Everything Warren Buffett: TILSON FUNDS: Lecture by Warren Buffett to Notre Dame MBA Students 1991

I’ll talk for a few minutes on some of the things that relate to this handout I’ve got, so if everybody has one, or looks with their neighbor, we’ll get the (garbled) about how to make a lot of money in stocks as we go along.

Eddie Cantor had a problem with Goldman Sachs in the late ‘20s. [Cantor was a popular entertainer who lost his fortune in the crash.] He did not do very well in something he bought from them, so he worked them into his routine when he performed, and he told (garbled).
You know Wall Street is a place that people drive to in Rolls Royces to get advice from people who ride to work on the subway.

I’d like to talk to you for just a few minutes about what I regard as the most important thing in investments and also in terms of your career. Because in your career what train you get on makes a lot of difference. Because frequently, perhaps generally, when people get out of business school, they don’t give enough thought to exactly what sort of train they’re going to get on. And it makes a tremendous difference whether you get involved in a prosperous company, one that’s going to really do well. On balance, you want to go with a company whose stock is going to be a good investment over the years because there’s going to be much more opportunity, there’s going to be more money made, you’re going to (garbled). And if you get involved with some of the businesses I’ve been involved with like trading stamps (garbled).

[Buffett is warning students to stay away from declining businesses such as Blue Chip Stamps, though this was in fact a highly successful investment. In the book Damn Right!, Janet Lowe wrote: “During the late 1960s and early 1970s, Munger, Guerin and Buffett gradually acquired a controlling interest in Blue Chip Stamps. This small company issued trading stamps, which merchants distributed. Customers collected and redeemed the stamps for merchandise. The investors saw untapped potential in the company’s float account – the difference between stamps issued and stamps redeemed. Using this pool of capital, Blue Chip’s controlling investors acquired several other companies: Wesco Financial, See’s Candies and The Buffalo Evening News.”]

It does make a difference what kind of a business you get associated with. For that reason I’ve set forth in this little handout Company A and Company E. I’m not going to tell you for the moment what these companies are. I’m going to tell you one thing about the two companies. One of the companies, to the point of where this cuts off, lost its investors more money than virtually any business in the world. The other company made its owner more money than virtually any company in the world. So one of these two companies, Company A and Company E, has made one of its owners one of the five wealthiest people in the world, while the other company made its owners appreciably poorer, probably more so than any other company to that point in time.
Now I’ll tell you a little bit about these companies (we’re leading up to the question of whether the business makes a difference). Company A had thousands of MBAs working for it. Company E had none. I wanted to get your attention. Company A had all kinds of employee benefit programs, stock options, pensions, the works. Company E never had stock options. Company A
had thousands of patents – they probably held more patents than just about any company in the United States. Company E never invented anything. Company A’s product improved dramatically in this period, Company E’s product just sat.

So far, based on what I’ve told you, does anybody have any idea of which company was the great success, and why?

If you get to buy one of these two companies, and this is all you know, and you get to ask me one question to decide on which one to buy. If you ask me the right question, you will probably make the right decision about the company’s stock, and one will make you enormously wealthy.
[Audience asks questions]

Both companies make products used every day. They started as necessities, highly useful, nothing esoteric about either one, although company A does have all these patents. There’s more technology involved in company A.

[How many companies compete with either one?]

Good question, very good question. In effect, neither company had any competition. And that might differentiate in some cases.

Well, I’ll tell you a little more about it. Company A is known as company A because it was in agony, and Company E, as Company E, because it was in ecstasy. Company A is American Telephone and Telegraph. I’ve omitted eight zeros on the left hand side, and the American Telephone and Telegraph Company, at the end of 1979, was selling for $10 billion less than the shareholders had either put in or left in the business. In other words, if shareholder’s equity was “X” the market value was X minus $10 billion. So the money that shareholders had put in, or left in, the business had shrunk by $10 billion in terms of market value.

Company E, the excellent company, I left off only six zeros. And that happens to be a company called Thompson Newspapers. Thomson Newspapers, which most of you have probably never heard of, actually owns about 5% of the newspapers in the United States. But they’re all small ones. And, as I said, it has no MBAs, no stock options – still doesn’t – and it made its owner, Lord Thompson. He wasn’t Lord Thompson when he started – he started with 1,500 bucks in North Bay, Ontario buying a little radio station but, when he got to be one of the five richest men, he became Lord Thompson. I met him one time in England as a matter of fact, in 1972, and went up to see him. He’d never heard of me, but he was a very important guy. (I’d heard of him!)
I said, “Lord Thompson, you own the newspaper in Council Bluffs, Iowa. Council Bluffs is right across the river from Omaha, where I live, four or five miles from my house. I said, “Lord Thompson, You own the Council Bluffs [Daily Nonpareil?]. I don’t suppose you’d ever think of selling it?” He said “I wouldn’t think of it.”

