[0:01]
OtherOkay, we're ready to start here with a question from Zone 1. If you'll take your seats please, we've got to...
QuestionerMr. Buffett, I'm Brian Murphy from Clearwater, Florida. I'd like to ask you a question concerning your present thinking behind your acquisitions of banks such as PNC and SunTrust, particularly in light of the fact that banks were selling so cheaply in 1990 and now many have tripled in price, and it would appear from recent publications in the financials in the financial literature that you've become much more interested in banks at these higher prices relative to the 1990 valuations. Could you comment on your thinking there?
WarrenYeah, we really have no different, there's no difference in the criteria we apply to banks than to other businesses. And a couple of publications have maybe made a little more of that than is warranted, because I doubt if there's more than a couple percentage points difference in, And we don't think of it that way, incidentally. And we do not have a lot of sector, we don't have any sector allocation theories whatsoever. So we simply apply the same criteria when looking at banks that we would at any other business. Incidentally, there sometimes you should know that there's, I would say that maybe half or maybe even a little more of the reports about our activities are in the press, are erroneous. Now, some are accurate, too. And then, of course, some are way out of date. I mean, we get confidential treatment on our, on the filings we make with the SEC as to our holding. So they're published well over a year after we filed them. And therefore, there have been a couple of stories in the last month or two as to something we've bought. And, of course, if you read the story carefully, it's we bought it a year and a half ago, maybe, and we may have sold it. We may have bought more, all kinds of things. So that I'd be careful about press reports generally. We actually, we bought a bank for Berkshire in 1969, the Illinois, the Illinois National Bank and Trust of Rocker. We've had an interest in the banking business. We feel it's something that we can, that falls within our circle of competence to evaluate. That doesn't mean we'll be right every time, but we don't think it's beyond us to understand. understand the banking business. And so it's a, it's, it's, we look at businesses in that area. Charlie?
CharlieNothing to add.
OtherOkay. And do we have? Zone 2?
[2:51]
QuestionerLarry Myers from Omaha. Warren, two quick questions. The first one very brief. Do you have any timetable regarding when you will write your own book about your career and philosophy?
WarrenYes, my time table has always been six months from now. The answer on that is, I've thought about doing it a few times, and I think about it. It always seems to me there's way more interesting, more interesting things yet to happen than have happened so far, and I don't want to, I know I won't write a second one, so I keep postponing it. That's my rationale. That's my...
QuestionerThank you. Second question concerns dividends. Last Friday night, by coincidence, on Lewis Ruekeiser's weekly television show, the special guest was Philip Corray, the special guest was Philip Corray, and Mr. Corray made the statement that his favorite American stock is Berkshire Hathaway. And one of the major reasons he stated was that Berkshire has never paid a dividend, as we all know, and consequently you had superior utilization of the extra cash. Now, if you extend that reasoning, could it also be a beneficial policy if Coca-Cola and Gillette stop paying dividends and utilized the cash in other ways?
WarrenWell, it depends what they could use, how they would utilize the cash and what they could use it for. Those are more focused enterprises than Berkshire, at least in terms of products. And they, I think, I commend managements that have a wonderful business for utilizing cash in those wonderful businesses and businesses that they understand and will also have wonderful economics and for getting the rest of the money back to the shareholders. So Coca-Cola in my book is doing exactly the right thing with its cash when it both, when a, It uses all the cash that it can effectively in the business to expand in new markets and all of that sort of thing. But then beyond that, it pays a dividend which distributes cash to shareholders, and then it repurchase his shares in a big way, which returns cash on a selective basis to shareholders, but in a way that benefits all of them. So we, you will benefit from us not paying dividends just as long as we can use every dollar we retain to produce more than a dollar of value and of market value over time. that we can continue doing that. You know, how long we can continue doing that, I can't promise you. But that is the, that's the yardstick by which the decision is made. And that is the yardstick, I think, by which Coca-Cola is making the decision, too.
[5:23]
WarrenAnd I think that they deserve great credit for exercising the discipline to quit when they, using cash, when they run out of the opportunities to use it well, and then to use it, then to further deploy it advantageously by repurchasing shares. I think one of the things I admire about my friend Bill Gates, he's got $4.5 billion of cash in Microsoft, and there are very few management can stand having $4.5 billion of cash and not doing something unintelligent with it. So far, it's made sense for us to retain everything we earn. And I think it'll make sense for a while longer, but it may not make sense indefinitely. Charlie?
CharlieI hope it lasts so long.
Othertime. Zone three. My name is Dan O'Neill from Santa Fe, New Mexico. And I would like to ask you a more specific question about Solomon Brothers, which is, why do we pay our employees there so much? Why, what? Why do we pay our employees there so much money? The conventional theory seems to be that there's just a different pay scale on Wall Street than the rest of the world. And it's based on the idea that traders are smarter than, that some traders are smarter than others and in some supernatural way are able to, you know, to receive signals that the future is sending back to the present. And how do we know that that isn't just an urban legend like alligators in the New York City sewers? Another theory would be that the large amount of shareholders' capital allows the traders to capture inefficiencies that are in the market in the same way that the House does in Las Vegas. I mean, if we own a casino, it wouldn't make any difference if we hired Albert Einstein or Forrest Gump to run the blackjack table. and we would pay them the same. And I wonder which theory you think is closer to the truth.
WarrenWell, you put it well. In the end, of course, you end up paying them at a, what you think, at least, is a market rate. And to some extent, the market tests you out by whether people leave because they can get a higher rate. But the limiting factor on that should be that you pay them a market rate as long as you were getting a market rate on capital. but is harder to measure the market rate on capital in a short period than it is to measure the market rate on compensation. So the, a good many of the people that have left, but far from all, have left because they felt that they would obtain, presumably because they would obtain greater compensation elsewhere.
[8:14]
WarrenThe market was working in that way, just as it works in entertainment that way, and it works in the athletic field that way. whether it when it works that way, it leaves a return for capital that's adequate is an open question. I mean, I haven't looked at the figures on all the baseball teams, but I've seen some of them. And certainly in some of the smaller markets, I mean, the books were not phony. I mean, it is very hard to pay market rates for ball players in Kansas City and still make money running a ball team. Well, you've got a smaller television market and all of that of the big cities. So in the end, you're going to have to pay market rates to retain people, but part of that will also depend upon the period over which they measure what they're going to be paid. I mean, if you want to look at Goldman Sachs last year, they were paid nothing. Does that mean that everybody will leave because they can get paid something someplace else? No, because 80% of the partners or 90% of the partners have a longer time horizon than that, and they, They have an anticipated earnings figure in mind when comparing it with what they're being offered elsewhere. If you have a situation where market rates, you know, exceed the earning capacity of the business, then at some point capital will flow away from the business. In the airline industry, which I use an example, the market rate, the most, well, the, in terms of the bigger airlines, people are not being paid market rates, they're being paid contractual rates. Well, you can't blame anybody for that. If you have a contract that it entitles you to X and the current market is a half of X, you're going to hang on to that contract very aggressively. And like I say, you don't blame anyway for that. It's just if you end up in that condition, though, you've got a real problem. And if you have the same problem that you have if the market is higher than or similar problem, you have if the market is higher than one that you can sustain in your own business. My guess is that there, that in effect, Solomon has put in a more Goldman Sachs-like system because essentially it created, to a degree, a partnership within it that, to have that work, A, over time the partners have to earn good money, and it won't work, but B, you have to have people to have a partnership mentality in it. And if you change from one culture to another, you are not
[10:59]
CharlieYeah, it was kind of a bad break to put in a new compensation system and then have a very bad year. In the very nature of things, people are going to blame the compensation system subconsciously. And then, too, I think that Wall Street generally has more envy- jealousy effects than are typically present elsewhere. I have a friend whose grandmother used to say that she couldn't understand why people got in to envy jealousy because it was the only one of the sins that you could never possibly have any fun at. But generally speaking, on Wall Street, I think a lot of people have had the wrong kind of grandmothers.
WarrenYeah, I've commented from time to time that, what's today, Robin Leach has it all wrong on lifestyles of the rich and famous because he's presenting all these wonderful things that will happen to you if you get rich. But they really aren't all that wonderful, these fancy houses. and votes and all that, that the real advantage of being rich, as I explain to people, is that it enables you to hate so effectively, that if you're terribly rich, you know, but you, your brother or whomever cousin or somebody is getting a little more attention in the world or something of the sort, you can hate in a very major way. You can hire accountants and lawyers to cause them all kinds of trouble. If you're poor, you just snub them at Thanksgiving and don't show up or something of the sort. But I've noticed that these rich people, particularly when they're, and they inherit great amounts of money. Soonerly, they start, frequently, they get very antagonistic toward siblings or cousins or whatever it may be, and they really can, they can hate in a way that, or get envious in a way that the rest of us really can't really aspire to. So that's a benefit that hasn't appeared on Robin Leach lately, but I, but you see that, you see a little of that in the athletic field and the entertainment field and perhaps even in Wal- Street, that making a million dollars a year looks great until this guy that sits next to you that can't possibly be as smart as you is making a million, too. And then the whole world that it turns into a very unfair place.
QuestionerZone 4. Good afternoon. My question is simply about the cash and cash equivalence that are shown on the balance sheet this year versus last year. In my thinking, cash equivalence is always something good to have around in case of a big market drop,
[13:50]
WarrenCash at Berkshire is a residual. I mean, we would like to have no cash at all times. We also don't want to owe a lot of money at any time. But if we have cash around, it's simply because we haven't found. anything we like to do. And we always hope to deploy it as soon as possible. We never are thinking about whether the market's going to go down or something of the sort or whether we might buy something even cheaper. If we like something, we'll buy it. And when you see cash on our balance sheet of any size, that's an acknowledgement by Charlie and me that we have not found anything in size anyway. attractive at that point. It's never a policy of ours to hold a lot of cash.
QuestionerZone 5? David Winters, Mountain Lakes, New Jersey. David Winters, Mountain Lakes, New Jersey. Years ago, you said you loved the newspaper business, and then over time, I guess it said it declined a bit and how much you loved it. And I'm kind of wondering how you feel about it now and if you can prognosticate a little bit for us at all.
WarrenWell, I... I used to love it in two respects. I love the economics, and I love the activity, both. And the activity, the love of the activity is not diminished. The economics are still exceptionally good compared to virtually any business in the world. They aren't quite as good as they were 15 years ago. So they have, I wrote about that a couple of years ago, whereas what was seemed to almost the most bulletproof of franchises is still an exceptionally good business. But it isn't quite as bulletproof as might have been the case 10 or 20 years ago. I still think it's about as interesting a business as there is in the world, I'm at. But if you're talking pure economics, I can't think of many other businesses that if I just owned one asset over my life, that I would rather own than a newspaper in a single newspaper town. But I wouldn't have quite a... I wouldn't have quite the feeling of absolute certainty that I had, that I would have had 10 or 15 years ago.
WarrenCharlie?
CharlieYeah, I think it's obvious. The newspaper for Pratters are getting a touch of paranoia for the first time. I mean, they worry about the electronic revolution.
