Everything Warren Buffett: NY TIMES BLOG: Warren Buffett Answers Your Questions

Tuesday, May 5, 2009

NY TIMES BLOG: Warren Buffett Answers Your Questions

May 4, 2009, 12:24 pm

I spent a few hours this weekend on stage with Warren E. Buffett, as the world-famous investor fielded questions from me, two other journalists and shareholders of his company, Berkshire Hathaway.

My list of questions came from Berkshire shareholders and DealBook readers, who sent me lots of interesting and thought-provoking suggestions in the weeks leading up to the meeting — some of which were still arriving by BlackBerry while I was up on stage.

Here’s what I asked the Oracle of Omaha and his longtime business partner, Charlie Munger, as well as their answers.

My first question came from Aaron Goldzimer:

“Given the role of rating agencies in the current economic crisis, their conflicts of interest, their reliance on flawed, history-based models (as you describe in this year’s letter to shareholders), and the likelihood that a loss of credibility and/or regulatory reforms could force drastic changes in their business models or earnings streams, why do you retain such a large holding in Moody’s? And more importantly, why did you not use your stake to try to do something to prevent conflicts of interest and reliance on these flawed, history-based models?”

His answer: Mr. Buffett said he still thought it was a good business that relied on little new capital. As for whether he could have used his influence, he said, “I don’t think I’ve ever made a call to Moody’s. We don’t tell Burlington Northern what safety procedures to put in, or AmEx who they should lend to. When we own stock, we are not there to try and change people.”

Then I asked Ben Knoll’s question about Ajit Jain, who runs some of Berkshire’s insurance operations:

“You famously said, ‘You should invest in businesses that a fool can run, because someday, a fool will.’ Given your reinsurance company’s capacity and inclination for big financial bets, can you provide us more reassurance about this risk once Ajit Jain is gone? Do you have a successor lined up for him? The Titanic-like ending at American International Group, once Greenberg was gone, has me spooked.”

The answer: “It would be impossible” to replace him, Mr. Buffett said.

After that, I (somewhat selfishly) asked this question from Dennis Wallace:

“Given the current economic conditions in the newspaper and publishing business, can you please provide some of your thoughts on its impact on Berkshire. Given, that our investee, Washington Post Company has had a substantial decline in its stock value, is it still a good use of capital? And, given the ‘cheap’ trading prices of newspapers in the current climate, would Berkshire consider purchasing additional newspapers to add to its Buffalo News and Washington Post properties? At what price does it become compelling to invest in the newspaper business? Or is there no price where it becomes compelling in today environment?”

The answers from Mr. Buffett and Mr. Munger were not very encouraging for those in the newspaper business.

“For most newspapers in the United States, we would not buy them at any price,” said Mr. Buffett, whose company owns a large stake in The Washington Post Company. He added that he sees the possibility of “nearly unending losses” for newspaper companies. Mr. Munger called the industry’s decline “a national tragedy” and said that “what replaces it will not be as desirable as what we are losing.”

Right after lunch, I started the afternoon session with this question, which arrived by BlackBerry, about Berkshire’s recent decision to take a stake in BYD, a Chinese company that makes rechargeable batteries:

“BYD appears to be more like a venture capital investment than a value investment. Would you both explain that investment, your logic behind it, and your expectations for it?”

Mr. Munger disputed the notion that BYD was an untested start-up or that the deal resembled a venture capital investment. BYD is a major player in the battery business that is now going after the automotive market, he said, adding, “It is a small company, but its ambitions are big.”

Then I asked a question from John McDade:

“Warren, in your General Electric and Goldman Sachs investments, do you think you’ve picked attractive businesses or simply attractive securities? Ben Graham’s Security Analysis suggest that the most frightening things management can do is manage earnings, which it could be argued both of these firms do. What’s your reaction to that?”

There was plenty of value in these deals, Mr. Buffett answered, pointing to the 10 percent dividends his firm was getting on its preferred shares in Goldman and G.E.

Later I asked this question from Dave Hackett:

“Even though the company (largely due to present management) has grown book value per share by 20.3 percent annually since 1965, such a rate going forward is obviously not likely given the size of the company as evidenced by the fact that a year greater than 20 percent has only been achieved once since 1999 (and was barely exceeded). Do you have a future target rate (i.e. a long-term average) that you hope we achieve going forward or that you think is a very successful or acceptable rate given the current size of the company (e.g. 15 percent)?”

His answer: Mr. Buffett said that he envisioned growth that was a couple of points or so above the Standard & Poor’s 500 index. He acknowledged that the much faster growth of the firm’s early days wasn’t likely to return.

My last question came from some shareholders who are also employees:

“We are concerned with both the financial condition of the company and the stability of our jobs. Could you discuss your attitude towards the use of layoffs as a means of responding to short-term downturns in company profits.”

His answer: He said he accepts that some companies are in a position where layoffs are necessary. While he hopes they won’t have to cut jobs, he understands that they might.

– Andrew Ross Sorkin

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