I said “Lord Thompson, you’ve bought this paper in Council Bluffs, and you’ve never seen the paper, never seen the town, but I do notice that every year you raise prices.” (garbled)
He’s got the only way to talk to people – his was the only “megaphone” for merchants to announce commercial news in Council Bluffs. He said “I figured that out before you did.”
I said, “If you ever raise prices to the point where it’s counterproductive (garbled).” Then [I said] “I’ve got only one other question: How do you figure out how much to charge people? You look like a man of awesome commercial instincts – you started with a $1,500 radio station, now you’re worth $4 or $5 billion dollars.”

He said “Well, that’s another good question. I just tell my US managers to try and make 45% pretax and figure that’s not gouging.” And as I got to the elevator, he said “If you ever hear of a newspaper you don’t want to buy, call me. Collect.”

I rode down and that was two years of business school. I mean, try to make 45% and call me collect if you ever find a paper you don’t want to buy.

The telephone company, with the patents, the MBAs, the stock options, and everything else, had one problem, and that problem is illustrated by those figures on that lower left hand column. And those figures show the plant investment in the telephone business. That’s $47 billion, starting off with, growing to $99 billion over an eight or nine year period. More and more and more money had to be tossed in, in order to make these increased earnings, going from $2.2 billion to $5.6 billion.

So, they got more money, but you can get more money from a savings account if you keep adding money to it every year. The progress in earnings that the telephone company made was only achievable because they kept on shoving more money into the savings account and the truth was, under the conditions of the ‘70s, they were not getting paid commensurate with the amount of money that they had to shove into the pot, whereas Lord Thompson, once he bought the paper in Council Bluffs, never put another dime in. They just mailed money every year. And as they got more money, he bought more newspapers. And, in fact, he said it was going to say on his tombstone that he bought newspapers in order to make more money in order to buy more newspapers [and so on].

The idea was that, essentially, he raised prices and raised earnings there every year without having to put more capital into the business.

One is a marvelous, absolutely sensational business, the other one is a terrible business. If you have a choice between going to work for a wonderful business that is not capital intensive, and one that is capital intensive, I suggest that you look at the one that is not capital intensive. I took 25 years to figure that out, incidentally.

On the next page, I’ve got a couple of other businesses here. Company E is the ecstasy on the left. You can see earnings went up nicely: they went from $4 million to $27 million. They only employed assets of $17 million, so that is really a wonderful business. On $17 million they earned $27 million, 150% on invested capital. That is a good business. The one on the right, Company A, the agony, had $11 or $12 million tied up, and some years made a few bucks, and in some years lost a few bucks.

Now, here again we might ask ourselves, “What differentiates these companies?” Does anybody have any idea why company E might have done so much better than Company A? Usually somebody says at this point “maybe company E was better managed than company A.” There’s only one problem with that conclusion and that is, Company E and Company A had the same manager – me!

The company E is our candy business, See’s Candies out in California. I don’t know how many of you come from the west, but it dominates the boxed chocolate business out there and the earnings went from $4 million to $27 million, and in the year that just ended they were about $38 million. In other words, they mail us all the money they make every year and they keep growing, and making more money, and everybody’s very happy.

Company A was our textile business. That’s a business that took me 22 years to figure out it wasn’t very good. Well, in the textile business, we made over half of the men’s suit linings in the United States. If you wore a men’s suit, chances were that it had a Hathaway lining. And we made them during World War II, when customers couldn’t get their linings from other people. Sears Roebuck voted us “Supplier of the Year.” They were wild about us. The thing was, they wouldn’t give us another half a cent a yard because nobody had ever gone into a men’s clothing store and asked for a pin striped suit with a Hathaway lining. You just don’t see that.

As a practical matter, if some guy’s going to offer them a lining for 79 cents, [it makes no difference] who’s going to take them fishing, and supplied them during World War II, and was personal friends with the Chairman of Sears. Because we charged 79½ cents a yard, it was “no dice.”

See’s Candies, on the other hand, made something that people had an emotional attraction to, and a physical attraction you might say. We’re almost to Valentine’s Day, so can you imagine going to your wife or sweetheart, handing her a box of candy and saying “Honey, I took the low bid.”

Essentially, every year for 19 years I’ve raised the price of candy on December 26. And 19 years goes by and everyone keeps buying candy. Every ten years I tried to raise the price of linings a fraction of a cent, and they’d throw the linings back at me. Our linings were just as good as our candies. It was much harder to run the linings factory than it was to run the candy company. The problem is, just because a business is lousy doesn’t mean it isn’t difficult.

In the end, I like to think anyway that if Alfred P. Sloan [the legendary CEO of General Motors during its heyday] came back and tried to run the lining business, it wouldn’t make as much money as a good business. The product was undifferentiated. The candy product is differentiated. (Garbled story of Hershey Bar and Coke versus unbranded but modestly cheaper products).

You really want something where, if they don’t have it in stock, you want to go across the street to get it. Nobody cares what kind of steel goes into a car. Have you ever gone into a car
dealership to buy a Cadillac and said “I’d like a Cadillac with steel that came from the South Works of US Steel.” It just doesn’t work that way, so that when General Motors buys they call in all the steel companies and say “here’s the best price we’ve got so far, and you’ve got to decide if you want to beat their price, or have your plant sit idle.”

