, that is not good news from our standpoint and it will increase the volatility in it. We will do not. nothing to encourage that.
OtherZone 2? Yes, Mr. Buffett, Steve Lang from Toronto.
QuestionerI was just curious about when you were saying that one of the best things that could happen to shareholders is the market goes down and you're able to buy good businesses at foolish prices, and then a little later on you were saying that we could judge your ability to do what it is that you feel you should be doing by how much cash you have in the account at any given point in time. By what? By what? that you have in the account. In other words, I guess what you feel you're supposed to be doing is investing the cash in good businesses. So I'm just wondering about that kind of dichotomy. Where does the cash come from if the market does go down if you've been successful in your first ability? Would that be from the cash flow on the operations of the business, from the float? Is that? So really the success of the company then is to some degree the fact that you're able to dollar cost average into the market on an ongoing basis? Is that right?
WarrenWell, it isn't that precise, but A, we do generate cash. in the considerable amounts so that we will not husband cash simply because we think the market's going to go down or to buy something. But obviously as cash comes in, we're always looking for things to do, and the cheaper that the market is generally, the more likely it is that we will find something that we understand and that we like and that the price will be attractive and that we will do. But it isn't like we could change around the whole portfolio then because that doesn't gain us anything.
[13:30]
Warrengain us anything. I mean, we'd be selling things at lower prices to buy things at lower prices. But to the extent that we have net cash coming in, which we do and which we will have, on balance, we are, you know, we are adding to our businesses at more attractive prices than would be the other case. And it's no prediction on any given company, I mean, whether it's Gillette or Coke, or it might be something we already own, it might be something we don't own, but we welcome the chance to buy We're not wishing it on anybody, but if you asked us next month whether Berkshire would be better off if the whole stock market were down 50 percent or where it is now, we would be better off if it was down 50 percent, whether we had any cash on hand now or not, because we would be generating cash to buy things.
OtherZone 3? Byron Randstale from Raleigh, North Carolina. Thanks for your hospitality this weekend.
WarrenWell, we thank you for coming too.
QuestionerMy question concerns Solomon Inc., and more specifically Solomon Brothers. I know that you want the Board of Directors, I think, from 87 to the current time, very much interested in compensation day, and maybe on the Compensation Committee. Between 1987 and 1992, Solomon's financial results were quite dismal, in a very lumpy way, but overall quite dismal. In your opinion, if the compensation had been rational during this time, Would Solomon have shown results that would make it a quite decent business? If the past compensation had been more rational decisions had been more rational, 87 to the current time, would Solomon have done better? Is that it?
WarrenYes, sir. Well, I would, yeah, I would, I would say that if the present people and the present compensation philosophy, which, allows for very large payments for very large results. I think the company would have done better. You're going to see very big numbers paid in Wall Street. That's the nature of it. The trick is to pay them only when you're getting very big results for the owners. I mean, there's no way you're going to pay numbers that look like numbers in other industries and get great results for owners. But if you pay these big numbers, I think you should be getting be getting very good results for owners. And the old system was not, I mean, it wasn't totally off the mark on that, but it was far from an ideal system in my view.
OtherZone 1? Boy and I have one question. Placier you were using Coca-Cola puts as a way to increase income,
[16:39]
Warrenand conversely if they were excise, as a way of increasing your position. Do you still use puts in this type on investments you wish they had to? Five million shares, as I remember, of Coke. Sometime, early fall or there, but I don't remember exactly the last year. And the puts, I think the premium was around $7.5 million, and they were priced around 35. We have not done that very often. And we're unlike the puts. And we're unlikely to do very much of it. For one thing, there are position limits on puts which don't apply to us, but they apply to the brokers for which we do them. And those position limits were not clear before that, but we could probably write puts on that same amount by doing it through a bunch of different brokers. It's not something we're really very like to do. I was happy to do it. And in that particular case, we made 7.5 million. dollars, but we're better off probably. If we like something well enough to write a put on it, we're probably better off buying the security itself. And particularly, since we can't do it in the kind of quantities that really would make it meaningful to Berkshire. There are securities I would not mind writing puts for 10 million shares or something, but that probably, it's probably allowable for us to us. probably allowable for us to do it. It's not allowable. We'd probably have to do it through multiple brokers to get the job done. And on balance, I don't think it's as useful a way to spend my time as just looking for securities to buy outright.
