Berkshire Hathaway 2017 AGM Q&A transcript – Part 3

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Berkshire Hathaway’s Annual General Meeting was held on May 6th, with the usual 40,000-odd attendees. It was also webcast on Yahoo Finance, giving us the chance to watch it in full, and live.  There’s always some dorks whining about one or two of their hundred-odd businesses, and the fan-boys asking rubbish about the search for happiness.  The fluff stuff aside, they’re two sharp dudes with clear insights, and answer in old white guy ways, which is sometimes pretty hilarious.

Here’s the third of five parts of the Q&A section.  

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The primary investment strategy of 3G capital is extreme cost cutting after the purchase of the company. This typically includes the elimination of thousands of jobs. With the current US President focusing on retention of US jobs, will Berkshire Hathaway still consider future investments in 3G Capital if those investments result in the purchase of US companies and the elimination of more US jobs?”

Yes, essentially, 3G management, and I’ve watched them very closely at Kraft Heinz, basically they believe in having a company that’s productive as possible and of course the gains in this world, for the people in this room and people in Omaha and people throughout America, have come through gains in productivity. If there had been no change in productivity, we would be living the same life as people lived in 1776. 

Now, the 3G people do it very fast and they’re very good at making a business productive with fewer people than operated before, but we’ve been doing that in every industry, whether it’s steel, cars, or you name it and that’s why we live as well as we do.

We prefer, at Berkshire – I wrote about this a year ago – to buy companies that are already run efficiently because frankly, we don’t enjoy the process at all of getting more productive, I mean, it’s not pleasant, but it is what has enabled the country to progress and nobody has figured out a way to double people’s consumption per capita without in some way improving productivity per capita. It’s a good question whether it’s smart overall if you think you’re going to suffer politically because political consequences do hit businesses. So, I don’t know that I can answer the question categorically.

I can tell you that they not only focus on productivity and do it in a very intelligent way, but they also focus to a terrific degree on product improvement and innovation and all of the other things that you want a management to focus on and I hope that at the lunch time, if you had the Kraft Heinz cheesecake, you’ll agree with me that product improvement and innovation there is just as much a part of the 3G playbook as productivity.

I don’t personally, we have been through the process of buying into a textile business that employed a couple thousand people and went out of business over a period of time where a business was headed for oblivion and it is just not as much fun to be in a business that cuts jobs rather than one that adds jobs. 

So, Charlie and I would probably forego personally having Berkshire directly buy the businesses where the main benefits would come from increasing productivity by actually having fewer workers, but I think it’s pro-social to think in terms of improving productivity and I think the people of 3G do a very good job at that, Charlie?

Well, I agree. I don’t see anything wrong with increasing productivity. On the other hand, there’s a lot of counterproductive publicity to doing it. Just because you’re right, doesn’t mean you should always do it.

Yes, I’d agree with that.

Berkshire’s cash and Treasury bill holdings are approaching $100bn. Warren, a year ago you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred, what are your latest thoughts on raising the share if we purchase threshold?

When the time comes and it could come reasonably soon, even while I’m around, where we really don’t think we can get the money out in a reasonable period of time into things we like. We have to re-examine then what we do with those funds that we don’t think can be deployed well and at that time, it would make a decision and it might include both, but it could be repurchases, it could be dividends. 

There are different inferences that people draw from a dividend policy than from a repurchase policy in terms of expectations that you won’t cut a dividend and that sort of thing, so you have to factor that all in, but if we really felt that we had cash that was unlikely to be used, excess cash, in a reasonable period of time and we thought repurchases had a price that was still attractive to continuing shareholders, was feasible in a substantial sum, that could make a lot of sense.

At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price, but at a point the burden of proof is definitely on us. The last thing we like to do is own something that a hundred times earnings where the earnings can’t grow. As you point out, we have almost $100bn, it’s a $90bn plus invested in a business – we’ll call it a business – where we’re paying almost a hundred times earnings and it’s kind of a lousy business.

It’s more after tax earnings.

Yes, so you know, we don’t like that and we shouldn’t use your money that way for a long period time and then the question is, are we going to be able to deploy it and I would say that history is on our side, but it would be more fun if the phone would ring instead of just relying on history books and I am sure that some time in the next ten years. It could be next week or it could be nine years from now, there will be markets in which we can do intelligent things on a big scale, but it would be no fun if it happens to be nine years off.  I don’t think it will be, but just based on how humans behave and how governments behave and how the world behaves…. but like I say at a point, the burden of proof really shifts to us big time and there’s no way I can come back here three years from now and tell you that we hold $150bn or so in cash or more and we think we’re doing something brilliant by doing it, Charlie?

