巴菲特 1998 年佛罗里达大学演讲英文逐字稿（82 分钟，带时间轴）
这份英文逐字稿是对 1998 年巴菲特佛罗里达大学演讲完整音轨的转写：开场那段品格课，以及随后一个多小时的全部现场问答——日本、长期资本管理公司、工作与薪水、护城河、喜诗糖果、可口可乐、犯过的错、宏观与华尔街、分红与卖出、分散投资、品牌与定价权、下跌的市场，直到最后关于「卵巢彩票」的问题。按句合并、逐段带时间轴，人名与公司名做过校正。
演讲人：沃伦·巴菲特（Warren E. Buffett）· 场合：佛罗里达大学（University of Florida, Gainesville）商学院，面向 MBA 学生 来源：【中文字幕】沃伦·巴菲特 1998 年在佛罗里达大学的演讲（FuVenture 上传版，01:22） 中文精读讲义：《巴菲特 1998 年佛罗里达大学演讲》讲义
说明：这份逐字稿是把视频音轨交给本地 Whisper 转写的，不是官方字幕。原视频是一份 1998 年的录像带转制版， 画面自带硬中文字幕，音频里既有巴菲特本人的讲述、也有现场观众的提问（远场麦克风，部分段落听感较差）。 人名、公司名按上下文做了校正（例如 Kiewit、See’s Candy、Salomon、General Re、Candler、Haghani / Hilibrand / Scholes 等）， 口语重复与语气词照录。逐字稿只求可核对，不作润色。
章节速览
00:00:00开场：SunTrust 的玩笑00:00:52一段小布道：正直、聪明、精力，以及「买下同学 10%」的游戏00:06:22提问一：日本00:09:07提问二：长期资本管理公司（LTCM）与杠杆00:18:57提问三：工作、薪水与「过得好一点」00:20:27提问四：什么样的公司是好公司（护城河）00:27:45提问五：怎么给生意定价（喜诗糖果、品牌与心智份额）00:34:16提问六：定性 vs 定量、能力圈、scuttlebutt00:38:34提问七：亚洲危机与可口可乐00:44:30提问八：我犯过的错00:49:06提问九：宏观、华尔街与「活动的代价」00:53:15提问十：不分红的伯克希尔、什么时候卖出01:00:10提问十一：分散投资01:02:27提问十二：可乐 vs 宝洁 vs 麦当劳 vs 吉列；公用事业；市值大小01:10:24提问十三：房地产与 REITs01:14:17提问十四：下跌的市场对净买入者是好事01:17:00提问十五：如果重来一次——「卵巢彩票」
[00:00] I’d like to just say a few words preliminarily and then the highlight for me will be getting your questions in a few minutes because I want to talk about what’s on your mind. I urge you to throw hard balls. It’s more fun for me if you put a little speed on the pitches as they come in. You can ask about anything except last week’s Texas A&M game. That’s off limits.
[00:00] We have a couple men here from SunTrust. I was just up at the Koch meeting and I sit next to Jimmy Williams there who ran SunTrust for many years and he wanted to be sure that I wore this SunTrust shirt down here. I’ve tried to get sponsorship on the senior golf tour. I haven’t had much luck but now in the banker store I’m doing a little bit better. He said I got a percentage of the increase in deposits in Gainesville. So I’ll go out for SunTrust, dear old SunTrust.
[00:00] I would like to talk for just one minute to the students about your future when you leave here because you’re going to learn a tremendous amount about investments and you’ll learn enough to do well. You’ve all got the IQ to do well.
[00:01] You’ve all got the initiative and energy to do well or you wouldn’t be here. And most of you will succeed in meeting your aspirations. But in determining whether you succeed, there’s more to it than intellect and energy.
[00:01] And I’d like to talk for just a second about that. In fact, there was a fellow that Pete Kiewit in Omaha used to say that he looked for free things in hiring people. Look for integrity, intelligence and energy. And he said if that person didn’t have the first two, that the latter two would kill them.
[00:01] Because if they don’t have integrity, you want them dumb and lazy. You don’t want them smart and energetic. And I’d really like to talk about that first one because we know you’ve got the second two. And play along with me in a little game for just a second in terms of thinking about that question.
[00:02] You’ve all been here, I guess almost all of your second year MBAs, and you’ve gotten to know your classmates. And think for a moment that I granted you the right to buy 10% of one of your classmates for the rest of his or her lifetime.
[00:02] Now, you can’t pick one with a rich father. That doesn’t count. I mean, you’ve got to pick somebody who’s going to do it on their own merit. And I gave you an hour to think about it. Which one are you going to pick among all your classmates as for the one you want to own 10% of for the rest of their lifetime?
[00:02] And are you going to give them an IQ test? Pick the one with the highest IQ? I doubt it. Are you going to pick the one with the best grades? I doubt it.
[00:02] You’re not even going to pick the most energetic one necessarily. You’re the one that displays the most initiative. But you’re going to start looking for qualitative factors in addition to it because everybody’s got enough brain here.
[00:02] And I would say that if you thought about it for an hour and decided who you’re going to place that bet on, you’d probably pick the one who you responded the best to.
[00:03] Because the one that was going to have the leadership qualities, the one that was going to be able to get other people to carry out their interests. And that would be the person who was generous and honest and gave credit to other people even for their own ideas.
[00:03] All kinds of qualities like that. And you could write down those qualities that you admire in this other person, whoever you admire most in the class.
[00:03] And then I would throw in a hooker. I would say as part of owning 10% of this person, you had to agree to go short 10% of somebody else in the class. That’s more fun, isn’t it?
[00:03] And you think, well, now who do I want to go short of? And again, you wouldn’t pick the person with the lowest IQ or the, you would start thinking about the person really who turned you off for one reason or another.
[00:03] I mean, they had various qualities, quite apart from their academic achievement. But they had various qualities. And in the end, you shouldn’t really want to be around them.
[00:03] And other people didn’t want to be around them. And what were the qualities that lead to that? Well, there’d be a whole bunch of things. You know, but it’s the person who’s egotistical, the person who’s greedy, the person who’s slightly dishonest, cuts corners, all of these qualities.
[00:04] And you could write those down on the right-hand side of the page. As you looked at those qualities on the left and right-hand side, there’s one interesting thing about them.
[00:04] It’s not the ability to throw a football 60 yards. It’s not the ability to run the 100-yard dash in 9-3. It’s not being the best-looking person in the class.
[00:04] They’re all qualities that if you really want to have the ones on the left-hand side, you can have them. I mean, they’re qualities of behavior, temperament, character that are achievable.
[00:04] They’re not forbidden to anybody in this group. And if you look at the qualities on the right-hand side, the ones that you find turn you off in other people, there’s not a quality there that you have to have.
[00:04] If you have it, you can get rid of it. And you can get rid of it a lot easier at your age than you can at my age. Because most behavior is habitual, and they say the chains of habit are too light to be felt until they’re too heavy to be broken.
[00:05] And there’s no question about it. I see people with these self-destructive behavior patterns at my age or even 10 or 20 years younger, and they really are entrapped by them.
[00:05] They go around and they do things that turn off other people right and left. And they don’t need to be that way, but by a certain point, they get so they can hardly change it.
[00:05] But at your age, you can have any habits, any patterns of behavior that you wish. It’s simply a question of which you decide. And why not decide the ones that, I mean, if you like, Ben Graham did this, Ben Franklin did it before him, but Ben Graham in his low teens looked around and he looked at the people he admired.
[00:05] And he said, you know, I want to be admired, so why don’t I just behave like them? And he found there was nothing impossible about behaving like them.
[00:05] And similarly, he did the same thing on the reverse side in terms of getting rid of those qualities. So I would suggest that if you write those qualities down and think about them a little while and make them habitual, you will be the one that you want to buy 10% of when you get all through.
[00:06] And the beauty of it is you already own 100% and you’re stuck with it, so you might as well be that person as somebody else. Well, that’s a short little sermon, so let’s get on to what you’re interested in.
[00:06] And like I say, you can go all over the lot, so I don’t know exactly how we’re going to handle this, but let’s start with a hand here someplace or other.
[00:06] Where did we go with the first one? Yeah, right here. Your thoughts about Japan? My thoughts about Japan? I’m not a macro guy. Now, I say to myself, Berkshire Hathaway can borrow money for 10 years at 1% in Japan now.
[00:06] 1%. And I say to myself, gee, I took Graham’s class 45 years ago and I’ve been working hard at this thing all my life. Maybe I can earn more than 1% if I really work hard at it.
[00:06] 1% annually. It doesn’t seem impossible, does it? So I wouldn’t want to get involved in currency risk, so I’d have to do it in something that was yen-denominated.
[00:06] So I have to be in Japanese real estate or a Japanese business or something of the sort and all I have to do is beat 1%, and that’s all the money’s going to cost me.
[00:07] And I can get it for 10 years. So far, I haven’t found anything. It’s kind of interesting. Japanese companies earn very low returns on equity, and they have a bunch of businesses that earn 4%, 5%, 6% on equity.
[00:07] And it’s very hard to earn a lot as an investor when the business you’re in doesn’t earn very much money. Now, some people do it. In fact, I’ve got a friend, Walter Schloss, who worked with Graham at the same time I did.