WarrenCharlie, do you have anything?
CharlieNo.
QuestionerZone 2. Mr. Buffett, I'm from West Point. My name is Rogers. A couple of months ago, there were stories in the World Herald that Berkett, Hathaway had taken a large position in Philip Morris and UST. But in your annual report, I don't see anything about that. Can you comment?
WarrenYeah, I would say in the last two years, maybe, I'm just approximating, I've probably seen reports in either the Wall Street Journal USA Today, maybe picked up by the Associated Press or in the Herald, but in papers of some significance, I've probably seen reports. stories that we were buying, maybe any one of 10 companies in aggregate over that period of time. I would say a significant majority were erroneous. We don't correct the erroneous ones because if we don't correct the erroneous ones, and if we correct the erroneous ones and don't say anything about the correct ones,
[19:53]
Warrenand in effect we're identifying the correct ones too. So we will never comment on those stories, no matter how ridiculous they are. And it's interesting because It's interesting because, you know, they keep getting printed. And frankly, from our standpoint, the fact that most of them are inaccurate is probably useful to us. We don't do anything to encourage it, but the fact that people are reading that we are buying A, B, C, or X, Y, Z when we aren't, you know, that's, I don't think people should be buying stocks because they're reading in the paper that we're buying something. But if they do, they may get cured of it at some point. the newspapers will even get cured of writing the stories when they don't know what the facts are. But it's something we live with, and we'll probably continue to live with. And I would say that based on history, if you read something about us buying or selling something, other than through reports we filed with the SEC or regulatory bodies, the chances are well over 50 percent. That I can tell you, based on history is correct. Well over 50 percent that it's wrong.
QuestionerZone 3? Do you expect that Burke-Chile would become one of the standard in poor 500 stocks or a Dow Jones stock.
WarrenWell, I think it's unlikely that ever becomes a Dow Jones stock. I don't know what the criteria are for the S&P 500, but I imagine there's some reason why we don't fit. I don't know whether they have questions about a number of shares outstanding or I've never checked with S&P. I wouldn't be surprised if we have the largest market count. the largest market capitalization of any company that isn't in the S&P, although I don't know that. But they may have some criteria, a variety, that preclude Berkshire being part of it. I've always thought to be very interesting for those of you who like to think about such things, that if we were part of the S&P 500 and enough people became indexed, so that 60% of the market was indexed, And if Charlie and I wouldn't sell, which we wouldn't, it'd be an interesting proposition as to how the index funds would ever get their 60% if they tried to replicate the S&P. It'd be, I don't know whether they have rules even about concentration of ownership. That same line of thinking might have applied to Walmart or some company, because just take the extreme example of a company that had 90% of its stock owned by one individual and 12% of the money in the market were indexed.
[22:39]
OtherAnd the 90% wouldn't sell it would bring back to the Northern Pacific corner or something at the sortment. In any of that, I don't think that's going to be a problem, and I don't think we are going to end up being in either index. Yeah, Zone 1.
QuestionerMr. Buffett, my name is Aaron Morris. I'm from California. What I wanted to know was how you think about how large a position you're willing to take in a given security, both in your case where you have new cash coming in that you can invest, and in a case of an investor where they have a fixed amount of capital, and they're trying to decide what's the most takes you put into security that they really love. that they really love?
WarrenWell, Charlie and I have, probably at our present size, we will never find anything that we get as much money into as we want. I think that's probably true, Shirley, if we really like it.
CharlieYeah, I think that's quite likely.
WarrenYeah. So we will probably never hit the limit. We would love to, we'd love to find something we felt that strongly about, and occasionally we do, but we won't get as much money into it as we would wish, or as if we were running. a million dollars of our own money or some number like that. So we are willing to put a lot of money into a single security. When I ran the partnership, the limit I got to was about 40 percent in a single stock. I think, Charlie, when you ran your partnership, you had more than 40 percent.
