1997: Does Buffett pay attention to capital flows?

AUDIENCE MEMBER: Good afternoon, Mr. Buffett. Good afternoon, Mr. Munger. My name is Bashir Narema (PH) from Arlington, Texas.

I see in the USA Today article about the shortage of labor in the state. And I was wondering when you analyze a company, do you take that into consideration by choosing companies who are not dependent so much on labor?

The second question is, I heard you in the beginning of the meeting that so much capital coming from foreign countries, you mentioned so many different countries, who bought Berkshire Hathaway. And I’m sure they buy all companies in the Dow.

Do you feel like the analysts who analyze the Dow had that into consideration, that the Dow now is becoming like the Walmart of the security business in the world, where all the national different countries bypass their market and come in and buy in the United States?

And as a result, the idea of [Federal Reserve Chairman] Mr. [Alan] Greenspan, as far as exuberance, is moot because if you remember how the Japanese were when they started to buy real estate in America, they forced us to pay high premiums for the price. And I think that’s what’s going to happen in the market. We, as Americans, who’ve been accustomed to low P/Es, now we’re going to miss out, and the price is going to continue going up.

And the third question is —

WARREN BUFFETT: Maybe we better stop at two. (Laughs)

AUDIENCE MEMBER: Alright. Thank you.

WARREN BUFFETT: OK. Thanks.

We pay very little attention — we don’t pay any attention — to capital flows. In other words, we don’t really care who’s buying or selling any securities. Somebody is buying or selling each one.

So, obviously, there’s, you know, you could focus on the buyers. You could focus on the sellers. But — you can say now that there’s $20 billion a month or so going into equity funds and all. But it doesn’t make any difference to us. All we’re interested in is what the business is worth. And what people are paying attention to, in terms of capital flows or whatever — or market signals, or whether the Fed’s going to move — that all changes.

Do you remember ten years ago, it was, you know, it was M2 that everybody — every — whatever day of the week it was, you know, “What’s M2 this week?” I always thought of having a mystery, you know, about whatever happened to M2? (Laughter)

There’s always something that people are talking about. There’s so much time to fill with chatter, you know, and pages to fill, that they write about all these things that, to us, don’t make much difference, because we don’t care if the market closes for the next five years.

We care how much Coca-Cola has sold five years from now, and what percentage of the world market they have, and what they’re charging for it, and how many shares are outstanding, and that sort of thing.

But we just — we don’t care who’s buying or selling it in the least, except we like it when the company’s buying it. The same way with Gillette. We care about whether people are trading up in the shaving experience.

So capital flows and all of those macro factors that people like to write about a lot just have nothing to do with what we do. We’re buying businesses.

And I really think it is not a bad mindset, whenever you buy a stock, to say, “Would I be happy buying this stock if the market closed for five years?” Because then you’re buying a business, if you say yes to that. If you don’t say yes to that, you may not be focusing on the proper thing.

By its nature, the U.S. is running a substantial trade deficit, merchandise trade deficit. If you buy more from the rest of the world than you’re selling them, which is what happens when you’re running a trade deficit, you have to balance the books. I mean, they get something in exchange. And what happens is they get some sort of capital asset in exchange.

They may get a government bond. They may get a piece of the U.S. business or something. But the key thing in economics, whenever somebody makes some assertion to you about economics, you always want to say, “And then what?” In fact, it’s not a bad idea to say that about everything in life. But you always have to say, “And then what?”

So when you read that the merchandise trade deficit is $9 billion, what else does that mean? Well, it means that somehow we have to have created $9 billion of capital assets, claims on our production in the future, with somebody else in the world. So they have to invest. They don’t have any choice.

When somebody says, “Won’t it be terrible if the Japanese sell all their government bonds?” They can’t sell all their government bonds without getting something else in exchange, you know, they get some other American asset in exchange because there’s no other way to do it. They could sell it to the French. But then the French have the same problem.

So trace through where the transactions go anytime someone starts talking about one specific action in economics.