[00:07] And it was the first way I went at stocks, to buy stocks selling way below working capital, very cheap, quantitative stocks. I call it the cigar butt approach to investing.
[00:07] You walk down the street and you look around for a cigar butt someplace, and finally you see one, and it’s soggy and kind of repulsive. But there’s one puff left in it.
[00:07] So you pick it up, and the puff is free. I mean, it’s a cigar butt stock. I mean, you get one free puff out of it, and then you throw it away, and you walk down the street and try to buy another one.
[00:08] I mean, it’s not elegant. But if you’re looking for a free puff, it works. Those are low return businesses. But time is the friend of the wonderful business.
[00:08] It’s the enemy of the lousy business. If you’re in a lousy business for a long time, you’re going to get a lousy result, even if you buy it cheap. If you’re in a wonderful business for a long time, even if you pay a little too much going in, you’re going to get a wonderful result if you stay in a long time.
[00:08] I find very few wonderful businesses in Japan at present now. They may change the culture in some way so that managements get more stockholder responsive over there and returns are higher.
[00:08] But at the present time, you’ll find a lot of low return businesses. And that was true even when the Japanese economy was booming. I mean, it’s amazing.
[00:08] They had an incredible market without incredible companies. They were incredible in terms of doing a lot of business, but they weren’t incredible in terms of the return on equity that they achieved.
[00:08] And that finally caught up with them. So we have so far done nothing there. But as long as money is 1%, I’ll keep looking. I mean, that’s… Yes. Yeah.
[00:09] You were rumored to be one of the rescue buyers of long-term capital. What was the play there? What did you see? Well, there’s a story in the current Fortune magazine.
[00:09] One has Rupert Murdoch’s picture on the cover that tells the whole story of our involvement. It’s kind of an interesting story because… Well, it’s a long story, so I won’t go into all the background of it.
[00:09] But I got the really serious call about long-term capital probably, what, four weeks ago, this Friday, whenever it was. It was my granddaughter. I got it in mid-afternoon, and my granddaughter was having her birthday party that evening.
[00:09] And then I was flying that night to Seattle to go on a 12-day trip with Gates to Alaska on a private train, all kinds of things, where I was really out of communication.
[00:09] But I got this call on a Friday afternoon saying that things were really getting serious there. I’d had some other calls before that the article gets into a few weeks earlier.
[00:09] I know those people, most of them pretty well. A lot of them were at Salomon when I was there. And the place was imploding, and the Fed was sending people up that weekend.
[00:10] And so between that Friday and the following Wednesday, when the New York Fed, in effect, orchestrated a rescue effort, but without any federal money involved, I was quite active, but I was having this terrible time because we were sailing up through these…
[00:10] sort of these canyons, which held no interest for me whatsoever in Alaska. And the captain would say, you know, if we just steer over here, we might see some bears and whales.
[00:10] And I said, steer where you got a good satellite connection. But we put in a bid on Wednesday morning. By then I was in Bozeman, Montana, and I talked to Bill McDonough, the head of the New York Fed, about 10 o’clock.
[00:10] They were having me, the bankers, at 10 o’clock that morning in New York, and I caught him. We actually delivered a message to him. He called me out there in Wyoming a little bit before 10 New York time, and we made a bid.
[00:11] It was because it was being done at a long distance and everything. It was really the outline of a bid. But in the end, it was a bid for $250 million, essentially, for the net assets.
[00:11] But we would have put in $3.75 billion on top of that, and it would have been $3 billion from Berkshire Hathaway, $700 million from AIG, and $300 million from Goldman Sachs.
[00:11] And we submitted that, but we put a very short time fuse on it, because when you’re bidding on $100 billion worth of securities that are moving around, you don’t want to leave a fixed-price bid out there very long, plus we were worried about it getting shopped.
[00:11] In the end, the bankers made the deal. But it was an interesting period. The whole long-term capital management, and I hope most of you are familiar with it, but the whole story is really fascinating, because if you take John Meriwether and Eric Rosenfeld, Larry Hilibrand, Greg Hawkins, Victor Haghani, the two Nobel Prize winners, Merton and Scholes,
[00:12] if you take the 16 of them, they probably have as high an average IQ as any 16 people working together in one business in the country, including at Microsoft or wherever you want to name.
[00:12] So there’s an incredible amount of intellect in that room. Now, you combine that with the fact that those 16 had had extensive experience in the field they were operating.
[00:12] I mean, these were not a bunch of guys who had made their money, you know, selling men’s clothing, and then all of a sudden went into the securities business or anything.
[00:12] They’d had, in aggregate, the 16 had probably had 350 or 400 years of experience doing exactly what they were doing. And then you throw in the third factor, that most of them had virtually all of their very substantial net worths in the business.
[00:12] So they had their own money up, hundreds and hundreds of millions of dollars of their own money up, super high intellect, working in a field they knew, and essentially they went broke.
[00:12] And that to me is absolutely fascinating. I mean, if I ever write a book, it’s going to be called Why Smart People Do Dumb Things. My partner says it should be autobiographical, but I, but, but this might be an interesting illustration.
[00:13] And these are perfectly decent guys. I, you know, I, I, I, I respect them and they helped me out when I was, had problems with Salomon. And so they, they, they, they’re, they’re not bad people at all.
[00:13] But to make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish. That is just plain foolish. It doesn’t make any sense what your IQ is.
[00:13] If you, if you risk something that is important to you for something that is unimportant to you, it just does not make any sense. I don’t care whether the odds are a hundred to one that you succeed or a thousand to one that you succeed.
[00:13] If you hand me a gun with a thousand chambers, a million chambers in it, and there’s a bullet in one chamber and you said, put it up your temple. How much do you want to be paid to pull it once?
[00:13] I’m not going to pull it. You know, you can name any sum you want, but it doesn’t do anything for me on the upside. And I think the downside is fairly clear.
[00:14] So I’m not interested in that kind of a game. And yet people do it financially without thinking about it very much. There was a great book, it wasn’t a great book, it was a great title.
[00:14] There was a lousy book written once with a great title by Walter Gutman. The title was, You Only Have to Get Rich Once. Now, that seems pretty fundamental, doesn’t it?
[00:14] What is, what difference, if you’ve got a hundred million dollars at the start of the year and you’re going to make 10% if you’re unleveraged and 20% if you’re leveraged 99 times out of 100, what difference does it make at the end of the year whether you’ve got 110 million or 120 million?
[00:14] It makes no difference at all. I mean, if you, if you die at the end of the year, you know, the guy that writes up the story may make a typo and he may say 110, even if he had 120, so you’ve got nothing at all.
[00:14] You know, what, it can’t, it makes absolutely no difference. Makes no difference to your family, makes no difference to anything. And yet, the downside, particularly managing other people’s money, is not only losing all your money, but it’s, it’s disgrace and humiliation and, and facing friends whose money you’ve lost and everything.
[00:15] I, I just, I just can’t imagine an equation that that makes sense for. And yet, 16 guys with very high IQs who are very decent people entered into that game.
[00:15] And, you know, I think it’s madness and it’s, it’s, it’s produced by an over-reliance to some extent on things, you know. Those guys would tell me back when I was at Salomon, you know, that a six sigma event wouldn’t, you know, wouldn’t, wouldn’t touch us.
[00:15] Or a seven sigma event. But they were wrong. I mean, their, their, their, history does not tell you the probabilities of future financial things happening.
[00:15] And they had a great reliance on mathematics and they felt that, that the beta of the stock told you something about the risk of the stock. It doesn’t tell you a damn thing about the risk of the stock in my view.
[00:15] And, and, and, and sigmas do not tell you about the risk of going broke in my view. And maybe in their view now too. But, but I, you know, I, I, I don’t, I don’t like to even use them as an example because they are, I mean, the same thing in a different way could happen to any of us probably where we, where we really have a blind spot about something that’s crucial
[00:16] because we know a whole lot about something else. It’s like Henry Kaufman said the other day, he said the people that are going broke in this situation are just two, of two types.
[00:16] The ones who knew nothing and the ones that knew everything. And, uh, it’s, it’s, it’s, it’s sad in a way. I urge you in anything, we never basically borrow money.
[00:16] I mean, we, we get to float through our insurance business and do things, but I, I never borrowed money. I never borrowed money when I had 10,000 bucks basically because what difference did it make?
[00:16] I was having fun as I went along and it didn’t make any difference whether I had $10,000 or a million dollars or $10 million, uh, you know, except if I had a medical emergency or something had come along like that.
[00:16] But I was going to, I was going to do the same things when I had a lot of money as when I had very little money. You know, if you think about the difference between me and you in terms of how we live, you know, we wear the, we wear the same clothes basically.
[00:17] SunTrust gives me mine, but you, I mean, what, we, so we wear the same clothes. We, we, we eat, you know, we, we all have a chance to drink the juice of the gods here.
[00:17] But we, we all go to McDonald’s or better yet, Dairy Queen. And, uh, uh, and we, we live in a house that’s, that’s, that’s warm in winter and cool in summer.
[00:17] And, and, and we watch, uh, Nebraska, Texas A&M on a big screen. You know, you, you see it the same way I see it. We do everything. Our lives aren’t that different.