Well, I agree with you. The answer is maybe.

He does have a tendency to elaborate.

I would appreciate your perspective, if any, on the practices of your CTB subsidiary which is somewhat involved in big poultry and egg production. Somewhat indirectly related as you share your concern in nuclear war extensively at the last annual meeting, I would love to pick your brain on Albert Schweitzer’s Nobel Peace Prize acceptance speech shortly after the first nuclear bombs were detonated, that compassion can attain its full breadth and depth if it is not limited to humans only? 

Well that’s a pretty broad question. I would say, on your first point, we have a subsidiary CTB run by Vic Mancinelli and I sit down with him once a year and he’s a terrific manager, he’s one of our very best. You don’t hear much about him and they do make the equipment for poultry growers. I can’t answer your question specifically, but I would be glad to have you get in contact with Vic directly because I know that what question you raised is a major factor in what they do. They do care about how the equipment is used in terms of poultry and egg production.

As you know, a number of the largest purchasers and the largest producers are also in the same camp, but I can’t tell you enough about it directly, that I can give you specific answer, but I can certainly put you in touch with Vic. I think you would find him extremely well-informed and doing some very good things in the area that you’re talking about. 

In terms of the nuclear weapon question, I’m very pessimistic on weapons of mass destruction generally, although I don’t think that nuclear, probably is quite as likely as either biological, primarily biological and then maybe cyber. I don’t know that much about cyber, but I do think that’s the number one problem of mankind, but I don’t think I can say anything particularly constructive on it, no, Charlie?

Well, I don’t think we mind killing chickens and I do think we’re against nuclear war, so no.

We’re not actually a poultry producer, but they use our equipment and that equipment has been changed substantially in the last ten or 15 years, but again I’m just not that good on the specifics that I can give them to you, but I can certainly put you in touch with Vic.  

Warren, since Todd and Ted joined Berkshire, the market cap of the company has doubled and cash on hand is now nearly $100bn, it doesn’t look like Todd and Ted have been allocated new capital on the same relative basis, why?

Well, actually I would say they have been. I think we started out with $2 billion. I could be wrong, but in my memory it was $2 billion with Todd when he came with us so there have been substantial additions and of course, their own capital has grown just because say in a sense they retained their own earnings, so yes, they are managing a proportion of purchased capital also measured by marginal securities. 

I think they’re managing a proportion that’s pretty similar, maybe even a little higher than when each one of them entered and Ted entered a year or two after Todd. 

I think they would agree that it’s tougher to run $10 billion than it is to run $1 billion or $2 billion. Your expectable returns go down as you get into larger sums, but the decision to bring them on has been terrific, they have done a good job of managing marketable securities, they’ve made more money than I would have made with that same, what is now $20 billion, but originally it was $2 billion and they’ve been a terrific help in a variety of ways beyond just money management. 

So, that decision, that’s been a very, very good decision and they’re smart, they have money minds, they are good specifically at investment management, but they’re absolutely first class human beings and they really fit Berkshire, so that was, Charlie gets credit for Todd. He met Charlie first and I’ll claim credit for Ted and I think we both feel very good about the decisions, Charlie?

Well, I think the shareholders are very lucky to have them because they both think like shareholders. After all, it came up that way and that is not the normal way that employees think. It’s a pretence that everybody takes on, but the reality is different and these people really deeply think like shareholders and they’re young and smart and constructive, so we’re all very lucky to have them around.

Yes, their mind-set is 100% what can I do for Berkshire, not what can Berkshire do for me and believe me, you can spot that over time with people and on top of that, they’re very talented, but it’s hard to find people young, ambitious, very smart, that don’t put themselves first. Every experience we’ve had, they do not put themselves first, and they put Berkshire first and believe me I can spot it when people are extreme in one direction or another. Maybe I’m not so good around the middle, but you couldn’t have two better people in those positions.  

But you can say, “Well, why don’t you give them another $30bn each or something?”  I don’t think that would improve their lives or their performance. They may be handling more as they go along, but the truth is, I’ve got more assigned to me than I can handle at the present time, as proven by the fact that we have this $90bn plus around. I think there are reasonable prospects for using it, but if you told me I had to put it to work today, I would not like the prospect, Charlie?

