Fool contributor Rick Casterline attended this year's Berkshire Hathaway
Question: You have invested in [South] Korea. What was your investment, and are there any plans for future investments?
Warren Buffett: Korea, for the past six years, offered extraordinary values, but in most of them we couldn't [invest] hundreds and hundreds of millions of dollars. We found 20 companies at good values, with good balance sheets, at three times earnings. I don't understand why they were so cheap. People knew about the larger companies, like Samsung, but not the smaller ones. Plus, the won [South Korea's unit of currency] was at 950 [to the dollar], and we knew that it would rise. I use this as an example that the markets were not efficient. You can go to the KSE [Korea Stock Exchange], which is just as good as the SEC, yet you would see prices where you can double or triple your money.
Charlie Munger: Are we happy Iscar has a strong presence in Korea? Sure.
WB: You bet.
CM: I live surrounded by Koreans in L.A. I would regard Korean culture and what they've created as one of the most remarkable in the history of capitalism. We don't think it's an accident that Iscar discovered Korea. If you try to find 10 countries better than Korea ... you won't get through one hand. We are huge admirers of Korea.
[Editor's note: Berkshire purchased Iscar, an Israeli tool-cutting manufacturer, earlier this year. Iscar has a business presence in South Korea.]
Q: Why didn't you buy more Wal-Mart
WB: Well, you don't know whether we bought more. [Laughs.] . The valuation strikes us as reasonable, but not a screaming bargain. Charlie?
CM: I have nothing to add.
Q: You have expressed an interest in international investing now. Which countries are the friendliest for acquisitions, and which are worse?
WB: There are dozens of countries. Below a certain size, they become too small for our needs. It's not like there are 200-plus countries [under consideration]. It is wherever we feel comfortable, but maybe 25 countries. We don't have a list.
CM: As for what we like least, we don't want kleptocracies. We need a rule of law. If people are stealing from the companies, we don't need that.
WB: If Coca-Cola
Q: Is this the right time to invest in Europe, and Italy specifically?
WB: That's a fertile field. We haven't been on the radar over there, so I hope this [Iscar] investment makes people aware. We own some in the U.K., but we have to report all purchases above 3% of a company there. You can expect us to buy more in Europe -- not because of currency considerations, but it is an added benefit. Icing on the cake.
Q: What do you think of the retail pharmacy sector?
WB: We don't have any special views in pharmacy. I want to know: What's the moat on the business? Sometimes, you can get a product or size advantage.
A person buying candy is not going to take the low bid. If you go buy candy for your spouse or your sweetheart -- which I hope is the same person -- you won't hand her a box of chocolates on your anniversary and say, "Here, honey, I took the low bid."
In retailing, we have to be pretty convinced there is a moat.
[Editor's note: Buffett also mentioned that some retailers are becoming brand names themselves.]
CM: We missed Walgreen
WB: In the crafts world, Michaels
We've seen a lot of others lose their edge -- [one of them being Sears Holdings'
CM: If someone is buying a Snickers or Hershey bar, people walk in with a known pleasure; they have a known expectation.
WB: Most people do not buy a candy bar they haven't eaten before.
CM: We're the tortoise that has outrun the hare because it chose the easy predictions.
Q: What do you think about shareholder activism?
WB: I have mixed emotions. I want to look at the individual case. Many activists want to see the stock go up next week and say goodbye. I've wrestled with that question as long as I've been investing. Tom Murphy was running Cap Cities when it was selling for less than half what it should have been. Does that mean it should be broken up?
[Editor's note: Thomas Murphy was CEO of Capital Cities/ABC until Disney
CM: The U.S. is exporting poison to Europe.
[Editor's note: Munger was speaking about corporate pay practices that are now being adopted in Europe, as well as undesirable actions such as leveraged-buyout specialists buying a business, dressing it up, and quickly dumping it. He likened these corporate raiders to Genghis Khan.]
Q: How do you reconcile your views against derivatives as "financial WMD" while you have global options?
WB: We don't think derivatives themselves are evil; it's the way they are used. There is nothing wrong with interest-rate swaps and forex [foreign exchange market] contracts, but we're worried about some of the consequences. It can lead to financial disaster or exacerbate one that starts for a different reason. I believe this will happen. But I was involved with puts and calls when I was 21.
CM: [In reference to why executives don't look seriously at the problem:] They don't look because it is embarrassing. What we have is high leverage, huge greed, and contemptible accounting. There's a huge interdependency of financial institutions based on others' assets, trillions of contracts, and multiple variables. Auditors have no chance.
WB: I once got a call on a Sunday morning; it was a guy from Long-Term Capital Management. He said, "Would you like to buy total return swaps?" Now, if you ask the Federal Reserve -- which puts a 50% margin requirement on margin accounts -- if it would be appropriate to be leveraged to the hilt, 100%, and do it for billions of dollars, and do it over and over again ...
Blessed are the meek, that they should inherit the Earth ... but the question is, after they inherit the Earth, will they stay meek?
Q: You talk about the problem with helpers in the markets. Is there anything else that is ...
[Editor's note: The questioner danced around what she wanted to say in an attempt to word it politely. Eventually, Buffett interrupted her and said:]
WB: A ripoff? Yes.
[Editor's note: Buffett told the story of an unscrupulous appliance store nearby -- a competitor to Berkshire-owned Nebraska Furniture Mart -- where the salesmen were "too stupid to remember the commission rating they got for selling certain appliances." To solve the problem, the store started putting the commission number (7.4, 8.1, etc.) on tags on the appliances. When the customers asked, "What does that number mean?" the salesman would reply, "Oh, that's the consumer rating." The higher "consumer rating" would have a higher commission number.]
CM: Everywhere there is a large commission, there is a high probability of a ripoff.
Q: What are your current criteria for foreign investments? Are they different now from what has been in the annual report for years?
WB: No, we still stay within our circle of competence. [We seek] good businesses with a durable competitive advantage, and able and trustworthy management. Location is not important.
CM: We have a problem outside the U.S. because we aren't well known. The reason we could buy Iscar is because [Iscar was] so smart. We weren't smart enough to find them; they were smart enough to find us.
There are a lot of countries in Asia with a similar culture to Iscar. I wouldn't be surprised to see a similar thing happen in Asia.
WB: The nice thing is that there are others out there [similar to Iscar in the international market], but there aren't really any other Berkshires out there.
Q: How can President Bush get out of Iraq? Can we get out?
CM: Once you're in, there aren't any good options. I could see how very reasonable people could be on either side. If you're confident you know the answer and are correct [on how to get out], you're probably stupid.
WB: There's not a good answer for you. When we were in US Air, there weren't any good answers.
CM: One big plus in the Iraq situation, which I haven't heard anyone else really mention, is that we all know a lot better now what we're up against. We're all wiser on both sides of the issue.
[Editor's note: Our correspondent missed the next question.]
WB: When GM
Q: Can you tell us more about the $15 billion acquisition? What is the chance it will go through? Plus more on your general acquisition policy?
[Editor's note: Buffett was working on the a $15 billion deal at the time but gave few details.]
WB: Well, I said yesterday during the meeting that I thought the chance of it going through was quite remote; it hasn't gotten less remote in the past 24 hours. We can't manufacture opportunities and feel no compulsion to buy.
Stay tuned for Part 2 of the press conference, right here at Fool.com.
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