Source: https://www.youtube.com/watch?v=qGe46Paihuo

now peter lynch has always said buy a
business that's so good
that any idiot can run it because sooner
or later one will
and well all i know is if i buy the
right kind of business
the right price for the right people
i'll do well over time you're about to
meet one of the most successful
investors in the world
warren buffett he gained that
distinction by truly investing his own
and other people's money starting in the
1950s and 1960s he ran an investment
partnership that earned a remarkable
annual average return
of nearly 30 per year for 13 years
in 1965 he paid 12 dollars a share for a
company named berkshire hathaway
in 1995 berkshire hathaway which is now
an investment holding company
was trading on the new york stock
exchange for over 25 000
per share based in omaha nebraska
berkshire hathaway
owns shares in such large companies as
coca-cola
gillette and capital cities abc as well
as 100 percent of such smaller companies
as seeds candies
h.h brown shoes and a furniture store in
omaha nebraska named the nebraska
furniture mart
in 1994 forbes magazine listed warren
buffett as the second richest man in
america but he's famous for far more
than just his wealth
his common-sense approach to business
decision-making is widely admired both
for its wit and its wisdom
in what follows you'll hear about how he
chooses companies to buy
about his views on predicting the stock
market and about some of his favorite
people
including rose blumpkin the 101 year old
founder of the nebraska furniture bar
welcome mr warren the format's the one
he enjoys the most
a dialogue with a group of students who
are invited to throw at him any
questions they like
he begins with a story about near
disaster in the financial world
it happened when the top management of
the huge wall street securities firm of
solomon brothers
in which berkshire hathaway held a stake
was forced to resign after a treasury
bond trading scandal
mr buffett stepped in as chairman and
his first challenge was to find the
right man to run the highly leveraged
company
and fast i really had a lesson on
unemployment a few years ago i went on
uh
august 14th of uh 1991
i got a phone call at a quarter of seven
in the morning
it was the top management of solomon and
they told me the quarter of seven
essentially that
uh that the head of the fed of new york
uh who was the most powerful man in
finance basically
told them that the top management was
unacceptable and that therefore
they were going to offer their
resignations and
there was no one there to to run the
place
and that was a matter of some concern
because at the time
solomon had balance sheet totals of 150
billion dollars of which about 4 billion
was equity and the other 146 billion
was owed to someone else and that was
the
largest amount owed by any american
corporation
except for citicorp at that time it's
larger than the liabilities of the
prudential insurance company uh
larger than the liabilities of the bank
of america merrill lynch american
express whatever
and there was one problem about this 146
billion that a
very high percentage of it can do within
a few weeks and so that was the
situation and i went back to new york
that day
on that friday and i met that evening
uh and this is this is where it may
start getting relevant to to this group
uh one of the problems i was going to
have the following week was i needed
somebody to run the place there were 8
000 people
and this 150 billion of balance sheet
assets and liabilities and a complex
business
and essentially somebody had to be
making decisions minute by minute about
the operations because i was going to
have to be dealing with regulators and
and legislators and people of that sort
so i met 12 people roughly 12
that that evening a dozen or so and i
probably knew four or five of them
uh by sight and there were probably six
or seven that i didn't know although i
probably knew their names
so as i interviewed these people making
what for me was the most important hire
by far that i've ever had to make it it
may be of interest to you
because uh it may not be quite as
dramatic a time when you get hired but
maybe some of the same things going for
the person that's looking at you
the mind of the person that's looking at
you uh
the the good news is i did not ask them
their grades in business school
the bad news of course is i didn't ask
them whether they'd been to business
school at all
uh i never i never looked at a resume i
it wouldn't have made any difference
i knew that all 12 had the iq
to handle the job that wouldn't no one
had gotten to that position
in the firm without being smart enough
uh to know all the instruments
and know how markets worked and all of
that sort of thing so it wasn't the
question
wasn't the question of iq at all it's
just sort of hearing how their
machinery works and uh you can you can
tell the people that are very full of
themselves
very easy to do you find a few of those
in investment banking believe it or not
and uh you know you could probably
technic perhaps the ones that aren't
going to have the courage in
a situation like that uh uh but i wanted
the qualities
you know the same thing ben franklin
wrote about a couple hundred years ago
the people who don't we're always
willing to give the other person more
credit than themselves and who don't cut
corners and who
who deliver all their promise and a
little extra
and essentially i was very lucky because
i found
i found that individual a fellow named
derek moan and he
the next day the board met and we had a
lot of complications
that day and we had a group of about 200
reporters probably about this size and
an auditorium would come in on sunday
to cover this story and and i walked out
and they
assembled about 2 30 i walked out of the
director's meeting about a quarter of
free it was late because of other
problems
and then these 12 were and i just walked
up to this
to derrick and i tapped them on the
chest and i said you're a towel and
we went right down to the auditorium and
200
or so reporters fired questions at him
for three hours while he sat up at the
podium with about
two minutes notice that he was going to
be running the firm
a month later derrick moore never had
asked me what he was getting paid
the question of his salary had never
come up forget about stock options or
anything like that
never came up he just walked right up