CharlieSure.
WarrenAnd we would do the same thing if we were running smaller partnerships or our own capital were smaller smaller and we were running that ourselves. Because now, we're not going to do that. going to do that unless we think we understand the business very well. And we think that the nature of the business, what we're paying for it, the people running it, and all of that lead up to virtually no risk. But you find those things occasionally. And we would put, assuming it were that much more attractive than the second, third, and fourth choices, we would put a big percentage of our net worth in it. We only advise you to do that. Well, probably don't advise you to do it at all, maybe, but we would only advise you to do it if you're doing it based on your own conclusions about your own ideas of value and something that you really feel you know enough to buy the whole business, if your funds were sufficient that was being offered to. You ought to really understand the business.
[25:11]
CharlieBut people do that all the time, incidentally, in private businesses, which have got terrible prospect. I mean, by dry cleaning establishments or filling stations or whatever, and they put very high franchises or some kind. They put a very high percentage of their net worth into something that business is very risky, basically. I mean, it, people put all their money in a farm, you know. It's a business. It's subject to all kinds of business risks. So it's not crazy if you understand the business well. And if the price is sufficiently attractive to put a very significant percentage of your net worth in. If you don't understand businesses, then you're better off diversifying and fairly widely diversifying.
QuestionerSir.
WarrenNo, go ahead.
QuestionerSir. Berkshire has a substantial shareholder who's father accumulated the original position. And when he died, he left a very large estate, practically all of which was in two securities, Berkshire and one other outstanding company. A bank was co-trustee, and the bank trust officer said, you've got to diversify this. And it was a very large estate. And the young man who was co-trustee with the bank said, well, he says, you know, if my father had believed the way you do, he might have been a trust officer in a bank instead of leaving this large estate. And that young man holds the brochure to this day, and I suppose the bank is still giving the same advice. Zone 2. Mr. Buffett, this is Chuck Peterson from Omaha. And I was just wondering if you could comment on the Coca-Cola company. Haven't really talked about it too much today in regards to what you foresee over the next five years earnings per share growth and where this growth is perhaps going to come from.
WarrenWas that the question about the growth of Coke?
QuestionerYeah.
WarrenYou really have to come to your own conclusion. Coca-Cola company writes, their end reports are extremely good. I mean, they're very informative. You know, my guess is that at least if you read a few of the reports, you absolutely know as much about the Coca-Cola company as I would. But in the end, you have to make your own decisions about growth, potential, profitability, potential, and all that. But the one thing I can assure you is that, you is that probably if you spend a relatively small amount of time on it, the facts that you will have available to you for making a decision on that question will be just as good, essentially, as the facts you get if you worked at the Coca-Cola company for 20 years,
[27:54]
Warrenor if you were a food and beverage analyst in Wall Street or anything of the sort. That's the kind of businesses we like to look at are things that we think we can understand that way. And they're also businesses that usually I think you could understand that way. could understand that way. But we don't like you to give you our answers. I mean, that that would not be a good idea.
OtherZone Free?
QuestionerDavid, I'm sorry, David Swab from Austin, Texas. I have a question pertaining to the convertible bonds that were outstanding for about four years. Any thoughts on if you're a teacher to grade, if that was a good deal, bad deal, how the money was applied compared to the cost of getting out? the cost of getting out of the bonds? Any thoughts?
OtherTry, what? Did you get there?
QuestionerYou want to know if you think in retrospect, your deal with the Lions was a good deal for Berkshire?
WarrenNo, I would say that if I knew everything at the time that we did the Lions deal, which was a convertible, Cheryl coupon, the Bencher, if I knew everything now, then that I know now, would we have done it? Probably pretty close. We had relatively few. We had relatively few bonds converted when we called, when we called them, and so that, it really wasn't a negative in that sense. But if we had more, we could have easily had a lot more converted, and that would not have been so good, obviously, if we'd ended up selling a lot of stock at $11,800 or whatever it was. It's very hard to measure exactly what we did with a $400 million or so that we took in at the time. So, money being fungible, fungible, separating that $400 million from other resources to measure what happened on the plus side from having the money is hard to do. But my guess is, if you could play the whole hand over again, it probably was maybe a tiny minus to have issued them. What do you think, Charlie?