Well, I certainly agree with that, it’s a lot harder now than it was at times in the past.

Warren, plans for your ownership stake which is heavily concentrated in Class A shares are fairly well-known. With the bulk of the staff going to the Bill and Melinda Foundation and four different charities over time, your annual pledges to these different charities involve the conversion Class A shares which hold significantly greater voting rights than the Class B shares. As such, as the voting control held by your estate will diminish over time with the whole layer of super voting shares being eliminated in the process.

While the voting influence of Class B shareholders is expected to increase over time, it will not be large enough to have a big influence on Berkshire’s affairs. With that in mind, in recognising the greater importance on having Berkshire buy back in retire Class A shares in the long run, I was just wondering if the firm has compiled a pipeline of potential future sellers from the ranks of the company’s existing shareholders, given the limited amount of liquidity for the shares, privately negotiate transactions with these sellers like the one you negotiated in December 2012 would end up being in the best interest of both parties.

Well, again it would depend on the price of Berkshire, so in terms of what I give away annually, in the last two years it’s been about $2 billion per year. That can be, that’s one day’s trading in Apple. The amount I’m giving away, in terms of Berkshire’s market cap, you’re down to seven tenths of 1% of the market cap. So, it’s not a big market factor and it really wouldn’t be that in liquid, so I know a few big holders that might have 8 000 or 10 000 shares of A, but the market can handle it.

Now when we bought that block of, I think it was 12 000 shares of A, we bought it because we thought it increased the intrinsic business value of Berkshire by a significant amount and we paid this out of what the market was at the time. We were open to that up to 120% and who knows if it came along at the time and it was 124% or something, it was a very large block and the directors decided that was okay, so it was a significant discount, we might very well buy it, but in terms of the orderly flow of the market or anything like that, there will be no problems just as there haven’t been, you know when I’ve given away, I do it every July, when I’ve given away the last two years.

Some of the foundations may keep it for a while, but they have to spend what I give them and they may build up a position in B for a fairly significant dollar amount, but they’re going to sell it and it is true that for a period after I died there’ll be a lot still in the estate and later in the trust, but that will get reduced over time. 

I see no problem with our capitalisation over time. I like the idea of a fair number of votes being concentrated with people that believe in the culture strongly and would not be thinking about whether they get a 20% jump in the stock if somebody came along with some particular plan, but eventually that’s going to get diminished and continues to get diminished.

I think in terms of, you know, there’s a very good market in Berkshire shares and if we can buy them at a discount from intrinsic business value and somebody offers me some, a big piece and it may be selling at 122% or 24%, I would pick up the phone and call the directors and see if they didn’t want to make a change and we did it once before and if it made sense, I’m sure they’d say yes and if it didn’t make sense, I’m sure they’d say no. So, I don’t think we have any problem in terms of blocks of stock right now. I don’t think people that own it have a problem selling it and I don’t think we have a problem in terms of evaluating the desirability of repurchasing it, Charlie?

Nothing to add.

You purchased Bank of America preferred stock with a warrant. You had the opportunity at a later date to exercise and convert those into common shares. When you’re looking at evaluating that decision to exercise that position which would increase our entire Berkshire or the value of the Berkshire holdings, what are you going to consider when you’re looking at that?

Well, it’s almost, well if the price of the stock is above $7.00 a share, which seems quite likely, whether we were going to keep it or not, it would still make sense for us to exercise the warrant shortly before it expired because it would be a valuable warrant but it’s only a valuable warrant if it’s converted, if it’s exercised, and exchanged into common and that warrant does expire. 

As I put it in the annual report, our income from the investment would increase if the Bank of America ever got to where it was paying a 11 cents quarterly. We get $300 million a year off the preferred and for us to use the preferred as payment in the exercise of the warrant, we would want to feel we were getting more than $300mn a year and that would take 11 cents quarterly.

They may or may not get to where they pay that amount before the warrant expires in 2021. If it does get to there, we’ll exercise the warrant and then instead of owning the $5bn of preferred and the warrant will have 700-million plus shares of common, then that becomes a separated decision, do we want to keep the 700-million shares of common. If it were to happen today, I would definitely want to keep the stock. Now, who knows what other alternatives may be available in 2021, but as of today, if our warrant were expiring tomorrow, we would use the preferred to buy 700-million plus shares of common and we would keep the common.