[16:56]
WarrenThey worry about the fact the young people, you know, don't read. It's not as much fun going to newspaper conventions as it used to be. They're still making exceptional money. I mean, that's the interesting thing. Ah, but they, I've heard you say a dozen times people don't seem to care what floor they're at just whether the elevator is going up or down. That is true. People feel better when they're on the second floor of an elevator that just come from one than they do when they're on the 99th floor coming down from 100. There's no question about that. They have this projection. And, of course, it's particularly the case where they've been in a business where the money, where the profits were automatic, because they start thinking about, you know, questions of whether they really have the ability to make a lot of money absent this favored position, and that's not something they've had to dwell on before, so it could make them uncomfortable. They're all screaming about newsprint prices. We probably scream about them a little bit, too, but, I mean, if you compare being in the newsprint business over time, being in the newspaper business, I mean, it's a joke, and newsprint prices, if you can graph them from any point, you know, 15 or 20 years ago or 10 years ago, and the price of the newspaper or the price of advertising is going up more. I mean, it is, it is interesting to hear them yelling foul because they have moved a lot in the last 12 months, and they'll move some more in the next six months. But believe me, it's better to be in the newspaper business and the newsprint business. Zone 6. Mr. Buffett, my name is Liz Pruss. I'm from New York City. I was wondering on your acquisition criteria. I know part of that is that Berkshire Hathaway won't participate in unfriendly takeovers. I wondered how that philosophy may or may not apply to your role as a member of the board of several other companies.
WarrenThat's an interesting question. I haven't been on the board of any company where the CEO has brought to the board, the question of a hostile takeover. Do you think anything I'm... No, but there's no rule that that can't happen. So I don't know exactly what I would do if that came along. It's a very good question. I used to be, I used to have a whole different attitude on that. I mean, in effect, we actually, if you go back 40 years, we bought, in effect, control of companies.
[19:42]
WarrenWell, in the case of Berkshire, Malcolm Chase, the chairman, was all in favor of us buying our stock in Berkshire, but Seabry Stanton, the president, would not have been in favor of it, and Seabry was managing the business. So it wasn't hostile, but Seabry would not have been in favor of it, but Malcolm would have been. So I don't know what the situation would be today if somebody walked in a Gillette, or. or cap cities or someplace like that. I don't think it's going to happen, but I have not, I don't have any policy on it at this point. What do you think we do, Charlie?
CharlieI don't think our behavior is totally predictable.
WarrenAnd he's right.
OtherZone one. Yes. Neil McMahon, New York City, also a Sequoia shareholder. Ben Graham investing in courage turnover. Looking at Berkshire's holdings, concentration, and long term, are you still a 15% fill-fell Phil Fisher and 85% Graham?
WarrenI don't know what the percentage would be. I'm 100% Ben Graham in those three points I mentioned earlier, and those really count. I am very, I was very influenced by Phil Fisher when I first read his two books back around 1960 or thereabouts, and I think that they're terrific books. I think Phil is a terrific guy. So I think I probably gave that percentage to, I think I first used it in Forbes one time when Jim Michaels wrote me, and I think I, you know, it was one of those things I just. named a number. But I think I'd rather think of myself as being a sort of 100% Ben Graham and 100% Phil Fisher in the points where they don't, and they really don't contradict each other. It's just that they had a vastly different emphasis. Ben would not have disagreed with the proposition that if you can find a business with a high rate of return on capital that can keep using more capital on that, that that's the best business in the world. And of course, he made most of his money on a Geico, which was precisely that's. sort of business. So he recognized it. It's just that he felt that the other system of buying things that were statistically very cheap and buying a large number of them was an easier policy to apply, and one that was a little more teachable. He would have felt that he would have felt that Phil Fisher's approach was less teachable than his, but his had a more limited value because it was not, it was not workable with really large sums of money. At Graham Newman Corp, Graham Newman Corp was a closed-end fund. It was technically an open
[22:24]
WarrenBut it had $6 million of net worth, and Newman and Graham, the partnership that was affiliated with, had six million. So you had a total pool of $12 million. Well, you could go around buying little machine tool, stocks in machine tool companies, whatever it might be, all statistically cheap. And that was a very good group operation. And he had to, you have, if you own a lousy business, you have to sell it at some point. If you own a group of lousy businesses, you better hope some of them get taken over or something happens. You need turnover. If you own a wonderful business, you know, you don't want turnover, basically. Charlie?
CharlieWhat was interesting to me about the Phil Fisher businesses is that a very great many of them didn't last as wonderful businesses. One of his businesses was title insurance and trust company, which dominated the state of California. It had the biggest title plant, which was maintained by hand, and it had had great fiscal solvency and integrity and so forth. They just dominated a lucrative field. And along came the computer. And now you could create it for a few million dollars, a title plan, and keep it up without an army of clerks. And pretty soon we had 20 different title companies, and they would go to great big customers, like big lenders and big real estate brokers, and pay them outlandish commissions by the standards of your, and bid away huge blocks of business. And in due course, In the state of California, the aggregate earnings of all the title insurance companies combined went below zero, starting with a virtual monopoly. So very few companies are so safe that you can just look ahead 20 years, and technology is sometimes your friend and sometimes your bitter enemy. If title insurance and trust company had been smart, they would have looked on that computer, which they saw as a cost reducer. As one of the worst curses that ever came to man. You can, it probably takes more business experience and insights to some degree to apply Phil Fisher's approach than it does Graham's approach. If you, the only problem is you may be shut out of doing anything for a long time with Ben's approach, and you may have a lot of difficulty in doing it with big money. But if you strictly applied, for example, his working capital test, is security. And it will work. It just may not work on a very big scale, and there may be periods when you're not, you're not doing much.
[25:13]
WarrenBen really was more of a teacher than a, I mean, he had no urge to make a lot of money. It did not interest him. So he was, he really wanted something that he thought was teachable as a cornerstone of his philosophy or approach. And he felt you could read his books sitting out here in Omaha and apply. buying things that were statistically cheap. And you didn't have to have any special insights about business or consumer behavior or anything of the sort. And I don't think there's any question about that being true, but I also don't think you can manage lots of money in accord with it.
QuestionerZone 2. Hi, Rob Pitts, shareholder from New York City. This is a question for Mr. Munger. I've noticed in the insider sales activity sheets that you've been a rather a consistent seller of your Berkshire stock over the last few months. I wondered if you would comment on why you're doing this, especially in light of the prospective tax change in capital gains where it might be reduced, which would obviously be beneficial to you and beneficial to Berkshire by reducing its deferred tax liability.
CharlieI've given away a fair amount of Berkshire in the last couple of years, and I've also sold some. I gave away the Berkshire because I thought it was the right way to behave, and I sold some because I had uses for the money.
WarrenHe doesn't know anything, I don't know. I don't know. I, when he started selling, I checked that, but sell them three. Charlie has a very high percentage of his net worth, and Berkshire is do I. Go ahead. I'm sorry, go ahead. I don't think it's working, clear.
QuestionerHello? Okay. Hi, Goran Pullich from New York City. I have a two-part question. First part, very short. I think a lot of people have difficulty valuing businesses because of some convoluted accounting schemes that are out there. Do you have any suggestions in terms of books or something you can read where you can sort of make sense of some of the accounting stories that are going around?
WarrenWell, that's a good question. And Abe Breloff used to write for Barron's quite frequently on various accounting machinations, and Barron's has continued that somewhat. But you're right that there are people out there who will try to paint pictures with accounting that are something far from economic reality. And sometimes the rules of accounting themselves lead to that. I would say that when the accounting confuses you, I would just tend to forget
[28:04]
Charlieabout it as a company. I mean, it's probably, it may well be intentional, and in any event, you don't want to, you don't want to go near it. I, we have never had any great investment results from companies whose accounting we regarded as suspect. I can't, I can't think about one. No. It's a very bad sign. I made a short tale once that worked out well in a case like that. Really, accounting, accounting can be a, accounting can offer you a lot of insight into the character of management. And I would say there's a lot, you know, there's a, you run into a fair amount of a bad accounting. I used to call it creative accounting, which is, and you probably run into a lot more if it was allowed. Some companies have been able to push their auditors pretty far, and I would be very skeptical of anything that looks suspicious to you. I think there have been a couple of things written, but I can't think of where they've appeared, where people talk about the questions of, you know, what. Obviously, if some prepaid expense deferred asset accounts start building up suspiciously high, and inventories look out of line, you know, with sales and particularly the trend of them and all. You want to look twice at companies like that. Life insurance, you know, frequently, you know, we see weak accounting in. You can, when you don't have a product where revenues and expenses are being matched up on something close to cash in the short term, you have the opportunity for people playing games with numbers. And some people have learned how to do that very well. And they've sometimes created long-lasting stock manipulation or promotion schemes that have enriched themselves at the, where they've enriched the managers or the creators of it at the expense of the public overtime. If you ever get suspicious about accounting, just go on to the next company.
OtherZone 4?
OtherYeah. Ms. Wasserman from Chicago, in order to understand the reinsurance business a little better, can you explain your relationship with Lloyds of London in the marketplace, how you, which is probably the leader in the field, how often you compete directly, or if you've ever done reinsurance business for them since they've had losses in recent years, and how you see the industry changing as their economics changes.
Ajit JainWell, Lloyd's, which is not an insurance company, as you know, but a, well, originally was a place. It was a coffee house, but it's people think what, it's a place where a large number of syndicates
[31:00]
Ajit Jainoperate and congregate in a given physical location. And it's had a history for larger, more exotic risks over time. Lloyd's has lost its relative position to a fairly significant degree in the last 10 or so years, partly, well, and significant part because of bad results, which had the other effects of causing capital to withdraw and people who back the syndicates to become unhappy. So Lloyds is still an important competitive factor in the reinsurance business and in certain specialized kinds of primary insurance. It's a very, you know, it's a very important factor, but it's not the factor it was 10 or 15 years ago. And I'm not sure how Berkshire's capital compares with the capital of all those syndicates of Lloyd's, but it certainly changed in its relative importance in the last five or 10 years. the ability of Lloyds to attract capital with the problems they had has been diminished, although they're working on that problem. But we regard Lloyds as a competitor, just like we would regard any one of a number of reinsurance companies as competitor. But we also do business with a number of syndicates at Lloyds, and we'll probably do a lot of business over the next 10 years with various syndicates. Charlie?
CharlieYeah, Lloyd's is a very interesting. institution because it had this reputation for integrity, what they paid off and what the San Francisco fire and so on and so on and but I would argue that 10 or 15 years ago, a lot of slop and folly got into Lloyds and certain syndicates particularly and too many commissions coming off the top as the same risks circulated around the system. Too much fine tailoring and three-hour lunches with fine wines. It wasn't right, and they got in a lot of trouble.
WarrenYeah, actually, in the history of Berkshire, the most significant insurance problem we ever had was in connection with Lloyds, almost, or certain syndicates at Lloyds, almost 20 years ago. And as Charlie said, they had this terrific reputation, behavioral reputation, over centuries. And I think that they coasted for a while on that. And we had a behavioral problem with, in one situation, and it was very expensive to us. So we may have gotten an early lesson in what was coming. There are a lot of different syndicates at Lloyd's, and there are different people running them, and they have had different standards of behavior to some extent. And people who assumed that because they were dealing with Lloyds,
[34:09]
Warrenthat they would have no problems of any kind if I not otherwise. But they will continue to be a major force in insurance, and they will get by their present troubles, and they'll probably come out of it better structured than they went in.