and never never said a word about it and
took on the job worked 18 hour days for
months and months and months
showed uncanny judgment about what what
to bring up to me and what not to bring
up to me and
all sorts of things like that and i
often use this illustration
with a class is that i say to them if
you if you were
looked under your seat today and one of
one of you won this had this uh
lucky ticket and the one who had that
ticket
got to pick one of their classmates been
together for a couple of years or
whatever and you got to pick one of your
classmates
and you could take anyone you wanted to
get an hour to make the decision
and you would get 10 of the earnings of
that individual for the rest of their
life
and the only you don't pick the guy with
the richest
father in the class but we'll assume you
pick everybody starting from scratch
but what would you think about in that
hour in terms of who you picked
would you think about who had the
highest grades in the class probably not
would you think about who had the
highest iq probably not
you know the best looking probably not a
whole bunch of things would go through
your mind i think you'd be amazed at
how most of you would settle on a
relatively few individuals
but the interesting thing is that when
you think about what's going through
your mind
you're not thinking about things that
are impossible for you to achieve
yourself and you're not thinking about
who can jump seven feet
who can throw a football 65 yards you
know
who can recite pie to 300 digits or
whatever it may be
you're thinking about a whole bunch of
qualities of character
and the truth is that every one of those
qualities is
is is is is uh obtainable
they're largely a matter of habit ben
franklin and actually my old boss ben
grant ben graham when he was 12 years
old
wrote down all the qualities that he
admired in other people and he wrote
down the qualities that he found
objectionable and he thought that they
looked at that list and there wasn't
anything there about
being able to run 100 yard dash in in
nine six or high jumping seven feet they
were all things
it were simply a matter of deciding
whether you're going to be that kind of
person or not
and when you're young you really have
that opportunity as you get older it
gets tougher because
somebody said the chains of habit are
too like to be felt until they're too
heavy to be broken
and in terms of behavior you know i see
that all the time so i
the time to form the right habits is
very early but it's
the right habits the habits that you
would in time to form the right habits
is very early but it's
the right habits the habits that you
would admire in someone else and want to
buy 10
of whatever individual that is they're
absolutely obtainable
and if you had to sell short one other
member of your class you know
these these deals always come with a
hooker and you had to pay 10
of their earnings again you wouldn't
pick the person with the lowest grades
or anything you think about the person
who always cut corners or
claim credit for things that they didn't
do never showed up one time all these
little things that seem like nothing
but they determine whether if you have a
300 horsepower motor
whether you get 300 horsepower output
out of it or whether you get a whole lot
less
and the people i see that function well
are not necessarily the people with the
biggest motors but they're the people
with the most efficient motors
and it's those qualities of character
that really make an enormous difference
so
what i would suggest to you is think
about that person you'd buy ten percent
of and the one you short ten percent of
and think about why you would do it
and then ask yourself what on this
left-hand side of the list
can't i achieve myself and what on the
right hand side of the list can't i get
rid of myself if i possess it and
in the end you know decide you're going
to be the person that you buy the ten
percent of
that's enough of the sermon i'd like to
answer questions now and uh
and really the nastier they are the
better i like it because it's it's it's
much more
makes it more interesting so let's start
off with one here mr buffett i was uh
reading it sounds like you're in charlie
munger's
analysis of some company's very back of
the envelope um
could you just tell us about the
financial analysis that you do on
companies
whether it be uh like rose blumkin's
furniture mart or whether it be
coca-cola
well yeah those are two good examples
there's a furniture martin
and omaha that it's going to do at one
location 230 million dollars of business
it's more than twice as
much business as any other furniture
single store furniture operation in the
country
and it's not really run by now but
she's she's still the spiritual head of
the place
a woman named rose bumpkin is going to
be 101 years
of age in december and she came over
here and landed in seattle with a tag
around her neck and
and the couldn't speak a word of english
the red cross
uh actually they got her to iowa first
and then she came over and started the
store
after bringing over seven siblings and
her mother and father
from russia she started the store with
500
and now has a store that does 230
million she works seven days a week
uh she's working you know as we talk
she'll be working sunday and
amazing woman and uh the punch line
she put all these people out of business
uh the punch shrine is the
that she can't read it right yeah she's
her business will make 22 million 23
million pre-tax this year
she if you told her this room was uh you
know 47 by 38 she would tell you how
many square yards that is in her head
and uh extend it out at 598 a yard and
add the sales tax and knock off
something because she liked you
but uh she and and you know it is a it
is a real story
so i would say incidentally on something
like that that's all the analysis you
need if you can buy into a business
that's uh run by somebody or
with their family that runs it that way
our total legal and accounting fees and
buying that business were fourteen
hundred dollars
and it was a one-page contract and and
it just
it just affirmed that she owned the
place and that uh
i was going to get good title and that
there was no audit
uh i never looked to see whether you
know what the real estate records were
on the 60 acres in omaha anything of the
sort
but i just knew that anything she said
was so and and you feel very comfortable
