Fool contributor Rick Casterline attended this year's
Question: Considering the more exotic risks average Americans are taking (such as with exotic home loans, no savings, and such), are we becoming a nation of gamblers?
Warren Buffett: People are enormously fixed to the rearview mirror. People have been offered easier terms. Those who bought real estate five years ago did very well -- this fires up a speculation boom as others feel that they missed out. It's the same in investing: The longer it goes on, the bigger the trouble. Leverage is very tempting and always leads to trouble.
People who have done these things for the past couple of years are doing well, and that draws more people in. It is irritating to see a neighbor who you know is less intelligent that you do well in some financial move.
What starts out going up for sound fundamental reasons then starts going up for unsound speculative reasons. There is a saying that what the wise do in the beginning, the fools do in the end.
[Editor's note: Buffett referenced the "Nifty 50" type of speculation that took place in the 1950s. He mentioned that companies whose names ended in "tron" did well back then, and he said he always thought there should have been a company named Trontronics. "They would have made a fortune," he said. He also mentioned a company selling scaffolding for painting that called itself Space Platforms.]
Charlie Munger: Of course there is more gambling. There is way more speculation. In the tout system, you share in the winnings, and if you lose, well, it's your customer's losses. The tout system has moved into the financial system.
WB: Fifty years ago last Thursday, getting together $105,000 wasn't the easiest thing in the world.
People like to gamble; it generates interest in what's going on. If you're watching a football game and you don't care about either team, that's OK, but if you bet on the game, now you have interest and excitement. We do the same thing, only by insuring hurricanes and watching the Weather Channel. [Huge laughs.]
Q: What do you think about employee benefits?
WB: Capitalism can be tough. It is creative destruction. We had a family grocery store, but people went to supercenters. Believe me, small grocers don't pay benefits.
Capitalism is constantly looking to get people what they want at a price they want, and to do so efficiently. The problem is, someone else gets hurt. But it lowers the price of food. It saves huge amounts for consumers and most probably pays more than a thousand Buffett grocery stores.
There used to be lots of farmers in America, and then you had the tractor, and then the combine. This is good for consumers; it has made food cheap. If you look at inflation for food over the last couple of hundred years, it is down. But if horses could have voted, they would have voted down tractors.
Charlie has always said that the best youth-training program in the country is McDonald's
The benefits of Wal-Mart
CM: Many Wal-Mart critiques are unfair, for anybody halfway glued together. It's a marvelous meritocracy, where anyone can get trained and rise up in the organization, or get trained for jobs elsewhere. It is asinine to take the highest-paid wage in an industry and apply it to everyone. Everyone is different. Costco
Q: Do you require a certain payback period in acquisitions? Why buy Russell at $18, instead of in lots at $14 or $15?
WB: If we buy a company which is publicly traded, we don't pay any attention to the price of its stock. We pay attention to what it's worth. We hope that eight out of 10 acquisitions will work out as expected
[Editor's note: Buffett talked briefly about the effect of time on money.]
Aesop said a bird in the hand is worth two in the bush. He missed a few things, I mean he didn't say how long it takes to get them out of the bush. If we get them out tomorrow, it may be worth 1.3 birds ... but he got the main point. We follow the Aesop approach to investing.
CM: We are quite proud of our acquisition of MidAmerican ... there is far more talent than we even thought. The best way to get success is to deserve it.
Q: Can you talk about the recent legislation effectively proposing segregation in Omaha's school districts?
WB: I went to public school up in D.C. for a time and had several congressional kids in my classes. Today, I don't think there are any [in the public schools].
[Editor's note: Buffett called the legislation a shame for Nebraska and used golf courses as an example of public versus private education. He says that he's not going to care too much about the condition of the public course if he's using the private courses. That becomes a problem, he says, if all of he rich people who pay a large share of the taxes are sending their children to private school. Buffett and Munger both agreed that the key is to not let the school deteriorate in the first place, especially because it is so hard to correct the problem once the deterioration has set in. They both lauded Omaha's public schools, notably Omaha Central High, which Buffett's late wife, Susan, attended. Munger said he thought that excellence might have a lot to do with "you and Susie," when talking to Buffett.]
Q: You don't like the 2%/20% structure of private equity such as hedge funds. What do you think about pension fees, and that structure going to pension fund managers? Will it improve their results?
WB: Pay more to get better performance? It won't work. Pension funds and university endowments are not getting their expected return groping around in alternative investments. An "alternative investment" is one you didn't own when it did well for the past five years but that you should own now [according to the broker].
Q: What do you think of all the current share buybacks? Why are they not challenged?
WB: Buybacks should occur only when all business needs are met and if shares are trading lower than a conservative estimate of intrinsic value. Companies should tell shareholders in advance exactly why they are buying back shares. Very few make that determination now. Buybacks are fashionable because it benefits the option holder more than a dividend. Executives and boards believe what they want to believe, and consultants tell them what they want to hear.
CM: There is less integrity in today's buybacks -- these are not your grandfather's buyback programs.
Q: Any French companies that you are interested in? If not, is it because of the business environment in France?
WB: Not [interested] at the moment. If French companies met our criteria and accepted our price, then we'd have no problem investing. There are some companies in France that we'd love to buy.
CM: The business environment there is not perfect.
Q: How do you place value on declining businesses? Should you sell a declining business like the Buffalo Evening News or World Book?
WB: When we have a business that management has played square, and it's in decline but doesn't have labor problems or lose money, then we are happy to hold. We don't play "gin rummy" management. . World Book makes a lot less money than it used to, but it helps kids. If Charlie and I sat down and said, "which child [in the sense of one of Berkshire's companies] should we get rid of this month?" the Berkshire family would have a very different climate today. Our behavior in relation to these companies affects our future prospects in acquiring new companies.
CM: Besides, World Book would be one of the last businesses we would sell.
[Editor's note: Munger further discussed the merits of World Book, including the continued popularity in schools of the encyclopedia company's products.]
Q: Would you invest in Japan? Are you looking to? Does the change in rates make things better?
CM: The change of rates in Japan is not consequential enough to affect global rates or Berkshire. The Japanese market, since the Second World War, is one of the most admirable instances of capitalism, but we seldom find Japanese equities to buy.
WB: I would like to buy Japanese businesses.
[Editor's note: Buffett mentioned that he likes Japan and mentioned that Berkshire has owned three Japanese equities in the past five years. He said he and Munger were both amazed at how long the rates stayed as low as they did.]
Q: Is the political situation a problem with Iscar [because it's an Israeli company], and does it increase risk for Berkshire shareholders? Does this mean you're looking to invest in Europe now?
CM: The political situation is not a problem. Iscar is a highly unusual company. The Iscar people are not normal -- way up on the management scale.
But this doesn't indicate that we will run all through Europe buying things.
[Editor's note: Berkshire purchased Iscar, an Israeli tool-cutting manufacturer, earlier this year. Iscar has a business presence in South Korea.]