[0:00]
OtherOkay, we have no afternoon movie. So we'll get to business in a second. If everybody will just find their seats, please. I've been advised by Mark Hamburg to make sure I make clear what I may not have made clear earlier.
WarrenIn terms of the figures we gave you about the first quarter, A, I think I said we had $16 billion of cash or cash equivalence, which is correct. We had a $290 million pre-tax underwriting profit. I think I said that. What possibly I may have misstated, we had a billion 700 million pre-tax operational gain. We had actually also, by coincidence, very close to a billion seven of after-tax accounting securities gains. But our operating gain, excluding security gains, was a lot of. about a billion seven pre-tax. Let's start right in at number one.
QuestionerYes, my name is Oliver Grouser, and I'm from Vienna, Austria. My question has two parts. So the first part is, how do you get a few excellent investment ideas to be so successful? Do you read any special? newspapers or industry magazines? Or do you visit the headquarters or any subsidiaries of companies? And which sources of information like books, for example, value lines, standard and POS, Moody's, databases like Reuters, Bloomberg, data, stream, annual reports, internet and so on, do you use to get the right impression of a company? And the second part, if you think that a company like the Washington Post, GECO, or Gillette, has a very competitive product, what are the steps before you ultimately decide to invest in the company? Which publications do you read to get the best knowledge of the project? and how important is the balance sheet and profit and loss account a statement of the company. Thank you very much.
OtherThank you.
WarrenThe answer to the first part is sort of, and maybe the second part, is sort of all of the above. I mean, we read a lot, and we read daily publications, we read weekly or monthly periodicals, we read annual reports, we read 10Ks, we read 10 Qs, and fortunately the investment business is a business where knowledge accumulates. I mean, everything you learn when you're 20 or 30, you may tweak some as you go along, but it all kind of builds into a knowledge base that's useful forever. And we, at least, you know, I read, Charlie used to read, may still read a fair amount, but I read a lot of 10Ks, read a lot of annual reports. 40 or 50 years ago, I did a lot of talking to management. I used to go out and take a trip every now and then and really drop in on maybe 15 or 20 companies.
[3:49]
WarrenI haven't done that for a long, long time. I find everything we do, pretty much I find through public documents. When I made an offer for Clayton Holmes, I'd never visited the business. I'd never met the people. I'd done it over the phone. I'd read Jim Clayton's book. I looked at the 10Ks. I knew every company in the industry. I look at competitors. And I try to, you know, I try to understand the business and not have any preconceived notions. And there is adequate information out there to evaluate a great many businesses. We do not find it particularly helpful to talk to managements. Managements frequently want to come to Omaha and talk to me. And they usually have a variety of reasons that they say they want to talk to me, but what they're really hoping is we get interested in their stock. That never works. You know, management are not the best reporting parties, in most case. The figures tell us more than a management does. So we do not spend any real amount of time talking to management. When we buy a business, we look at the record to determine what the management's like. And then we want to size them up personally, as I said earlier, whether they will keep working. But we don't give a hoot about anybody's projections. We don't even want to hear about them in terms of what they're going to do in the future. We've never found any value in anything like that. But just the general business knowledge, you know, what we've seen work, what we've seen has not worked. There's a There's a lot you absorb over time. Charlie?
CharlieYeah, the more basic knowledge you have, I think the less new knowledge you have I think the less new knowledge you have to get. And the game is a lot like that fellow that plays chess blindfolded. He's got a memory of the board and everything that happened before. And that enables him to do the next move in a way he never could if you just showed him the board. board mid-game cold. And so there, and in terms of what publications, I don't know, Warren, I would hate to give up the Wall Street Journal.
WarrenOh, you'd also hate to give up the Buffalo News.
CharlieYeah. But you could, well, you want to read lots of financial materials that comes along. And actually, the New York Times has a far better business section than they had 25 years ago. But you, you, you know, you want to read lots of financial materials as it comes along. You want to read Fortune. You want to read lots of annual reports.
[6:48]
WarrenYou really want to have a database in your mind so that you can tell what kind of a business you're looking at in general by looking at the figures. It's far over rate. We never look at any analyst reports. I mean, I don't think, you know, if I read one, it was because the funny papers weren't available. You know, it just isn't, I mean, I don't understand why people do it. do it. But there's a lot of data out there. And, you know, the beauty of it is, it's what makes the investment game great, is you don't have to be right on everything. You don't have to be right on 20% of the companies in the world, or 10% of the companies in the world, or 5%. You only have to get one good idea every year or two. So it's that's something, you know, when I used to be very interested in horse handicapping, and the old story was, and I hope Bob Dwyer is still here, you know, you can beat a race, but you can't beat the races. And you can come up with a very profitable decision on a single company. I would hate to be measured. If somebody gave me all 500 stocks in the S&P and I had to make some prediction about how they would behave relative to the market over the next couple of years, I don't know how I would do. But maybe I can find one in there where I think I'm not in 10, 90% in being right. It's an enormous advantage in stocks. You only have to be right on very, very few things in your lifetime as long as you never make any big mistakes. What's interesting is that at least 90% of the professional investment management operations don't think the way we do at all. They just think if they hire enough people, they can be better at determining whether Pfizer or Merck is going to do better over the next 20 years. And they can do that stock by stock all through the 500 and have wide diversification. And at the end of 10 years, they'll be way ahead of other people. And of course, they won't. Very few people have this idea of searching for just a few opportunities. Yeah. You wait for the fat pitch. Ted Williams wrote about that in a book called The Science of Hitting. He said the most important thing in being a good hitter. you know, is to wait for the pitch in the sweet spot, basically. But, you know, I've always said that the way to get a reputation for being a good businessman is to buy a good business. You know, it's much easier than taking a lousy business, you know, and showing how wonderful you are at it,
[9:38]
Questionerbecause I haven't seen that done very often. Number two. Good afternoon. David Winters, Mountain Lakes, New Jersey. Thank you again for hosting the Berkshire weekend. It's just great. Interest rates are the lowest they've been in, I think, two generations. Equity values in aggregate are still high. Berkshire has meaningful free cash flow, a short-duration bond portfolio, and your buyer of low-multable, high-quality private businesses, and a few stocks. Assuming that the stimulative economic policy is to deal with a recession eventually cause interest rates to go up and maybe equity values to come down, Berkshire seems very well positioned to benefit. benefit. Would you comment? And also, are there any concerns on both of your parts about investors inadequately understanding the conglomerate structure of Berkshire and then, therefore, improperly pricing the shares?