I put one business in here, CBS versus Cap Cities in 1957, when my friend Tom Murphy took over Cap Cities. They had a little bankrupt UHF station in Albany. They ran it out of a home for retired nuns. And it was very appropriate because they had to pray every day. At that time CBS was the largest advertising medium in the world: $385 million in revenues whereas Cap Cities had $900,000 in revenues. Cap Cities made $37,000 a year and they paid my friend Murph $12,000 a year. CBS made $48 million pretax. Cap Cities was selling for $5 million in the market and priced on the come, while CBS was selling for $500 million.

Now, if you look at the two companies, Cap Cities has a market value of about $7 billion and CBS has a market value of about $2 billion. They were both in the same business, broadcasting. Neither one had, certainly Cap Cities didn’t have, any patents. Cap Cities didn’t have anything that CBS didn’t have. And somehow CBS took a wonderful business that was worth $500 million, and over about 30 years they managed a little increase – peanuts – while my friend Murphy, with exactly the same business, with one little tiny UHF station in Albany, (bear in mind that CBS had the largest stations in New York City and Chicago) and my friend Murph just killed them. And you say “how can that happen?” And that’s what you ought to study in business school. You ought to study Tom Murphy at Cap Cities. And you also ought to study Bill Paley [who was the CEO] at CBS.

We have a saying around Berkshire that “all we ever want to know is where we’re going to die, so we’ll never go there.” And CBS is what you don’t want. It’s as important not to do what CBS did, and it is important to do what Cap Cities did. Cap Cities did a lot of things right, but if CBS had done the same things right, Cap Cities would have never come close.

They had all the IQ at CBS that they had at Cap Cities. They had 50 times as many people, and they were all coming to work early and going home late. They had all kinds of strategic planners, they had management consultants. They had more than I can say. Yet they lost. They lost to a guy that started out with a leaky rowboat, at the same time the other guy left in the QE II. By the time they got into New York, the guy in the rowboat brought in more cargo than the QE II did. There’s a real story in that. And you can understand broadcasting, so it’s really worth studying what two people in the same field did, and why one succeeded so much and one failed.
I couldn’t resist kicking in the last page: the only public offering Cap Cities ever made, back in 1957 which raised, as you can see, $300,000. And this was when they were going to buy the station in Raleigh/Durham. The only public offering of stock the company’s every made (aside: they sold us a block of stock when they bought ABC). And if you look very carefully you’ll see that the underwriting commission – they took two firms to get this sold – the total underwriting commission was $6,500 bucks.

The last thing I want to show you, before we get onto your questions, is an ad that was run June 16, 1969, for 1,000,000 shares of American Motors. This is a reproduction from the Wall Street
Journal of that day. Now does anybody notice anything unusual about that ad?

[Guesses from audience.]

Everybody in that ad has disappeared. There are 37 investment bankers that sold that issue, plus American Motors, and they are all gone. Maybe that’s why they call them tombstone ads. Now the average business of the New York Stock exchange in 1969 was 11 million shares. Average volume now is fifteen times as large. Now here’s an industry whose volume has grown 15 to 1 in 20 years. Marvelous growth in the financial world. And here are 37 out of 37, and those are some of the biggest names on Wall Street, and some of them had been around the longest, and 37 out of 37 have disappeared. And that’s why I say you ought to think about [the long-term durability of a business?] because these people obviously didn’t.

These were run by people with high IQs, by people that worked ungodly hard. They were people that had an intense interest in success. They worked long hours. They all thought they were going to be leaders on Wall Street at some point, and they all went around, incidentally, giving advice to other companies about how to run their business. That’s sort of interesting.
You go to Wall Street today, and there’s some company the guy hadn’t heard of two weeks before and he’s trying to sell you. He will lay out this computer run of the next 10 years, yet he doesn’t have the faintest idea of what his own business is going to earn next week!

Here are a group of 37. And the question is, how can you get a result like that? That is not a result that you get by chance. How can people who are bright, who work hard, who have their own money in the business – these are not a bunch of absentee owners – how can they get such a bad result? And I suggest that’s a good thing to think about before you get a job and go out into the world.

I would say that if you had to pick one thing that did it more than anything else, it’s the mindless imitation of one’s peers that produced this result. Whatever the other guy did, the other 36 were like a bunch of lemmings in terms of following. That’s what’s gotten all the big banks in trouble for the past 15 years. Every time somebody big does something dumb, other people can hardly wait to copy it. If you do nothing else when you get out of here, do things only when they make sense to you. You ought to be able to write “I am going to work for General Motors because ... “I am buying 100 shares of Coca Coals stock because...” And if you can’t write an intelligent answer to those questions, don’t do it.

I proposed this to the stock exchange some years ago: that everybody be able to write out “I am buying 100 shares of Coca Cola Company, market value $32 billion, because ....” and they wouldn’t take your order until you filled that thing out.

I find this very useful when I write my annual report. I learn while I think when I write it out. Some of the things I think I think, I find don’t make any sense when I start tying to write them down and explain them to people. You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be. And if it can’t stand applying pencil to paper, you’d better think it through some more.