OtherIs that Zone 5 that we did there?
OtherFor Christopher Jones from Scottsdale, Arizona.
QuestionerI had a couple of questions for you. You've mentioned several times today about the difficulty and the frustration that you both have in trying to find capable companies to acquire or acquire parts of in the United States. And I realize that, of course, when we own Coca-Cola and Gillette, we are a part of the global environment. But it's surprising to me that there haven't been any global franchises or global managements that have been interesting to either of you that I realize in the past we've owned some pieces of some. So I was questioned. Because of the size of Berkshire now, might we see something more of a global flavor to the portfolio? And second question, you've also addressed the intelligent use of cash as something that you look for in management. Many management teams now are buying back their own shares because they can't find anything cheaper or better in the marketplace. Does your current philosophy of not buying back your own shares, suggest that maybe you think Berkshire is overpriced at these prices?
WarrenWell, we have never, we've never bought back shares. We actually bought a few back in the 60s, but we basically have never bought back shares, although there were plenty of times when we thought it would be quite attractive to do it, but we've also felt that if we could create more than a dollar of market value by, and maybe well more than, well over a dollar market value by retaining a dollar that on balance that that would work out better over time. As long as we can find ways to use the cash, which overall we feel will turn dollar bills into something larger than dollar bills, we will keep retaining the money. And we won't measure that on whether we can find anything this week or this month, but we'll certainly measure it based on whether we can find anything in a couple of years, always. We've had dry spells. Actually, right now, there's a little more going on than usual. But we've had dry spells a lot of times over a 20-odd-year period. And, you know, as I said, I wound up the partnership during one dry spell. So that it will be, it's measured partly on what's going on now,
[37:02]
Warrenand it's measured partly on the expectancy. And I don't think whether our stock was selling at X or three-quarters of X right now would would make a lot of difference. But it would make a difference if we thought we couldn't find things to do with the money externally. The question about non-domestic operations, as you mentioned, we've got almost $8 billion in Coca-Cola and Gillette combined, and Coke has 80% plus of the earnings from non-U.S. sources, and Gillette has maybe two-thirds or thereabouts. So you can argue that almost 40% of the net worth of Berkshire, 35 to 40% is operating outside the United States, right, just in those two investments alone. In terms of buying a business outright, we don't preclude buying a non-U.S. domicile business, but it's not too likely that it will happen. We'd like to do it, particularly if we're large and if we understood it. But are we as likely to get a fix on a Helsbergs of Europe, as we would, a Halesburgs in the United States. You know, I doubt it. I just don't know whether we would develop as much confidence in understanding the scene in which they operated and understanding the management and all that. But we might. It would have to be a pretty simple business, and it would have to be a business where we thought we really understood the moat for a long time, and it would have to be a business where we could establish a rapport with the management despite coming from somewhat different backgrounds. It's not impossible, but I would say it's, you know, it's less than likely. Charlie?
CharlieI've got nothing to add.
QuestionerZone 6. Hi there. My name is Lee DeBrov from Morgantown in West Virginia. Ever since the Solomon debacle appears that you have attracted more and more media attention. In this regard, there have been numerous displays that would appear to be distractions from the actual business of investing. To it, we watched as you attended Bill Gates' wedding in Hawaii and bought a personal computer and now wear striking designer ties. And yesterday Bill would have invited me to the wedding, even if I hadn't been in Sullivan. Yesterday we got those pennants during the rain out. A very serious question. Now, now that you become this media darling how can you assure us that you're still keeping your eyes concentrated on the proverbial ball
Warrenwell i do get more mail than i used to so we we've developed a little more of a system on that but i just i do what i like to do and uh just take speeches i probably get
[40:04]
Warreninvited asked to make maybe 20 times as many speeches as i would have been asked to make 10 years ago but i make the same number i uh you know i've got the i've got my own selection process for what i do on that and it's the same way you know I'm invited to you know I don't know how many dinner tributes etc and you know basically I don't I don't change the way what I do because I don't want to change the way if I if I wanted something else if while I was building Berkshire that was being done to end up in some other spot I'd have been there by now and it just doesn't it doesn't it doesn't change any does change the volume of mail but I've got that that so that is not a big distraction.
WarrenOh, I'll remain in Omaha. Yeah, there's no question about that. I mean, if I, if I hadn't wanted to be in Omaha, I would have figured out ways to change, and it's been very easy to change decades ago.
QuestionerI think, I think it's, you know, we've got a lot of people here who aren't from Omaha, but, but that's their problem. I mean, I've been watching Warren for a long time, and people who are concerned that he will change have a huge appetite for needless worry the odds that I will change you're about as good as the odds that Charlie will change I the mail thing is a you know you wish it didn't it was it was the easier way to handle it because but but you essentially can't answer all the letters you get that's that simple and that that's about the once you get past that and get a form letter that takes care of it that's that takes care of zone one yes I'm Samuel Park from Tulsa, Oklahoma. My question is regarding GEICO. I noticed that for last five years, their return on equity has come down every year. Is this something signifies change of a business or just temporary things?
WarrenQuestions about GEICO's return on equity? Yes, sir. Yeah. Well, it's true. It has come down. To some extent, the GEICO's growth is more or less a function of basically, I mean, there's a, there's a natural rate of growth there and the growth in capital has been greater than the growth rate in premium volume and an invested asset so that achieving the same success on underwriting and achieving the same success on investments will produce a lower return on capital unless they buy in stock, which they have done fairly significantly, but that's limited by availability too. But it's a very good business, but it's not a business where if you double the capital, you can double
[42:54]
Warrenthe earnings easily. Charlie?
CharlieNothing to add.
OtherZone 2.
QuestionerMy name is Mark Haake from Scottsdale. And I think your question, my question about foreign equity investment was pretty much answered by the other gentleman. But I noticed that you had made an investment in Guinness in the past. And can you comment on that? Is it still owned? And if not, why not?
WarrenWe don't comment on purchases and sales of securities or ownership. unless either we're legally required to or they hit this threshold level where we report annually. And we move the threshold level up as our assets move up. We don't move it up as a percentage of assets so that we used as a cutoff this year, $300 million, I believe, a market value as to where we reported. Now, if we'd owned the same amount of Guinness, which I'm not saying that we did, but if we'd own the same amount of Guinness on December 31, 1994, it would not have hit that threshold. that threshold as we had on December 31st 93 it would not have hit that threshold and we really don't want to get in the business where we're where we are talking at all about and what we're buying or selling we get a lot of speculation on that but but it's of no use to Berkshire to be talking about purchases or sales if we were if we were acquiring a piece of land downtown and we bought a quarter of what we intended to buy for example we would not feel we were benefited by a front page story in the paper saying that we were acquiring land. And it, we are not in the business of giving investment advice, basically. We'll talk about our principles. So the only conclusion you can come to about Guinness or anything else that does not show up on our list at year end is that we did not own $300 million worth at market value at that time.
OtherZone 3?
OtherYes, Mr. Buffett.
QuestionerMy name is Don Brescott. I'm from Boston, Massachusetts. Recently, I've noticed you wearing an IZOT shirt with Berkshire Hathaway, and in the middle of there was a fist grasping cash. Is that the new insignia? And the second question is, is that a shirt available to stockholders?
WarrenThe shirt is not available. That shirt was a gift from someone, and the shirt is not available to stockholders, but you can draw your own conclusions. The meaning of it.
OtherSoon, Zone 4.
OtherYes.
QuestionerMcIntosh, Missouri Valley, Iowa, about 25 miles up the road. And Warren, recognizing this is corn country and I farm, and there's several other farmer shareholders,
[45:45]
Otherthis meeting hits right in the middle of corn planning. Could you move it back about three weeks? And also, I noticed Phil Corray was on Wall Street Week Friday night. I'm sorry, I don't know his marital status, but if he is available, have you thought about introducing to Mrs. B.?
WarrenWell, Mrs. B., incidentally, was out working yesterday. and dropped by to see her about 4 o'clock, and she was doing fine. She will be 102 late this year, and my guess is she will be working on her 102nd second birthday as well. But I'll let Phil and Mrs. B. handle their own affairs in that respect. He's probably a little too young for her.
OtherTone 5. I'm Ken Donovan, a Cincinnati investor. You've addressed the subject of your feelings about buying entire foreign corporations. I wonder if you'd say something about, are, is Berkshire looking for opportunities to buy, we'll call them near franchise companies that might be based overseas, buying a stock interest or a part interest, and also how do you feel about fixed debt investments of overseas companies?
QuestionerDebt investments, was that?
OtherYeah. Well, the first part was buying a stock investment rather than a whole company. Right. The second part was debt investments, right.
WarrenWell, we're open to buying anything. When you say, are we looking at them, I've never been quite sure how we look at things anyway. I mean, it just seemed to sort of pop up from reading or something of the sort. But we are, it's less likely we end up doing it for some of the reasons I've given earlier. But we have bought stock in companies that, aside from Guinness, that are domiciled outside of the United States and we would have we could conceivably buy debt instruments. We don't buy a lot of debt instruments anyway. So it'd be very unlikely. But we will do anything we think makes sense at Berkshire that's compatible with the way we want to operate. And certainly we don't care where the domicile is not that important. Charlie?
CharlieOkay.
OtherZone 5, is it? Scott Spilkevitz, New York City. My question is regarding E. Hellsburg acquisition. Can you consider? comment on things such as the acquisition price, your sales and profit expectations, and how much debt we're on the books at the time of the acquisition?
WarrenThis is in reference to which acquisition?
QuestionerHelzburg.
WarrenWell, we have not put out the figures on Helzburgs and we won't be, but we evaluate the sales have been published at about 280 million for the year that ended in February, and there'll be
[48:48]
Warrenconsiderably more in the current year. But we have not put out the figures. I can tell you that obviously that we think that in terms of the amount we are laying out in terms of shares and or cash, we think over time that it's going to be a very decent acquisition. It's the same line of reasoning we've applied in other businesses. Retailing, as I mentioned earlier, is the kind of business where you have to stay smart over time. And we've got a terrific manager, a fellow named Jeff Komet, who's going to be running it. And his record is extremely good, and I would bet the record would stay good. It earns good returns on invested capital, or we wouldn't be, we wouldn't be buying into it. We always look for good returns on capital. And a lot of companies in the jewelry business do not get good returns. on capital. I mean, it's not an industry that, where most of the participants are prosperous. It takes unusual sales per square foot compared to competitors to succeed in that, and we have one operation that does that in spades at Borsheims and then a different type of operation that does it at Helsbergs. The typical jewelry store operation is not a very good business. but we think we've got two good operations. Charlie?
CharlieYeah, we frequently find that owners of entire businesses have schizophrenia. They want to sell their business for a little more than it's worth, taking stock so they don't have to pay taxes, and they want the stock to be in a kind of business that will make just one dumb acquisition theirs. And thereafter, we'll guard the stock like gold, making no more dumb acquisitions. Needless to say, the world is not that easy. And I think over time, we've made acquisitions that were fair on both sides, and average thought they've worked well for Berkshire. And I think a company that behaves that way is giving the best long-term value to the private owner who wants to sell. You do not want to sell your business for stock to a firm that likes issuing stock.
OtherIt's on six? That was six. Where do we have the mic? I don't think it's on. Can you hear me now? Yeah, sure.
