1997: Why don’t more companies copy Berkshire?

AUDIENCE MEMBER: Hello. Martin Wiegand, Bethesda, Maryland, stockholder. For myself, my family and other small business owners, I want to thank you for the annual reports. They help a lot in helping us make business decisions and life decisions.

My question is, many people come here — (Applause)

Many people come here to listen to you and to copy and understand your investment philosophy. But why don’t more people, in your opinion, try to copy your investment vehicle, a corporation that pays no dividends?

WARREN BUFFETT: Well, I don’t really think if the right — I think there are other things that are probably better to copy about Berkshire, but they don’t get copied either.

It was always interesting to me how few people — everybody read [Benjamin] Graham’s — and they didn’t really disagree with him. They just didn’t like following him because it didn’t promise enough, in a sense. I mean, people really wanted something very quickly.

In terms of not paying dividends, we don’t pay dividends because we think we can turn every dollar we retain into more than a dollar of market value. I mean, the only reason for us to keep your money is if it becomes worth more by us keeping it than it would be worth if we gave it to you.

And if we can create more than a dollar of market value for every dollar we keep, you’re better off, whether you want to take that dollar out by selling a little piece of your stock, or whether you continue to leave it in. That’s the test.

If we come to the conclusion that we can’t do that, and we could come to that conclusion sometime, then we should distribute it to you.

The interesting thing is, we’re in certain businesses, for example, See’s Candy being one — we don’t have a way to intelligently use all of the money that See’s generates within the See’s Candy Company.

So if See’s were a standalone company, it would pay very large dividends, not because it, you know, just had some dividend paying policy. It would be simply because we wouldn’t have a way of using, in this case, $30 million a year, intelligently in expanding that business.

The Buffalo News is the same way. We don’t have a way of using money within that specific business, intelligently, to use the money it generates.

We hope that in the overall Berkshire Hathaway scheme of things that we can intelligently use the money that the companies, in aggregate, generate for us.

And we think, so far, we have. And we think the prospects are reasonably good that we can continue to do that.

But dividend policy should really be determined by that criteria, also bearing in mind the possibilities of repurchase of stock, too.

But they should be determined by whether a dollar left in the business is worth more to the shareholder than a dollar paid out.

Someplace like Coca-Cola, you know, if Coca-Cola paid no dividends and simply repurchased shares and developed the bottling system and done the things that they have, the shareholders probably would’ve been even better off. They’ve been sensationally well off as it is. But they probably would’ve been even better off than they have been with the dividend policy they have had.

And that’s true for Gillette and Disney and the companies of that sort that have got these terrific opportunities to use capital within the business, or to repurchase shares of a company that simply can’t be replaced.

If — that usually is the best use of capital. It’s probably better than dividends. And, you know, we have written some about that, Martin. But people usually keep doing what they’ve been doing. They’re hard to change.

Charlie?

CHARLIE MUNGER: Well, it’s interesting that you take that simple standard, you should retain money if you can make it worth more than it is by retaining it. That is not the standard thing that’s taught in the corporate finance departments of our major universities.

Why do we have this simple idea and they have another one? Time after time, we find that so.

I’ve tried to understand why they think the way they do. And I have great difficulty with it. I’ve just concluded that they’re wrong, and — (Laughter)

But that isn’t enough. There has to be reason why so many smart people are that wrong. And — (laughter) — that’s a story for another day. But there are things gravely wrong with American education that I hope that Berkshire Hathaway is slowly helping to fix.

WARREN BUFFETT: Can you imagine if the — pick any one of you here. And let’s say the two of us were in a business together. You know, it was earning $100,000 a year. How would we decide whether to leave the 100,000 each year? And it’d be exactly what we’ve talked about here. If we thought the 100,000 would translate into a present value of more than 100,000 by some action, we’d leave it in. And if it didn’t, we’d take it out. And it doesn’t seem to register, generally.

And incidentally, in our own case, we’ll probably go too long before we come to the conclusion that we’re not really using it that effectively, because there’ll be a certain — denial — we’ll go through. And we’ll say, “Well, that was just temporary last year.”

But that will — that is our approach. And we’ll do our best to apply it.