buying a business like that i mean i i
think that any good investment idea
probably can be put in one paragraph i
mean
now there are all kinds of investment
ideas
that i'm not going to be able to
understand i believe very strongly as
does mrs b
rose bumped in this call i believe very
strongly in in
and operating with what i call my circle
of confidence
and the most important thing in terms of
your circle of confidence
is not how large the area of it is it's
how well you've defined the perimeter
if you know where the edges are you're
way better off than somebody that's got
one that's five times as large but they
get very fuzzy about the edge
around the edges and i can understand
some kinds of simple businesses i can't
understand complicated businesses
coca-cola was 110 years old now and
now selling 750 million eight ounce
servings of
their products a day around the world
per capita consumption going up in every
virtually every country in the world
after
1010 years or so and
it has 47 of the
soft drink consumption throughout
the world outside the united states 41
percent of the united states and
gaining share every year uh
it isn't very complicated i mean you
have to decide
a whether it's a a product that is
somewhat durable which i think
illustrated and and whether the appeal
is is uh
universal which it certainly is and then
whether you have honest and
and competent management running it
which you most certainly do
uh you know peter lynch has always said
buy a business that's so good
that any idiot can run it because sooner
or later one will
and well we would like to buy a business
like that and then we'd like a terrific
guy uh running it and we had two
terrific people
at coke running it now and
all we're trying to do is try and find
businesses we think we can understand
where we like the people running them
and where the price makes sense in
relation to the future economics and
and when i find that i like to buy a lot
of them and keep it and they're hard
enough to find that i don't believe in
selling them very often because it's
it's hard to find replacements so
are we over here now mr buffett how do
you know when to sell a business when is
the time to do that
well the answer the question about
selling a really great business is never
you know because to sell off something
that is a really wonderful business
because the price looks a little high or
something like that it's almost always a
mistake and it took me a long time to
learn that but
i haven't fully learned it yet but it it
it
it's rare that it makes sense if you
really believe
that the long-term economics of the
business are terrific it's very rare it
makes any sense to sell it now
if you get into some technology company
or something that
where five guys are out in a garage
someplace doing something that's going
to change the whole industry
that's beyond me anyway if you try to
jump from flower to flower among groups
like that i think you probably have to
because
i'm not sure that you can pick permanent
winners but
but i would say that you keep it very
simple
uh we own a lot of gillette for example
there are 20 21 billion razor blades
used in the world a year
uh 30 percent of those are gillettes but
60 by value or gillette they have 90
market shares in some countries in and
mexico now when something's been around
as long as shading
and you find a company that has has that
kind of
both innovative power in terms of
developing better razors all the time
plus the distribution power and the
position in people's minds
you know for an item that only costs 20
bucks a year i mean you know the
difference here's something you do every
day
i hope you do it every day and uh for 20
for 20 bucks a year you know you get a
terrific shaving experience now
men are not inclined to shift around a
lot you know when they uh when they get
to kind of a situation so
you get that and
you know who knew has come into the
under the blade market wilkinson
30 years ago had a shot for a period
like that and
they didn't take advantage of it with a
stainless steel blade but it's not going
to change a lot and i like businesses
where i think i know what it's going to
look like in 5 or 10 or 15 or 20 years
i think i know what gilletta looked like
and i think i know what coke will look
like
they uh and it
opens up around the whole i mean for one
thing you got a bed feeling very
comfortable you know just thinking of
two and a half billion males with
hair growing while you sleep i mean i
know one of july has trouble sleeping
it's like investments that's the beauty
of the investment business i don't have
to be right
on all of these companies i don't
understand
i don't have to write on oracle systems
or microsoft or dupont
i just have to be right on one decision
a year it's a beautiful business that
way
and i was in the department store
business for a while don't ask me why
but i was in it and if my competitor air
conditioned i had air conditioning if my
competitor offered 18-month terms
instead of 12-month turns i had offered
to put in an escalator i had to put in
all of those were defensive decisions i
had to make those
like that i mean he was throwing
pictures with me and i had to swing no
matter whether the ball was good or not
but in investments
there's no such thing as a called strike
you can stand there at the point
very rich because you would think about
every single
one you made and and when you when you
knew enough
to make a decision you'd do it on a big
scale uh
but buying businesses on wall street is
so easy
you can buy one at 10 o'clock and sell
it at 105 and you know you can become a
part owner
of general electric at 10 10. that the
very
ease with which that can be done causes
people to do a lot of things that
don't make a lot of sense but most of
the fortunes
have been made in relatively few
securities and
and ones that were held for a very long
time and one that the buyer
understood mr buffett you invest in
companies with managers that you say you
like and you trust and admire
and i'd like to know who you like and
trust and admire
in politics and business today well and
in business i can tell you that there's
there's nobody
that i admire more than the ceo of cap
city's
tom murphy i admire
roberto grey sweden and don kia who
retired recently but they were one of
the great
two manager combinations in the history
of business at coke they took the market