QuestionerJack Lanning from Knoxville, Tennessee. I have a question which may not be appropriate for the officers of Berkshire to answer, but I think I'll ask it anyway. You focused on intrinsic value in your annual report, and you suggested that by reviewing the gray pages in the back that one could come. come up with a possibly come up with a value of intrinsic value for Berkshire.
[52:13]
QuestionerI've made an effort to do this. And I think I come up with a priced earnings ratio of somewhere around 21, which seems to be a little overvalued. I'd like to ask you, Mr. Buffett, if you would care to divulge what you believe is the intrinsic value of Berkshire. And if you're not willing to do that, do you consider the price of Burkshire? the price of Berkshire at this level to be fair?
WarrenI, every year I get asked that in one form or another, and I always say that I don't want to spoil the fund for those of you who are working out the intrinsic value for yourself. You have all the numbers that we have that are key to it, and I would say that there are some important factors besides PE. I mentioned earlier that I thought that the page where we describe float, for example, is probably as important, the pages there is in the report. And then the question is, you know, what do you do with the capital as you allocate it over time? And obviously that makes a difference in intrinsic value, too. But I would say in a general way that I, and this has been true virtually all of the time, that I think, I would say that the I would say that the intrinsic value of Berkshire in relation to its I'll put it the other way the price of Berkshire in relation to its intrinsic value I think probably offers as much value as as or more than the majority of stocks that I say but I won't not only go any further than that
CharlieCharlie I've got nothing to add the your story about the fun of working it out there was a famous English headmaster we used to say to each graduate class is that say 5% of you are going to become criminals and I know just who you are but I'm not going to tell you because I don't want to deprive your lives of a sense of excitement and we'll explain that later on there's there's a lot more to there's more to intrinsic value as we've discussed earlier than just adding up what you think you can sell the pieces for at any given time because it is it is it is a perspective figure it is the it is the future cash discounted back to the to the present and capital allocation is a good part of that what you expect the float to do for example over time would not that would lead to a large swing in possible numbers relative to value I mean if if when we bought national indemnity in 1967 when it had whatever it had 15 or 20 million in float we didn't see it then but if we could have foreseen the eventual
[55:34]
Otherdevelopment of float over time it might have turned out that the intrinsic value of national indemnity was many multiples of what most people might have thought at the time or probably what we thought at the time so in one
QuestionerRichard Dutcheck from Melbourne Florida I have a two-prong question first on the stock as we all know is the first month this year we ramped up about 25 percent and then we've pulled back I guess about 20 just wonder if your thoughts on that specifically you attribute that to the books perhaps or institutional buying or you know what explanation you might have for that
Warrenand I would say that first I would say Hagstrom's book undoubtedly had some effect on that I it's impossible to measure but but but that book sold a lot of copies and my guess is that that had some effect okay more so than the institutional buying because I've heard rumors like Fidelity and whatever we're buying I can't I just don't know the I don't know how to separate out the variables but but I would say that that the book was certainly a factor that at that time and it's unreasonable to assume that it had no effect. Although a lot of the buying came in and odd lots so a lot of odd lot activity
Questioneryeah yeah certainly looked like book buyers. Secondary question I'm electronics engineer by profession so the technology sector is of prime interest to me and I think we'll all agree at least last six to eight months has been phenomenal for technology sector and I also see that you're somewhat befriending Mr. Gates and inviting you into your house, etc. Is there a possibility down a road a piece of you doing some type of purchase of Microsoft or acquiring that or is there something you took to work out together?
WarrenI bought a hundred shares one of the day. First day I met Bill and that was the end of it. I just want to be sure I got his reports from that point on this was personal not in the not in the not in brochure. There's no chance we'll be in in businesses we don't understand and I I won't understand that you're quite clear on that
QuestionerI just thought maybe there'd be an exception because apparently
Warrenwell if you made an exception he would be a good guy to make a very good guy to make an exception with but I I don't think I'll make an exception
Questionerzone two my name is Bessu Norema from Arlington Texas mr. Buffett and mr. munger what possibility to use these two great mind of for a long
[57:59]
Questionerterm in life by either taking apprenticeship in Brookshire or for open a school. I didn't follow that one. Warren, you have a question. What what the possibility using these two great minds of yours to educate the new generation as a long-term investment in the in this country to either through a brintship in Brookshire for young people or open a business school?
CharlieWell, let me try that one because I have a demonstrated record. of non-performance. I have had great difficulty enabling my children to know what I know.
WarrenAnd Warren, maybe you have failed less. My children in many ways are a lot smarter than I am, so I have a different experience, Charlie. I think you can, you know, I've mainly learned by reading myself. So I don't think I have any original ideas that I certainly But I've certainly got a lot. I mean, I've talked about reading Graham. I read Phil Fisher, and I've gotten a lot of ideas myself from reading. And in my own case, I mean, talk about your parents having influences. And my parents had enormous influence. So I think you can, I think you can learn a lot from other people. In fact, I think if you learn reasonably well from other people, you don't have to get any new ideas or too much on your own. You can just apply the best of what you see. Generally speaking, I think. we always get a group of wise people after sifting millions. But I don't think anybody's invented a way to teach so that everybody is wise. It's extraordinary how resistance some people are learning anything.
CharlieWell, and really, what is astounding is how resistant they are when it's in their self-interest to learn. I mean, I was always astounded by how much attention was paid to Graham. I mean, he was regarded 40 years ago as the dean of security analyst, but how little attention was paid in terms of the principles he taught. And it wasn't because people were refuting them, and it wasn't because people didn't have a self-interest in learning sound investment principles, that it was just this incredible resistance to thinking or change. I mean, I quoted Bertrand Russell one time as saying, who said that he said that most men would rather die than think. Many have, you know, and in the financial sense, that's very true. It's not complicated. I mean, human relations, you know, usually aren't that complicated. But certainly it's people's self-interest to develop habits that work well in human relations,
[1:01:17]
Warrenbut an amazing number of people seem to mess it up one way or another. How much has Berkser Hathaway been confident? either in investing America or corporate America. I'm not saying we deserve to be necessarily, but people don't want to do it differently than they're presently doing it. You might argue that Mrs. B, having started what you may have seen out there this weekend, with $500 in 1937, you know, without a day in school in our life, and building that into a great enterprise, you might say, well, that is something to study? I mean, it, you know, is it because she couldn't speak English when we got, you know, she got over her? Maybe that we cleanse people. I mean, what are the, you know, what is there to learn from seeing somebody create an incredible success like that in a competitive business? She didn't invent something that the world had never seen before. She didn't have a lock on some piece of real estate that protected her from competition. You know, all of these, and yet she accomplished. something that virtually no one has accomplished. Now, why aren't business schools studying her? You know, why are they talking about EVA, you know, economic value added, as we talked about earlier, any of the, I mean, here is a success. Something has made her a success. You know, is it something, is it a 200, she's very smart, but is it a 220 IQ? No, it isn't. It's a very smart woman, but it's not, it's not something that's incapable of being replicated in the habits, the way of thinking. But who is studying her? I mean, a presenter as a curiosity, but if you go to any of the top 20 business schools, you know, there's not one page that's being given to anybody to study what is an incredible success. And I just, I find that very interesting that, and to some extent, you know, I've seen it in the investment world. There's this, for one thing, the high, you know, it's probably a little discouraging to a professor of management. and some major business school who's gone on to get his doctorate and everything to think he has to come out and hang around the furniture market and study a woman in a golf cart, I mean. You could, they'd be better off if they did. Or were we on that, what zone are we on four, are we? Wherever it is, zone three, maybe, huh?
OtherYes, thank you. I'm Jim Ludkey from Phoenix, Arizona, and I haven't been to one of your annual meetings for about 10 years now. The last one was down
[1:04:03]
Questionerat the Red Lion Inn by the water, and I congratulate you on your popularity. I wish I'd want more stock, but like Charlie, I too, have been giving mine away for charitable purposes, so your beneficial effects have reciprocated and rippled throughout the economy. I congratulate you. I congratulate you.
QuestionerWhat do you think has changed? Well, one thing is that Ben Graham commenting on what you just said, I'm a student of Ben Graham, and he said it never ceased to. It'll how widely read he was and least followed. But how have you changed in the last 10 years? Much, if any, or none at all?
WarrenWell, we'll let Charlie. He'd been watching me. I'd say about one stone. It takes one to no one.
CharlieYeah. If we'd wanted to change, we would have changed a long time ago.
WarrenI mean, I've never believed much in this theory of, you know, if I, if I have X, two X instead of X, then I'm going to do this or that, and then, you know, or I'll take this job. don't like now and I'll get one I like later on. It doesn't make much sense to me. I mean, there aren't there aren't there many years around, so you ought to be doing what you like at the present time. And Charlie and I've always followed that pretty well.
QuestionerZone 4. Peter Borma, Chicago. Every year you have your operating companies send a check back to Omaha. What percentage do the heads of the operating companies keep as a bonus? And how do you set that figure?
Warrendifferent bonus arrangements at different companies. It would be a big mistake with businesses with as many different economic characteristics or varying economic characteristics as existing as they do with Berkshire to have trying to have some formula approach that paid managers in all of these different businesses based on a simple formula of one kind. So we have, I think, four businesses where they own a part of it. And we have varying arrangements. arrangements with the various businesses. Some businesses, capital employed, is unimportant. There simply isn't a way to employ a lot of capital. So we do not have a capital charge, even at those businesses. We don't believe in going through a lot of machinations if it's going to involve peanuts at the end. So some businesses have a capital charge. Some businesses don't have a capital charge. If they use a lot of capital, they're going to have a capital charge is what it amounts to. Some Some businesses are easy business businesses. Some businesses are tougher businesses. So we have different
[1:06:56]
Warrenthresholds where things kick in based on that. We simply sit on and try and figure out, in the case of each business, what makes sense. And that usually isn't very hard to figure out. I mean, we want something that's fair. The best managers, we aren't going to change their behavior much by the compensation thing. We may a little bit in terms of teaching them how we think about capital employee. But in terms of their enthusiasm for the business, imagination, and marketing and all that. Basically, we usually buy businesses with those people in place. But it would be, A, it'd be wrong not to treat people fairly, and they would resent it if they weren't treated fairly, too, understandably. So we try to have a system that rewards the things that we want to have rewarded and treats them fairly in a way that they understand they're treated fairly. And I don't think we have, I don't think we have any two businesses that have the same arrangement. I mean, they're different in each case. Incidentally, that applies in their policies, too. We don't get into, to very sell them, I should say, maybe once or twice, but they have different arrangements in terms of compensating their employees. Some of our businesses have budgets. Some of them don't. We don't have any budgets that come up to headquarters. We let 400 hitters swing the way they want to swing, and some of them, you know, have a little different swings than others. but overall, they're extremely effective, and they feel, we want them to feel like they own their own business. If they felt, if somebody that's independently wealthy sold us a business and we started telling them how to swing, they would tell us what we could do with it very quickly because they don't need that in life. So what we have to do is create a situation or maintain a situation where they are having more fun doing what they're doing than anything else they can do. do in life. And that's, that's, that's what we're designing for. And then we have to treat them fairly in respect to that. Charlie?
CharlieNothing to add.