CharlieCertainly close to a wash.
WarrenNow you can ask about U.S. Air, and that is one we would have been welded duck. And I might say Charlie had nothing to do with that decision. He didn't even know about it until like that. He didn't even know about it until I did it. And when he knew about it, hmm.
OtherZone 1.
QuestionerMr. Buffett, I'm Joe Sertivan from Toronto. With respect to Berkshire's non-permanent but large and therefore illiquid holdings, what is your strategy for managing market impact on sales, given the intense scrutiny that Berkshire is under by the market?
[30:44]
OtherI didn't get that. I'm not hearing that very well. Yeah, I don't know whether you're too close to the money. We're having trouble on that. Speak a little more slowly. Or maybe the monitor could repeat that. Would you repeat the question?
QuestionerOkay. Sorry. Just with respect to Berkshire's large, non-permanent holdings that are therefore illiquid, I'm just wondering what your strategy is for managing market impact when you do decide to sell portions of those holdings, given the intense scrutiny you're under?
WarrenYeah, the question about the things we might sell and what's going to happen to the market when we sell them. That depends, I mean, it can be a very significant impact. It can be a negligible impact. And it depends on market conditions. It depends on whether we might sell in a couple of large blocks to some institutions. It depends on, there could be a tender offer or something that sort we would sell through. So it's hard to measure, but it is a disadvantage. Size is a disadvantage. You're absolutely correct in the basic point, both in buying and in selling. And we don't know any way around that. We allow for it. in terms of what we expect, you know, the kind of possibilities we need to see. And we do, we sell so infrequently that it's, it's not a crusher of a negative point, but it's a negative we have that you do not. So on too?
QuestionerMy name is Anise Ripley. I'm from rural Virginia. Does Berkshire Hathaway, or any of its subsidiaries, have key man insurance on you and Mr. Munger?
WarrenDoes Berkshire have key man insurance on? Oh, no, no, no, we have no life insurance, to my knowledge on anyone except the maybe standard group life contracts people have. We have no key man insurance. It really doesn't, it wouldn't be material. I mean, if we have a market value of $18 billion or something like that, and if it really didn't, if it made a 1% difference, it'd be $180 million, and if it really didn't, if it made a 1% difference,000 basically the math of intelligently selling insurance is better than the math of intelligently buying insurance.
QuestionerZone 3. Mr. Buffett, I'm Barry Ziskin from Mesa, Arizona, a long-time admirer of yours. Question pertains to Guinness. I remember reading in a publication I greatly respect Outstanding Investor Digest by Henry Emerson, New York, that back in, I think it was 58 or 59, you made an investment in Cuba, decided never to make an investment outside the United States again at that time, have subsequently invested
[33:43]
Questionerin Guinness. I'm a fellow investor in Guinness and its sister company, Louis Vuitton, Moe Hennessy, for over five years, and I'm very happy with those investments, by the way. There's been a restructuring, as you know, of the Guinness LVMH relationship, where Guinness no longer owns 24% of LVMH, rather it owns only its distilling or, I should say, alcoholic beverage related businesses. Right, the Moe Hennessy part. The other parts of LVMH are showing better results these days, namely the Louis Vuitton luggage, as well as the Christian Dior perfume. They've also expanded into the newspaper businesses past year, business that you understand. Do you intend to look at the possibility, first of all, of participating in those businesses that you no longer own now with the restructured Guinness LVMH deal through some other form and the second question relates to the currency risk inherent in the Guinness investment having bought it at about a dollar 80 as you mentioned pound sterling now down to about a dollar forty-eight the the cost of hedging foreign currency through the FX has diminished through the combination of lower interest rates in the U.K and the higher interest rates most recently in the U.S. to just about zero. I take it we're all investors and companies, not speculators and currencies. So the second part of the question is, do you intend to do anything about the currency risk portion of that investment?