[00:17] You know, you’ll, you’ll get decent medical care if something happens to you and I’ll get decent medical care. The only thing we do is we travel differently.
[00:17] You know, I ride around this little plane. I love it. And that takes money. But if you leave, if you leave that aside, if you leave that, we travel differently.
[00:17] But other than travel, you know, I would, I think about it. Think, what, what can I do that you can’t do? Now, I get to work in a job that I love, but I’ve always worked in a job I love.
[00:18] I love that when I, and I love that just as much when I, when I, when it was a big deal, if I made a thousand bucks. And I urge you to work in jobs you love.
[00:18] I mean, I think you’re out of your mind. If you take, keep taking jobs that you don’t like because you think it’ll look good on your resume. I was with a fellow at Harvard the other day who was taking me over to talk.
[00:18] And he was 28 and he was telling me what he’d done in life and, which was terrific. And, and then I said, what are you going to do next? And he said, well, he said, after I get out my, my, uh, MBA, he said, I think maybe I’ll go to work for management.
[00:18] I’m a consulting firm because it’ll look good on my resume. I said, what do you think? If you’re 28, you’ve been doing all these things. I mean, you’ve got a resume that’s 10 times as good as anybody I’ve ever seen it already.
[00:18] I said, if you take another job you don’t like, just for, I said, isn’t that a little like saving up sex for your old age? You know, I mean, there comes a time when you ought to just start doing what, you know, I think I got the point across to him.
[00:18] But you ought to take a job. When you get out here, take a job you love. Don’t take a job that, you know, you think is going to look good on your resume.
[00:19] Take a job you love. You may change it later on, but you’ll jump out of bed in the morning. I mean, when I got out, when I got out of Columbia, the first thing I tried to go to work for Graham immediately.
[00:19] I offered to go to work for him for nothing. He said I was overpriced. But I kept pestering. I went out to Omaha and I sold securities for three years and I kept writing him and giving him ideas and doing all these things.
[00:19] Finally, I went to work for him for a couple of years and it was a great experience. But I always really worked in a job, I worked in a job that I would, you know, love doing.
[00:19] And you should really take a job that if you were independently wealthy, you would take. That’s the job to take because that’s the one that you’re going to have great fun in.
[00:19] You’ll learn something. You’ll be excited about it. And you can’t miss. You may go do something else later on, but you’ll get way more out of it. And I don’t care what the starting salary is or anything of the sort.
[00:19] I don’t know how I got off on that, but there I am. So I do think that if you think you’re going to be a lot happier if you’ve got 2x instead of x, you’re probably making a mistake.
[00:20] I mean, you ought to find something you like that works with that and you’ll get in trouble if you think that making 10x or 20x is the answer to everything in life because then you will do things like borrow money when you shouldn’t or maybe cut corners on things that your employer wants you to cut corners on.
[00:20] It just doesn’t make any sense. You won’t like it when you look back on it. Would you talk to the students about the companies they can like? I don’t mean names.
[00:20] I mean what makes the company something that you like. I like businesses I can understand. We’ll start with that. That narrows it down about 90%. I mean, see, there are all kinds of things I don’t understand, but fortunately, there’s enough I do understand.
[00:20] You’ve got this big, wide world out there. Almost every company is publicly owned, so you’ve got all American business practically available to you. Now, to start with, it doesn’t make sense to go with things that you think you can understand, but you can understand some things.
[00:21] I can understand this. I mean, you can understand this. Anybody can understand this. I mean, this is a product that basically hasn’t been changed much, I’ve added the cherry, but since 1886 or whatever it was, and it’s a simple business.
[00:21] It’s not an easy business. I don’t want a business that’s easy for competitors, so I want a business with a moat around it. I want a very valuable castle in the middle, and then I want the duke who’s in charge of that castle to be honest and hardworking and able, and then I want a big moat around the castle,
[00:21] and that moat can be various things. The moat in a business like our auto insurance business at GEICO is low cost. I mean, people have to buy auto insurance, so everybody’s going to have one auto insurance policy per car, basically, or per driver, and I can’t sell them 20, but they have to buy one.
[00:21] When are they going to buy it on? They’re going to buy it based on service and cost. Most people will assume the service is fairly identical among companies or close enough, so they’re going to do it on cost, so I’ve got to be the low-cost producer.
[00:22] That’s my moat. To the extent my costs get further lower than the other guy, I’ve thrown a couple of sharks into the moat. But all the time, if you’ve got a wonderful castle, there are people out there who are going to try and attack it and take it away from you.
[00:22] And I want a castle that I can understand, but I want a castle with a moat around it. 30 years ago, Eastman Kodak’s moat was just as white as Coca-Cola’s moat.
[00:22] I mean, if you were going to take a picture of your six-month-old baby, and you’re going to want to look at that picture 20 years from now, and you’re going to want to look at it 50 years from now, and you’re never going to get a chance.
[00:22] I mean, you’re not a professional photographer, so that you can evaluate what’s going to look good 20 or 50 years ago. What is in your mind about that photography company is what counts, because they are promising you that the picture you take today is going to be terrific to look at 20 or 30 or 50 years from now
[00:22] about something that’s very important to you, maybe your own child or whatever it may be. Well, Kodak had that in spades 30 years ago. They owned that.
[00:22] They had what I call share of mind. Forget about share of market. Share of mind. They had something in everybody’s mind around the country, around the world, with a little yellow box and everything, that said Kodak is the best.
[00:23] That’s priceless. They’ve lost some of that. They’ve been lost at all, and it’s not due to George Fisher. George is doing a great job, but they let that moat narrow.
[00:23] They let Fuji come and start narrowing the moat in various ways. They let him get into the Olympics and take away that special aspect that only Kodak was fit to photograph the Olympics.
[00:23] So Fuji gets there, and immediately in people’s minds, Fuji becomes more on a parody with Kodak. You haven’t seen that with Kodak. Kodak’s moat is wider.
[00:23] Now that it was 30 years ago. You can’t see the moat day by day, but every time, you know, the infrastructure gets built in some country that isn’t yet profitable for Coke but will be 20 years from now, the moat is widening a little bit.
[00:23] Things are all the time changing, that moat in one direction or another. Ten years from now, you can see the difference. Our managers of the businesses we run, I’ve got one message to them, you know, which is to widen the moat.
[00:24] And we want to throw crocodiles and sharks and everything else, gators, I guess, into the moat to keep away competitors. And that comes about through service, it comes about through quality of product, it comes about through cost, it comes about sometimes through patents, it comes about through real estate location.
[00:24] So that’s the business I’m looking for. Now, what kind of businesses am I going to find like that? Well, I’m going to find them, I’m going to find them in simple products because I’m not going to be able to figure out what the moat’s going to look like for Oracle or Lotus or Microsoft ten years from now.
[00:24] I mean, Gates is the best businessman I’ve ever run into and, you know, they’ve got a hell of a position but I really don’t know what that business is going to look like ten years from now.
[00:24] And I certainly don’t know what his competitors’ businesses are going to look like ten years from now. Now, I’ll name one I don’t own. I know what the chewing gum business is going to look like from ten years from now.
[00:24] I mean, the internet is not going to change how we chew gum. And nothing much else is going to change how we chew gum. And then there are going to be lots of new products that really, you know, our spearmint and juicy fruit and all those are going to evaporate.
[00:25] It isn’t going to happen. You give me a billion dollars and tell me to go in the chewing gum business and try and make a real dent in Wrigley’s, I can’t do it.
[00:25] And that’s the way I think about business. I say to myself, give me a billion dollars and how much can I hurt the guy? Give me ten billion dollars. Give me ten billion dollars and how much can I hurt Coca-Cola around the world?
[00:25] I can’t do it. Well, those are good businesses. Now, give me some money and tell me to hurt somebody in some other fields and I can figure out how to do it.
[00:25] So I want a simple business, easy to understand, great economics now, honest and able management and then I can see about in a general way where they’re going to be ten years from now.
[00:25] And if I can’t see where they’re going to be ten years from now, I don’t want to buy it. Basically, I don’t want to buy any stock where if they close the New York Stock Exchange tomorrow for five years, I won’t be happy owning it.
[00:25] I buy a farm and I don’t get a quote on it for five years and I’m happy if the farm does okay. I buy an apartment house, don’t get a quote on it for five years, I’m happy if the apartment house produces the returns that I expect.
[00:26] But people buy a stock and they look at the price the next morning and they decide whether they’re doing well or not doing well. It’s crazy because they’re buying a piece of a business.
[00:26] That’s what Graham, the most fundamental part of what he taught me. You’re not buying a stock, you’re buying a part ownership and a business. You will do well if the business does well and if you didn’t pay a totally silly price.
[00:26] And that’s what it’s all about. And you ought to buy businesses you understand. Just like if you’re buying farms, you ought to buy farms you understand.
[00:26] It’s not complicated. In calling us Graham Buffett, I mean, it’s just pure Graham. I was very fortunate because I picked up a book when I was 19. I got interest in stocks when I was about 6 or 7 and I bought my first stock when I was 11 but I was playing around with all this stuff and I had charts and volume
[00:26] and I’m making all kinds of technical calculations and everything and then I picked up a little book and it just said that you’re not buying some little ticker symbol that bounces around every day.