People in that ad did a lot of things that could not have stood that test. Some major bankers in the United States did a lot of things that could not meet that test. One of the bankers in the United States, who’s in plenty of trouble now, bragged a few years ago he never made a loan. And, from the way things are starting to look, he’s never going to collect on one either.
You should not be running one the major banks in the United States without having made loans. I mean, you learn about human nature, if nothing else, when you make loans.

[Question and Answer With Students]

That jewelry store, it’s an interesting story, I’ll take an extra minute. We bought a furniture store about five or six years ago. We bought it from a woman who was 89 [Rose Blumkin, the legendary Mrs. B]. That woman came to this country with a tag around her neck from Russia. She walked out of Russia, and the Red Cross truck got her in Seattle and (garbled) then Fort Dodge, Iowa and sent her there. And she saved money. She sold used clothes and that sort of thing, and she brought over seven siblings, plus her mother and father. She sent over $50 bucks at a time to get the rest of the family over here.

In 1937, she would have been 44 at the time, she started a store with $500, a home furnishings store. That’s all the money she ever put into it. Last year it made $18 million, pretax. It’s become the largest home furnishings store in the country. And she put everybody out of business. She doesn’t know accounting, she’s never had an audit, she doesn’t know what accruals mean, she doesn’t know what depreciation means, but she knows how to run a business. And, unfortunately, two years ago she got mad at her grandchildren and she went out and quit and started competing with us, which shows you how stupid I was not to get a non-compete agreement from an 89-year-old woman! She is now in business right across the street, and works seven days a week at 97 years of age. And if you tell her that this room is 27 by 31, she will tell you how many square yards it is just like that, at $6.99 a yard, and how much that comes to plus tax. She can do it just like that. She cannot read or write. She has never been to school a day in her life. But she knows how to run a business.

One of the sisters she brought over, also to Omaha, was a woman named Rebecca. She went through Latvia, and the border guard took the money when she got to Latvia, and she had to sit in Latvia for a year until her sister got another $50 bucks to bring her over here. They got over here, and it took them 20 odd years to get enough money to buy into a tiny little jewelry store. And I bought that business a couple of years ago from the Friedman family, which is Mrs. B’s sister. Incidentally, Mrs. B is 97, and her three other (garbled).

In any event, in that jewelry store last year, the sales were up 18%. I believe it’s the second largest jewelry store in the United States, next to Tiffany’s main location, and it uses exactly the same formula the furniture store used in building up the largest home furnishings store. The people that run them never went to business school, and they stress the things that Ben Franklin would stress. Essentially, their business is pure Ben Franklin. Tell truth and give people service. Ben Franklin said “take care of thy shop and it will take care of thee.” Now that’s old fashioned in terms of the phraseology, but it’s that simple. And, the truth is that family... If you were at our
jewelry store last Saturday like I was, Ike Friedman who is 65, 66, was there. His mother, Mrs. Friedman, came in – she’s 89 years old – Wall Street Journal under her arm. You’ve got his son there, his only son, two sons-in-law, two daughters in there, they’re all busy. The family’s worth tens and tens and tens of millions of dollars. They don’t do it ‘cause they have to, they do it ‘cause they like to.

The one thing we’ve done well in buying businesses is the people who sold them were in love with their business and not in love with money. If they’re in love with money we can’t do it, but if they’re in love with their business we get along very well because we leave them alone.
Actually Fran Blumkin, the wife of Louis Blumkin, who’s now Chairman of the Furniture Mart, comes in on Saturday, and works Tuesday, to help out Louis’ cousins. And she sells jewelry all the time there. It’s a great business. Berkshire bought a great business. It gets better, and better, and better. And no-one can knock ‘em off.

That’s one of the things I always ask myself: If you give someone hundreds of millions of dollars, or billions of dollars, [can you hurt a particular business?] You can’t hurt the Furniture Mart or Borsheim’s.

[Question: When you look at a company, how do you value it, how do you decide how much to pay for it, and after that, would you say how much you’d sell it for.]

Well, we won’t sell it. We just don’t sell businesses. If we had a business that would permanently lose money, or we had a manager lie to us, or cheat us, or (garbled). But we will never sell a business just because we get a wonderful offer for it. My house isn’t for sale. The children aren’t for sale. The businesses aren’t for sale. I tell shareholders that. That may make me crazy, but that’s who they’re getting in with, and they might as well know it. It is not a game we’re playing, like gin rummy, where we pick up one card and discard another.

And I think good human relationships... I work with nothing but people I like. There’s not one person I work with that causes my stomach to churn in the least. In fact, I feel like tap dancing. I work with nothing but people I like. Well, just think how fortunate you are if you’re 60 years of age and that’s the way you’re going to be able to spend your life. These people are wonderful to work with. I mean, Ike Friedman...we never disagree. Charlie Munger, my partner, and I have never had a disagreement in 30 years. And, why in the world [would I sell businesses run by people I like] so that I can be worth 110% of X, instead of X, when I die? It will all be in the foundation anyway. Why should I go around discarding people like that who are in the business, for some people who might not turn out so well? So I’m not interested in selling at all.

