1999: Does new technology slow inflation?

AUDIENCE MEMBER: Good afternoon. My name is Greg Kaza (PH) from Oakland County, Michigan. I’d like to thank both of you gentleman for your hospitality this weekend.

My question deals with price deflation. Could you please explain how technological advances and productivity increases are affecting our non-fixed income holdings, especially insurance?

WARREN BUFFETT: Well I think that, to the extent your question implies — the question, how has technology affected the inflation rate, the advances in technology? I’ve heard Alan Greenspan make a lot of interesting comments on that.

I think it baffles him to some extent, but he also recognizes that there’s some important, very hard-to-measure factor that has caused inflation not to behave in the way that most people expected, with this drop of employment, general prosperity, et cetera.

And I think he attributes it, in some part — but again, immeasurable — to what has been happening in the information technology world.

Obviously, low inflation is good for fixed-income investments, but that’s been reflected to a significant degree in a long-term rate that’s at about 5 1/2 percent now.

You know, it is — it does look, at the moment, like an almost perfect world, in terms of the macroeconomic factors. And that probably is a reason why people are enthused about stocks.

And it’s a reason — and it’s a good reason, in terms of price inflation — it’s a good reason why bonds have behaved well over the last, really, since 1982.

I don’t know the answers to what it means for the future. I have to believe that it’s very good for this country to have the lead in information technology that it does on the rest of the world. I mean, we —

It seems to me, as a non-expert, that we are so far ahead of the rest of the world, in terms of the leading — having the leading companies and the money flowing into it, the brainpower flowing into it, that it’s hard to think of it — who’s in second place.

And I think that’s helped this country in some very significant way. But I don’t know how to measure it.

Charlie?

CHARLIE MUNGER: Well I would say that Berkshire’s businesses, on average, are less likely to be obsoleted by new technology than businesses generally. New steel-toed work shoes? I do not anticipate a significant change in the technology. (Laughter)

And I think we have more of the stuff that’s sort of basic and hard to obsolete than many other corporations do.

WARREN BUFFETT: Yeah. As we mentioned in the report, we think all of that activity is very beneficial from a societal standpoint. Our own emphasis is on trying to find businesses that are predicable in a general way, as to where they’ll be in 10 or 15 or 20 years.

And that means we’re looking for businesses that, in general, are not going to be susceptible to very much change.

We view change as more of a threat into the investment process than an opportunity. That’s quite contrary to the way most people are looking at equities now.

But we do not get enthused about — with a few exceptions — we do not get enthused about change as a way to make a lot of money.

We try to look at — we’re looking for the absence of change to protect ways that are already making a lot of money and allow them to make even more in the future.

So we look at change as a threat. And whenever we look at a business and we see lots of change coming, 9 times out of 10, we’re going to pass on that.

And when we see something we think is very likely to look the same 10 years from now, or 20 years from now, as it does now, we feel much more confident about predicting it.

I mean, Coca-Cola is still selling a product that is very, very similar to one that was sold 110-plus years ago. And the fundamentals of distribution and talking to the consumer, and all of that sort of thing, really haven’t changed at all.

Your analysis of Coca-Cola 50 years ago can pretty well serve as an analysis now. We’re more comfortable in those kind of business.

It means we miss some — a lot — of very big winners, but we would not have picked those out anyway.

It does mean also that we have very few big losers and that’s quite helpful over time.

CHARLIE MUNGER: Yeah, the peanut brittle has very little technological change, too. (Laughter)

WARREN BUFFETT: They better not change it. (Laughs) We like it just the way it is.