If they get to 11 cents quarterly dividend, we’ll convert it and we’ll very likely keep the common and if we get to 2021, if the common’s above $7.00, which I would certainly anticipate, we will exercise, so that’s all I can tell you on that, but I certainly wish you success on your other objective and I think probably the fellow will be using very good judgement too. Okay, Charlie?

Well, I think it’s a very wise thing for a woman that owns Berkshire stock and I think a good looking woman to put her picture up like that.

It does give me a thought though; we might actually start selling ads in the annual report. 

Okay, incidentally that incident, that BFA purchase, it literally was true that I was sitting in the bathtub when I got the idea of checking with the BFA whether they’d be interested in that preferred, but spent a lot of time in the bathtub since and nothing’s come to me, so clearly I either need a new bathtub or we’ve got to get into a different market.  

I am a very happy long-term shareholder, but this is a concern I have regarding Berkshire Hathaway’s Kraft Heinz investment. This investment has done well in economic terms. The carrying value is $15bn and the market value was $28bn in 2016, but the DNA of 3G is quite different from ours. We do not make money by buying companies and firing people. 3G fired 2500 at Kraft Heinz. That is what private equity firms do, but we are not a private equity firm. Our values have worked for us for over 50 years. There is a risk that as 3G continues to deviate from our principles, they will eventually harm both our value and our values. How do we prevent that from happening?

Well, it’s interesting, I mentioned earlier that it was very gradual, but it would have been probably a better decision. We fired 2000 over time – some retired and left and all of that – at the textile operation, it didn’t work and at Hochchilds-Kohn, the successor fortunately sold it to somebody else, but eventually they closed up the department stores because the department stores, at least that particular one and a good many actually including our competitors in Baltimore, could not make it work. Walmart came along with something and now Amazon’s coming along with something, but it changed the way people bought. 

We mentioned our poultry CTB, which is a lot of different farm equipment. The farm equipment, often that CTB develops, the idea is that it’s more productive than already what is out there, which means fewer people are employed on farms.

We had 80% of the American working population working on farms a couple of hundred years ago and if nobody had come up with things to make it more productive farming, we’d have 80% of people working on farms now to figure out a populous and it means that we’ll be living on a far more primitive way, so if you look at the auto industry, it gets more productive, if you look at any industry they’re trying to get more productive. Walmart was more productive than department stores and that will continue in America and it had better continue where we won’t live and our kids won’t live any better than we do.

Our kids will live better than we do because America does get more productive as it goes along and people do come up with better ways of doing things. 

When Kraft Heinz finds that they can do whatever amount of business, $27 billion worth of business or something and they can do it with fewer people, they are doing what American business has done for a couple of hundred years and why we live so well, but they do it very fast, they’re more than fair in terms of severance pay and all of that sort of thing, but they don’t want to have two people doing the job that one can do.

I frankly don’t like going through that, having faced that, I faced that down at Dempsters in Beatrice Nebraska and it really needed change, but the change is painful for many people and I just would rather spend my days not doing that sort of thing having had one or two experiences, but I think that it’s absolutely essential to America that we become more productive because that is the only way we have more consumption per capita and more productivity per capita, Charlie?

Well, you’re absolutely right; we don’t want to go back to subsistence farming. I had a week of that when I was young on a Western Nebraska farm and I hated it and I don’t miss the elevator operators who used to sit there all day in the elevator round the little crank you know, so on the other hand, as you say, it’s terribly unpleasant for the people that have to go through it and why would we want to get into the business of doing that over and over ourselves. We did it in the past when we had to when the businesses were dying. I don’t see any moral fault in 3G at all, but I do see that there is some political reaction that doesn’t do anybody any good.

Milton Friedman, I think it was, used to talk about the time, probably apocryphal,, he would talk about the huge construction project in some communist country and they had thousands of workers out there with shovels digging away on this major project and then they had a few of these big earth moving machines behind, which were idle and which could have done the work in one twentieth of the time of the workers. So, the economists suggested to the local party worker, whoever it was, that why in the world don’t they use these machines to get the job done in one tenth or one twentieth of the time instead of having all these workers out there with shovels and the guy replied, “Well, yeah, but that would put the workers out of work” and Friedman said, “Well, then why don’t you give them spoons to do it instead?”

I know.