value from 5 billion to
now 60 billion in a matter of 11 or 12
years and tom murphy worked with dan
burke tremendous
combination uh it's a business i don't
know anything about but i but i admire
bill gates enormously i
know individually and i think he's
incredible
uh in business and uh uh
so they're they're i do believe that i i
only believe in working with people i
like i mean
and and have a very small office uh we
have maybe 10 or 11 people there but i
i you know i think it's crazy uh
to take a job or work with people that
cause your stomach to churn and you know
keep you up at night and all of that and
if you're in a job like that think about
changing it i
i said that you know working with people
you don't like in business
is really like marrying for money which
is probably a
bad idea under any circumstances but
it's crazy if you're already rich right
so i uh i just uh i i work with people i
like i mean i i tap dance every day at
work and i i'm
i'm with people that i i think they're
terrific i admire them
i gave a talk to some student that uh
harvard asked me and talked last year he
said you know who should i go to work
for i said well go to work for whomever
you admire the most
and uh got a call from the dean about
two weeks later said
why don't you tell these kids he said
they won't because they're all becoming
self-employed
berkshire hathaway is currently the most
expensive stock that trades on the new
york stock exchange
when mr buffett was in chapel hill in
october of 1994
the stock was trading for around twenty
thousand dollars per share
after a best-selling book on mr buffett
was published the share price pushed
above 25 000
in the early part of 1995. he's often
asked about his views on splitting the
stock
and in the next section he gives an
answer that illustrates his overall
approach to investing
yup mr buffett i would love to buy a
share of berkshire hathaway
unfortunately my cash flow is a little
tight now uh why doesn't virtually not a
loan company too
have you considered splitting the stock
yeah i get asked that occasionally
uh it's it i got a philosophy about
about shareholders that uh essentially
if you're a public company
uh anybody can become your partner in
the business i mean
if i was going to form a decide to build
a motel
here or or start a mini steel works i
mean i could invite 10 or 12 people to
be my partners and
i would be sure they would be compatible
with me because i'd select them and and
they'd select me in a private business
private partnership you should get a
good relationship among the owners
because they have a chance to
sit down and decide who wants to be
associated with whom but in a public
company anybody can buy or sell i mean
you can have anybody the only
qualification is money which as you
mentioned is
sometimes a limiting factor but the uh
the at berkshire i want to get people
as shareholders as partners of mine who
are
got the same expectations the same
time horizons the same methods of
measurement that i have i mean
it's crazy to go into business with
somebody that's got
entirely different expectations than you
have so
the only way i can affect that since
anybody can buy it
is by my communications and policies i
will try to follow
policies and i will try to communicate
with
the people who are my partners or my
would-be partners so that the right kind
of people
in terms of expectation i don't mean the
right kind of people that they're
necessarily people you want at a
cocktail party or something but
the the people who are going to be happy
when i'm happy with results and we're
going to be unhappy when i'm unhappy the
worst thing in the world though
and we could stick a sign outside this
hall tonight
and we could put rock concert on it and
we'd have one
kind of cloud come in and we could put
ballet and we'd have a somewhat
different kind of crowd come in
both crowds are fine but it's a terrible
mistake
to put rock concert out there if you're
gonna have a ballet or vice versa and
and the only way i have of sticking a
sign on berkshire as to the kind of
place i'm
asking people to enter is through the
communications and policies
splitting the stock is a relatively
minor item in that but essentially i
would rather have
people as owners that they expect to own
at the rest of their lives i mean i i i
ideally i don't want anybody to say
about selling it next week or next month
or next year
then they change their mind and that's
fine but i but i really wanted to go in
the idea that they're going into
partnership with me
for the rest of their lives and if
they're buying because they think the
stock is going to be split 50 for one or
because they think the earnings are
going to be up next quarter or something
like that
they're not terrible people but they are
going to change their mind after they
get into the hall and they're going to
think this is the wrong kind of place
all the seats are going to be occupied
that's the nature of of the stock market
all the shares of general motors or
berkshire hathaway or general electric
are going to be owned by somebody
and it makes sense in my view to
follow policies that get people that are
as close to you and objectives and
expectations as you can have and and
by not splitting we have
eliminate we've eliminated some people
we wouldn't like to eliminate we've also
eliminated all the kind of people that
are basically interested in trading
stocks uh uh
actively and that's that's a good group
from my standpoint the new stock
exchange
is not wild about it because we probably
oh i know we have by far the lowest
turnover
relative capitalization of any stock on
the exchange but that to me that that's
terrific i mean if i had a club or i
or if i was if i was preaching at a
church i would not measure my success by
how often
uh how frequent the turnover of the
congregation was or their club
membership would be i
i would i would really like the idea
nobody wanted to leave their seats so
there wasn't any seat available for
someone else
i was wondering if you could share a
story with us as one of your investment
non-successes
and maybe would it you know why it
failed and maybe some of the reasons
that our lessons you learned from that
failure that would be helpful to us
i uh i make more mistakes when i have a
lot of cash around
um the i think your decision making
my decision making uh acuity
uh folds or fades as with extra cash