Now, in terms of buying, a) I’ve got to like the people. I’m just not interested in marrying for money. That might have been great when I was 12, but it would be crazy now for me to marry someone for money. Why should I marry in business for money? It just doesn’t make sense. I get associated with these people, so I want to buy the people I like, and I want to buy businesses I understand, and then I don’t want to think too much. And, paying too much simply comes out.
If you can tell me what all of the cash in and cash out of a business will be, between now and
judgment day, I can tell you, assuming I know the proper interest rate, what it’s worth. It doesn’t make any difference whether you sell yo-yo’s, hula hoops, or computers. Because there would be a stream of cash between now and judgment day, and the cash spends the same, no matter where it comes from. Now my job as an investment analyst, or a business analyst, is to figure out where I may have some knowledge, what that stream of cash will be over a period of time, and also where I don’t know what the stream of cash will be. I don’t have the faintest idea of where Digital Equipment will be in next week, let alone the next 10 years. I just don’t know. I don’t even know what they do. And I never would know what they did. Even if I thought I knew what they did, I wouldn’t know what they did. Hershey bars I understand.

So, my job is to look at the universe of things I can understand – I can understand Ike Friedman’s jewelry store – and then I try to figure what that stream of cash, in and out, is going to be over a period of time, just like we did with See’s Candies, and discounting that back at an appropriate rate, which would be the long term Government rate. [Then,] I try to buy it at a price that is significantly below that. And that’s about it. Theoretically, I’m doing that with all the businesses in the world – those that I can understand.

Every day, when I turn to the Wall Street Journal, back in the C Section, that’s like a big business brokerage ad. It’s just like a business broker saying “you can buy part of AT&T for this, part of General Motors for that, General Electric...” And unlike most business broker’s ads, it’s nice because they change the price every day. And you don’t have to do business with any of them. So you just sit there, day by day, and you yawn, and you insult the broker if you want to, and talk to your newspaper, anything you want to, because someday, there’s going to be some business I understand selling for way less than the value I arrived at. It doesn’t have anything to do with book value, although it does have to do with earnings power over a period of time. It usually relates, fairly closely, to cash [flow]. And, when you find something you understand, if you find five ideas in your lifetime and you’re right on those five, you’re going to be very rich.
You know I always tell business students that if you got a punch card when you got out of here, and it only had 20 businesses on it, and every time you made an investment decision they took a punch, and when the 20 were gone you were all done, it would be wonderful. You’re not going to get more than 20 investment ideas in a lifetime. I’m not going to get more than 20 great ideas. And the important thing is that you recognize them when you see them, and that you do something about them.

So, when we find something we understand, if we’re buying all of the business, I want to like the people. If we’re buying part of the business, it’s less important. We want to buy things we understand, and we want to buy them very cheap. If we don’t understand them, we don’t buy them. If they’re not cheap, we don’t buy them. If we can buy them with Tom Murphy, my friend, at an attractive price, we do that in a second.

We bought 5% of the Walt Disney Company in 1966. It cost us $4 million dollars. $80 million bucks was the valuation of the whole thing. 300 and some acres in Anaheim. The Pirate’s ride had just been put in. It cost $17 million bucks. The whole company was selling for $80 million. Mary Poppins had just come out. Mary Poppins made about $30 million that year, and seven years later you’re going to show it to kids the same age. It’s like having an oil well where all the
oil seeps back in. Now the [numbers today are] probably different, but in 1966 they had 220 pictures of one sort or another. They wrote them all down to zero – there were no residual values placed on the value of any Disney picture up through the ‘60s. So [you got all of this] for $80 million bucks, and you got Walt Disney to work for you. It was incredible. You didn’t have to be a genius to know that the Walt Disney company was worth more than $80 million. $17 million for the Pirate’s Ride. It’s unbelievable. But there it was. And the reason was, in 1966 people said, “Well, Mary Poppins is terrific this year, but they’re not going to have another Mary Poppins next year, so the earnings will be down.” I don’t care if the earnings are down like that. You know you’ve still got Mary Poppins to throw out in seven more years, assuming kids squawk a little. I mean there’s no better system than to have something where, essentially, you get a new crop every seven years and you get to charge more each time.

$80 million dollars [sigh]. I went out to see Walt Disney (he’d never heard of me; I was 35 years old). We sat down and he told me the whole plan for the company – he couldn’t have been a nicer guy. It was a joke. If he’d privately gone to some huge venture capitalist, or some major American corporation, if he’d been a private company, and said “I want you to buy into this. This is a deal,” they would have bought in based on a valuation of $300 or $400 million dollars. The very fact that it was just sitting there in the market every day convinced [people that $80 million was an appropriate valuation]. Essentially, they ignored it because it was so familiar. But that happens periodically on Wall Street.

I wanted to go see Mary Poppins, to see if she’d be recycled, and she was showing at the Loews Theater on 45th and Broadway in New York, and here I am with a briefcase at 2:00 in the afternoon heading in to see Mary Poppins. I almost felt like I had to rent a kid.
[Question from audience.]