[00:26] You’re buying a part of a business and as soon as I started thinking about it that way everything else followed. Very simple. So we buy businesses we think we can understand.
[00:27] There’s no one here that can’t understand the Coca-Cola company. I would say there’s no one here that can understand some new internet company. I said at the annual meeting this year that if I were teaching a class in business school on the final exam I would pass out the information on the internet company
[00:27] and ask each student to value it and anybody that gave me an answer I’d flunk. I don’t know how to do it. But people do it every day. I mean it’s more exciting.
[00:27] I mean if you look at it like going to the races or something that’s a different thing but if you’re investing I mean investing is putting out money to be sure of getting more money back later at an appropriate rate and to do that you have to understand what you’re doing it in.
[00:27] I mean you have to understand the business and you can understand some businesses but not all businesses. Yep. Warren so you covered half of it which is trying to understand a business and buying a business but you also alluded to getting a return on the amount of capital you invest in the business as an investor
[00:28] and that comes back to what are you paying for the business. How do you determine what do you think is a fair price to pay for the business? It’s a tough thing to decide but I don’t want to buy into any business I’m not terribly sure of.
[00:28] So if I’m terribly sure of it it probably doesn’t it probably isn’t going to offer incredible returns. I mean why should something that is essentially a cinch to do well offer you 40% a year or something like that.
[00:28] So we don’t have huge returns in mind but we do have in mind never losing anything and I mean we bought See’s Candy in 1972. See’s Candy was then selling 16 million pounds of candy at $1.95 a pound and it was making two bits a pound or $4 million pre-tax.
[00:28] We paid $25 million for it. Took no capital to speak of. When we looked at that business basically my partner Charlie and I really decided whether it was a little untapped pricing power there.
[00:28] In other words whether that $1.95 box of candy could just as easily sell for $2.50 or $2.25. If it could sell for $2.25 another $0.30 a pound was $4.08 on $16 million which on a $25 million purchase price was fine.
[00:29] We didn’t do any we’ve never hired a consultant in our lives. Our idea of consulting is to go out and buy a box of candy. But what we did know was that they had share of mind in California.
[00:29] I mean there was something special. Every person in California had something in their mind about See’s Candy and overwhelmingly it was favorable. They had taken a box at Valentine’s Day and given it to some girl and she kissed him.
[00:29] If she slapped him we’d have no business. But as long as she kisses him that’s what we want in their mind. See’s Candy getting kissed. And if we can get that in the minds of people we can raise prices.
[00:29] And I bought that in 1972. Every year I raise the price on December 26th. I raise it the day after Christmas because we sell a lot at Christmas. In fact, we’ll make $60 million this year.
[00:29] We’ll sell $30 million make $2 a pound. Same business. Same formulas. Same everything. $60 million bucks still doesn’t take any capital. And we’ll make more money 10 years from now.
[00:29] But if that $60 million we make about $55 million in the three weeks before Christmas. And our company song is What a Friend We Have in Jesus. I mean it is.
[00:30] It is a good business. But the important thing about that business is think about it a little. People don’t buy most people don’t buy boxed chocolates to consume themselves.
[00:30] They buy them as gifts. You know somebody somebody’s birthday more likely it’s a holiday. Valentine’s Day is the single biggest day of the year. Christmas is the biggest season by far.
[00:30] But women buy for Christmas and they plan ahead and buy over two or three big period. Men buy on Valentine’s Day. They’re driving home. We run ads on the radio.
[00:30] You know guilt, guilt, guilt, guilt. You know the guys are veering off the freeway right and left. And they won’t dare go home without a box of candy when we get through with them on our radio ads.
[00:30] So that Valentine’s Day is the biggest day. But can you imagine going home on Valentine’s Day and our See’s candy is now 11 bucks a pound thanks to my brilliance.
[00:30] And let’s say there’s candy available at $6 a pound. But you really want to walk in on Valentine’s Day and hand… I mean your wife has got all these favorable images of the See’s candy over the years and she sees you and that’s the way she thinks of you during the rest of the year when you really behave
[00:31] kind of badly. And you walk in and say, honey, this year I took the low bid and then hand her a box of candy. I mean, it just isn’t going to work. So, in a sense, it’s…
[00:31] there’s untapped prices. It’s price… It’s not price dependent basically. Think of Disney. I mean, Disney is selling, we’ll say, home videos for, I don’t know, what, 1695, 1895, or whatever.
[00:31] All over the world, people, and we’ll say particularly mothers in this case, have something in their mind about Disney. I mean, every person in this room when you say Disney has something in their mind about it.
[00:31] If I say Universal Pictures, you don’t have anything in your mind. If I say 20th Century Fox, you don’t have anything special in your mind. If I say Disney, you’ve got something in your mind.
[00:31] And that’s true around the world. Now, picture yourself with a couple young kids who you want to put away for a couple hours every day to get a little peace of mind.
[00:31] And you know if you get them one video, they’ll watch it 20 times. So you go to the video store or wherever you buy the video. Are you going to sit there and premiere 10 different videos and watch them each for an hour and a half to decide which one your kids should watch?
[00:32] No. I mean, let’s say there’s one there for 1695 and the Disney’s there for 1795. You know if you take the Disney video that you’re going to be okay. So you buy it.
[00:32] And you don’t have to make a quality decision on something that you don’t want to spend the time to do. And so you can get a little bit more money if you’re Disney and you’ll sell a lot more videos.
[00:32] It makes it a wonderful business. It makes it very tough for the other guy. How would you try to create a brand? DreamWorks is trying. But how would you try to create a brand that competes with Disney around the world and to replace the concept that people have in their minds about Disney with something
[00:32] that says Universal Pictures? You know, so that the mother’s going to walk in and pick out a Universal Pictures video in preference to a Disney. It’s not going to happen.
[00:32] Coca-Cola is associated with people being happy around the world. We’re every place they’re happy. We’re at Disney World or Disneyland where the World Cup will be at the Olympics.
[00:32] We’re every place where people are happy. Happiness and Coke go together. Now, you give me, I don’t care how much money, and tell me that I’m going to do that with RC Cola around the world and have 5 billion people that have a favorable image in their mind about RC Cola, it can’t get done.
[00:33] and you can fool around and you can do anything you want to do. You can have price discounts on weekends and everything, but you’re not going to touch it.
[00:33] And that’s what you want to have in a business. That’s the moat and you want that moat to widen. And if you’re See’s candy, you want to do everything in the world to make sure that the experience basically of giving that gift leads to a favorable reaction.
[00:33] That means what’s in the box. It means the person that sells it to you because all our business is done when we’re terribly busy. I mean, people come in in those weeks before Christmas or on Valentine’s Day and they’re long lines.
[00:33] So at 5 o’clock in the afternoon, some woman is selling the last person the last box of candy and that person’s been waiting in line for maybe 20 or 30 customers.
[00:33] And if the salesperson smiles at that last customer, our moat is widened. And if she snarls at him, our moat is narrowed. We can’t see it. It’s going on every day, but that’s the key to it.
[00:34] I mean, the total part of the product delivery is having everything associated with it, say, See’s candy and something pleasant happening. And that’s what business is all about.
[00:34] Yep. Before purchasing a company, how much is qualitative analysis do you do versus quantitative analysis? And have you ever bought a company where the numbers told you not to?
[00:34] Those are the best buys. The question is whether have I ever bought a company where the numbers told me not to and how much is qualitative and how much is quantitative.
[00:34] The best buys have been when the numbers almost tell you not to. I mean, because then you feel so strongly about the product and not just the fact that you’re getting a used cigar butt cheap that it’s compelling.
[00:34] I mean, I owned a windmill company at one time. So I’ve, you know, windmills are cigar butts, believe me. I bought it very cheap. I bought it a third of working capital and we made money out of it.
[00:34] But there’s no repetitive money to be earned. I mean, there’s a one-time profit in something like that and it’s just not, it’s not the thing to be doing.
[00:35] I went through that phase. I mean, I bought streetcar companies and all kinds of things. But in terms of the qualitative, I probably understand the qualitative the moment I get the phone call.
[00:35] I mean, almost every business we’ve bought has taken five or ten minutes, I mean, in terms of analysis. And we bought two businesses this year. General Re is, you know, 18 billion or some deal.
[00:35] I’ve never been to their home office. Yeah. I hope it’s there. There could be just a few guys and they say, well, what numbers shall we send Buffett this month?
[00:35] I can see them coming in once a month and say, well, we’ll just tell them we’ve got 20 billion in the bank this month instead of 18 billion or something.
[00:35] But I’ve never been there. And before, I bought Executive Jet, which is fractional ownership of Jets. And before I bought it, I’d never been there. I bought my family a quarter interest in the program for years earlier and I’d seen the service and seen it develop well.
[00:36] And I got the numbers, but if you don’t know enough to know about the business instantly, you won’t know enough in a month or two months. I mean, you have to have sort of the background of understanding and knowing what you do understand and don’t understand.
[00:36] And that is the key. It’s defining what I call your circle of competence. And everybody’s got a different circle of competence. The important thing is not how big the circle is.
