2000: Is the average insurer a good business?

WARREN BUFFETT: The question about insurance, about whether we become average — average is not going to be good [in] insurance. Average is going be terrible in insurance over time. It’s not —

It’s a commodity businesss, in many respects. And if you are average, you’re going to have a very poor business. You may limp along because you got a lot of capital that’s supporting the lousy business, but it’s not — it won’t be a good business, per se.

But I think in GEICO, and in General Re, and some — and our other operations as well — we do not have average businesses, and there is nothing about the way the industry is going that would force us or lead us to have average operations.

I mean, we have special things we bring to the party in both cases I’ve named, and actually, in other cases as well. We have things we bring to the party that should make us considerably better than average.

It’ll show more in some periods than others, and it’ll be different in the way it is applied at GEICO or at General Re or at National Indemnity’s reinsurance operation. But none of those, in my view, will be average.

But average — and there will be a lot of average, by definition — average is not going to be good.

The other problem about it is average is not going to go away, either. So that is an anchoring effect, to some extent, on what even the skillful operator can achieve. I think insurance will be a very good business for us over time.

Charlie?

CHARLIE MUNGER: Yeah. Every once in a while, we have a business sort of die under us. Trading stamps is now off 99 3/4 percent from its peak volume, and we were able to do nothing to prevent that except wring all the money out and multiply it by about 100. (Laughter)

WARREN BUFFETT: We actually did about, what, 120 million, in the late ’60s, per year in trading stamps, far more dominant in our area than S&H was nationally.

And we have — by skillful management, Charlie and my constant attention to detail — have taken that business from 120 million a year down to, what, about 300,000 a year or so?

CHARLIE MUNGER: Oh, way less than that. (Laughter)

WARREN BUFFETT: We thought of having the sales chart here and turning it upside down to impress you, but it wouldn’t have worked very well.

CHARLIE MUNGER: I think it’s the nature of things that some businesses die. It’s also in the nature of things that, in some cases, you shouldn’t fight it. There is no logical answer, in some cases, except to wring the money out and go elsewhere.

WARREN BUFFETT: Yeah, and that’s very tough for managements, too. In fact, they almost never face up to that. It’s very, very rare.

And it’s logical that it’d be rare. In a private business, you can understand why people face up to it. In a public company, if you take the equation of the manager, he or she may be far better off ignoring that reality than accepting it.