WarrenWell, LVMH, which as you mentioned, was 24% owned by Guinness, you know, that's one of thousands of securities that we could be a buyer or seller. So I really don't want to comment on LVMH's specific attractiveness or lack thereof. And Guinness, I think what Guinness did was quite likely. I mean, their interest in that operation was basically through the distribution advantages that it gave to Guinness's own brands around the world to be hooked up with Moet Hennessy and vice versa. So I think what they did was logical. You can – the question of the exchange rate and all of that – the exchange rate in terms of what they got – in the spirits business versus what they gave up in the luggage businesses and Christian Dior and a few things. You can form your own opinion on that. But I think the logic was sound. But in terms of whether we want to be an LVMH by itself, that's like any other security, which we really can't – we really can't answer. Second question related to –
[36:36]
WarrenHedging. Yeah, the hedging – We're doing an edge. The answer to that is we don't, and Coca-Cola, as I mentioned, gets 80 percent the earnings from a variety of currencies, the yen and the mark being two very important ones. They're going to be getting a very high percentage of five years from now, 10 years from now. They do certain currency transactions, but it's a practical matter. If you own Coca-Cola, you own a bunch of foreign bonds with coupons on them, denominated in local currencies that go on forever. Now, should you try and engage in currency swaps on all those coupons, you don't know what those coupons are yet because you don't know how much they're going to earn in Japan or Germany, but you do know it's going to go on for decades, and they're going to be very significant sums. Should you try and engage in a whole bunch of currency swamps to go on out and convert all that stream into dollars and we basically don't think it's worth it. We don't think our opinion on currencies is any good. We don't think – we think the market probably know – well, we know it knows as much of about it probably knows more about currencies, but we don't know – we do not know more than the market does about currency. So there are costs to hedging, and even though interest rate structures may cause the curve to look flat going out forward so that in effect there's no contango on it, there's still the cost – there are costs in it. Now it's a relatively efficient market so that they're not huge. But we see no reason to incur those costs with what we regard as a totally effective. 50-50 proposition, and it really doesn't go out that far anyway. I mean, we could do it for a couple of years. But if you take that – the way we look at businesses being the discounted flow of future cash out between now and judgment day, we can't really hedge that kind of a risk anyway. We could keep rolling hedges, but there's a cost to it that we don't want to incur. We don't – we wouldn't worry a whole lot about whether some portion of earnings, whether it's from Guinness, whether it's from Coke, whether it's from Gillette, are denominated in some mixture of marks and pounds and yen and dollars, or whether they're all in dollars. We'd slightly prefer it if we're all in dollars, but we don't lose sleep over the fact that it may be coming from a mix of currencies like that. We wouldn't like it in terms of, obviously, some very weak currencies.
[39:05]
QuestionerLawrence Grom in Mill Valley, California. On page 13 of the annual report, in talking about the insurance operation, You say that it possesses an intrinsic value that exceeds its book value by a large amount, larger, in fact, than is the case at any other Berkshire business. To refine an earlier question that was asked, could you tell me whether you mean that it is larger in, by a percentage or an absolute dollars, that is?
WarrenBy absolute dollars. That's what you're referring to.
QuestionerYeah, by absolute.
WarrenIt's very hard to stick a percentage figure on the insurance bill. because we have so much capital in there that, that, and then we have other businesses. I think that the, we've got businesses with a book value of, of, in the tens of millions that are worth in the many hundreds of millions. So you couldn't apply that to the insurance company base, but it's absolute dollars. But in terms of absolute dollars, we think the excess of intrinsic value over carrying value, at least I do, is substantially greater for the insurance business than any other business we own.
Warrenwe own. Charlie, do you have any thoughts on that?
CharlieThat's exactly right.
QuestionerJoe Little, Vancouver, Canada. Does the management succession issue for the top job at Coca-Cola concern you?
WarrenThe management picture, you do what with the?
QuestionerThe management succession issue over the next several years.
WarrenOh, yeah. At Coca-Cola?
QuestionerYeah.
WarrenI think any announcement from that would come from Coca-Cola. He said, do you like it? Does it concern you? Oh, I'm not concerned at all. No. Coca-Cola is very well managed.