[00:36] The important thing is staying inside the circle. And if that circle has only got 30 companies in it out of thousands on the big board, as long as you know which 30 they are, you’re okay.
[00:36] And you should know those businesses well enough so that you don’t need to read, do lots of work. Now, I did a lot of work in the earlier years just in getting familiar with businesses.
[00:36] And the way I would do that is I would go out and use what Phil Fisher called the scuttlebutt approach. I’d go out, I’d talk to customers, I’d talk to maybe ex-employees in some cases, I’d talk to suppliers, everybody.
[00:36] Every time I’d see somebody in an industry, let’s say I was interested in the coal industry, I’d go around and see every coal company and I’d ask every CEO, if you could only buy stock in one coal company that wasn’t your own, which one would it be and why?
[00:37] You piece those things together and you learn a lot about the business after a while. And the funny thing is you get very similar answers as long as you ask about competitors.
[00:37] I’d say if you’ve got a silver bullet and you put it through the head of one competitor, which competitor and why? You’ll find out who the best guy in the industry is in that case or the one that’s coming up.
[00:37] So there’s a lot of things you can learn about a business. I’ve done that in the past on the businesses that I feel I could understand so I don’t have to do much of that anymore.
[00:37] It’s a nice thing about investing is you don’t have to learn anything very new. I mean, you can do it if you want to, but if you learned about Wrigley’s chewing gum 40 years ago, you still understand Wrigley’s chewing gum.
[00:37] There’s not a lot of great insights to get or anything of the sort as you go along. So you do get a database in your head. I had a guy, Frank Rooney, who ran Melville for many years.
[00:37] His father-in-law died and owned a company called H.H. Brown, a shoe company. And he put it up with Goldman Sachs, but he was playing golf with a friend of mine here in Florida and mentioned to this friend, the guy said, she called Warren.
[00:38] He called me at the end of the golf match and in five minutes I basically had a deal. But I knew Frank and I knew the kind of business, I sort of knew the basic economics of a shoe business and so I could buy it.
[00:38] And quantitatively, I got to decide what the price is. But, you know, that’s either yes or no. I mean, I don’t fool around a lot when negotiations. So if they name a price that makes sense to me, I buy it.
[00:38] If they don’t, I was happy the day before, so I’ll be happy the day after without owning it. Yeah. Coca-Cola just announced the drop in expectations in terms of future earnings and quarter earnings.
[00:38] In light of the fact that Coke has a lot of their profits coming in from outside the United States, how do you think the Asian crisis, so to speak, is going to affect Coke and how it affects a company like Coke that recently announced that the earnings, actually they just announced their third quarter earnings,
[00:39] but a few weeks ago they tipped people off that they were going to be lower in the fourth quarter. Well, basically I love it, but because the market for Coca-Cola products is going to grow far faster over the next 20 years internationally than it will in the United States.
[00:39] It will grow in the United States on a per capita base, but it’s going to grow faster elsewhere. So the fact that it’s going to be a tough period for, who knows, three months or three years, but it won’t be tough for 20 years.
[00:39] I mean, people are still going to, you know, they’re going to work productively around the world and they’re going to find that this is a bargain product in terms of the portion of their working day that they have to give up in order to have one of these or better yet, five of them a day like I do.
[00:39] It’s a, you know, this is a product in 1936, when I first bought six of those for a quarter and sold them for a nickel each and it was in a six and a half ounce bottle and you paid a two cent deposit on the bottle.
[00:40] That was a six and a half ounce bottle for a nickel at that time. It’s now a 12 ounce can, which if you buy it on weekends or if you buy it in bigger quantities so much money doesn’t go to the packaging, I mean, you essentially can buy the 12 ounces for not much more than 20 cents.
[00:40] So you’re paying not much more than twice the per ounce price of 1936. It is a product that’s gotten cheaper and cheaper and cheaper relative to people’s earning power over the years and which people love and in 200 countries you have the per capita use going up every year for a product that’s over 100 years old
[00:40] and that dominates the market. I mean, that is, it’s unbelievable. One thing that people don’t understand is one thing that makes this product this is worth tens and tens of billions of dollars.
[00:40] It’s one simple fact about really all colas but we’ll call it Coca-Cola for the moment. It happens to be a name I like. Cola has no taste memory. You can drink one of these at 9 o’clock, 11 o’clock, 3 o’clock in the afternoon, 5 o’clock.
[00:41] The one at 5 o’clock will taste just as good to you as the one you drank early in the morning. You can’t do that with cream soda, root beer, orange, grape, you name it.
[00:41] All of those things accumulate on you. Most foods and beverages accumulate on you. You get sick of them after a while. And if you if you eat I mean we get these people who go to work for us and seize candy and we tell them they eat all the candy they want and the first day they go crazy.
[00:41] But after a week they’re eating about the same amount they need if they’re buying it because chocolate cumulates everything cumulates on. There is no taste memory to cola and that means that you get people around the world that are heavy users that will drink five a day or diet coke maybe seven or eight a day
[00:41] or something of the sort. They’ll never do that with other products. So you get this incredible per capita consumption. The average person in this part of the world well maybe a little north of here drinks about 64 ounces of liquid a day and you can have all 64 ounces of that be coke and you will not
[00:42] get fed up with coke if you like it to start with in the least. But if you do that with almost anything else if you eat just one product all day you’ll get a little sick of it after a while and it’s a huge factor so that today over 1 billion 8 ounce servings of Coca-Cola products will be sold in the world
[00:42] and that will grow year by year it’ll grow in every country virtually and it’ll grow on a per capita basis and 20 years from now it’ll have grown a lot faster internationally than in the U.S.
[00:42] so I really like that market market better because there is more growth there over time but it will hurt them and it is hurting them in the short term right now but that doesn’t mean anything I mean that Coca-Cola went public in I think it was 1919 stock sold for $40 a share went back before that as the Candler family
[00:43] they went back they bought it for $2,000 the whole business he’s the Candler back in the late 1880s in a couple of purchases so now he goes public in 1919 $40 a share one year later it’s selling for $19 going down 50% in one year now you might think that’s some kind of disaster and you might think that sugar prices
[00:43] increased and the bottles were rebellious and a whole bunch of things you can always find a few reasons why that wasn’t the ideal moment to buy it years later you’d have seen the Great Depression and you’d have seen World War II and you’d seen sugar rationing and you’d seen thermonuclear weapons and the whole thing
[00:43] there’s always a reason but in the end if you bought one share for $40 and reinvested the dividends it’d be worth about $5 million now and that factor so overrides anything else I mean if you’re right about the business you’ll make a lot of money and the timing part of it is a very tricky thing so I don’t worry
[00:43] about any given event if I’ve got a wonderful business whether what it does to next year or something of the sort price controls have been in this country at various times and that’s followed up even the best of businesses I mean I wouldn’t be able to raise the price on December 26th if we had price controls
[00:44] and we’ve had them in this country but that doesn’t make it a lousy business if that happens to happen because you’re not going to have price controls forever we had them in the early 70s so the wonderful business you can figure out what will happen you can’t figure out when it will happen you don’t want to focus
[00:44] too much on when you want to focus on what if you’re right about what you don’t have to worry about one very much the question is about my business mistakes how much time do you have well the interesting thing about the mistakes is that in investments at least for me and for my partner Charlie Munger
[00:44] the biggest mistakes have not been mistakes of commission they’ve been mistakes of omission they’re where we knew enough about the business to do something and for one reason or another we sat there sucking our thumbs instead of doing something and so we’ve passed up things where we could have made billions and billions
[00:45] of dollars from things we understood forget about things we don’t understand in fact I could make billions out of Microsoft doesn’t mean anything because I never understand Microsoft but if I could make billions out of healthcare stocks then I shouldn’t make it and I didn’t when the Clinton healthcare program
[00:45] was proposed and they all went in the tank we should have made a ton of money out of that because I could understand it and I didn’t make it I should have made a ton of money out of Fannie Mae back in the mid 80s and I understood it and I didn’t do it those are billion dollar mistakes or multi-billion dollar
[00:45] mistakes that that generally accepted accounting principles don’t pick up the mistakes you see the mistakes you see we made a it isn’t we I made a mistake buying US Air Preferred some years ago I mean that I had a lot of money around I make mistakes when I get cashed Charlie tells me to go to a bar instead
[00:45] don’t hang around the office but I hang around the office I got money in my pocket I do something dumb and it happens every time and so I bought this thing nobody made me buy it I now have a 800 number I call every time I think about buying stock in an airline and they talk me down and they say I’m Warren
[00:46] I’m an aeroholic and then the guy says keep talking don’t hang up don’t do anything rash and finally I get over it but I bought it and it looked like we were going to lose all our money in that and we came very close to losing all our money and you can say we deserve to lose all our money and we bought it
[00:46] because it was an attractive security but it was not an attractive business I did the same thing with Salomon I bought an attractive security in a business that I wouldn’t have bought the equity in so you can say that that’s one form of mistake buying something because you like the terms when you don’t like
[00:46] the business that well and I’ve done that in the past I’ll probably do it again the bigger mistakes though were the ones of omission I did back when I had the 10,000 bucks I put $2,000 of it into a Sinclair service station which I lost so my opportunity cost and that’s about $6 billion right now fairly big mistake
[00:47] it makes me feel good when Berkshire goes down then because the cost of my Sinclair station goes down too my 20% opportunity cost but I will say this you talk about learning from mistakes I really believe it’s better to learn from other people’s mistakes as much as possible but we don’t spend any time looking back
