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1997: Would a concentrated portfolio of growth stocks outperform Berkshire's portfolio?
AUDIENCE MEMBER: Yes, Mr. Buffett, I would like to thank you again for issuing the Class B shares.
WARREN BUFFETT: (Laughs) Well, I’m glad we did, and I hope you own them.
AUDIENCE MEMBER: I am a class B shareholder.
I need your comment on some analysis that we did. If someone uses your investment philosophy of building a highly concentrated portfolio of six to eight stocks, and adopts your buy-and-holding principle so that the max of compounding and no tax works for you, but however, with one major modification: invest in high-octane companies like Intel and Microsoft that are growing at 30 percent, instead of typical 15 percent growth company in your portfolio.
My question is, will this investment philosophy will translate into twice the shareholder return as you have historically provided to your shareholders?
WARREN BUFFETT: Yeah. Well, it will certainly work out to twice the return if Intel and Microsoft do twice as well as Coke and Gillette. I mean, it’s a question of being able to identify businesses that you understand and feel very certain about.
And if you understand those businesses, and many people do, but Charlie and I don’t, you have the opportunity to evaluate them. And if you decide they’re fairly priced and they have marvelous prospects, you’re going to do very well.
But there’s a whole group of companies, a very large group of companies, that Charlie and I just don’t know how to value. And that doesn’t bother us. I mean, you know, we don’t know what — we don’t know how to figure out what cocoa beans are going to do, or the Russian ruble, or I mean, there’s all kinds of financial instruments that we just don’t feel we have the knowledge to evaluate.
And really, you know, it might be a little too much to expect that somebody would understand every business in the world.
And we find some that are much harder for us to understand. And when I say understand, my idea of understanding a business is that you’ve got a pretty good idea where it’s going to be in ten years. And I just can’t get that conviction with a lot of businesses, whereas I can get it with relatively few. But I only need a few. As you’ve pointed out, you only need a few, six or eight or something like that.
It would be better for you — it certainly would have been better for you — if we had the insights about what we regard as the somewhat more complicated businesses you describe, because there was and may still be a chance to make a whole lot more money if those growth rates that you describe are maintained.
But I don’t think they’re — I don’t think you’ll find better managers than Andy Grove at Intel and Bill Gates at Microsoft. And they certainly seem to have fantastic positions in the businesses they’re in.
But I don’t know enough about those businesses to be as sure that those positions are fantastic as I am about being sure that Gillette and Coca-Cola’s businesses are fantastic.
You may understand those businesses better than you understand Coke and Gillette because of your background or just the way your mind is wired. But I don’t, and therefore I have to stick with what I really think I can understand. And if there’s more money to be made elsewhere, I think the people that make it are entitled to it.
CHARLIE MUNGER: Well, if you take a business like Intel, there are limitations under the laws of physics which eventually stop your putting more transistors on a single chip. And the 30 percent per annum, or something like that, you — I don’t think — those limitations are still a good distance away, but they’re not any infinite distance away.
That means that Intel has to leverage its current leadership into new activities, just as IBM leveraged the Hollerith machine into the computer. Predicting whether somebody’s going to be able to do that in advance is just — it’s too tough for us.
WARREN BUFFETT: Bob Noyce —
CHARLIE MUNGER: We could (inaudible) to you.
WARREN BUFFETT: Bob Noyce, one of the two founders of — two primary founders — of Intel, grew up in Grinnell, Iowa. I think he’s the son of a minister in Grinnell, and went through Grinnell College and was chairman of the board of trustees of Grinnell when I went on the board of Grinnell back in the late ’60s.
And when he left Fairchild to form Intel with Gordon Moore, Grinnell bought 10 percent of the private placement that funded — was the initial funding for Intel.
And Bob was a terrific guy. He was very easy to talk to, just as Bill Gates is. I mean, these fellows explained the businesses to me, and they’re great teachers but I’m a lousy student. And they — I mean, they really do. They’re very good at explaining their businesses.
Bob was a very down to earth Iowa boy who could tell you the risks and tell you the upside, and enormously likeable, a hundred percent honest, every way.
So we did buy 10 percent of the original issue. The genius that ran the investment committee and managed to sell those a few years later, I won’t give you his name. (Laughter)
And there’s no prize for anybody that calculates the value of those shares now.
Incidentally, one of the things Bob was very keen on originally, in fact he was probably the keenest on it, was he had some watch that Intel was making. And it was a fabulous watch, according to Bob.
It just had one problem. We sent a guy out from Grinnell who was going out to the West Coast to where Intel was. And Bob gave him one of these watches. And when he got back to Grinnell he wrote up a report about this little investment we had, and he said, “These watches are marvelous.” He said, “Without touching anything, they managed to adapt to the time zones as they change as we went along.” In other words, they were running very fast, as it turned out. (Laughter)
And they worked with that watch for about five or six years, and they fell on their face.
And as you know, you know, they had a total transformation in the mid-’80s when the product on which they relied also ran out of gas. So, it’s not —
And Andy Grove has written a terrific book, incidentally, “Only the Paranoid Survive,” which describes strategic inflection points. I recommend that every one of you read that book, because it is a terrific book.
But they had an Andy Grove there who made that transformation, along with some other people. But that doesn’t happen every time. Companies get left behind.
We don’t want to be in businesses where companies — where we feel companies can be left behind. And that means that, you know — and Intel could have, and almost did, go off the tracks. IBM owned a big piece of Intel, as you know, and they sold it in the mid-’80s.
So, you know, here are a bunch of people that should know a lot about that business but they couldn’t see the future either.
I think it’s very tough to make money that way, but I think some people can make a lot of money understanding those kinds of businesses. I mean, there are people with the insights.
Walter Scott, one of our directors, has done terrifically with a business that started, you know, just a gleam in the eye maybe ten or 12 years ago here in Omaha, and it turned into a huge business.
And you know, Walter explained that to me on the way down to football games, but bad student again, so — (Laughs)
Walter — if Walter could have connected, and you know, I’d cheer from the stands. But that doesn’t bother me at all. I mean, what would bother me is if I think I understand a business and I don’t. That would bother me.
CHARLIE MUNGER: Well, having flunked when we were young and strong at understanding some complex businesses, we’re not looking to master what we earlier failed at — (laughs) — in our latter years. (Laughter)