I understand that Berkshire is much more liquid than is ideal right now with $113 billion of consolidated cash in bonds versus a policyholder float of $105 billion, but I have trouble calculating how much incremental buying power Berkshire has at any point in time. You’ve talked about having a minimum of $20 billion in cash on a consolidated basis, but for regulatory risk control or liquidity purchases, is there some minimum amount of float beyond the $20 billion that has to be in cash bonds or say, preferred stocks or can all but $20 billion be put into either common stocks or invested into wholly owned businesses if you found attractive opportunities, what does the balance sheet look like if you were fully invested and where does additional debt fit into the equation, if at all?

Yes, I wouldn’t conflate the cash and the bonds. When we talk about $20 billion of cash, we could own no bonds and be on that, $20 billion would be the absolute minimum. As a practical manner, since I’ve said $20 billion is a minimum and I’m not going to operate with $21 billion any more than I’m going to see a highway, a truck sign that says maximum hold, 30 000 pounds or something and then drive 29 800.00 across at them, so we won’t come that close, but the answer is that A) we’re not inclined to use that. Obviously if we’ve found something that really lit our fire, we might use something like that but  it is unlikely under today’s circumstances, but $20 billion’s an absolute minimum.

You can say that because I say $20 billion’s an absolute minimum, it probably wouldn’t be below $24 or $25 billion and we could do a very large deal if we thought it was sufficiently attractive. I mean, we have not put our foot to the floor on anything for really a very long time but if we saw something really attractive, we spent $16 billion back when we were much smaller in a period of two or three weeks, probably three weeks maybe in the fall of 2008 and we never got to a point where it was any problem for me sleeping at night. Now we obviously have a lot more money to put out, so if a good – Charlie, at what point, if I called you, would you say, “I think that’s a little bit big for us today?”

I would say about $150 billion.

Well, in that case I’ll call you. I’m a little more conservative on that, but actually Charlie, we both would do a very, very big deal.

We don’t have to agree perfectly.

Yes, it’d have to be, but if we find a really big deal that makes compelling sense –

Now you’re talking.

– we’re going to do it. 

Your partnership with Jorge Paulo Lemann and his associates at 3G has been very successful taking it to a great outcome of transactions such as the Craft Hinds merger. Even though you and Jorge Paulo have different investment methods, would you and Charlie consider him to be a member of your board or even your successor?

I don’t think that will happen, I think it would complicate things in terms of the board membership, but we love the idea of being their partner and I think that there’s a good chance that we will do more and perhaps even bigger things together, but we’re probably unlikely to be doing much change in the board, certainly in the next few years. 

There will be a successor and the successor could very well be while I’m alive, but there’s a very high probability that will be from somebody that’s been in our company for some time. The world could change in very strange ways, but that is a very high probability, Charlie?

All I can say is that my back hurts when I come to these functions because I want to indicate to my fellow shareholders that they probably have seven good years to get out of Warren.

Charlie is inspiring to, I’ve got to tell you that, but we’ve been very lucky in life and so far our luck seems to be holding. 

Is Fruit of the Loom experiencing difficulties related to the distribution channel shift towards online and the trouble in the brick and mortar retail world? If so, do you believe the difficulties are short-term in nature?

No, well he may know more about that than I do. The answer is, essentially “no” so far, but anybody that doesn’t think that online isn’t changing retail in a big way and that anybody who thinks they’re totally insulated from it is correct, the world is changing big time. 

Like you said, Fruit of the Loom, it really hasn’t changed much and our furniture operation, which is setting a record so far, again this year, for the shareholders weekend. I mentioned it in the report, about, I think we did $45 million in one week and our furniture operations; it’s hard to see any effect from online. Outside of our own online operations, we had really good same store gains. You can take, you know, where there’s a Nebraska Furniture Mart but RC Willey whether it’s in Sacramento or Leno or Boise or Salt Lake City or Jordan’s which in Boston has done very well on the same store basis.

So we don’t really see it, but there are many things we didn’t see ten years ago that then materialised. One thing you may find interesting, is that the furniture market at Omaha, which is an extraordinary operation, the online has grown very substantially and I may be wrong on this, but I think it’s getting up so that I’d like to check this with the numbers but I think it’s getting pretty close to 10% or so of volume, but a very significant percentage of those people still go and pick the product up at the furniture mart, so apparently, it’s the time spent entering the store, maybe the checkout lines or whatever it may be, I’m surprised that it gets to be that percentage, but the one thing about it is, we keep looking at the figures and trying to figure out what they’re telling us.