OtherZone 5. Roger Hill from Racine, Racine, Wisconsin. Gentlemen, a little change of pace. Could we get your opinion on the present situation with international exchange? Do you think we have a dollar problem or is the Japanese have a yen?
WarrenWell, I'm going to let Charlie answer that. I have no comment. That's probably a very good question, but the trouble is any time I say that's a very good question,
[1:09:30]
Warrenit's probably because I don't know the answer. And I, you know, I don't know the answer to that. Foreign Exchange baffles me, frankly. I mean, you know, I think in terms of purchasing power parity, because that's a natural way to approach it. But purchasing power parity does not work very well as a guide to how exchange values will behave in any shorter medium or maybe even long term because the world adapts in different ways. Sometimes it adapts by high rates of inflation to a sinking currency. Usually it does. It hasn't done that in respect to ours, but we're only sinking relative to a couple of other important currencies. I don't have a great answer for you on that. Sorry.
QuestionerZone 6. Hi, I'm Howard Winston from Cincinnati, Ohio. First, I wanted to thank you and Charlie for your sharing your time with us today. My question is, you've repeatedly said that you see many wonderful stock ideas, but can't invest because they're too small. Given that many in the audience today have a lower dollar investment threshold. Do these stocks have names?
WarrenWell said. Well, the answer to that is that we don't look anymore. We assume that there are a reason. reasonable number of opportunities as you work with smaller amounts of capital, because it's always been true. I mean, it was over the years, as I looked at things, clearly, you run into companies that are less followed as you get smaller, and there's more chances for inefficiency when you're dealing with something where you can buy $100,000 worth of it in a month rather than $100 million. But that is not because I'm carrying around in my head the names of 25 companies that we could put 100,000 in. I just don't look at that universe anymore. Sometimes people send me annual reports or get letters from managers, and they say, well, you know, I've got this wonderful thing. And I look, I usually know ahead of time, but I mean, I would first look at the size, and if the size isn't right and it isn't going to be virtually any time, I don't look any further, I don't look any further because there's just no time to be looking at at all kinds of smaller opportunities. I do think if you're working with very small amounts of money, that there almost always are some significant inefficiency someplace to find things that I've mentioned to some people. When I started out, I actually went through all of the Moody's manuals and the standard point manuals page by page.
[1:12:16]
WarrenAnd, you know, it's probably 20,000 pages, but there were a lot of things that popped out, and none of them were in any brokerage report or anything of the sort. They were just plain overlooked. And you could find out about them, but nobody was going to tell you about them. And my guess is that that that continues to be true, but not on anything like the scale it was then.
WarrenCharlie?
CharlieWell, I can remember when you bought one membership in some duck club that had oil under it when you were young. When you get down to one duck club membership, well, you're really scavenging for cigar butts. Not a bad cigar, but there were 98 shares outstead. It was the Delta Duck Club. And the Delta Duck Club was founded by a hundred guys who put in 50 bucks each, except two fellows didn't pay. So there were only 98 shares outstanding. They bought a piece of land down in Louisiana. And one time somebody shot downward instead of upward, and oil and gas started spewing forth out of the ground. So they renamed it Atlet, which is Delta's spelled backwards, which was sort of illustrated the sophistication of this group. And a few years later, they were taking a, at $3 barrel oil, they were taking about a million dollars a year in royalties out of the place. And the stock was selling at $29,000 a share. And it was earning $10,000 a share. No, it was earning about $7,000 a share after tax, about $11,000 pre-tax. And it had about $20,000 a share in cash. And it was a long, live field. So, you know, I use that sometimes as an example of efficient markets, because somebody called me and offered me a share of it. And those things, you know, is, is that an efficient market or not? You know, $29,000 for $20,000 of cash plus $11,000 of royalty income at $0.25 gas and $3 oil. I don't think so. You can find things out there. I'll give you hunting rights on all my duck clubs in the future.
QuestionerZone 1. Don't think the mic. How do Barksshire and Barkshire companies protect themselves against lawsuit-heavy lawyers? And is it possible for American businesses to survive the financial and time-consuming costs of dealing with lawyers?
WarrenIt's a good question. And we've probably had less litigation than any company that, you know, with a $25 billion market value in America. But it's, you know, and we were sued one time at Blue Chip Stamps.
Warrenit for, Charlie?
CharlieHow many billion by some guy that?
CharlieLots.
CharlieYeah, it was, you know,
[1:15:16]
Warrenyou cannot protect yourself against lawsuits, and there are, there's certainly a lot of frivolous ones. We've, like I say, we have, it's not been a drain on our time or money, but particularly time to date. And I think one thing you'd have to do is if you ran into anything of that sort you would not pay and you would make life as try to make life comparably difficult for the other party as they made it for you. But that has not been our experience so far. Charlie?
CharlieYeah, well, I can tell an Omaha story on that one, which demonstrates the Berkshire Hathaway technique for minimizing lawsuits. When I was a very young boy, I said to my father, who was a practicing lawyer here in Omaha, why do you do so much work for X, who was an old? overreaching blow hard. And so little work for Grant McFadden, who is such a wonderful man. And my father looked at me as though I was slightly slow in the head, and he said, Charlie. He said, Grant McFadden treats his employees right, his customers right, everybody right. When he gets involved with somebody who's a little nuts, he gets up from his desk and walks to where they are and extricates himself as soon as he can. And he says, Charlie, a man like Grant McFadden doesn't have enough law business to keep you in school. Ah, but X, he said. He's a walking minefield of continuous legal troubles, and he's a wonderful client for a lawyer. Now, my father was trying to teach me, and I must say it worked beautifully because I decided that I would adopt the Grant McFadden approach, and I would argue that Warren independently reached the same approach very early in life. Boy, has that saved us a lot of trouble. That is a, it is a good system. You can't, we basically have the attitude that you can't make a good deal with a bad person. And you can, and that means you just, we just forget about it. I mean, we don't try and protect ourselves by contracts or getting into all kinds of, you know, due diligence or, it just, we just forget about it. We, we can do fine over, over time, dealing with people that we like and in my and trust. So we have never, and a lot of people do get the idea because the bad actor will tend to try and tantalize you in one way or another, and you won't win. It just pays to avoid them. And I, we started out with that, with that attitude, and, you know, maybe one or two experiences have convinced us even more so that that's the way to play the game. Zone 2?
[1:18:13]
QuestionerI'm Clarence Cafferty from Long Pine, Nebraska. I'd like to know if we can get another 400 hitter by starting another boershine store someplace in this United States.
WarrenWell, it's an interesting question about both the boershimes and the mart. I mean, they, and of course, they're owned, as you probably know, historically by the same family. I mean, it was Mrs. B's sister's family that bought boersheims, but in effect started virtually from scratch. The, both of those institutions offer this incredible selection, low prices brought about by huge volume, low operating costs and all of that. Operating multiple locations, you would get some benefit, obviously, from the name and, and the reputation, but you would lose something in terms of the amount of selection that could be offered. there's $50 million plus at retail of jewelry at Boersheim's one location. Well, when someone wants to buy a ring or a pearl necklace or something of the sort, they can see more offerings at a place like that than they possibly could at somebody who's trying to maintain inventory at 20 or 50 locations. Similarly, that gives us a volume out of a given location that results in operating costs that, again, can't be matched if you're have an enormous number of locations. So I think those businesses tend to be more successful in that particular mode as one location businesses. Now, Helsbergs will be bringing merchandise to people all over the country at malls, and they will do through that mode of operation. They perform that exceptionally well. But Borsheims can't be Helsbergs, and Helsbergs can't be Borsheims. They're both going for two different, in a sense, two different customers to some degree. Saul Price, Charlie's friend who started the Price Club, the first big wholesale club, said that part of his success was due to figuring out the customer he didn't want. I think that's right, isn't it?
CharlieRight. Yeah, and you have to figure out what you're good at, who you really can offer something special to. Borson offers something very special to people, but in part it comes about through being at one location. You can see more of almost any kind of jewelry you want there than you're going to see virtually any place in the world. And that will bring people there or it will bring male people there. And that gives you operating costs that are many, oh, 20 percentage points off of what somebody else will be doing without that pulling
[1:21:16]
WarrenAnd that in turn enables you to offer the lower prices, which keeps the circle going. I mean, it's a, it's very hard to replicate something like that. And trying to do it in 10 spots probably wouldn't work well. But it's a question you ask yourself as you go along, obviously, when you McDonald certainly did well by deciding to open a second store. I mean, zone three.
QuestionerWarren, I'm Frank Martin from Elkhart, Indiana. You have written extensively on the subject of the immutability of return on equity for American industry as a whole being stuck in the 12 to 13 percent range. What forces do you see since we're above the main to cause that number to regress to the mean over time?
WarrenYeah, it's true. It has been higher in the last few years, although fortune's got some interesting figures in the current issue on the 500 that shows decade by decade what the return has been on the Fortune 500 group, which is a shifting group, of course. And it's tended to stick, although I would say it was more between 12 and 13 than 11 and 12, probably in that one. The return to some extent in certain businesses has gotten a big kick because they finally put the health liabilities on the balance sheet and therefore reduce equity. So if you, anything you do that tends to pull down equity, if it doesn't change your ability to do the same sales volume, it's leveraged American business in effect by putting the health. I liabilities on the balance sheet. I, it may be wrong. It may be that business can earn 15% or so. But I think competitive factors tend to, over time, keep pushing that number down somewhat. 12 or 13, when you think about it, is not bad at all. I mean, it's a level with 7% interest rates that allows stocks and equity to be worth much more when employed in equity than elsewhere in the world. But if I had to pick a figure for the next 10 years, I would pick some figure between 12 and 13, but that doesn't mean I'd be right on it. Charlie?
CharlieYeah. I think all of those published averages overstate what's earned anyway. They're the biggest companies. They're the winners. They're the ones whose stock sells at high multiple so they can issue it to other people for high-earning assets. And many of the low-returned people are constantly being dropped out of the, the figures. Now, you can say that was true in the past, too. But it would be remarkable to me if, on average, American business earned 13% on capital after taxes.
[1:24:14]
WarrenThose figures, incidental, this isn't a huge item, but it's not totally insignificant. They don't show us the cost, for example, the cost of stock options. And the American shareholders paid that. So the American shareholder has not gotten the returns on equity shown by those numbers, although it's not a huge factor. But I wouldn't be surprised if it was, you know, two or three-tenths of a percent just for that one cost that's omitted. If you let me omit my costs, I can show a very high return on equity. So on four.
OtherJeff Peskin from New York. And I have a question for you. It's really more of an observation in that you've written about when you look at acquiring a business, you look at a lot at how they allocate cash. capital. And my question is, once you acquire a stake in a company, do you find that just by the fact that you are helping doing the allocation of capital and doing the compensation, that that alone makes a company have a lot higher return, or is there some benefit by the fact that you own or some major shareholder owns a big slug of the company that also allows a company to increase its return on capital.