[00:47] at Berkshire I’ve got a partner Charlie Munger we’ve been pals for 40 years never had an argument we disagree on things a lot but we don’t have arguments about it and we never look back we just you know we just figure there’s so much to look forward to that there’s just no sense thinking about what we might
[00:47] it just doesn’t make any difference I mean you can only live life forward and you can learn something perhaps from the mistakes but the the big thing to do is stick with the businesses you understand and so if there’s a generic mistake of getting outside of your circle of competence and you know buying something
[00:48] because somebody tips you on it or something of the sort in an area you don’t know anything about I mean you should learn something from that which is that you stay with what you can figure out yourself I mean you really want your decision making to be by looking in the mirror and saying to yourself
[00:48] I’m buying 100 shares of General Motors at 55 because and I mean it’s your responsibility if you’re buying it and there’s got to be a reason and if you can’t state the reason you shouldn’t buy it if it’s because somebody told you about it at a cocktail party not good enough you know I mean there’s just
[00:48] it’s got to be something the volume you know the chart looks good on it or anything like that it’s got got to be a reason you’d buy the business and we that we stick to pretty pretty carefully that’s one of the things Ben Graham taught me yeah the question about what’s going to happen in the interest rates
[00:49] or where we go in the world I don’t think about the macro stuff you know I I just the important what you really want to do in investments is figure out what’s important and knowable if it’s unimportant or unknowable you forget about it what you talk about is important but in my view it’s not knowable
[00:49] understanding Coca-Cola is knowable or Wrigley or Eastman Kodak or anything I mean you can understand those business that’s knowable and whether it turns out to be important depends on where your valuation leads you and the current price and all of that but we have never either bought a business or not bought a business
[00:49] because of any macro feeling of any kind we don’t read things about predictions about interest rates or business or anything like that because it doesn’t make any difference I mean let’s say in 1972 when we bought See’s candy I think maybe Nixon put on the price controls a little bit later let’s say we’d seen it
[00:49] but so what we’ve missed a chance to buy something for 25 million that’s earning 60 million pre-tax now we don’t want to pass up the chance to do something intelligent because of some prediction about something that we’re no good on it anyway so we just don’t we don’t read or listen to or do anything
[00:50] in relation to macro factors at all zero and the typical investment counseling organization goes out and they give you they bring out their economists they trot them out and he gives you this big macro picture and then they start working from there on down in our view that’s nonsense and if you know
[00:50] if Alan Greenspan was on one side of me and Bob Rubin on the other side they were both whispering in my ear exactly what they’re going to do the next 12 months wouldn’t make any difference to me in what I pay for executive jet or General Re or anything else I do yeah well what’s the benefit
[00:50] of being an out-of-towner as opposed to being in Wall Street I worked in Wall Street for a couple of years and and I like I’ve got I’ve got my best friends actually and I’m on both coasts and I like seeing them and I get ideas when I go there but the best way to get to think about investments is to be in a room
[00:51] with no one else and just think and if that doesn’t work nothing else is going to work and the disadvantage of being in any kind of a market type environment on Wall Street would be the extremes that you get overstimulated you think you have to do something every day I mean the Candler family paid 2,000 bucks
[00:51] for this company and you don’t have to do much else if you pick one of those and the trick then is not to do anything else even not to sell it in 1919 which the family did later on so what you’re looking for is some way to get one good idea a year you know and then and then write it to its full potential
[00:51] and that’s very hard to do in an environment where people are shouting prices back and forth every five minutes and shoving reports under your nose and all that because Wall Street makes its money on activity you make your money on inactivity you know I mean if everybody in this room trades their portfolio
[00:52] around every day with every other person you know you’re all going to end up broke and the intermediary is going to end up with all the money on the other hand if you all own stock in a group of average businesses and just sit here for the next 50 years you’ll end up with a fair amount of money and your broker
[00:52] will be broke so his activity is he’s like a doctor who gets paid on how often he gets you to change pills I mean basically I mean he gives you one pill and it cures you the rest of your life and he’s got one sale one transaction and that’s it but if he can convince you that changing pills every day
[00:52] is the way to great health it’ll be great for him and the prescriptionist and you’ll be out a lot of money and you won’t be any healthier it’ll be a lot worse off financially so you want to stay away from any environment that stimulates activity and Wall Street would have the effect of doing that I would
[00:52] I used when I went out to home I’d go back about once every six months and I’d go back with a whole list of things I wanted to check out one way or another companies I wanted to see and I would get my money’s worth out of those trips but then I’d go back to Omaha and think about it yeah how should an investor
[00:53] how should an investor evaluate owning shares of Berkshire Hathaway or Microsoft if they don’t pay dividends for the investor yeah well the question with Berkshire Hathaway the question was about evaluating Berkshire when it doesn’t pay any dividends and it won’t pay any dividends either it’s a promise
[00:53] it’s a promise I can keep all you get with Berkshire you stick it in your safe deposit box and then every year you go down and fondle it you know you take it out and it’s on a little then you put it back and I mean there’s enormous psychic reward in that you don’t underestimate it but the real question
[00:53] is whether we can keep retaining dollar bills and turning them into more than a dollar at a decent rate and that’s what we try to do and Charlie Munger and I have our money in it to do that that’s all we’ll get paid for doing we won’t take any options we won’t take any salaries to speak of or anything
[00:54] we’ll ride around in the plane but the that’s what we’re trying to do it gets harder all the time the more money we manage the harder it is to do that and we would do way better percentage wise with Berkshire if it was one one hundredth the present size but it is it is run for its owners but it isn’t run
[00:54] to give them dividends because so far every dollar that we’ve earned and could have paid out we’ve turned into more than a dollar it’s worth more than a dollar to keep it and therefore it’d be silly to pay it out even if everybody was tax free that owned it it would have been a mistake to pay dividends
[00:54] at Berkshire because so far the dollar bills retained have turned into more than a dollar but there’s no guarantee that that happens in the future and at some point the game runs out on that but it is the goal I mean that is what the business is about we’re not nothing else about the business do we judge ourselves by
[00:54] we don’t judge it by the size of its home office building or you know anything of the number of people working around we’ve got 12 people at headquarters we’ve got 45,000 employees at Berkshire and 12 people at headquarters 3,500 square feet and we won’t change it so we will judge ourselves by the performance
[00:55] of the company and that’s the only way we’ll get paid but believe me it’s a lot harder than it used to be one of your investments has reached its full potential as you said earlier that you I missed the last part when do you decide it’s full potential well ideally you buy in businesses where you feel that will never happen
[00:55] in terms of I mean I don’t think I don’t buy coke with the idea that it’s going to be out of gas in 10 years you know or 15 years I mean there could be something happened but I would think the chances of that are almost nil so what we really want to do is buy businesses that we would be happy to own forever
[00:55] it’s the same way I feel about people who buy Berkshire I want people to buy Berkshire to plan to hold it forever they may not for one reason or another but I want them at the time they buy it to think they are buying a business that they’re going to own forever and I don’t say that’s the only way to buy things
[00:56] it’s just that that’s the group I want to have join me because I don’t want to have a changing group all the time I measure Berkshire by how little activity there is in it if I had a church and I was the preacher and half the congregation left every Sunday I wouldn’t say oh this is marvelous because I have all this liquidity
[00:56] among my members you know there’s terrific turnover you know I would rather get a church where all the seats are filled you know every Sunday by the same people well that’s the way we look at the businesses we buy we want to buy something that we’re really happy to own virtually forever and we can’t find
[00:56] a lot of those and back when I started I had way more ideas than money so I was just constantly having to sell what I thought was the least attractive stock in order to buy something that I just discovered that looked even cheaper but that’s not our problem really now and so we hope we’re buying businesses
[00:56] that we’re just as happy with five years from now as now and if we ever found some huge acquisition you know then we’d have to sell something maybe to make that acquisition but that would be a very pleasant pleasant problem to have we never buy something with a price target in mind I mean we never buy something
[00:57] at 30 saying if it goes to 40 we’ll sell it or 50 or 60 or 100 we just don’t do it that way any more than when we buy a private business like See’s candy for 25 million we don’t say to ourselves if we ever got an offer 50 million for this business we’d sell it that’s just not the way to look at the business
[00:57] the way to look at the business is is this going to keep producing more and more and more money over time and if the answer to that is yes you don’t need to ask any more questions well Salomon like I said I went into that because it was a 9% security in 1987 September 1987 the Dow was up 35% that year
[00:57] we’d sold a lot of stuff and I had a lot of money around it looked to me like we were never getting a chance to do anything so I took an attractive security form in a business I would never buy the common stock of and I went in because of that and I think that’s generally a mistake it worked out okay
[00:58] finally on that but it’s not what I should have been doing I either should have waited in which case I could have bought more Coca-Cola a year later or thereabouts or I should have even bought Coke at the prices it was selling at and even though it was selling at a pretty good price at the time so that was a mistake
[00:58] I’m long-term capital that’s we have learned other businesses that are associated with securities over the years and I mean one of them is arbitrage I’ve done arbitrage for 45 years and graham did it for probably 30 years before that and that’s a business unfortunately I have to be near a phone for and I have to
[00:58] I have to really run out of the office myself because it requires being more sort of market attuned and I don’t want to do that anymore so unless a really big arbitrage situation came along that I understood I won’t be doing much of that but I’ve probably been in 300 arbitrage situations at least in my life