So far, I would not say that it’s affected Fruit of the Loom in a significant manner, I would not say it’s affected the furniture operation in a significant manner, but I have no illusions that ten years from now it’s going to look anything like today. If you think about it, you know if you go back a hundred years to the great department stores, what did they offer? They offered incredible selection, you know, if you had a big department store in Omaha, you had a thousand bridal dresses and if you lived in a small town around the local valley had two or something of the sort, so the department store was the big exciting experience of variety and decent prices and convenient transportation because people took the streetcars to get there.

Then along came the shopping centre and they took what was vertical before and they made it horizontal and they changed it into multiple ownerships, but they still kept incredible variety and assortments and convenience of going to one place and accessible transportation because now the car was the method and now you go to. Then we went through the discount stores and all of that, but now you’ve got the internet and you’ve got the assortments and you have people that are coming in at low prices and the transportation is taken care of entirely.

Therefore, the evolution for this taking place, the department store is online now basically, except much expanded in assortment, much more convenient and lower prices, so the world has evolved and it’s going to keep evolving but the speed has increased dramatically and what’ll happen is, the brands are going to be tested in a variety of ways and they have to make decisions as to whether they try to do it online themselves or work through an Amazon or whether they try to hang onto the old methods of distribution while embracing new ones. There are many questions in retail and in branding that are very interesting to watch and you’ll get some surprises in the next ten years, I can promise you that, Charlie?

It would be certainly unpleasant if we were in the department store business. Just think of what we avoided, Warren.

Yes, we got very lucky actually because we were in the department store business and our business was so lousy that we recognised it. If it had been a little bit better, we would have hung on and we owe a tremendous gratitude to Sandy Gottesman, our director who is here in the front row, because he got out of the business when Charlie and I and Sandy were partners in that and something we paid $6.00 a share for, I think it’s worth about $100 000.00 a share now because we got out of the business and if it had been a somewhat better business, it might be worth $10.00 or $12.00 a share now, so sometimes you get lucky. We don’t miss it either, do we Charlie?

No we don’t miss it.

This question is on Berkshire’s intrinsic value. A substantial portion of the company’s values driven by operating businesses rather than the performance of the securities portfolio, also the values of previously acquired businesses are not marked up to their economic value including GEICO, Mid American, and Burlington Northern. Based on these factors, is book value per share still a relevant metric for value in Berkshire?

Well, it has some relevance but it has a whole lot less relevance than it used to and that’s why I don’t want to drop the book value per share factor, but the market value tends to have more significance as the decades roll along. It’s a starting point and clearly our securities aren’t worth more than we’re carrying forward and that’s carrying forward at that time and on the other hand you’ve got the kind of businesses you’ve mentioned, but we have some small businesses that have worked ten times or so, you know what would occur, but we also have some clunkers. I think the best method of course, is just to calculate intrinsic business value, but it can’t be precise.

We think the probability is exceptionally high, that 120% understates it. Although if it was all in securities, a 120% would be too high, but as the business has evolved, as we build in unrecognised value at the operating businesses unrecognised for accounting purposes, I think it still has some uses being kind of the base figure we use. If it were private company and ten of us here owned it, instead we just sit down annually and calculate the businesses one by one and use that as a base value, but that gets pretty subjective when you have as many as we do. Therefore, I think the easiest thing is to use those standards we’re using now, recognising the limitations in them, Charlie?

Yes, I think equities in the insurance company offsetting shareholders’ equity in the company are really not worth the full market value because they’re locked away in a high tech system and so I basically like it when our marketable securities go down and our own businesses go up.

Yes, we’re working to that end, we’ve been working that way for 30 years now or something like that, and we’ve done a really good job too.

We have replaced a lot of marketable securities with unmarketable securities that are worth a lot more.

Yes, and it’s actually a more enjoyable way to operate too beyond that.

Yes, we know a lot of people we wouldn’t otherwise be with, good people.

One of your most well-known pieces of investment advice is to buy what you know. Additionally, you said earlier, one of the main criteria for buying is if you could ever understand the business. Ever since I came to my first meeting in 2011 you were not known for being a tech guy. You’ve said smart phones are too smart for you, you don’t have a computer at your desk, and you’ve only tweeted nine times in the last four years.

It was either that or going to a monastery.

Despite this, you’ve recently been investing, looking, and talking more about tech companies. My question to you and also to Charlie to comment is what turned you from the oracle of Omaha to the tech knave in Omaha?