because i just think there's more of a
compulsion to do something when you're
sitting around with cash than if you
have to either
uh sell something or or maybe borrow
money although we're not big on borrowed
money
so i would say that
that's been one causal factor over the
years fortunately most of the time i
haven't had much cash around so it
haven't been a major problem but uh um
but it has caused me i i'd like to think
that's what caused it maybe
it was just playing stupidity at the
time it has been
uh it's interesting i made a study back
when i ran a partnership with all our
large investments
or larger investments
i think we have not we've generally not
had
large losses relative to capital and the
largest
the largest loss we've ever had even the
partnership in berkshire probably was
two percent of
net worth uh so the nature of
not doing very many things and being
careful about them
probably will keep you from making big
errors of commission
now heirs of omission are the ones that
are the big sins
and uh i wrote in the report a couple of
years ago
i've got a thing in my report called
mistake du jour
and uh and i managed to come up with one
every year too and and
i started out to buy fannie mae for
example back in 19 i think 88 or so
and for one reason i didn't i didn't i
just didn't follow through
we'd have made about a billion and a
half dollars on that you know i think we
made about five million
those are the mistakes you don't see the
mistakes you have you don't see are in
in our case
are way bigger than the mistakes that
you see we owned five percent of the
walt disney company in 1966
the whole walt disney company was
selling for 80 million dollars in 1966
debt free
four million dollars bought us five
percent of the company that was the they
spent 17 million dollars on the pirates
right in 1966 building here was a
company selling at less than five times
rides you know they had a lot of rides
i mean that is cheap uh i remember i i
married
the the knockout on wall street that was
that they were earning a lot of money
that
year and and it was mary poppins and
there wasn't anything coming next year
and and uh i remember i went to see mary
poppins on
a at a theater on broadway about 45th
about two in the afternoon i've got a
little anti-state case and everything
i'm going to see mary poppins i
got up to this woman took a booth and i
said i've got a kid around here
someplace
i was going to see if i thought this
thing could be run over and over again
in the future and
but here they would have had 200 and
some films of one sort or another in the
can at that point they
they had they had 300 acres down at
anaheim with disneyland drawing at that
time nine million people a year and the
whole place was selling for 80 million
bucks
so we bought five percent for four
million dollars and the great news is we
sold five percent for six million about
a year later
that five percent now would be worth
about a billion at uh
but you don't see that that's that
conventional accounting doesn't pick
that up but that's the kind of mistake i
made
yeah mr bartheit uh what
prompted you to make an investment in
u.s air given the fact that this is such
a cutthroat industry
and certainly not transparent and easily
understandable
well i think probably the best answer is
temporary insanity
it's a the fellow runs uso is a
wonderful guy i mean
but he has just happened to be in an
extraordinarily tough business
and the interesting thing is i i've
written i actually written something for
graham's book in in the early 70s about
how
the airline business was about the
toughest business there was
and the interesting thing of course is
that if you go back to the time and
we're in the right state for that we go
back to the time of kitty hawk
net the airline transport business the
united states
has made no money i mean just think if
you've been down there kitty hawk
and you've seen this guy go up and you
and all of a sudden this vision hits you
that
the tens of millions of people would be
doing this all over the world someday
and it would bring us all closer
together i mean
i think my god this is something to be
in on and that
despite putting in billions and billions
and billions of dollars the net return
to
owners from being in the entire airline
industry if you've owned it all
and you put up all this money it's less
than zero if they've been a capitalist
down there the guys should have shot
down wilbur
i mean
you know one small step for mankind one
huge step backwards for capitalism but
anyway the uh the uh
so along comes 1989 and i've got a lot
of cash and
uh no one misled me in any way shape or
form i mean this is
a 100 my decision and uh
and i put i put money in it and
seth schofield you can't find a better
human being or manager than than seth
scofield but he's got he's
he is operating with revenues based on
market factors and costs that are not
based on market factors and that's a
recipe for
for a lot of trouble uh so i now have
this
800 number and if i ever get the urge to
buy an airline stock i dial this
number and i say my name is warren i'm
an airaholic and then this guy talks me
down on the other end
warren buffett's approach to investing
removes the worry of predicting where
the stock market's going to go
he simply pays no attention to it in
this next section you'll see why and why
he considers owning the stock the next
best thing to owning the company
he also responds to student questions
about recent trends in banking
consolidation
about investing outside of the united
states and about how to judge the
franchise value of a company
i never think about what the stock
market is going to do because if if walt
disney had come to me in 1966
and said and it was a private company
said would you like to buy five percent
of this company for four million dollars
i would not think about what the stock
market was going to do i would think
about what i thought the walt disney
company was going to do over time
and if in 1988 uh roberto voice sweating
let's say coca-cola been private and
he'd come to me and said you want to buy
six in a fraction percent of
the coca-cola company for a billion
dollars you know i would look at the
coca-cola company so
if something appears to me to be
intelligent to do
i'm not going to forgo doing it because
i or anybody else has an opinion about
the stock market if alan greenspan came
up and whispered in my ear
