1996: Will class B-shares permanently discourage UITs?

AUDIENCE MEMBER: Wesley Jack from Oklahoma City, Oklahoma.

As a stock broker, I can say I definitely don’t like UITs and I appreciate your plan for the B shares.

But as long — with the rest of the shareholders, what we hope — that the shares go up in value in the future. Don’t you see a problem with them coming back with this idea in the future?

WARREN BUFFETT: On the unit — you mean on the issuance of unit trusts?

AUDIENCE MEMBER: Yes.

WARREN BUFFETT: Oh, I don’t see any problem because the B will be out there. And it is a superior product, whatever its absolute merits may be. On a relative basis, it is a superior product to anything that is going to carry a big commission to a salesperson and a lot of annual costs.

So, I think — my guess is we’ve taken care of that problem. I wish it hadn’t come up, but it — I would think that it would be very difficult for anyone to honestly offer a product — a derivative-type product — through a unit trust that would be superior to buying the product that will be available.

CHARLIE MUNGER: I think he’s afraid that the B will go up to the place where the whole story comes again. And I must say that if that were to happen, we’d like it. (Laughter)

WARREN BUFFETT: Well, we’d like it, only if it reflected underlying values, but — (Laughs)

CHARLIE: Yeah.

WARREN BUFFETT: Yeah. We have a very strange attitude on that. I mean, most managements feel that the — on the price of their shares — that the higher, the better. And that’s an understandable feeling. But the trouble is the game isn’t over at any time.

We really feel the fairer, the better. Our goal is that every shareholder participates in the progress that Berkshire makes, during — as a business — during their holding period. In other words, we don’t want one party getting wealthy off the other. We want them to share based on the gain in value of the business.

And to the extent that the stock got way overvalued or way undervalued, you know, that may make one party — in the first case, the seller, in the second case, the buyer — very happy. But there’s somebody on the other side of the transaction.

In economics, you know, the most important question — maybe important beyond economics, too — but whenever somebody tells you something, you know, the first question to ask yourself is, “And then what?” And we tend to do that around Berkshire.

And so, the stock going up is not an end of itself, because it’s — the next question is, “And then what?”

And to the extent that the stock goes up because the intrinsic value goes up, everyone is getting their fair share of the pie as they go along.

To the extent it exceeds that in some way, the selling shareholder gets a benefit. But the entering shareholder is at a disadvantage. And we really like the idea of the price tracking intrinsic value over time.

And we think that, by having the right kind of shareholders and by communicating with them properly and following the right kind of policies, that we can come as close to that as is attainable in a world where markets, essentially, are fairly volatile. And so far, I think it’s worked out pretty well that way.

But the intention is to — and the goal — is to keep it that way.

One thing to remember: in the end, the owners of businesses, in aggregate, cannot come out anyway better than the businesses come out.

I mean, you can — the businesses are the — and not just our businesses, I’m talking about all American business — the profitability of American business determines the profitability of what the owners of American business have, and you can forget all about the little ticker symbols and everything else.

The owners suffer to the extent that they have some extra costs imposed in broker’s commissions, fees, all kinds of things. That diminishes the return from the business. But no one has figured out yet how to perpetually have owners do better than their businesses.

And our idea is to have them do it as they go long in proportion to the gain that occurs during their tenure as a shareholder. And that isn’t easy to do. And it’s not attained perfectly. But that’s the goal as we go along.