OtherZone 3?
OtherYeah.
QuestionerChris Stavru from New York. According to the latest Solomon Brothers proxy, if Derek earns 30% on allocated equity of Solomon Brothers, provided that that's at least 10% above the return for competitors, he could earn a bonus of $24 million. My question is whether that return number is reduced by a charge for preferred dividends.
WarrenI, Charlie, do you remember on the Compton?
CharlieI can't remember the detail on that. I think the equity, I'm fairly sure, but I'm not positive, that the equity figure would include our preferred but not non-converdable preferred, and it would apply to the earnings applicable to our preferred plus common, but not, but it would be after dividends on non-converdable preferred. But I, you know, I'm not on the comp committee, and I have not read the description that carefully.
WarrenWell, I am and I can't remember.
[42:32]
WarrenBut I will tell you one thing I do remember about that, and that is a target, which would be one, would be hellishly hard to hit. It would be unbelievable. I mean, that is... talking about Babe Ruth. Squared. Yeah, doing 150 home runs in a season instead of a... If that happens, you'll be very glad to pay the money. Very, either, under either calculation. Yeah, it really... But it, you know, I'm glad it's there. I hope Derek's paying attention to it.
QuestionerZone 1. Hi, Chris Davis again from New York. I wanted to ask if you... I feel there's such a huge discrepancy between the valuation, of some of your holdings versus others in terms of the market valuation, in terms of price to earnings, price to book. In your opinion, do the growth prospects of Solomon Brothers or the quality, or your anticipation of your ability to clip the coupons at Solomon Brothers justify such a dramatic discount to the growth prospects of Coca-Cola or Gillette in terms of our ability as Berkshire shareholders to clip those coupons, And if you could explain or perhaps share your thoughts on why the market perception, if it is, justifies that distinction.
WarrenYeah, I'm not sure I can answer that question without getting into a discussion of the relative merits of the two companies or the three companies you mentioned at these prices. But Solomon and Coca-Cola are obviously very different kinds of businesses are Solomon and Gillette. And Charlie and I do our best to try to understand the businesses, obviously it's easier to understand the future of a Coca-Cola than it is to Solomon, but that doesn't mean it's a better buy. And what you see at any given time in our holdings is partly the historical accident even of one we bought and when we had money available and all that. But it reflected an affirmative decision at that point, obviously. And our guess would be that, you know, we would feel reasonably good about anything that we owned in terms of the price at which we bought it and the facts at the time we bought it and the facts change over time. Solomon, I think, is a better company now than it was some years back, but it's still in a business that can be very volatile volatile and it has a small amount, as does any investment banking firm and does any commercial banking firm of systemic risk. I mean, you can't get rid of that. Charlie, you want to?
CharlieNo, I've got nothing to add.
OtherZone 2. Thank you.
[45:35]
QuestionerSean Berry, Regina, Canada. Mr. Buffett, you've indicated that most of us in this room could acquire a lot of the information that you and Charlie acquire through the annual reports. Yet you both also indicated that the gap rules a lot of times leave a little to be desired. Could you perhaps give an indication as to how you and Charlie come up with the economic value or the intrinsic value of the businesses that you finally decide to invest in and a little bit about the process that you go through with that? Thank you.
WarrenWell, in the 1992 annual report, we discussed that a fair amount, but the economic value of any asset essentially is the present value, the appropriate interest rate of all the future streams of cash going in or out of the of the business. And there are all kinds of businesses that Charlie and I don't think we have the faintest idea what that that future stream will look like. And if we don't have the faintest idea what the future stream is going to look like, we don't have the faintest idea of what it's worked now. So if you think you know what the price of a stock should be today, but you don't think you have any idea what the stream of cash will be over the next 20 years, you've got cognitive dissonance, I guess, is what they call it. So we are looking at. for things where we feel fairly high degree of probability that we can come within a range of looking at those numbers out over a period of time, and then we discount them back, and we are more concerned with the certainty of those numbers than we are with getting the one that looks absolutely the cheapest, but based upon numbers that we don't have any, they don't have great confidence in. And that's basically what economic value is all about. The numbers in any accounting report mean nothing per se as to economic value. They are guidelines to tell you something about how to get at economic value. But they don't tell you anything. There are no answers in the financial statements. There are guidelines to enable you to figure out the answer. And to figure out that answer, you have to understand something about business. You don't have to understand a lot about mathematics. I mean, the math is not complicated. But you do have to understand something about the business. But that's the same thing you would do if you're going to buy an apartment house or a farm or any other small business you might be interested in.