WarrenYeah. Well, that's a good question. The answer is sort of some of the time, some of the places. It's just the, there's no question in a business that earns a high rate on capital that doesn't have natural ways to employ that money within the business that we actually may contribute significantly to the long-term results of that business by taking the capital out. Because if they don't have a place to use it, nevertheless, they might well use it someplace, and we have the whole universe to spread that money over. So we can take the money that earned in some operating business, and we can buy part of the Coca-Cola company with it and buy into another wonderful business, whereas very few managements probably would do that. So there's an advantage there. Now, on the other hand, Helzbergs, for example, will probably grow very substantial. They'll probably use all the capital they generate. Maybe they'll even use more. Well, they don't really need us for that. I mean, they would have done that under any circumstances. We may actually give them the ability to grow even a little faster because if a company, and this is not the, these are not the Hellsberg's figures, but if a company is earning 20% on equity but can grow 25% a year, you know, they're going to feel equity strains at some point.
[1:26:47]
WarrenAnd we obviously would love the idea of supplying extra capital that would earn 20% on equity. So there can be some advantage to having us as a parent in terms of sending capital to the business as well as taking capital from the business. We also, I think, can be helpful in some situations in that once we are there, a lot of the rituals, particularly in a public company, but a lot of the things that people waste time doing in a business, they don't have to do with us. I mean, they're an awful lot of time spent in some businesses just preparing for committee meetings and directors meetings and all kinds of things like that, show and tell stuff. And none of that's needed with us. We won't go near them. And so we really free them up to spend 100% of the time thinking about what is good for the business over time. If they have extra money, they don't have to worry about what to do with it. If they need extra money for a good business, it'll be supplied. So there are some advantages that way. And I guess, Charlie, can you think of any further?
CharlieYeah, I think our chief contribution to the businesses we acquire is what we don't do.
Questionerit's hard to continue to grow at the rate you've grown in the past because the company has gotten so big. And I'm wondering if you could elaborate a little bit on that. And my second question, which is totally unrelated, but I've also read where you're very good with numbers, with working things in your head. And I'm totally a rookie when it comes to economics and accounting and things like that. But I'm very good with numbers and keeping things in my head. And I'm wondering if there's some way a mathematician who knows very little about the business world, what I could read or what I could do to learn how better to invest and how you did that.
WarrenWell, going to the first question, when you say it's going to be hard, it's going to be impossible. I mean, that's the answer. We cannot compound money at 23 percent from a $12 billion base. We don't know how to do that. It would be a mistake for anybody to think that we could come close to that. We think we can do okay with money, but, but the, we did not start with a $12 billion base, and we've never seen anybody in the world compound numbers like that at that rate. So we'll forget it, that part of it. But we'll, there are intelligent things we can be doing. The second part of the question, I don't think, I don't think any great amount of mathematical aptitude is,
[1:29:44]
Warrennot aptitude, but mathematical knowledge. is of advanced math is of no use in the investment process. An understanding of mathematical relationship, sort of an ability to quantify, a numeracy, as they call it. I think that's generally helpful in investments, because something that tells you when things make sense or don't make sense or sort of how an item in one area relates to something someplace else. But that doesn't really require any great mathematical ability. It really requires sort of a mathematical awareness and a numeracy. And I think it is a help to be able to see that. I mean, I think Charlie and I probably, when we read about one business, we're always thinking of it against a screen of dozens of businesses. It's just sort of automatic. But that's just like a ball, you know, a scout in baseball, thinking about one baseball player against an alternative. I mean, you only have a given number on the squat, and they're thinking, you know, one guy may be a little faster, one guy can hit a little bit better, all of that sort of thing. And it's always, in your mind, you are prioritizing and selecting in some manner. My own feeling about the best way to apply that is just to read everything in sight. You know, I mean, if you're reading a few hundred annual reports a year and you've read Graham and Fisher and a few things. You'll soon see whether it kind of falls into place or not. Charlie?
CharlieYeah. I think the set of numbers, the one set of numbers in America that are the best quick guide measuring one business against another are the value line numbers.
WarrenI'd agree with that. That stuff on the log scale paper going back 15 years, that is the best one shot description of a lot of big businesses that exists in America. I can't imagine anybody being in the investment business involving common stocks without that thing on the shelf. And if you sort of have in your head how all of that looks in different industries and different businesses, then you've got a backdrop against which to measure. I mean, you know, if you'd never, if you'd never watched a baseball game and never seen a statistic on it, you wouldn't know whether a 300 hitter was a good hitter or not. You have to have some kind of a mosaic there that your thinking is implanted against in effect. And the value line figures, they cycle it every 13 weeks, and if you ripple through that, if you ripple through that, you don't have a pretty good idea of what's happened over time in American business.
[1:32:41]
WarrenBy the way, I pay no attention to their timeliness ratings or stock ratings. None of that means anything. It's too bad they have to put. that there but that it's the statistical material not the I would like to have that material going all the way back they cut it off about what 15 years back yeah but I save the old ones yeah well you know I I wish I had that in the office but I don't yeah we Charlie and I maybe even I do it more we tend to go back and I mean if I'm buying Coca-Cola I'll probably go back and read the fortune articles from the 1930s on it or something I like a lot of historical background on things just to sort of get it in my head as to how the business has evolved over time and what's been permanent and what hasn't been permanent and all of that I'd probably do that more for fun than for actually a decision-making but it I think I think it is I think if you think if we're trying to buy businesses we want to own forever you know and if you're if you're thinking that way you might as well see what's been like to own them forever and look back away zone six
QuestionerI'm Stuart Horish from Salina Kansas When you first bought part of Wells Fargo a few years back, I looked at it and I couldn't tell it was any better than any of the other banks. I think now anybody that would look at it can tell it's better than almost any bank. Now you've bought P&C Bank, and again, I can't see how it's distinguished from any of the other banks. What did you see in PNC Bank that made you select it over all the other banks that were available?
WarrenWell, we're not going to give me any stock advice on that, so I think that that going back to Wells, it was very clear that if you, I knew something about Carl Reichert and to a lesser extent at that time, Paul Hazen, from having met him and also from having read a lot of things they said. So they were different, they were certainly different than the typical banker. And then the question was is how much did that difference make in terms of how they would run the place. And they ran into some very heavy seas subsequently, and I think probably the difference, I probably think those human differences that were pretty received earlier what enabled them to come through as well as they did. But that's about all I can say on banks. Well, you might add to that slightly because that Wells Fargo thing is a very interesting example. They had a huge concentration of real estate lending, a field in which people took the biggest,
[1:35:18]
Warrenthat was the biggest collapse in 40 or 50 years in that field, so that if they had been destined to suffer the same sort of average loss per real estate loan that an ordinary bank would have suffered. The place would have been broke. So we were basically betting that their real estate lending was way better than average. And indeed, it was. And they also handled it on the way down way better than average. So you can argue that everybody else was looking at this horrible concentration of real estate loans. and this sea of troubles in the real estate field and in bankers to the real estate field. And they just assumed that Wells Fargo was going to go broke. And we figured know that since their loans were way higher quality and their loan collection methods were way higher quality than others, it would be all right. And so it worked out. Probably couldn't have told that. If we hadn't, if we hadn't gone a little further, though, than just looking at numbers, we would not have been able to make that decision.
QuestionerZone one. David Carr, Durham, North Carolina. TAM brands and U.S. tobacco are two companies, which are primarily single-focused product companies that seem to possibly have some barriers to growth in unit sales and pricing and have employed a strategy of returning cash to shareholders through stock repurchases. Both companies have at times when they thought the stock was at a discount to intrinsic value, used debt to accentuate the repurchases. Those companies recently have talked about problems with going into a negative shareholders, a negative stated shareholder's equity position through the use of additional debt to repurchase more shares at a time when both companies believe their stock's very cheap and they appear to have the type of long-term cash flow that would at least allow that. Would you comment on the at least accounting treatment and the stated shareholders' equity and if you think that should be a real concern for management in those areas. What was the first coming besides U.S. Tobago? Tam Brands. Tam Brands? Yes. Yes. Yeah,
WarrenI don't think there's anything magic about whether shareholder equity is positive or negative. The Coca-Cola has a shareholder equity of $5 billion. It has a market value of $75 billion or so. Now, they're not going to do it, and I'm not going to recognize. recommend it, but if they were to spend $10 billion buying in their stock, they would have a negative shareholder's equity of $5 billion.
[1:38:14]
WarrenThey would, their credit would be sound. I mean, if somebody else were to buy the company for $75 billion, they'd have $5 billion of tangible assets and $70 billion of intangible assets. And there is nothing magic about a company having a positive shareholders' equity, and it isn't done very often. and I can't even think of a case where it's been done, but it may have been. But I see no, I see nothing wrong with a company having a negative shareholder's equity, although it may be prohibited by the state in which they're incorporated in terms of repurchasing shares at a time that would produce that. You have to look at the state law on that. But any time a company in an LBO or something is bought out at some very large number over book value, in effect, In effect, they're creating a negative, if they borrow enough money on it, they're creating a negative shareholder's equity in terms of the previous shareholders equity, and it's just a fiction as the numbers between the two organizations. You should buy in your stock when you don't have a use for the money, and that can be management specific. I mean, some management might have a use for the money if they, if their field of capital allocation were large enough, whereas another management that was more specialized in their own business might not. But once a company is attended to the things that are required or advantageous for the present business, we think reacquisition of stock is a very logical thing to consider as long as you don't think you're paying more than the intrinsic value of the business in doing it. And obviously, the bigger the discount from intrinsic value, the more compelling that particular use of money is. Charlie?
CharlieI've got nothing to add. Generally speaking, maybe Coca-Cola can have a negative equity, but I don't think would be a good idea for General Motors. I think there's something to be said for a positive shareholder's equity.
OtherZone 3? Edward Barr, Lexington, Kentucky.
QuestionerI had a twofold question. Number one, you mentioned American Express earlier, and I was curious as to whether the fact that credit card usage is only 10, percent of all transactions and that may continue to grow for some time going forward was a factor in your decision. And the other part of the question pertains to the durability and permanence of the banking franchise with regard to alternative delivery channels that may appear over the next few years,
[1:41:05]
Warrenincluding the possibility of the Microsoft Intuit merger. Well, the specific number you mentioned about credit card usage and so on, and that's not a big factor. with us. We think credit cards are both here to stay and likely to grow to some extent, although at some point you start reaching limits, at least in terms of outstanding, that people make any sense. But the credit card field is a very big field. The question is, is who's got the edge in it? Because everybody is going to want to be in it, and they already are, and there are a lot of different ways you can play the game. If you're in the credit card business, and you're better have some way of playing one part of the game, preferably a large part, but you better have some way of playing one part of the game better than others, or natural capitalistic forces are going to grind you down. I mean, it's a business that people are willing to change their minds about what they do in. I mean, if they, if you offer somebody a credit card that gives them some advantages that don't exist on their earlier card, people are quite willing to shift cards. So you need some kind of an edge in some particular segment of the market. So the growth aspects overall of the market were not a big, are not a big factor with us. It's really a question of figuring out who's going to win what game and who's going to lose what game. And what was the second question again on that?
QuestionerThe second question pertained to the permanence and durability of the banking franchise.
WarrenOh, yeah, sure. And whether alternative delivery channels over the next few years may erode the durability of that, including the Microsoft and to it, Roger. That's a good question. You're certainly seeing the value of bank branches diminish significantly. It used to be a point of enormous pride with management's in how many branches they had, and it was, you know, often political influence and everything else was called into obtaining branch. permits and the world will change in banking probably in some very major ways over a 20 or 30 year period, exactly what players will benefit and which ones will be hurt. You know, it's a very tough question, but I would expect, I would not, I don't think I'd expect really significant change in banking over the next five years, but I'd certainly expect it over the next the next 20 years. And there are a lot of people that have their eye on that market
[1:43:50]
Questionerincluding Microsoft, as you mentioned. It may be to their advantage to hook up with the present players. I mean, I know it's certainly something that gets explored, but they may figure out a way to go around the present players, too. And that's one investment consideration. Charlie?