WarrenWell, to answer the second question first, we hope the latter wouldn't be true because we do our best to explain it. I mean, I used 14,000 words in the last annual report, which caused certain members of my family to ask whether I was getting paid by the word. word. We want you to understand Berkshire, and I hope that comes through. That's why we have these kind of meetings. That's why we spend a lot of time writing an annual report. We try to tell you what we would like if the position was reversed, and if our positions were reversed. And we think that the information in the annual report, if read by somebody, that they have to have some understanding of business and accounting, but if they don't, you you know, nothing is going to help, really, in terms of helping them with the business. But we think if they have some understanding of it, we have given them the information that Charlie and I would need in order to come up with our rough ideas of the valuation of Berkshire, and we hope we get across what it's all about. You know, there are a lot of companies in Berkshire, but it's not important that you understand the nuances of every single one. Looking at what happens in aggregate, in many cases, will be will be sufficient. In terms of how we're positioned, you know, we have 16 billion of cash, not because we want 16 billion of cash, or because we expect interest rates to go up, or because we expect equities to go down. We have 16 billion of cash because we don't see anything that makes us want to part with that cash where we feel we're getting enough
[12:07]
Warrenfor our money. But we would spend it Monday morning on the right sort of business, or even if we could find equities that we liked, or if we could find like last year we found some junk bonds we like. We're not finding them this year at all because prices have changed it dramatically. So we're not really ever positioning ourselves. We're simply trying to do the smartest thing we can every day when we come to the office. And if there's nothing smart to do, cash is the default option. Charlie?
CharlieIn terms of future opportunities, the issue is, is it all likely that there'll be an opportunity like 1973-4 or 1982 even, when equities generally are just mouth-watering. I think there's a very excellent chance that neither were not or I will live to see either of those occasions again. If so, Berkshire's not going to have a lot of no-brainer opportunities. We're going to have to grind ahead the way we've been doing it recently. which is not all bad. It's not impossible, though, we'll get some mouth-watering opportunities. I mean, you just don't know in markets. It's unbelievable what markets do over time. And since you brought up interest rates, you know, in Japan, the 10-year bond is selling to yield 5 eighths of 1%. Five-eighths of 1%. I don't think there's anybody in our annual meeting of 20 years ago, certainly including Charlie and myself, who would have dream with a 10-year bond of a country, you know, running a significant deficit would be selling at 5 eighths of 1%. I mean, would you say so, Charlie? Would I ever? But strange things happen. Strange things happen. But if that could happen in Japan, something much less horrible for the investing class could happen in the United States. It's not unthinkable. I mean, we could be in for a considerable period when the average, intelligent, diversified investor in common stocks using fancy paid advisors just doesn't do very well. But you can argue that if what we warned against and hope doesn't happen with derivatives should happen, it might create enormous opportunities for us in some arena. I mean, you know, we wouldn't be good for society, but it might very well turn out to be good for us. If you get chaotic markets, you had a somewhat disorganized market in junk bonds last year, because there were a lot of them created much faster than the funds available to absorb them were coming in. Now, this year, you have just the opposite situation.
[15:14]
QuestionerYou have money pouring into the junk bond funds, billion dollars a week, roughly, and that's changed the whole price situation. The world hasn't changed that much. It's just that that the chaos has left the market for those instruments. Number three? Yes. Hello, Paul Thomasick, Thornton, Illinois. Ben Graham and the model of value investing, I'd like to bring discussion back to that. And what's interesting and exceptional about you and Charlie and Ben Graham is the self-discipline, the incredible self-discipline. And if you look at the model and try to think how to present it, to teach others that self-discipline, I think you have to make a little tweak to it in two areas. And that's what I'd like you to comment on. One, intrinsic value. It's always discussed that you calculate intrinsic value, but in practice, I think you find a number that is guaranteed 99% likely to be less than intrinsic value. Classic example was in 2000 when you said you'd buy shares back at 45,000. You weren't saying that Berkshire Hathway's intrinsic value was 45,000, you were saying it was significantly more, and anyone who board it for less than $40,000, $45,000 is grateful to you. The other area is the hidden assumption in the