[00:59] maybe more and it was a good business perfectly good business long-term capital has a bunch of positions they got tons of positions but the top 10 are probably 90% of the money that’s at risk and I know something about those 10 positions there’s a few other positions we have that aren’t that big because they can’t get that big
[00:59] but they involve they could involve yield curve relationships or on the run off the run governments or things like that that are just things you learn over time if you’re around securities markets they’re not the base of our business probably on average they’ve accounted for a half a percentage point
[00:59] of our return a year or three quarters of a percentage point a year of our return they’re little pluses that you get for actually having just been around a long time and learning a little bit about first arbitrage not the first arbitrage I did but one of the first arbitrages I did involved the company
[00:59] where you they were offering cocoa beans in exchange for their stock that was in 1955 and I bought the stock turned to the stock got warehouse certificates for cocoa beans and they happened to be a different type they were trading their cocoa exchange but there was a basis differential in my favor and I sold them
[01:00] I mean that’s just something that I was around at the time so I learned about hasn’t been a cocoa bean deal since 40 odd years I’ve been waiting for another cocoa bean deal I haven’t seen it but it’s there in my memory if it ever comes along and that long term capital is that on a big scale yep the question is about diversification
[01:00] and I’ve got a dual answer to that if you are not a professional investor if your goal is not to manage money in such a way as to get a significantly better return than the world then I believe in extreme diversification I mean if it so I believe 98 or 99% maybe more than 99% of people who invest should extensively diversify
[01:00] and not trade so that leads them to an index fund type of decision a decision with very low cost because all they’re going to do is own a part of America and they made a decision that owning a part of America is worthwhile I don’t quarrel with that at all that is the way they should approach it unless they want to bring
[01:01] an intensity to the game to make a decision and start evaluating businesses but once you’re in the business of evaluating businesses and you decide that you’re going to bring the effort and intensity and time involved to get that job done then I think that diversification is a terrible mistake to any degree
[01:01] and I got asked that question when I was at SunTrust the other day and if you really know businesses you probably shouldn’t own more than six of them I mean if you can identify six wonderful businesses that is all the diversification you need and you’re going to make a lot of money and I will guarantee you
[01:01] that going into a seventh one is going to rather than putting more money in your first one it’s got to be a terrible mistake very few people have gotten rich on their seventh best idea but a lot of people have gotten rich on their best idea so I would I would say that for anybody working with normal capital
[01:02] who really knows the businesses they’ve gone into a six is plenty and I probably have half of it and what I like best I don’t diversify personally I mean and all the people I know that have done well with the exception of what we mentioned Walter Schloss here Walter diversifies a lot he owns a little of everything
[01:02] I call him Noah you know he’s got two of everything yeah how do you differentiate the Coke loans in the world from the Procter & Gamble in the world well Procter & Gamble is a very very good business strong distribution capability lots of brand names and everything but if you ask me if I’m going to go away
[01:02] for 20 years and put all my family’s net worth in one business would I rather have Procter & Gamble or Coke actually Procter & Gamble is a little more it would be more diversified among product line but I would feel sure of Coke than Procter & Gamble I wouldn’t be unhappy if somebody told me I had to own Procter & Gamble
[01:03] during that 20 year period I mean that would be in my top 5% because they they are not going to get killed you know but I would feel better about the unit growth and the pricing power of a Coke over 20 or 30 years than I would about a Procter & Gamble right now the pricing power might be tough but you think
[01:03] a billion billion servings a day you know an extra penny 10 million dollars a day you know we own 8% of it that’s that’s $800,000 a day for Berkshire Hathaway you get another penny on the stuff doesn’t seem impossible does it I mean it’s worth another penny it doesn’t right now it would be a mistake
[01:03] to try and get it in most markets but over time Coke will make more per serving than it does now 20 years from now I’ll guarantee you they’ll make more per serving and they’ll be selling a whole lot more servings I don’t know how many I don’t know how much more but I know that P&G’s main products I don’t think
[01:03] they have the kind of dominance and they don’t have the kind of unit growth but they’re good businesses you know I would not be unhappy if you told me that I had to put my family’s net worth in P&G and that was the only stock I could own I would you know I might prefer some other names but there aren’t
[01:04] a hundred other names I would prefer yeah the question is about McDonald’s and going away for 20 years McDonald’s has got a lot of things going for it and particularly abroad again I mean their position abroad in many countries is stronger relatively than here it’s a tougher business over time people do not want to eat
[01:04] exception to the kids people do not want to eat at McDonald’s every day I mean if people are drinking Coke today they drink five of them today they’ll probably drink five tomorrow the fast food business is tougher than that but if you had to pick one hand to have in the fast food business which is going to be
[01:04] a huge business worldwide you’d pick McDonald’s I mean it has the the strongest position it doesn’t win taste tests you know with adults I mean it does very well with children and it does fine with adults but it does I mean it is not like it’s a clear winner and and it’s gotten into the game in recent years
[01:05] of being more price promotional and you know you remember the experiment a year ago or so and so it’s gotten more dependent on that rather than just selling the product by itself I like the product by itself sells I feel better about Gillette if people buy the Mach 3 because they like the Mach 3 than if they get
[01:05] a Beanie Baby with it you know I mean so I just think it’s fundamentally a stronger product if that’s the case and you know it probably is we own we own a lot of Gillette and you can sleep pretty well at night if you think of a couple billion men with their hair growing on their faces you go to you know
[01:05] it’s going all night while you sleep you know and women have two legs it’s even better so it’s it beats counting sheep and those are the kind of business but if you think what promotion am I going to put out there against Burger King next month what if they sign up Disney and I don’t get Disney I like the products
[01:06] that stand alone absent promotion or price appeals although you can build a very good business based on that and McDonald’s is a terrific business it’s not as good a business as Coke but there are really hardly any it’s a very good business and if you bet on one company in that field aside from Dairy Queen
[01:06] of course you might have been McDonald’s we bought Dairy Queen here a while back that’s why plugging it shamelessly here yeah way back there what do I think of what the electric utility industry well I’ve thought about that a lot because you can put big money in it and I’ve even thought of buying entire businesses
[01:06] there’s a fellow in Omaha actually that’s done a little of that through CalEnergy but I don’t quite understand the game in terms of how it’s going to develop with deregulation I mean it’s it’s got I can see how it destroys a lot of value for the high cost producer you know once they’re not protected by a
[01:07] monopoly territory and I don’t for sure see how who benefits and how much I mean obviously the guy with very low cost power some guy’s got hydropower you know two cents a kilowatt or something like that has got a huge advantage but how much of that he’s going to get to keep and everything or how extensively
[01:07] he can send that outside his natural territory I haven’t been able to figure that out so that I really think I know what the industry is going to look like in 10 years but it is something I think about and if I ever develop any insights you know that call for action I will act on it because I think I can understand
[01:07] the attractiveness of the product and all the aspects of certainty of user need and the fact that it’s a bargain and all of that I understand I just don’t understand who’s going to make the money 10 years from now and that keeps me away the question is large caps versus small caps and why large caps
[01:08] overperform I don’t know the answer to that we don’t think we don’t care whether companies large cap giant cap middle cap small cap micro cap it doesn’t make any difference I mean the only question to us is can we understand the business do we like the people running it and does it sell for a price that is attractive
[01:08] from our my personal standpoint running Berkshire now because we’ve got pro forma for General Re I don’t know what we have maybe 75 or 80 billion dollars to invest and I only want to invest in about five things so I’m really limited to very big companies but if I were investing 100,000 dollars I wouldn’t care
[01:09] whether something was large cap or small cap or anything I would just look for businesses I understood now I think that on balance large cap companies as businesses have done extraordinarily well the last 10 years and way better than people anticipated they would do I mean you really have American business earning
[01:09] close to 20% on equity and that’s something nobody dreamed of and that’s being produced by very large companies in aggregate so you’ve had this huge revaluation upward because of lower interest rates and then much higher returns on capital and you know if American business is really a bond disguised bond
[01:09] that earns 20% has a 20% coupon it’s much better than if it’s a bond with a 13% coupon and that’s that’s happened with big companies in recent years whether it’s permanent or not is another question I’m skeptical of that but I don’t I wouldn’t even think about except for questions of how much money we run
[01:10] I wouldn’t even think about the size of the business a good small See’s Candy was a 25 million dollar business when we bought it and if I could find one just like it now even as big as we are you know I’d love to buy it it’s the certainty of it that counts yeah way over there you mentioned earlier in buying stock
[01:10] almost every company is publishing one thing until the last five years real estate has been primarily private securitization of real estate and what is your insight into the industry yeah you know I’m going to say there’s been securitization enormous securitization of the debt too of real estate and that is one
[01:10] of the items right now that is really clogging up the capital markets I mean the mortgage-backed securities are they’re just not moving in commercial mortgage-backed not residential mortgage-backed but I think you’re directing your question at equities probably and the equities if you leave out the corporate form