and said you know i i think bonds are
going to do this or that and then
therefore stocks will
i wouldn't pay any attention not because
i don't respect alan greenspan it's just
i'm not going to trade something i know
how to do
and and give up something i know how to
do
because of some opinion about something
i don't know how to do and i don't know
how to predict
the stock market i don't know how to
predict interest rates i don't know how
to predict
uh business uh all i know is if i buy
the right kind of business the right
price
with the right people i'll do well over
time and in in stocks
it's very hard to know when something
will happen and it's very easy to know
what will happen
and uh we bought seized candy in 1970
one or two that wouldn't be familiar too
much on the east coast here but it's a
very dominant boxed chocolates on the
west coast
uh when they so happened the
grandson of the founder wanted to sell
the company now
i wouldn't think about what the stock
market's going to do when i try and
decide whether to buy seas
chocolates what i'm thinking about is
whether russell stover can knock them
out of the box or you can raise your
prices periodically as you go along
how strong their hold is on the on on
people who are
chocolate consumers in the west and
if that's my attitude toward buying a
hundred percent of a business like seas
it's also going to be my attitude toward
buying six percent of a business like
coca-cola in other words
why in the world should i pass up the
chance coca-cola went public
in 19 either 19 or 20 in 19
at forty dollars a share uh the candler
family had sold it
they sold it through uh through uh
i guess it would have been then jp
morgan of the predecessor company and
and
the trust company georgia which is now
part of suntrust the fee was 200
some thousand dollars for this 25
million offering
and morgan took theirs in cash
the trust company of georgia took theirs
in stock so you'll see on the trust
company of georgia suntrust balance
sheet
a little item investment in coca-cola
where the cost of 110 000 is worth a
little over a billion dollars now
and subsequent to going public the stock
went down 50
over 50 percent that's when mr woodruff
came back from cleveland where he was
working with a white motor company
and they brought him back to run it they
they had a problem with the bottlers
because of some contractual arrangements
they made a
bad deal back in 1899 in terms of the
original
back in two years whether the stock
market will be higher and lower i do
know there will be intelligent things to
do between now and then
and if you see one you know the thing to
do is to do it
yep from your point of view what's the
difference in investing in uh
the entire company like seas versus just
a piece of the company like
like coca-cola well there's way way less
difference than most people think uh
in my view uh if if i own all of seas at
berkshire and we want to change the
management we can change the management
but i don't want to get in with
managements we need to change in the
first place i mean
i'm not if i got into seas and i thought
if i were going to buy season i thought
i needed to change the management
i might not buy it because i wouldn't
you know what do i know about making
chocolate so
uh so i want to find them with good
management but it is true
that if you had a managerial problem and
you owned it all you could change it
it is also true that you can take the
capital out of uh the earnings out of a
business
that you control 100 you can decide the
distribution policy and put them over
someplace else and that's an advantage
to us
uh if the xyz company that we own five
percent of
wants to go out and buy movie studios or
whatever they might want to do
uh they get to allocate the capital
and all things being equal and even
unequal i would rather allocate the
capital and i can do that if we own 100
so that's an advantage only 100
but it's so much more important on a
good business
and be in with good managers than to
have this little extra
uh advantage of being able to change
managers that
it's not a big difference to i would
have owned a good business than own all
of it and i mean i like going
i like going all over coca-cola but i'm
not going don't know coca-cola
is that a reason not to buy seven
percent no
so uh we the one advantage we have at
berkshire
is that we have this mental flexibility
but all we're doing is trying to figure
out how to put capital into good
businesses and
we're not in the steel business per se
we're not in the shoe business per se
we're not in any business person
we're you know we're big insurance but
we're not in insurance we're not
committed to it we don't have mindset
which says you got to go down this road
so we can take capital and we can move
it into businesses that make sense and
that is an advantage
and i'm since i don't come up the route
from any one of these businesses i've
got that advantage of being somewhat
detached perhaps and
therefore objected then the question is
whether it's smart but at least
at least i i should be objective about
it banking consolidation well
uh it's gonna it's going to continue in
a big way and and
most most people like to
uh most managers like to grow and and
they like to grow intelligently if they
can but if they can't they're also
willing to grow in other ways
and and uh it is
every year the american banker which is
the daily
banking publication every year they list
what used to be 13 or 14 000 banks by
size
they don't list them by profitability in
the first 100 they used to show the
pictures of the ceos of the 100 largest
banks
and i think that that probably has some
effect if you start measuring yourself
by
by size they measure by assets but the
asset's always balanced off by
liabilities in that strange
accounting convention the only business
in the world what people brag about how
much they owe you know they say i got a
100 billion dollar bank which means they
go 100 billion
but they're close to it but
i myself do not see among the banks i
look at
economies of scale beyond certain points
there's always an advantage being
dominant in a market
but i'm not sure whether if you've got
200 billion spread across the country
and 15
market shares you're going to have a
better business than the guy who's got
30 percent of the market in rockford
illinois which
we used to own a bank in rockford