There’s very little relationship between Walt Disney and Salomon. In Salomon we have lent them, in effect, $700 million on a preferred which matures in five equal installments, starting five years from now, which is also convertible. And this is primarily a fixed income investment with an interesting conversion privilege attached to it. But it is not primarily an equity investment. We get a 9% dividend which, because of the corporate dividend tax credit, converts to something over 7% on an after-tax basis. It’s a form of lending money. It’s an alternative to municipal bonds or something of that sort. It is not an investment like Coca Cola, or the Washington Post, or Cap Cities, which are pure equity investments.

We would rather, and this is nothing negative on Salomon, buy more things like Coca Cola. You know, those are the things that really cause excitement, because those are super businesses as far as the eye can see. Salomon is a perfectly decent business, but it’s just not the same kind of business. Neither is Champion Paper or US Air, which we’ve done the same thing for. If we had way less money, we wouldn’t be doing those things, as opposed to the Coca Cola thing. It’s because we can’t find more of those. And we should own some fixed income investments because of our [insurance business].

[Question from audience.]

Well, I started out when I was 20. I had just finished Ben Graham’s course. And I took Moody’s Manuals – they had investment manuals – and I took Standard and Poor’s, where they put them all together, and do them all alphabetically, and I went through them all page by page. And things jumped out at me. I saw Western Insurance Services, in Fort Scott, Kansas, looking in Moody’s Bank and Finance Manuals. I’d never heard of Western Insurance Services until I turned that page that said Western Insurance Services. It showed earnings per share of $20 and the high was $16. Now that may not turn out to be something you can make a lot of money on, but the odds are good. It’s like a basketball coach seeing a guy 7’3” walk through the door. He may not be able to stay in school, and may be very uncoordinated, but he’s very large. So I went down to the Nebraska Insurance Department, and I got the convention reports on their insurance companies, and I read Best’s. I didn’t have any background in insurance. But I knew I could understand it if I worked at it for a while. And all I was really trying to do was disprove this thing. I was really trying to figure out something that was wrong with this. Only there wasn’t anything wrong. It was a perfectly good insurance company, a better than average underwriter, and you could buy it at one times earnings. I ran ads in the Fort Scott, Kansas paper to buy this stock when it was $20. But it came through turning the pages. No one tells you about it. You get ‘em by looking.

I read hundreds of annual reports every year. I don’t talk to any brokers – I don’t want to talk to brokers. People are not going to give you great ideas. On the other hand, getting them is not that difficult. If you’d read the Disney report in 1966, believe me, you’d have known as much about Disney then as now. You wouldn’t have Michael Eisner, you’d have Walt Disney running it. And you could have multiplied, at two million shares outstanding (garbled).

Cap Cities at that time was an act of faith. You had to believe in Tom Murphy. You could not see (garbled).

(Garbled) and some of you will be stars, and some of you will be less than stars. But it won’t correlate with your IQ at all. But you have it already. And everybody in the room has it. I’ll give you a little question. Let’s think about this. Let’s say that everyone here got a bonus when they left Notre Dame. Let’s say for $25,000 you could buy a 10% interest in the income of any one of your classmates that you wanted to. Now, what are you thinking about? You can take anybody in this room, and for $25,000 buy a 10% interest in their income for life. If they make $25,000 the first year, you make $2,500. If they’re unemployed, you don’t get anything. If they get stock options, you get 10% of the stock options. What are you thinking about as you look around? Are you thinking about which ones are the smartest? It’s interesting what ingredients you think now are what’s going to produce that in the classroom. I would suggest that you start thinking about, assuming you have a 10% interest, what qualities you want to have. I know I would take Tom Murphy. Why? Well, he’s got an IQ, there’s no question about that. But, that’s something one or two others might have as well.

Think about why you picked him or her, and how much of that is transferable to you. And it usually won’t be anything you can’t attain yourself. But if it’s qualities of character, or qualities of enthusiasm, or whatever it may be, most of those things you can pick up.

[Question from audience.]

Well, we will do that anytime we feel that a dollar we retain in the company is not going to be worth more than a dollar in market price. And that can happen. I mean, as we get bigger, it’s more likely to happen. But so far, every dollar we’ve kept in the company has translated into more than a dollar in market price, so that anybody who wanted to take $10 a share out, or $50 a share out, is better off having us keep the $50, having at appraised in the market at $60, $70, or $80 and selling a little piece. They actually come out dollars ahead by doing that. But, when we can’t use the money for any extended period, not for a month or three months, but a period of years, when we find out that we don’t have ways to use money in a way that creates more than a dollar of market value for each dollar reinvested, then we won’t.

I couldn’t attend the 50th birthday of one of my friends so I sent him a telegram “may you live until Berkshire splits.” That doesn’t apply to cash dividends. It will be a market failure but, nevertheless, that may be what happens.

[Question from audience.]