[01:11] has been a lousy way to own equities I mean you’ve interjected a corporate income tax into something that people individually have been able to own with a single tax and by having the normal corporate form you get a double taxation in there you really don’t need with real estate and it takes away too much of the return
[01:11] REITs have in effect created a conduit so that you don’t get the double taxation but they also generally have fairly high operating expenses and if you get real estate let’s just say you can buy fairly simple types of real estate on an 8% yield or thereabouts and you take away maybe close to 1 or 1 maybe even 1.5%
[01:11] by the time you count stock options and everything it’s not a terribly attractive way to own it maybe the only way a guy with a thousand bucks or five thousand bucks can own it but if you have a million dollars or ten million dollars you’re better off owning the real real estate properties yourself than sticking some
[01:12] intermediary in between that will get a sizable piece of the return for himself so but generally speaking we’ve seen very very little in that field that gets us excited people sometimes get very confused about they’ll look at some huge land company I’ll take one that won’t evoke any emotional reactions
[01:12] on the part of anybody like Texas Pacific Land Trust which has been around over a hundred years and got a couple million acres in Texas and they’ll take the you know they’ll sell 1% of their land every year and they’ll take that as applying to everything and come up with some huge value compared to the market value
[01:12] but that’s nonsense if you really own the property I mean you can’t move you can’t move 50% of the properties or 20% of the properties it’s way worse than an illiquid stock so you get these I think you get some very silly valuations placed on a lot of real estate companies by people that don’t really understand
[01:13] what it’s like to own one and try to move large quantities of property REITs have behaved terribly in the market this year as you know and it’s not at all inconceivable they would become a class that would get so unpopular that they would sell at significant discounts from what you could sell the properties for
[01:13] and they could get interesting as a class then and then the question is whether the management would fight you in that process because they would be giving up their income stream for managing things and their interest might run counter to the shareholders on that I’ve always wondered about the REITs
[01:13] that say our assets are so wonderful and they’re so cheap and then they go out and sell stock there’s a contradiction in that if they say our stock at 28 is very cheap and then they sell a lot of stock at 28 less than underwriting commission there’s a disconnect there but it’s a field we look at Charlie and I
[01:13] can understand real estate and we would be open for very big transactions periodically and if there was a long term capital management situation translated to real estate we would be open to that trouble to so many other people would be too that it would be unlikely to go at a price that would really get us excited
[01:14] way back there understanding your theory that sort of a down market is good for net savers can you sort of give us your thoughts as to where the market is going it’s downward trend it’s a long term drop and a long term what’s going to go well I yeah I’ve got no idea where the market is going to go I prefer it going down
[01:14] but I haven’t you know my preferences have nothing to do with it the market knows nothing about my feelings that’s one of the first things you have to learn with a stock you know you buy 100 shares of General Motors now all of a sudden you have this feeling about General Motors I mean if it goes down
[01:14] you may be mad at it you may say well if it just go up to what I paid for it you know my life will be wonderful again or if it goes up you may say how smart you were and how you and General Motors have this love affair I mean you’ve got all these feelings stock doesn’t know you own it stock just sits there
[01:15] it doesn’t care what you paid it doesn’t care that you owned it or anything so any feeling I have about the market is not reciprocated I mean it is the ultimate it is very cold shoulder we’re talking about here and anybody that is going to be in that sector practically everybody in this room is more likely to be
[01:15] a net buyer of stocks over the next 10 years than they are a net seller so every one of you should prefer lower prices I mean you’re going to be a net eater of hamburger in the next 10 years you want hamburger to go down unless you’re a cattle producer and if you’re going to be a buyer of Coca-Cola and you don’t own Coke stock
[01:15] you hope the price of Coke goes down I mean you’re looking for it to be on sale this weekend at your supermarket you want it to be down on the weekends not up on the weekends when you’re going to attend the supermarket your stock exchange is a big supermarket of companies and you’re going to be buying stocks
[01:15] what do you want to have happen you want those stocks to go down way down and you know you will make better buys then and later on 20 years from now 30 years from now when you’re in a period when you’re dis-saving or when your heirs dis-saved for you after you’re gone I mean then you may care about higher prices
[01:16] but I I find people that was one of the there’s a chapter 8 in Ben Graham’s intelligent investor about the attitude towards stock market fluctuations and that and the chapter 20 on the margin of safety are the two most important essays ever ever written on investing as far as I’m concerned because when I read
[01:16] chapter 8 when I was 19 I figured you know I mean I just figured out what I just said but it was it’s obvious I didn’t figure it out myself though it was it was explained to me I’ve probably gone another hundred years if I had read still thought it was good when my stocks were going up we want we want things to go down
[01:16] but I have no idea what the stock market is going to do I never do I never will it’s not something that I think about at all when it goes down I feel I look harder at what I might buy that day because I know there’s more likely to be some merchandise there that I can use my money effectively in okay
[01:17] Warren we’ll take one more question from the audience okay I’ll let you pick who gets it you can be the guy I would say and this is going to sound disgusting the question is what would I do if I were going to live over again and have a happier life well I the only thing I might do is select a gene pool
[01:17] where people live to be 120 or something where I came from but I’ve been I’ve been extraordinarily lucky I mean I use this example I’ll take a minute or two because I think it’s worth thinking about a little bit let’s just assume that it was 24 hours before you were born and a genie came to you and he said
[01:17] he said Herb you look very promising and I’ve got a big problem I’ve got to design the world I’ve got to design the world in which you’re going to live and he says I’ve decided to hell with it it’s too tough you design it so you’ve got 24 hours you figure out what the social rules should be the economic rules
[01:18] the governmental rules and you’re going to live under those and your kids are going to live under them and their kids are going to live under and you say I can design anything and genie says yeah you can do it and you say well there must be a catch he says well there is a catch you don’t know whether you’re going to be born
[01:18] black or white rich or poor male or female infirm or able-bodied bright or retarded all you know is you’re going to take one ball out of a barrel that’s got 5.8 billion you’re going to participate in what I call the ovarian lottery you’re going to get one ball out of there and that is the most important things
[01:18] that are going to happen to you in your life because that is going to control whether you’re born here or in Afghanistan or whether you’re born with an IQ of 130 or an IQ of 70 it’s going to determine a whole lot and you’re going to go out of the world and you’re going to have that ball what kind of a world do you want to design
[01:19] well I think that’s a good way to look at social questions because not knowing which ball you’re going to hit you’re going to want a ball that you’re going to want a system design a system that’s going to produce lots of goods and services because you’re going to want people on balance to live well and you’re going to want it that produces more and more
[01:19] so your kids live better than you do and your your grandchildren are better than the kids but you’re also going to want a system that if it does produce lots of goods and services does not leave behind a person that accidentally got the wrong ball and is not well wired for this particular system see I’m ideally wired for the system I fell into here
[01:19] I mean I came out and I got something that enables me to allocate capital you know nothing so wonderful about that if all of us were stranded on a desert island you know we all landed there we’re never going to get off of it the most valuable person would be the one that could raise the most rice you know over time
[01:19] and you know I could say well I can allocate capital how about paying me and you wouldn’t get very excited about that so I am in the right place I mean Gates says if I’d been born you know a few million years ago I’d be some animal’s lunch you know he says you can’t run very fast you can’t climb trees
[01:20] you can’t do anything you know you’ve just been chewed up in the first day so he says you’re lucky you were born today and I am but the question getting back one question you can ask yourself incidentally is here is this barrel with 5.8 billion balls everybody in the world if you could put your ball back
[01:20] and they gave you and then they took out at random a hundred other balls and you had to pick one of those would you put your ball back in now those hundred balls that you’re going to get out roughly five of them will be American so there’s 95 versus 5 so you’re only going to have five balls if you want to be in this country
[01:20] you’re only going to have five balls now left you know half of them are going to be women half of them are going to be men I’ll let you all decide how you vote on that one half of them are going to be below average intelligence half are going to be above I mean do you want to put your ball back most of you I think will not want to put that ball back
[01:21] to get a hundred so what you’re saying is I’m in the luckiest 1% of the world right now right now sitting in this room top 1% of the world well that’s the way I feel I mean I’ve been lucky to be born where I was because it was 50 to 1 against me in the United States when I was born lucky with parents
[01:21] lucky with all kinds of things and then lucky to be wired in a way that in a market economy pays off like crazy for me doesn’t pay off for somebody that’s absolutely as good a citizen as I am you know leading boy scout troops teaching Sunday school whatever raising fine families but it just doesn’t happen to be wired
[01:21] in the same way I am so I’ve been extremely lucky so I would like to be lucky again and if I’m lucky then the way to do it is to play out that game and do something you enjoy you know all your life and be associated with people you like I only work with people I like you know I don’t I don’t if I could make it
[01:21] a hundred million dollars by buying a business with some guy that caused my stomach to churn I’d say no because I say that’s just like marrying for money which probably isn’t a very good idea in any circumstances but if you’re already rich it’s crazy right I am not going to marry for money so I would do
[01:22] I would really do almost exactly what I’ve done except I’d only got to bought the U.S. Air thanks
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