[48:20]
WarrenYou would try to figure out what you are laying out currently and what you are likely to get back over time and how certain you felt about getting it and how it compared to other alternatives. That's all we do. We just do it with large businesses, basically. The accounting figures are very helpful to us. in the sense that they generally guide us to what we should be thinking about. And, of course, if we find numbers where it looks like people are taking the most optimistic interpretation of things that they can under Gap and all of that, we get very worried about people who look like they massage the numbers in any way, and there are plenty of people to do.
QuestionerZone 3? I'm Howard Baskin from Kansas City. When you are estimating a growth rate on a company, I'm at a very predictable company, I imagine you apply a big margin of safety to it. What kind of rate do you generally apply? I mean, high single digits? In the margin of safety? What kind of growth rate would you, on a predictable company, might you stand that?
WarrenWe are willing to buy companies and aren't going to grow at all. Okay. Assuming we get enough for our money when we do it. So it, it, we are not looking, we are looking at objecting numbers out as to what kind of cash we think we'll get back over time. But, you know, would you rather have a savings, if you're going to put a million dollars in a savings account, would you rather have something that paid you 10% a year and never changed? Or would you rather have something that paid you 2% a year and increased a 10% a year? Well, you can, you can work out the math to answer those questions, but you can, you can certainly have a situation where there's absolutely no growth in the business and it's a much better investment than some company that's going to grow at very substantial rates, particularly if they're going to need capital in order to grow. There's a huge difference in the business that grows and requires a lot of capital to do so in the business that grows and doesn't require capital. And I would say that generally financial analysts do not give adequate weight to the difference in those. In fact, it's amazing how little attention is paid to that. Believe me, if you're investing, you should pay a lot of attention. I agree with that, but it's fairly simple, but it's not so simple can all be explained in one sentence. Some of our best businesses that we own outright don't grow.
[51:04]
WarrenBut they throw off lots of money which we can use to buy something else, and therefore our capital is growing without physical growth being in the business. And we are much better off being in that kind of a situation than being in some business that itself is growing, but it takes up all the money in order to grow. and doesn't produce that high returns as we go along. A lot of management's don't understand that very well, actually.
OtherZone 1. Byron Wien from New York.
QuestionerYou said that you decentralized the operating decisions, but centralized the capital allocation decisions. What kind of staff do you have in Omaha to help you with the capital allocation decisions and the stock selection decisions you make, or do you and Charlie do that pretty much by yourselves?
WarrenYeah, we don't have any staff to help us on it. staff to help us on it. I mean, basically, we tell them to mail all the money to Omaha, and then when we get there, we put our arms around it, and we allocate all the capital ourselves. I mean, that is our job. And we don't feel we should delegate – I mean, we wouldn't do it anyway. Our personalities aren't such that we would delegate our – allocating our own money to somebody else allocate our own money. But we feel that's our job. And it's interesting. It's interesting, and I've written about this in the past, that that's an important job for most management. There are some companies where it's not, but it usually is a very important job for most managements. And if you take a CEO that's in a job for 10 years and he has a business that earns, say, 12% on equity, and he pays out a third, that means he's got 8% per year of equity. I mean, when you think of his tenure in office, how much capital is allocated, it's an enormous factor over time. And yet, probably relatively few chief executives are either trained for or are selected on the basis of their ability to allocate capital. I mean, they get there through other routes. So I've said it's like, you know, somebody playing the piano all their life and then getting to Carnegie Hall and they hand them a violin. I mean, it is a different function than most – than the route, than the functions that exist along the routes to the CEO's job. CEO's job at most companies. And so many CEOs, when they get there, think they can solve it by either having a staff that does it or by hiring consultants or whatever it may be.