illinois and which made two percent on
assets after tax
uh and was conservative in every respect
but uh
that bank would earn less money as as
part of a uh
as part of a larger institution i'm
convinced of that so i don't see great
advantages to shareholders in terms of
a major expansion of banks i'm not
saying it's all
a mistake because i've seen some good
acquisitions wells fargo made a terrific
acquisition of proper for example
some years back uh but
i think it will continue and i think
private bank shareholders are going to
be a little luckier than the acquiring
banks
shareholders i was wondering if you
would comment on your perspective
of investments outside of the u.s and in
particular address
your perspective on how you would hedge
currency risk yeah the
through gillette and gillette makes
about two thirds of his money outside
the united states
and we own about 11 percent of gillette
and coke makes over 80 percent of its
money outside the united states
7.7 percent of coke uh
we like we love the the
kind of companies that can can do well
in international markets obviously
and and particularly where they're
largely untapped would we buy coca-cola
if instead of being domiciled in atlanta
it was domiciled in london
or amsterdam or some place the answer of
course is yes would i like it quite as
well
probably just a tiny notch less because
there might be nuances of
of uh corporate government governance
factors or tax factors or
or attitudes toward capitalists or
anything else that i might not quite
understand quite as well if they're
even in england as i might in the united
states but
so i prefer by a small margin to many
countries and by a large
margin to other countries i prefer a u.s
domicile operation but i also prefer
businesses that are in high returns on
capital and
all of that sort of thing so i i we will
look any place
to find a good business and uh
[Music]
i find it easier to find them in the us
i understand the accounting a little bit
better i understand probably
i just probably have more insight into
how they're going to function in the
future a little more
here than in some other country um but i
don't rule them out
on the other hand the u.s equity market
is a five trillion dollar market and if
if i can't make money in a 5 trillion
dollar market you know
it may be a little bit of wishful
thinking to think all i have to do is
get a few thousand miles away and i'll
i'll start showing my stuff
yeah yeah you and mr munger have uh long
talked about franchise value of
businesses and without tipping your hat
i'm just curious as to
what areas y'all what you perceive is as
that has franchise value right now well
franchise value i
i mean the real test is is if they don't
have your product but they have
something that somebody else
says is similar because the would-be
purchaser walk out of the store
particularly walk across the street and
buy it i mean
so if you go in and you say i'd like a
hershey bar
you know and and they say well we don't
have hershey bark we've got this
unmarked chocolate bar you know that's
that the owner of the uh the place
recommends now
if you'll walk across the street to buy
a hershey bar or if you pay a nickel
more for the bar than the unmarked bar
or something like that that's franchise
tell you that
and you have to maintain that in
people's minds but it's it's
it's very important that was our
consideration when we bought c's candy
it was candy was selling for a dollar
ninety five a pound and the question was
you know would people pay more
for that candy as years went along and
inflation took place
and the truth is that people
if they perceive that it's the best
candy
uh or a significant percentage of them
do in the area or the dominant
percentage
you're going to do very well with a
business like that the franchise is in
their mind i mean it's it's the
experience they had i mean it's the
first time they handed it to a girl she
kissed him afterwards or whatever you
know or slapped him i mean that's what
we like to do with the competitors candy
but uh and and you know this you know
they're not gonna go home on valentine's
day and say here honey you know here's
two pounds of chocolates i took the low
bid
i mean it doesn't it it just doesn't
work so
so if you've got the right kind of
product that way if your wrigley's
chewing gum or whatever it may be it
it's that you're paying you may be
paying for taste in this case
you may be paying for a mental
association that you have something
maybe paying for service availability or
a lot of things
but that's franchise right then the
question is how how durable is it how
big is it how durable is it
and i say that franchise is basically
like a moat
around your economic castle now there's
two things are important how big is the
castle
coca-cola is a big castle sees candy is
not a very big castle
but it's a castle and around both of
those there's a moat
and that moat is either
slightly eroding
service it may be based on employee
training it may be based on research
a lot of things i mean there are all
kinds of things you're trying to do to
make that note bigger and bigger and
throw more piranha and crocodiles and
uh etc into the end of the moat and
you need a moat in business to protect
you from
some guy that's going to come along and
i'll prefer penny cheaper uh
that's what we're looking for all the
time and
you can't find it all you know you're
not going to find it in carbon steel
you know you're not going to find it
with an integrated oil company or
something absorbed in all likelihood
but you will find that you don't have to
find very many very few
if you have 10 good ideas in the rest of
your life that you know you can afford
to give away five of them because
that you'll get very rich with a very
few
good ideas each year the berkshire
hathaway annual report is eagerly
awaited by shareholders
that's because mr buffett writes it
himself part of the report the
chairman's letter has become a widely
cited source of business advice
in fact the entire report is so readable
that it's cited as a model for how
financial reports should be written
in this next segment we'll hear about mr
buffett's views on clear
writing we'll hear about why he thinks
berkshire hathaway may be less
successful in the future
and will hear his views on inherited
wealth
if you understand an idea you can't
express it to other people understand it
it's a little
