Warren Buffett and Charlie Munger: Questions and Answers
Part 2
By Selena Maranjian (TMF Selena)
May 4, 2000
On Dividends:
WEB: We paid a dividend in 1969 -- 10 cents per share, I think. If we can keep a dollar and use it to buy businesses, to make more with it, it becomes worth more. We have retained our earnings and will continue to do so as long as we think we can earn more with it. There's no reason to keep a dollar in the business if it becomes 90 cents. We would never have a conventional dividend policy [one that, say, routinely pays a certain amount per year] -- the idea strikes us as nuts. There's no logic to it -- except that some people have these expectations.
CM: What's interesting about what Warren just said is that if you go to all the business schools, academia, etc., they'd never say it. We love saying academia is wrong.
On Selling and the Berkshire Culture:
A shareholder asked, "What are your criteria for selling a company you bought? Would you agree with Phil Fisher, who advises selling when a) you erred and the company isn't what you thought it was or b) the company has changed?"
WEB: I'm glad you brought up Phil Fisher. I recommend his books highly, especially the early ones.
We don't break off the relationships we've formed with companies we own when we're offered a higher price. That actually helps us buy companies. A lot of companies have been built with love. The seller wants the company to be in a good home. We're just about the only ones who'll commit to care for it forever. I commit to the seller that the only one who would betray them would be me. There won't be a takeover of Berkshire.
With stocks, we're not 100% with Phil Fisher. We love buying stocks that we can stick with forever. We used to think that newspapers, TV, were the most solid things around. But things change. In my first 20 years, I'd sell when I found something better. Now I have lots of money and no ideas. The opposite of the earlier days.
CM: We almost never sell. When we do it's because there's something we can't fix.
[later]
WEB: We're the Metropolitan Museum of Businesses. We promise we'll take care of the paintings and we'll let the painters keep painting them. We won't tell them to use more reds and less yellows. To some people, this doesn't mean anything. But if someone loves their business, it means something to them. It has to be enormously important what happens to it. They don't want it auctioned off.
CM: I think our culture is very old-fashioned. Ben Franklin, Andrew Carnegie-- their ideas still work. Can you imagine Carnegie hiring a compensation consultant or an advisor to tell him whether to buy a mill? A lot of our businesses are old-fashioned like us. They have standards. See's has standards.
WEB: It strikes us as idiocy to hire an investment banker to tell you what your company is worth. And he gets a big paycheck if you buy it.
On Compensation:
WEB: Our compensation plans vary, but they're all rational. It's been a huge advantage at GEICO to have an improved compensation plan. Its says what we think a rational measure of productivity over time is.
[WEB then likened stock options issued to executives/employees as lottery tickets.]
There's a lot of repricing of options going on. When you're compensating with options, the stock market determines an employee's value, not their own efforts and work. I hope our competitors do all kinds of crazy things with compensation.
CM: We're out of step with the conventions of the world.
WEB: If an executive said that to work for a company he'd want options on S&P 500 futures, that would be crazy. But if he gets options on his company stock and it goes up due largely to the S&P 500 going up, that's okay?
[later]
WEB: Options are calculated based on what they're worth on the market. That's the opportunity cost for the company. I think you'll see a lot of repricing going on. Companies say they won't do it -- until they do it. I doubt companies will choose to bankrupt their managers. Giving options changes the value of the property. It's like selling a house but keeping 10% of it. Options reduce the value of a company as soon as they're issued.
[later]
[A shareholder asked what they thought about CEOs who get enormous severance packages.]
CM: Generally, I think it's a mistake for corporate America to have created so much hostility toward management. Stupid little details [in executive contracts] make a terrible impression on people. They're advised to [go for these stupid little details] by these damn consultants.
WEB: I agree. We've done very well without consultants. It's maddening when CEOs show up with lawyers and 20 page contracts. People look around and see what others are doing and do the same. It's escalating and won't stop. It doesn't seem to bother shareholders.
CM: It does madden them, but what can they do?
WEB: Well, institutional shareholders could do something. We've yet to hire a consultant and we've never lost a key executive.