[53:41]
WarrenAnd in our view, that is, you know, that's a terrible mistake because it is, if not the key function of the CEO, it's one of two or three key functions that say 80 or 90% of all companies. companies. And if you can't do it yourself, you're going to make a lot of mistakes. It may make a lot of mistakes even if you do it yourself. But if you, you wouldn't want anybody in any other position of that importance in the company, essentially saying, I don't know how to do this, so I'm going to have somebody else do it, when it's their key responsibility. But that's the way it works in business. And Charlie and I take responsibility. for all capital allocation decisions other than just sort of routine expenditures at the operating businesses. And we don't get into those at all. I mean, if our managers are spending three or four million dollars a year on machinery, one of them is, I mean, on machinery equipment, plants, new leases, we have no review process on that. We don't have a staff at headquarters. We don't waste the time to do that. We think those people know how to allocate the money that relates to the operations of their business. We think in terms of the capital that is generated above that, that that's our job. Charlie?
CharlieYeah, I would say we have practically nobody at headquarters in Omaha. One of the reasons Warren shines up so well is, you know, he's being compared to practically nobody. I might say, one interesting, when we're having this meeting, for example, I think there's one person there in the office. I mean, the rest of them are down here helping on the meeting. But here, yeah. Warren and I are selling candy and encyclopedias and so forth. The chief financial officer of Berkshire Hathaway is handling the microphones. I mean, this makes Southwest Airlines look like they don't understand. Cost accounting. Cost accounting. It's a very old-fashioned place. And by the way, speaking of hawking our merchandise, if any of you have safety deposit boxes full of Berkshire Hathaway certificates and have children or grandchildren who don't have world book in print in the house, you are making a very serious error. That is a marvelous thing for to have in a house. And the discount only applies today. Accidentally, I think that's right. It is. That is, it may not be selling too well because of the current vogue for encyclopedias on computers. And by the way, those encyclopedias that are available are inferior computers,
[56:30]
Warrencompared to World Book, which is very user-friendly for children, and I like it that way myself. And that is one product you really ought to buy. We both use it personally. I mean, I keep a set at the office and a set at home, and I give away more of that product than any other product that Berkser Hathaway makes in any subsidiary. It's a perfectly fabulous human achievement. to edit a thing to make that user-friendly, with that much wisdom encapsulated. It's a fabulous thing.
QuestionerZone 2. Past Sudhu Khan from Houston, Texas. From time to time, you have quoted John Maynard Keynes, the British economies. So I would assume that you have read his investment writing very extensively. What are two or three investment relations in your opinion one can learn from that economist.
WarrenWell, I forget which, I think it's chapter eight of the general theory. Do you remember Charlie or the chapter?
CharlieNo.
WarrenThere's one chapter in the general theory that relates to markets and the psychology of markets and the behavior, market participants and so on. That probably, aside from Ben Graham's two chapters eight and 20 in the intelligent investor, I think you'll find, you've got as much wisdom. I'll get as much wisdom from reading that as anything written in investments. And you'll know it when you see it in the general theory. It's a chapter that jumps out to you about the securities and so on. It could be chapter eight, but I may be wrong on that. But I would recommend reading that. Keynes and Graham, from vastly different starting points, came to the same conclusion at about the same time in the third. in the 30s as to the soundest way to invest over time. They differed some on their ideas on diversification. Keynes believed in diversifying far less than did Graham. But Keynes started off with the wrong theory, I would say, in the 20s, and he essentially tried to predict business cycles and markets and then shifted to fundamental analysis of businesses in the 30s and did extremely well. And about the same time Graham was writing his first material. I think Janet Lowe in her book on Ben, Graham, actually has a little correspondence that took place between Keynes and Ben. So I would advise you to read that. And there's some letters of his that he, of Keynes's that he wrote to co-trustees of life insurance societies and colleges and so on that I think you'd find interesting too. It's 115. and Charlie and I have to go to our director's meeting at Berkshire, which starts in about 15 minutes. So we thank you all for coming.