Berkshire AGM 1995 excerpts-2
AFTERNOON SESSION
“It’s never a policy of ours to hold a lot of cash”
WARREN BUFFETT: Cash 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 we — if we have cash around, it’s simply because we haven’t found anything we like to do, and we hope — 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.
Newspaper business is “exceptionally good,” but not as good
WARREN BUFFETT: Well, I used to love it in two respects. I loved the economics and I loved the activity, both. The activity — the love of the activity has 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 almost the most bulletproof of franchises is still an exceptionally good business, but it isn’t quite as bulletproof as might’ve 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 in. But if you’re talking pure economics, the — 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 the feeling of absolute certainty that I had — that I would’ve had 10 or 15 years ago.
Charlie?
CHARLIE MUNGER: Yeah, I think it’s obvious, I — the newspaper proprietors are getting a touch of paranoia for the first time.
I mean, they worry about the electronic revolution, they worry about the fact that young people, you know, don’t read. It’s not as much fun going to newspaper conventions as it used to be.
WARREN BUFFETT: They’re still making exceptional money. I mean, that’s the interesting thing.
CHARLIE MUNGER: 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.”
WARREN BUFFETT: That’s right, that is true. (Laughter)
People feel better when they’re on the second floor of an elevator that’s just come from one than they do when they’re on the 99th floor coming down from a hundred, there’s no question about that.
Comparing investing styles of Ben Graham and Phil Fisher
WARREN BUFFETT: I don’t know what the percentage would be. I’m a hundred percent 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, and 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 a hundred percent Ben Graham and a hundred percent 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 out of GEICO, which was precisely that 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’ve felt that Phil Fisher’s approach was less teachable than his, but his had a more limited value because it was not workable with really large sums of money.At Graham-Newman Corp — Graham-Newman Corp was a closed-end fund — oh, it was technically an open-end fund, but it had $6 million of net worth. And Newman and Graham, the partnership that was affiliated with it, had 6 million. So, you had a total pool of 12 million.
Well, you could go around buying little machine tool companies — stocks in machine tool companies, whatever it might be, all statistically cheap. And that was a very good group operation.
And he had — you have — if you own a lousy business, you have to sell it at some point. I mean, 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 MUNGER: What 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 great fiscal solvency, and integrity, and so forth. It just dominated a lucrative field.And along came the computer, and now you could create, for a few million dollars, a title plant 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 yore, 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.
WARREN BUFFETT: From what looked like a monopoly.
CHARLIE MUNGER: So, very few companies are so safe that you can just look ahead 20 years. And technology is sometimes your friend and it’s sometimes your bitter enemy. If Title Insurance and Trust Company had been smart, they would’ve looked on that computer, which they saw as a cost reducer, as one of the worst curses that ever came to man.
WARREN BUFFETT: 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 to securities, you know, it will work. It just may not work on a very big scale, and there may be periods when you’re not doing much. Ben 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 and approach.
We’ll keep a dollar if we can make more than a dollar of value
WARREN BUFFETT: Well, we have never bought back shares. I — 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 over a dollar of 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 — we’ll 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 measured — it’s measured partly on what’s going on now, and 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 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.
“Not too likely” we’ll buy a business outside the U.S.
WARREN BUFFETT: 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 percent-plus of their earnings from non-U.S. sources, and Gillette has maybe two-thirds or thereabout.So, you can argue that almost 40 percent of the net worth of Berkshire — 35 to 40 percent — is operating outside the United States, 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’ll happen. We’d like to do it, particularly if it were large and if we understood it. But are we as likely to get a fix on a Helzberg’s of Europe as we would a Helzberg’s 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.
Helzberg has unusually good sales for jewelry retailer
WARREN BUFFETT: Well, we have not put out the figures on Helzberg’s, 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 considerably more in the current year.
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 have a terrific manager, a fellow named Jeff Comment, who’s going to be running it.
It earns good returns on invested capital or 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 Helzberg’s. The typical jewelry store operation is not a very good business, but we think we’ve got two good operations.
Business schools should study Mrs. B’s success
WARREN BUFFETT: You might argue that Mrs. B. [Nebraska Furniture Mart founder Rose Blumkin], having started what you may have seen out there this weekend, with $500 in 1937, you know, without a day in school in her life, and building that into a great enterprise, you might say, “Well, that is something to study.”
I mean, is it because she couldn’t speak English when we got — you know, she got over? Maybe we can explain to people — I mean, 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?
I mean, here is a success. Something has made her a success. You know, is it something — is it a 200 — and she’s very smart — but is it a 220 IQ? No, it isn’t. It’s a very smart woman, but it’s not something that’s incapable of being replicated in the habits and the way of thinking. But who is studying her?
I mean, they present her 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.
“We let .400 hitters swing the way they want to swing”
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, and 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.
We don’t look for small stock bargains anymore, but they exist
WARREN BUFFETT: Well, the answer to that is that we don’t look anymore. We assume that there are a 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 am 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. I —
Sometimes, people send me annual reports, or I get letters from managers and they say, you know, “I’ve got this wonderful thing.” 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, because there’s just no time to be looking 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.
I’ve mentioned to some people, when I started out, I actually went through all of the Moody’s manuals and the Standard and Poor’s manuals page by page. And you know, it was 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 had to — You could find out about them, but nobody was going to tell you about them. And my guess is that continues to be true, but not on anything like the scale it was then.
“Advanced math is of no use” in investing
WARREN BUFFETT: Well, going to the first question, when you say it’s going to be hard — it’s going to be impossible. I mean, now that’s the answer. We cannot compound money at 23 percent from a $12 billion base. We don’t know how to do that, and it would be a mistake for anybody to think that we could come close to that. We still — we think we can do OK with money, but 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 there are intelligent things we can be doing.
The second part of the question, I don’t think any great amount of mathematical aptitude is —not aptitude, but mathematical knowledge is a — advanced math is of no use in the investment process.And understanding a 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, and —
But that’s just like a scout in baseball thinking about one baseball player against an alternative. I mean, you only have a given number on the squad and thinking, you know, “One guy may be a little faster, one guy can hit a little 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?
CHARLIE MUNGER: Yeah. I think the set of numbers — the one set of numbers in America that are the best quick guide to measuring one business against another are the Value Line numbers.
WARREN BUFFETT: I’d agree with that
WARREN BUFFETT: Yeah, we — Charlie and I — maybe even, I do it more — we tend to go back. 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 probably do that more for fun than for actually decision making.
But I think it is — I think if you think about if — we’re trying to buy businesses we want to own forever, you know, and if you’re thinking that way you might as well see what it’s been like to own them forever, and look back a ways.
National debt isn’t scary now, when compared to GDP
WARREN BUFFETT: First question about the U.S. balance sheet, it — the net national debt is about — it would be about 60-odd percent of GDP.
CHARLIE MUNGER: Without counting unfunded pensions.
WARREN BUFFETT: Yeah, but that’s — but also with a claim on the income, in effect, of future citizens, which was an asset, too, that you could set up the —But that figure, I think, at the end of World War II, may have been — 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 rate on that debt was much lower. A lot of it was at 2.9 percent because that’s what 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 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 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, I think it’s close to 150 percent now. And you start getting to 150 percent, and talk 8 percent interest rates, and you’re talking 12 percent of GDP 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 interest — 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 Hathaway. 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, in other words, the taxes they get.