[later]
WEB: We look for a great castle and a great knight to protect it. How much does the knight get paid? We try to pay fairly. No one wants to be in the lower half, so the median rises. Compensation committees meet once a year or more often. It's a fact of life and will continue? I don't think it's the money as much as the ego -- they don't want someone else making more.
I've been on 19 boards besides Berkshire subsidiaries. But I've only been on one compensation committee -- at Salomon. You can only belch so many times at the dinner table and get invited back.
CM: I think we can confidently be sure that [this trend toward sky-high executive compensation] will get worse and that it's bad for Berkshire. But with our culture being so different, we do attract some of these wonderful old-fashioned businesses.
On the State of the Market:
WEB: It's amazing what you'll see on the markets. We've seen companies valued at tens of billions of dollars that are worth nothing. The trick is to occasionally take advantage of wild things happening. We don't see any cases of dramatic undervaluation in any areas. There's a lot of money sloshing around. We'd love to find companies trading for half their intrinsic value, but we're not seeing them.
CM: This is a very unusual period.
WEB: Right now you're seeing companies valued at $1 billion that couldn't borrow $100 million if they were private. But since they're public, they can borrow easily with scraps of paper [i.e. by issuing more stock].
CM: Zero unemployment, rampant speculation? a very amazing time.
WEB: We don't know how it will end.
On the Internet and Competition:
They were asked about the future of the Buffalo News newspaper in the face of the Internet.
WEB: I think the Buffalo News will do as well as the top 50 papers in the U.S., but how well those 50 papers will do is an open question.
The Internet democratizes capitalism. The fluidity is incredible, in terms of moving resources around. The newspaper industry has to try a lot of things. It would be crazy to sit on the sidelines.
CM: It's in the nature of things that some businesses die.
WEB: It's very tough for managers to acknowledge that, and public managers can't always afford to. Competitive advantage is vital. It's more important to deepen it than to increase the profit and loss statement. We like to ask questions such as why has State Farm been so successful. It defied the norms. No stock. It was socialistic. Yet it thrives. There have to be lessons. Look at Mrs. B[lumkin], turning $500 into Nebraska Furniture Mart.
[later]
WEB: The Internet will change the insurance industry in many ways. I'm not yet sure how, but there's no question it will have an impact. I don't think our float will change. The industry economics net won't change.
On balance, for society the Internet is good for consumers, but for capitalists it's a net negative. It's more likely it will improve efficiency of American business and reduce profitability.
On Books About Them:
WEB: The most representative book on my thinking is what Larry Cunningham put together. [The Essays of Warren Buffett: Lessons for Corporate America, an edited compilation of Buffett's writings.] We've got more than two decades of shareholder letters on the Web. We've said exactly what we do in our own words. People are looking for mechanistic systems [a likely reference to the Buffettology book] -- but this is all we do.
On Mistakes:
WEB: The original purchase of the Berkshire Hathaway textile mill was a terrible mistake -- and mine alone. It was a cigar butt investment -- free, with a puff left.
CM: You can't avoid the wrong decisions in life, but if you recognize them and do something about them, you can wring some lemonade out of them. We've scrambled our way out of many mistakes.
On Gold:
WEB: I don't believe in investing in gold -- that's dug up out of the ground in South Africa and put back in the ground at Fort Knox.
On Globalism:
WEB: We talk about a global society, but consider that Dr. Pepper has a much bigger market share in Dallas than Boston. How can we have such discrepancies? Some things travel well and some don't. It's not always easy to predict. Razors travel well. Soda generally does. Chocolate bars don't. Cadbury sells well in the U.K., and Hershey sells well in the U.S., but not vice versa. We sell a lot of See's candy in California and we ought to be able to sell at least some in New York, but we've not yet figured out how -- and we've tried.
We will continue to look at things internationally. We may be more likely to find a big opportunity internationally. We missed a good opportunity in Japan recently.
Related Links:
Selena's Annual Meeting Travelogue
Resources For Learning More
Whitney Tilson's Notes From the Meeting
The Berkshire Hathaway Meeting (5/99)
Warren's World -- The man and his company
Berkshire Hathaway Message Board
Berkshire Hathaway's Website |