CharlieYeah, the interesting player that went around the rest was Merrill Lynch. Merrill Lynch went heavily into banking with its cash management accounts, and I don't think it's the only innovation that'll come along. What's the name of that book? You know, I've forgotten. That's a marvelous book. Maybe Molly remembers. What was that book you gave me? It was the history of the credit card. Was it Joe No, Joe No Serra's or?
QuestionerYeah, Joe No Serra was the author. I don't remember the title.
CharlieBut came out about six months to a year ago. It's a terrific history of the credit card business. And if you read that, you will get some idea of the amount of change that it can occur in something like, you know, the movement of money. And my guess is that if there's another edition of it in 20 years, there'll be plenty more to write about some. By the way, that is a fabulous book. Most of the people who are here will not be able to put it down. I mean, for a book about an economic development, it captures the human background in a very interesting way.
OtherIs it zone four? That seems far over there for zone three.
QuestionerYeah. I was Adam Engel from Boulder, Colorado. I was wondering if you could comment on the moat you see around the castles of SunTrust and PNC.
WarrenWell, I don't think I should comment on anything on specific holdings like that. But so I would, I would say you would look at those in a general way very much as you'd look at banking operations first. Then you try and figure out what are the specific strengths. your weaknesses of both organizations. But there again, I don't want to spoil the fun for you. Charlie?
CharlieNothing to add.
OtherZone 5. My name is Bob McClure. I'm from the States, but I live in Singapore. About a week ago in the Asian Wall Street Journal, a remark was attributed to Mr. Munger, specifically that owning Solomon Brothers was like owning a casino with a restaurant in the front. The casino alluding to the proprietary trading and the restaurant to the so-called client-driven business, if that attribution is correct or accurate, can you elaborate on why you view the business in that way?
CharlieI don't think it's entirely correct, but I have a pithy way of speaking on occasion, and I frequently speak.
[1:47:02]
Warrenin a way that works with an end group, but wouldn't necessarily work everywhere else. And every once in a while, when you take one of those wise-ass comments out of context, why I very much wish that it hadn't occurred, this was such a case. It won't stop him in the future, though, or me.
OtherZone 6. Which one are we in? Kelly?
QuestionerMr. Buffett, I'm Randallel Bellows from Chicago. And the two questions I have since you're answering questions so far afield are, if you were to look at the balance sheet of the United States of America, is the national debt as frightening as that it appears to be? And secondly, in terms of redeployment of capital, if Coca-Cola is such a wonderful investment, has returned so much, why not redeploy some capital in purchasing additional shares of Coca-Cola? And finally, thank you for letting Jane do that portrait of you. And if it's good, we'll do Mr. Munger next. Thank you.
WarrenFirst question about the U.S. balance sheet. The net national debt is about, it would be about 60-odd percent of GDP. Without counting unfunded pensions. Yeah, but that's, but also with a claim on the income in effect of, effect, of, of, of, of, of, of, of, of, of, of, uh, but that figure, I think at the end of World War II may have been, uh, I know it was around at least 125 percent, may have been 150 percent or so of GDP. So we have sustained, now, the interest, the interest rate on that debt was much lower. A lot of it was at 2.9 percent, because that's what say. savings bonds paid. But that level of debt, which I don't advocate, in relation to GDP, turned out to be quite sustainable. And as a matter of fact, it drifted down year after year for a long time until the early 80s, when it started rising again. And now it's actually fallen a little bit in the last few years, the ratio of debt to GDP. There are a lot of measurements of how much debt is too much and all of that. But probably, I, I think that if I had to look at one single statistic, I would look at that ratio, just like I would look at a ratio of debt to income for an individual. Then you'd get into the question of the stability of the income and to whom it is owed. But I do not think that the, that the, that the level, of debt relative to the economy is of anything that's of a frightening nature. I like the idea of it trending downward a little bit over time rather than trending upward. And if it keeps trending upward, it can get awkward, although it's, I think in Italy it's close
[1:50:50]
Warrento 150 percent now. And you start getting to 150 percent and talk 8 percent interest rates, and you're talking 12 percent of GDP is essentially going to interest. If you were to put a balance sheet of the country together, it's kind of interesting because you would have this $4 billion of net debt on the liability side, and you'd also have a lot of pension obligations, as Charlie mentions on the liability side. But you've got a lot of assets, too. You've got a 35 percent profits interest in all the American corporations. I mean, the government, if it has a 35 percent tax rate, really owns 35 percent of the stock. of American business. They own a significant part of Berkshire Hathway. We write them a check every year. We don't write you a check every year, but we write them a check. We plow your earnings back to create more value for their stock with, in other words, the taxes they get. You're trying to cheer these people out. But what would you, what would you pay to have the right today to receive all the future corporate tax payments made by all the companies in the United States, the discounted value of it? a very big number. What would you pay to have a right to take a percentage of the income of every individual that makes more than X in the United States and also the right to change your percentages you went along? That's a very big number, too. So you've got a very big asset there. And you've got some very big liabilities, too. But the country is very solvent, and I would not like to see debt rise in any rapid rate. I wouldn't like to see it rise at all, but I wouldn't like to see it particularly at a rapid rate because that sets a lot of things in motion if it's rising as a percentage of GDP. But if you tell me that 20 years from now, the national debt will be $10 trillion, but that it'll be the same percentage of GDP, does that alarm me? Not in the least. I mean, so I expect it to increase, and I think there's some arguments why even why it may be advisable to have an increase, but I don't think it's a good idea to have it take up more and more of your income, because that sets a lot of other things in motion. So I welcome what's happened in the last couple of years, which is to see a decrease modestly from the trend that existed the previous 10 or 12 years. Charlie?
CharlieWell, generally, I think that you're right, that it isn't all bad, and to the extent that it is bad, a great nation with a
[1:53:34]
Warrencapitalistic economy will stand quite a bit of abuse on the political side. It's a damn good thing, too, because I don't think we should be terribly discouraged. If there's anything that's really going to do the country in, it'll be what I call a serpico effect, where you start rewarding what you don't want more of, and it then just grows and grows and grows. But I don't think that's necessarily a bad fiscal result. It's just a bad result. $800 million or whatever it is now in debt, and then we have another $3 billion sum up float. You know, those numbers would have sounded very big to me 25 years ago, and yet, you know, we're one of the most conservatively financed operations you'll find. Ten years from now, we may owe more money, and it may be a smaller percentage still. I mean, you can't talk about debt levels without relating it to the ability to pay debt. And this country is probably in better financial shape now than it was in 1947. zone one. Was there a second question I didn't answer on that? Oh, in terms of repurchasing shares, right. No, you said, why don't we buy more? Well, we think about it. We did. Yeah, we did. We bought more last year, and it's not a bad measuring stick against buying other things. I would not rule out Berkshire buying more. I don't have any plans to do it right now, but I wouldn't rule that out at all, because If I'm going to look at another business, I will say, you know, why would I rather have this than more Coca-Cola?
CharlieWell, there he's saying something that is very useful to practically any investor when he said, use this as a measuring stick in terms of buying other things. For an ordinary individual, the best thing you have easily available is your measuring stick. If it isn't, if the new thing isn't better than what you already know as available that hasn't met your threshold, then that screens out, you know, 99% of what you see, and it's an enormous thought conservor, and it is not taught in the business schools by and large. No, and that's why we think it's slightly nuts when big institutions decide because everybody else is doing it to put 4% of their money in international equities or 3% in emerging growth country, some damn thing like that. I mean, it, it, that, the only reason to put the money in there is that they measured against what they're already doing, and if they measured against what they're already doing, and they think
[1:56:24]
Charlieit's a screamingly good idea, to leave 97% in the other place and put 3% in, you know, I mean, it just doesn't make any sense whatsoever, but it's, it's, it's what committees are talked to about and what keeps investment managers going to conferences and everything. They're, they're deliberately using a technique that takes away the best mental tool they have. You can say, this is nuts, and you're right, and I think Nietzsche said it pretty well when he said he laughed at the man who thought he could walk better because he had a lame leg. I mean, they literally are blinding themselves, and then they're teaching our children how to do this in our own business schools. Very interesting, don't you think? And what all Warren says is deciding whether to do something, just compare the best opportunity you have. If that one is better and you're not taking it, why would you do this? Just because somebody tells you you need 2% in international equities.
QuestionerZone 1. Hi, my name is Mark Wheeler. I'm from Portland, Oregon. And I have a few eggs in your basket. My grandmother always said, don't put all your eggs in one basket. I have a question. I think you answered this a couple of years ago in one of your reports about Little Abner's investment approach. suppose I had $100,000 and I decided to buy four or five more of your shares. And that was sort of a buy-and-hold thing for four or five years. And also I have a money manager. I've already got one. And he does pretty well, 10, 15%, but he churns the assets all the time. You know, every time I turn around all this mailbox full of paperwork. I guess my question is, how can you know, how can you know, I arrive at which is a better deal for me? In other words, to buy Berkshire, which I like, and obviously I'm here, so I'm interested in it, or hang on to my money manager who just seems to be churning the hell out of the account.
WarrenWell, it's better than have a broker churning the hell out of the account. He had a little less incentive if he's getting a management fee. But I can't answer your question as to which decision you should make in that case. But I would say that if you're right in the sense that if you're buy Berkshire, you should only think about buying it for a very long period of time. I mean, we have no idea what Berkshire is going to do either intrinsically or in the market in the next year. And, you know, we care about the intrinsic part of it. We don't care about the market aspect.
[1:59:05]
WarrenWe do care about building intrinsic value. And, you know, in the end, we don't think, when we own Berkshire, we don't think of all our eggs being in one basket. I mean, because we have got a lot of good businesses. But, but if you're talking about some, you know, lightning from someplace, the huge liability suit or something like that hitting one corporate entity were one corporate entity. But if you think about it in terms of the business risk implicit in an entity, we have a lot of different good businesses. In fact, we probably have as decent a collection of good businesses as any company I can think of. But your money will also undoubtedly have the advantage of working with probably with smaller sums, too, and that gives him a bigger universe of opportunity. We're not set up tax-wise perfectly as compared to an individual working with their own capital. We're set up tax-wise fine for somebody's going to sort of own it forever, but we're not set up tax-wise as well for somebody that's going to own it a year or something of the sort. Charlie? Anything to add. Zone what? Hope back there? I don't think it's on. Okay. I'm Jeff Johnson. I'm grateful to be here from Tulsa, Oklahoma. I have two questions. First, I was hoping you could explain or offer an opinion as to why investors in property casualty insurance companies are willing to accept traditionally below-average type of returns. Second question relates to an answer you gave me yesterday, that being that intuition or gut feeling has nothing to do in your making investment decisions. I was wondering if there is anything subjective in yours and Mr. Munger's assessment of whether or not you like someone and how it is that you determine whether or not you like the the Lord of the Castle. I don't know, Charlie, do you want to answer that second part?