Well, I won’t comment too much on that. The question is whether Security Pacific and Wells Fargo, two of the four largest banks in California, were in talks late last year, and a story appeared in the Wall Street Journal talking about this a week or two ago. They were in talks last year about merging. And that excited some people because Wells had done a particularly good job when they took over Crocker four years ago, or so. And then the deal, the Security Pacific/Wells Fargo thing, did not happen. And then the story leaked out so it’s in the paper. Security Pacific is probably an $80 billion bank. Wells Fargo, I know, is a $50 billion bank. It would have created what would have been the second largest bank in the country, next to Citicorp.

My guess is there will be some bank mergers in the next few years, but they may be more suicide pacts than mergers. There’s going to be a lot of action, not all good by a long shot, in banks, simply because there’s so much trouble there. The big problem in merging two banks these days is that you don’t know what’s in the other guy’s loan portfolio – because too often he doesn’t know. And people didn’t used to worry about that five or 10 years ago, and they worry about it a whole lot now because, if they merge with the wrong bank, they can go broke.
C&S, the Citizens and Southern Bank of Atlanta, merged with Sovereign earlier this year. Sovereign has got a lot of real estate problems in the Washington D.C. area, and that merger took place less than 12 months ago.

Al Lerner merged his Equitable Trust Company in Baltimore into the old Maryland National. Al Lerner is a very, very, smart fellow. And he merged his own company, which he had a lot of his own money in, her merged it in with MNC and in six months MNC was in huge trouble. The stock was 10% of what the value was when he merged it six months ago. And Al just got in with something where he didn’t know how bad it was. But that was easy to do. So, everybody is super careful about that, and this is why there’s a problem, because to look at a Wells Fargo with assets of $50 billion, and Security Pacific with $80 billion, and if there’s $2 or $3 billion in there that’s no good, that wipes out equity. That’s a tough decision to make.

[Question from audience.]

Right now, in property/casualty insurance, generally speaking, prices are lousy, which means business is terrible. We have found a few things to do that will be in our annual report. We’ve found a few things that are OK, they’re not like they were four or five years ago, but they’re keeping us out of bars. And that’s what we look for in times like this. But that is a very interesting business. When that guy was predicting an earthquake near New Madrid we wrote a two month policy against a $3 billion earthquake for some crazy rate as a percentage of everything. We ought to keep that guy out there.

We’ve had a chance to do some very interesting things in insurance. It’s a very tricky business. We are getting in claims on policies we wrote in 1970. We’re not getting in any premium, we’re just getting in claims. They tell the story in insurance ...

[Told burying dad in a rented suit story. From the 2001 Berkshire Hathaway annual letter:
Even when companies have the best of intentions, it’s not easy to reserve properly. I’ve told the story in the past about the fellow traveling abroad whose sister called to tell him that their dad had died. The brother replied that it was impossible for him to get home for the funeral; he volunteered, however, to shoulder its cost. Upon returning, the brother received a bill from the mortuary for $4,500, which he promptly paid. A month later, and a month after that also, he paid $10 pursuant to an add-on invoice. When a third $10 invoice came, he called his sister for an explanation. “Oh,” she replied, “I forgot to tell you. We buried dad in a rented suit.”

There are a lot of “rented suits” buried in the past operations of insurance companies. Sometimes the problems they signify lie dormant for decades, as was the case with asbestos liability, before virulently manifesting themselves. Difficult as the job may be, it’s management’s responsibility to adequately account for all possibilities. Conservatism is essential. When a claims manager walks into the CEO’s office and says “Guess what just happened,” his boss, if a veteran, does not expect to hear it’s good news. Surprises in the insurance world have been far from symmetrical in their effect on earnings.]

We literally will pay hundreds of thousand of dollars for things that happened years back. On the other hand, overall, it can be a good business if you’re disciplined. We have a rule, we’re very Japanese in that, we never lay off anybody. We tell them, in times like this where we’re writing way less than we were writing a few years ago, we tell them that under no conditions will they be laid off for lack of business because otherwise they’ll go out an write some business. I mean, it’s the easiest thing in the world to do. And we tell them we’ll buy them golf memberships, country club memberships, if they’ll promise to play golf during business hours, because we don’t want them in the office during business under terms that are generally available these days. So we occasionally run into a good big deal, and we keep busy that way, but we are operating at 1/4 speed. We have a lot of people that are doing crossword puzzles, which is fine. It beats whatever
else they’d be doing. You do not want energetic people in a lousy business.

[Question from audience.]

I read all kinds of business publications. I read a lot of industry publications. Coming in today on the plane (garbled). I’ll grab whatever comes in the morning. American Banker comes every day, so I’ll read that. I’ll read the Wall Street Journal. Obviously. I’ll read Editor and Publisher, I’ll read Broadcasting, I’ll read Property Casualty Review, I’ll read Jeffrey Meyer’s Beverage Digest. I’ll read everything. And I own 100 shares of almost every stock I can think of just so I know I’ll get all the reports. And I carry around prospectuses and proxy material. Don’t read broker’s reports. You should be very careful with those.

[Question from audience.]