Well, I don’t think I’ve talked that much about tech companies, but the truth is we made, or I made a large investment in IBM, which has not turned out that well. We haven’t lost money but in terms of the bull market we’ve been in, it’s been a significant laggard. Then Charlie recently, we took a large position in Apple, which I do regard as more a consumer goods company in terms of certain economic characteristics, although it has a huge tech component in terms of what that product can do or what other people might come along to do to leapfrog it in some way. No guarantees, but I think I’ll end up being one for two instead of all for two, but we’ll find out, Charlie? I make no pretence whatsoever of being on the intellectual level of some 15 year old that has an interest in tech.

I think I may have some insights into consumer behaviour. I certainly can get a lot of information on consumer behaviour and then try to draw inferences about what the means about what consumer behaviour is likely to be in the future, but we will find, the other thing I’ll guarantee is, I’ll make some mistakes on marketable securities and I’ve made them in other areas than tech, so you might be at a thousand, no matter what industries you try to stick with. I know insurance pretty well, but I think we probably lost money on an insurance stock perhaps once or twice over the years, so you don’t bet a thousand, but I have gained no real knowledge about tech in the last, well, since I was born actually, Charlie?

I think it’s a very good sign that you bought Apple. It shows either one of two things, either you’ve gone crazy or you’re learning. I prefer the learning explanation.

Well so do I actually. 

What do you think about the implications of artificial intelligence on Berkshire’s businesses beyond autonomous driving GEICO, which you’ve talked about already? In your conversations with Bill Gates, have you thought through which other businesses will be most impacted and do you think Berkshire’s current businesses will have significantly more or less employees a decade from now as a function of artificial intelligence?

I certainly have no special insights on artificial intelligence, but I will bet a lot of things happen in that field in the next couple of decades in probably a shorter time frame. They should lead, I would certainly think, but again, I don’t bring much to this party, but I would certainly think they would result in significantly less employment in certain areas but that’s good for society and it may not be good for a given business, but let’s take it to the extreme. Let’s assume one person could push a button and essentially to various machines, there’s robotics, all kinds of things, turn out all of the output we have in this country. So, there’s just as much output as we have, it’s all being done by, instead of 150 some million people being employed, one person.

I mean, is the world better off or not? Well, it certainly would involve less hours of work per week and so on. It would be a good thing, but it would require enormous transformation in how people relate to each other, what they expect of government, you know all kinds of things and of course as a practical matter more than one person would keep working, but pushing the idea that way is one of the, you’d certainly think that’s one of the consequences of making great progress in artificial intelligence and that’s enormously pro social eventually, it’s enormously disruptive in other ways and it can have huge problems in terms of a democracy and how it reacts to that.

It’s similar to the problem we have in trade, where trade is beneficial to society but the people that see the benefits day-by-day of trade don’t see a price of Walmart on socks or whatever they’re importing that says you’re paying X, but you would pay X plus so many cents if you bought this domestically, so they’re getting these small benefits and invisible benefits and the guy that gets hurt by it, who is the roadkill of free trade feels it very specifically. That translates into politics, so it gets very uncertain as to how the world would adjust in my view, to great increases in productivity. Without knowing a thing about it, I would think that artificial intelligence would have that, usually beneficial social effect, but a very unpredictable, clinical effect. If it came in fast, which I think it could, Charlie?

Well, you’re playing in a very funny world where everybody’s engaged in trade and the trade is, I give you golf lessons and you dye my hair and that would be a world kind of like the Royal Family of Kuwait or something and I don’t think it would be good for America to have everything produced by one person and the rest of us just engaged in leisure.

How about if we just got twice as productive in a short period of time so that 75-million people could do what 150-million people are doing now?

I think you’d be amazed how quickly people would react to that.

In what way?

Favourably, that’s what happens during the period when everybody remembers with such affection back in the Eisenhower years, 5% a year, or something, people loved it. Nobody complained they were getting air conditioning and they didn’t have it before, nobody wanted to go back to stinking, sweating nights in the South.

Well, if you cut everybody’s hours in half, it’s one thing, but if you fire half the people and the other people keep working, I just think it gets very unpredictable. I think we saw some of that in this election because I think that –

Well, we’ve adjusted to an enormous amount of it. It just came along a few percent per year.

Well, and the question ended, you can’t –

I don’t think you have to worry about coming out with 25% a year. I don’t think you have to worry about it; you’re going to get less than 2% a year, that’s what worries them.

 

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