1995: Are the concepts of market value added and economic value added worthwhile?

AUDIENCE MEMBER: My name is Donald Stone. I’m from Riverside, Connecticut. I’m — this is my second shareholders meeting, ever, at age 61. So, I’m really very privileged to be here.

My first was Coca-Cola a week and a half ago. And there were only 200 people there. I’m trying to figure this out. (Laughter)

I think the rule is that the number of people present is in direct proportion to the price of the shares.

WARREN BUFFETT: Well, in that case, we won’t split. (Laughter)

AUDIENCE MEMBER: OK.

Prefatory comment to my question: the November 24th, 1994 issue of Fortune Magazine had an article, a featured article, entitled “America’s Greatest Wealth Builders,” dealing with the concepts of market value added and economic value added.

It was with great glee that I noticed that Coca-Cola was number two on that list, second only to General Electric, and that Coca-Cola had done twice as well as Pepsi-Cola, number nine on the list, with one-third as much capitalization.

My question is this: whether the concept of market value added and economic value added, as such, or any of its variants, is a concept that’s applicable and useful to Berkshire Hathaway as a whole, or in analyzing its line of business segments?

I’d really like to hear from Charlie Munger on this first. (Laughter) Because I’ve heard —

WARREN BUFFETT: So would I. (Laughter)

AUDIENCE MEMBER: I’ve heard —

WARREN BUFFETT: Charlie?

AUDIENCE MEMBER: I’ve heard that he’s thought a lot about this particular subject.

WARREN BUFFETT: Right.

CHARLIE MUNGER: If Warren is using economic value added exactly the way they’re now teaching it in the business schools, he hasn’t told me.

Obviously, the concept has some merit in it. But the exact formal methods, I don’t believe we use.

Warren, are you using this stuff secretly?

WARREN BUFFETT: No, we — (laughter) — in a sense, they’re trying to get at the same thing we do. Or we’re trying to get at the same thing they do. But I think it’s — A, I think it has some flaws in it.

Although I think it generally comes out with the right answers, it sort of forces itself to come out with the right answers.

But I really don’t think you need that sort of thing. I mean, I do not think it’s that complicated to figure out, you know, where it makes sense to put money. You can make mistakes doing it. But in terms of the mental manipulations you go through, I don’t think it’s a very complicated subject.

And I don’t think that — I think that the people marketing one or another fad in management tend to make them a little more complicated than needed so that you have to call in the high priest.

And, you know, it — if all that really counts is the Ten Commandments, you know, it’s very tough on religious counselors and everything. (Laughs)

It doesn’t take — it just doesn’t make it complicated enough.

And I think there’s some of that in — quite a bit of that — in management consulting and in the books that you see and all of that, that come out.

CHARLIE MUNGER: It’s way less silly than the capital assets pricing model. So that, at least academia’s improving. (Laughter)

WARREN BUFFETT: Really, yeah. The capital asset pricing model, which is — I don’t know how much it’s used now. Certainly — you know, they had these great waves of popularity. You get that in management. You get it in investing. I mean, real estate, you know, may have been popular, or international.

I — you can read Pensions & Investment magazine, which is a pretty good magazine. But you can just see these fads sort of going through. And then they have seminars on them and everything. And, you know, the investment bankers create product to satisfy the demand.

And there’re these fads in management — I mean, obviously, listening to your customer and things like that, I mean, that is — nothing makes more sense. But it’s hard to write a 300-page book that just says, “Listen to your customer.” (Laughter)

And, you know, that’s one of the things I liked about Graham’s book. I mean, you know, he wrote — everything he wrote sort of made sense. He didn’t sort of get into all the frills and try and make it more complicated than it really, truly is.

You know, I really didn’t need to read the November issue — 1994 issue of Fortune — to know that Coca-Cola had added a lot of value. (Laughter)

We added about 4 billion-some of value to Berkshire. That’s good enough for me. (Laughter)