I think the Wall Street Journal is essential. I spend 45 minutes a day with the Wall Street Journal. Actually, I got up the night before, about 11:00... I frequently read it at night. But I’ll read anything. Actually, I probably spend five or six hours a day on reading. We have no meetings at Berkshire. We have a directors meeting once a year, after the shareholders meeting, at lunch. And at the end, I say “I’ll see you next year.” It’s a very economical operation. We don’t have a slide projector. We don’t have a calculator. We do not have meetings on anything. If I take Ike Friedman, and bring him to a meeting, I’ve probably lost $20,000 or something. He should be out there selling. There just isn’t anything to meet about. He’s having meetings in his head all the time about the jewelry store. I’m having meetings in my head about what to do with the money.

[Question from audience.]

We don’t attend any seminars, or trade things. I get all this stuff about how to incorporate in the Cayman Islands or how to never write a check to the IRS. We don’t do any of that stuff. There’s not much goes on at the place, and that’s probably just as well. Every now and then we get a chance to do something and we do it as best as we can.

When Coca Cola got to where it was attractive, for seven or eight months we bought every share of Coca Cola we could. We bought what, on the old stock, 23 million shares, we probably bought that on 150 trading days, that’s 160,000 shares a day. You gotta do it when the time is right to do it.

[Question from audience about the possibility of buying British companies.]

I look at them. I read the Financial Times every day. We’ve looked at, and we’ve come close, very close, to one deal. There’s another proposition I’ve got right now from somebody. But so far, we haven’t done anything. But I don’t rule it out.

If Coca Cola were located in London, and was an English company, and did business exactly like they do, it would be worth slightly less than [if it were a US company]. But overall, I’d do it. Obviously.

We’ve looked at a lot [at foreign companies]. [But] we’ve got a $3 trillion pond in terms of market value in this country. And if I can’t make money in a $3 trillion pond, I can’t make money in an $8 trillion pond. We tend to look in the $3 trillion pond mostly.

[Question from audience.]

Usually they won’t. And I tell them, almost always, they shouldn’t. I’m going to have a letter in the annual report this year which I’ve sent many times to possible sellers of businesses. And the one thing I tell them is you’re not richer when you sell a business. You’ve got a wonderful asset that will be worth more money later on. I wouldn’t be talking to you if I didn’t think this was the case. If it takes care of a specific problem you have, and you want somebody that meets these certain parameters, we’ll talk. If it doesn’t, that great. You’ve got something better than I’ve got, because I’ve got cash, and I’ve got a problem, and you’ve got a good business, and you don’t have a problem.

Mrs. B wasn’t richer when she sold me the business. She did have one son and, at that time, three grandsons in the business, and she had three daughters and their husbands, and a bunch of their children who weren’t in the business, and everybody owned 20% of it. So she thought there would be some sort of problem when she died. She was a strong enough matriarchal figure that there weren’t and problems when she lived – she told them what to do, and that was it. But, when she was gone, she could see trouble. You saw it down at the Louisville Courier/Journal a couple of years ago with the Bingham family. You get a lot of money, but somebody gets unhappy. Sometimes the in-laws get unhappy. Some people prefer to solve that problem themselves, when they’re alive, rather than have some trust department try and solve it when they dead. But, I don’t want people selling to me because they think they’re getting richer, I want them selling to me because it solves some particular problem, and I can help them solve it.
I can do things that other companies can’t do. I can arrange the transfer of some of the ownership of the business to another generation. I can promise them it won’t get resold.

Virtually no other American company can do that. If the XYZ company goes out and buys See’s or Borsheim’s, the President of XYZ company can say “we’re not going to sell it” but he may be taken over himself, his board of directors may tell him to do something, McKinsey may come in next week and say “get out of this business and get into some other business.” You can get double crossed in a lot of ways that there’s no moral stigma attached to, but that’s just the way the cards fall. With me that can’t happen. The only thing that can happen bad to them is if I double cross them. So they have to make a judgment whether I’m lying to them. I can’t come back to them later and say the board’s told me we’ve got to get out of the jewelry business, there’s this great offer that’s come in, I’ve got this fiduciary responsibility, blah, blah, blah, blah. That won’t happen.

[Question from audience.]

They’re rich because they’ve already gotten rich by having the company. All they’re going to do, if they take money from me, is they’re going pay some taxes, and they’re going to invest in some other business. They might buy Berkshire, they might buy General Motors, they might buy
government bonds, but they already had a good business. And they don’t have to pay the taxes. So they are not getting richer.

I can help them with some problems. When Ike at Borsheim’s came to me I said “look, I will pay you X, and I will show you how to get more money than that, and here is how you can do it.” He said “I’m not interested.”

[Question from audience.]

We don’t want what I call the used cigar butts, where you get one free puff and that’s it (garbled comment from audience). Well, partly I don’t have the people to stick in anyway. And I don’t want to go through the human travail that’s involved in that.

I don’t want to go through it, basically. And, if you have your choice, we’ll just think in terms of looks now, but marrying some gal that’s the girl of your dreams and having another one and saying “If I send her to the psychotherapist for five years and have some plastic surgery” well maybe it will work [tape ends].

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