CharlieWell, we spoke about agency costs. There are two different kinds. of agency costs. One, the guy favors himself at the expense of the shareholders, and the other is he does foolish things where he's not trying to favor himself. He just is foolish by nature. Either way, it's very costly to you as the shareholder. So you have to judge those two aspects of human character, and they're terribly important. On the other hand, there are some good businesses so good that they'll eat. easily stand a lot of folly in the managerial suite. Much as we like perfect people, I don't think we've always invested with them.
[2:02:10]
WarrenBut generally, we like people who are candid. We can usually tell when somebody's dancing around something or when the reports are essentially a little dishonest or biased or something. And it's just a lot easier to operate with people that are candid. And we like people that are smart. I don't mean geniuses, but that, and we like people who are focused on the business. It's not real complicated, but we generally, you know, there may be a whole bunch of people in the middle that we don't really have any feeling on one way or the other, and then we see some that we know we don't want to be associated with and some that we know we very much enjoy being associated with. Averaged out, we've been very fortunate. Very lucky. And your other question, you said, Why is it that these investors accept below average results? Well, in the nature of things, approximately half the investors are going to get below average results. They didn't exactly accept it in advance. It's just the way it turned out. And the money tends to be fairly captive once it's in a company. I mean, it takes a lot. If you have a business that gets subnormal returns over time, there's a big threshold in terms of either a take. over or proxy fight or something like that to unleash the capital. So money that's tied up in an unprofitable business or a sub-profitable business is likely to stay tied up for a good period of time. Eventually something will probably correct it, but but capitalism does not operate so efficiently as to move capital around promptly when it's misallocated. We are in a better position to do that when Berkshire owns the company, and obviously we're in no position to do it because it involves something we don't want to do if we own it through some other in some other enterprise. We just sell to somebody else who takes our chair at the table in effect.
QuestionerZone three. Hi, Philip King from San Francisco. I've got another question about valuation. More specifically, the relation of PEs to interest rates. I understand that You don't want to lay down a rigid formula for valuation. But I also know that you don't want people to think that a multiple of 20 times earnings is cheap or a multiple of five times earnings is expensive. So Benjamin Graham, he devised a central value theory that valued the average stock at an earnings yield that's about a third above bond yields. In other words, that would work out to maybe 11 times earnings currently.
[2:05:02]
QuestionerAnd I know that you've compared the average business. to a 13% bond that's worth roughly book at 13% interest rates and worth perhaps roughly twice book at 6% interest rates. So given current interest rates of 7% to 8% as they are now, that would tend to imply that stocks are worth perhaps 12 to 13 times earnings. And yet the acquisitions that I've seen in the private market have gone out at more like 17 to 20 times earnings. And I'd like to know what do you think is the rough range of multiples that makes sense.
WarrenYeah, well, it isn't a multiple of today's earnings that is primarily determinate of things. We bought our Coca-Cola, for example, in 1988 and 89 on this stock had a price of $11 a share, which as low as nine as high as 13, but it averaged about $11. And it'll earn, we'll say, most estimates are between $1,000. 2.30 and 240 this year. So that's under five times this year's earnings, but it was a pretty good size multiple back when we bought it. It's the future that counts. It's like what I wrote there, what William Gretzky says to go where the puck is going to be, not where it is. So the current multiple interacts with the reinvestment of capital and the rate at which that capital is invested to determine the attractiveness of something now. And we are affected in that value process to a considerable degree by interest rates, but not by whether there's 7.3 or 7.0 or 7.5. But, I mean, we will be thinking much differently if their long-term rates are 11% or 5%. But we don't have any magic multiples in mind. We're thinking we want to be in the business that 10 years from now is earning a whole lot more money than it is now, and that we will still feel good about the prospects of the business at that time. That's the kind of business we're trying to buy all of, and that's the kind of business that we try and buy part of. And then sometimes we buy others, too.
WarrenCharlie?
CharlieWe don't do any of that rigid formula like stuff. There's a general framework that you can call a formula in our mind, but we also don't kid ourselves that we know so much about the specifics that we would actually make a calculation in terms of the equation. When we bought Coke in 88 and 89, we had this idea about what we thought the business would do over time, but we never reduced it to making a calculation. Maybe we should, but I mean, it just, we don't think there's that kind of precision.
[2:08:02]
WarrenDo we think it's the right way to think in a general way, and we think if you try to, if you think that you can do it to pinpoint it, you're kidding yourself, and therefore we think that when we make a decision, there ought to be such a margin of safety that it ought to be so attractive that you don't have to carry it out to three decimal places. We'll take a couple more, and then we'll have to leave. We've got a director's, we have one director's meeting a year, and we don't want to disappoint them.
QuestionerYes, I'm Roy Christian from Aftos, California. I wanted to ask one question about U.S. Air, which has not been questioned much at this meeting. When you were on television talking about the losses there, it was funny how so many of my friends or maybe acquaintances came forward to tell me this. this piece of startling news. And, you know, I tried to stand up for you a little bit. It was a mistake. You should have just taken a dive. Well, at least I wanted to point out to that you did have dividends over a period of about five or six years and that that money was reinvested maybe at a better return than the U.S. Air, so that it wasn't quite the disaster that was pictured on television when you spoke about it. or the impression that all my friends or I shouldn't call them acquaintances pointed out to me. Just a comment, I guess, is what I'm asking for.
WarrenYeah, well, you're right. It could have been worse, but it was a mistake. But we received five years, I guess, yeah, it would be five years of dividends at a good rate while we got it. But it's like somebody says it isn't the return on principle that you care about. It's the return of principle. And we, but we're better off, we're a lot better off, obviously, than if we bought the common, and we're even better off than if we bought some other stocks, but it was still a big mistake on my part. But just keep standing up for me. I need all the help I can get on this one.
QuestionerZone 5. Hi, I'm Chris Stavreau from New York. Charlie, in addition to the book that you mentioned on credit cards, are there any other books you have been reading that you'd recommend to And Warren, are there any books that you've been reading that you'd recommend? I know you're a fan of Bertrand Russell, any favorite one or two of his books.
CharlieIt's been a long time since I've read those stuff. I mean, I read a lot of Russell, but I did that a lot.
[2:10:39]
WarrenHe hasn't written much of the last 10 or 15 years. Charlie?
CharlieThere's a textbook which is called, I think, judgment and managerial decision making. It's used in some of the business schools, and it's actually. quite a good book. It's not sprightly, it's not written in a sprightly way that makes it fun to read, but there's a lot of wisdom in it. Something like Brabberman or, but it's judgment and managerial decision-making. Since taking up computer bridge, which is 10 hours a week, it's really screwed up my reading. It's a lot of fun, though.
OtherZone 6, take a couple more and then we'll
QuestionerYes, I'm Dick Leighton from Rockford, Illinois. This is the first, meeting that I've attended, and it's been very beneficial to me. I've been extremely impressed with a number of people here, but even more so with the number of young people who have come. And I would like very much to be able to bring my grandchildren as shareholders, but I find it difficult to get shares into their hands with the current per unit.
WarrenThat's the nicest introduction to the stock split question we've had. It really is, too. I thought you would appreciate that. Obviously, you understand the question. I understand the position you've taken over the years, and the fact that it adds no value to make the split. In this case, however, it could be a tax savings to many of us who would like to get stock shares into the hands of other family members. Should I just go to work on my congressman to change the tax code, or would you consider a change? change. Well, that's a very valid question. And there's certainly a couple of areas, one of which you've just mentioned, and I had someone else mentioned to me that they had their Berkshire in an IRA account, and now they were getting into the mandatory payout arrangement, and they, and it didn't work well in terms of using the Berkshire, although I think they could sell it to them payout a percentage of it. But there are certain aspects, primarily of gifting, where it is true. anywhere from awkward to disadvantage, disadvantage, to have the price per share on a stock that exists with Berkshire. And, you know, we're aware of it. We've thought about it. And we've got our own personal situations even sometimes that are involved in that. I've got one in the family, which we've worked figured out ways around. The disadvantage, of course, is that is that that you saw a little even earlier this year of what a book can do.
[2:13:37]
WarrenWe want to attract shareholders who were as investment-oriented as we can possibly obtain, with as long-term horizons. And to some extent, the publicity about me is negative in that respect, because I know that if we had something that it was a lot easier for anybody with $500 to buy, that we would get an awful lot of people buying it. people buying it, who didn't have the faintest idea what they were doing, but heard the name bandied around in some way. And secondly, to the extent that ever created a market that was even that was stronger, you then would have people buying it simply because it was going up. We got a little bit of that going on this year. There are a lot of people that are attracted to stocks that are going up. It doesn't attract us, but it attracts the rest of the world to some degree. So we are almost certain that we would get, we don't know. we don't know the degree to which it would happen. We are almost certain we would get a shareholder base that would not have the level of sophistication and the synchronization of objectives with us that we have now. That is almost a cinch. And what we really don't need in Berkshire stock is more demand. I mean, that is not, we don't care to have it sell higher except as intrinsic value grows. Ideally, we would have the stock stock price exactly parallel the change in intrinsic value over time because then everybody would be treated fairly among our shareholders. They would all gain just or lose as the company gained or lost over their ownership period. And anything that artificially stimulated, the price in one period simply means that some other period shareholders are going to be disappointed. I mean, we don't want the stock to sell it twice intrinsic value or 50% above intrinsic value. We want the intrinsic value to grow a lot. And I don't think there's any question, but that we would get a worse result in that aspect if we introduce splits in because then people would think about other possibilities that that might give the stock a temporary boost. We had a tabulation in Business Week a couple of months ago on turnover on the exchange. We were at 3 percent, and I don't think anybody was, that I saw on the list, was under double digits and bigger numbers. Well, those are people that are simply, you know, they're shareholders leaving frequently and new shareholders coming in with shorter term anticipations. We have wanted this to be as much like a private partnership as we can
[2:16:11]
Warrenhave with everybody having the ability of buy it. We don't think the minimum investment is too high in this investment world. I mean, there are all kinds of investment opportunities that are limited to 25,000 or 50,000 and that sort of thing. But the problem of making change, you know, in terms of gifts or, you know, that I wish I had a better answer for, because I think that is a, that is a, that is a, my grandchildren pay me the difference between $20,000 and the current price. And I think that's a very reasonable way for them to behave, particularly when they are sometimes, they're only six weeks old. You need, you need a spouse's consent to make it. to work with with 20, obviously. But most of the things can be solved, but I'll admit it isn't as easy to solve as if we just had a stock denominated in a lower dollars per share. I do think that once you get a shareholder base that has got, that has different objectives or expectations or anything, you can't get rid of it. I mean, you can keep a, you can keep a shareholder base like Berkshire, but you can't reconstruct it if you, if you, if you just. destroy it in some way. And it's important us who we're in with. I mean, it enables us to, I think it helps us in our operation. I think it even may, in some cases, it may even help us in acquisitions in terms of who we attract. It may, for all I know, it may hurt us someplace, too, that I don't know about, but I don't think so, because I think we can design, particularly with a preferred stock, we can design something to satisfy somebody who might have in mind a different denomination security. around you, are we really likely to do a lot better? This is a good bunch. That may be a good question to end on, and I appreciate it. I appreciate all of you coming, and we'll see you next year.