it's interesting right you know i find
that every year when i write the report
i mean i get these
blocks and the block isn't because you
know i've run out of words in the
dictionary
because i haven't got it straight in my
own mind yet and there's nothing like
writing
to force you to think and get your
thoughts straight and
if you want to communicate something
to other investors and co-owners or
whatever it may be
you know it's quite possible to do it i
mean it and and
uh i think based on what uh chairman
levitt said i think you're going to
probably see a lot of improvement in
that area uh
same thing goes for accounting footnotes
i mean i i get accounting footnotes that
i have trouble understanding well
i have trouble understanding is the
person the robot didn't want me to
understand it i mean
it's not it's not impossible to write a
footnote
explaining deferred acquisition costs
and life insurance whatever you want to
do
you can write it so people can
understand it but and if it's written so
you can't understand it i am very
suspicious
i mean i probably won't invest oh i
won't invest in the company where i
where i can't understand a footnote
because i know they don't want me to
understand it
the greater the amount of capital we
work with the first year
the worse we are going to do in terms of
everything else being equal in terms of
in terms of percentage returns on equity
and i've been
telling our shareholders that for years
and and the reason is very simple
that uh when i started out with ten
thousand dollars
any security in the united states that i
could find that
would seem cheap could have a very
significant
impact on that amount of capital now if
we find something we can put 100 million
dollars in and we make 50
that's 50 million pre-tax it's about 32
and a half
million after tax and that's three
tenths of one percent on net worth so
it it takes very big ideas to have an
impact and our universe
of potential investments has shrunk or
businesses that we can buy outright
has shrunk as our capital gets greater
we are down to where our universe is
very
very small and our returns cannot be as
good in the
future as in the past when i started out
i went
i went through moody's and standard
tours page by page every page i just
looked at companies and i found
western insurance security selling at
two times earnings or national american
insurance selling at two times earnings
i found a public utility in genesee new
york selling it less than two times
earnings
that was just by turning the pages but i
could only put five or ten or fifty
thousand dollars in those things they
still have the capacity maybe to double
my net worth or something of this order
more than that maybe
but that would have could be useless for
me to do that now at berkshire so
so a lot of money is a drag but it has
other advantages
i've read that you're not going to
burden your children with the fortune
that you've amassed
that's not the word they use but you've
got the idea
i just wanted to that extent could you
lend some words of wisdom about
family and disciplining children with
the with money
my general belief is if you've got a lot
of money that you should probably
and i got this idea this phrase from
somebody else but you should leave your
children enough money so they can do
anything but not enough so they can do
nothing
and i think that uh if there's a there's
probably a certain social justice in
that i think and
on top of that i have to think it's
probably in aggregate it's probably best
for
development of individuals although
there could be lots of exceptions to
that
but i i have used the analogy that i
mean i i run into people all the time
you know the country club would say
isn't it terrible to these people
on welfare you know and that they they
get food stamps and then that just
creates a cycle of dependency and you
get second generation welfare recipients
because
they were used to getting the food
stamps from the wiper officer before and
they never stopped to think that
maybe inherited wealth is really just a
lifetime supply of food stamps
you know given by through a trust
officer instead of a welfare officer
they never think about the debilitating
effect of that
you know that waking up at age 10
seconds and finding out that
that you never have to work to compare
that to somebody that
that's probably got a couple of kids
that they don't know what to do with and
and has plenty of problems their own and
and
are struggling and they say well we're
going to ruin this poor person's
desire to work if we don't uh if we uh
if we give them something to
let them buy a little food i i
personally think that
that society is responsible for a very
significant percentage of what
what i've earned i mean if you stick me
down in the middle of bangladesh or peru
or
or some place you'll find out how much
you know this
talent is going to produce in the wrong
kind of soil and
you know i will be struggling 30 years
later so society
i work in a market system that happens
to reward what i do very well
disproportionately well but so does you
know mike tyson did too i mean if you
can knock a guy out you know that
in 10 seconds and earn 10 million for it
this world will pay a lot for that if
you can bat
you know 360 this world will pay a lot
for it if you're a marvelous teacher
this world won't pay a lot for it if
you're a terrific nurse this world will
not pay a lot for it
now am i going to try and come up with
some comparable worst system that
somehow distributes that no i don't
think that i don't think you can do that
but i do think
that when you're treated enormously well
by this market system
or in effect the rest of society showers
goods and services or the ability to buy
goods and services on you because of
some peculiar talent
you don't have your adenoids or a
certain way so you can sing and
everybody will pay you
enormous sums to be on television or
whatever i think you probably
i think society's got should have a big
claim on that
you're lucky enough to be the child of
somebody in that position i think
cutting them off with zero is
is probably a mistake but i think that
setting them up
so that essentially they've got this
lifetime supply of
of claims on other people's production
of goods and services in society for the
rest of their life
it doesn't make much sense to me
my kid will be glad to come and rebut
this next week
[Applause]
[Applause]
you