2001: How fast does Berkshire's subsidiaries need to grow to produce a 15% total return?
AUDIENCE MEMBER: Mr. Buffett, Mr. Munger, my name is Joe Schulman (PH). I’m a shareholder from Oxford, Maryland. Thank you for a wonderful meeting.
In order for Berkshire to have an opportunity to hopefully grow its earnings by about 15 percent per year, if we can do that, at least for the next few years, it’s obvious that because of the redeployment of earnings and float, the existing businesses do not need to grow at 15 percent.
At what rate would you expect the existing businesses to grow to achieve an aggregate rate close to what I’m describing? And what do you think the probability is of achieving that?
WARREN BUFFETT: Yes. Well, I think the probability of us achieving 15 percent growth in earnings over an extended period of years is so close to zero, it’s not worth calculating.
I mean, we’ll do our best, and we have a lot of fun doing it. So it is not something where we have to come down and do things that are boring to us or anything of the sort.
I mean, our inclination is to — very much — to do everything we can, legitimately, to add to Berkshire’s earnings in things we can understand. But it can’t happen, over time. You know, we will have years when we do it, but —
And you’re quite correct in pointing out we don’t need to do it from the present businesses — we will add things all the time — any more than we needed to do it from the current business back in 1965 with the textile business.
I mean, we have to improvise as we go along. And we will. And the businesses we have are good businesses, in aggregate. They will do well.
They won’t do anything like 15 percent growth per annum, but we will take a good rate of progress from those businesses, and we will superimpose upon that acquisitions which will add to that.
But we can’t do 15 over a period of time, and — nor, incidentally, do we think any large company in the United States is likely to do.
There will be a couple that do it for a long period of time, but to predict which of the Fortune 500 will end up being the one or two or three, would be very hard to do.
And it won’t be more than a couple out of 500, if you take large companies not working from a deflated base year.
I think our method is a pretty good one. I mean, I think the idea of having a group of good businesses to throw off cash in aggregate, in a big way, that themselves grow, that are run by terrific people, and then adding onto those, sometimes at a slow rate, but every now and then at a good clip, more businesses of the same kind, and not increasing the outstanding shares, I think that’s about as good a business model as you can have for a company our size. But what it produces, we’ll have to see.
CHARLIE MUNGER: I certainly agree that the chances of this 15 percent per annum progress extrapolated way forward is virtually impossible. I think, generally, the shareholding class in America should reduce its expectations a lot.
WARREN BUFFETT: Including the pension funds.
CHARLIE MUNGER: Yeah, including the pension funds, you bet.
It’s stupid the way people are extrapolating the past. Not slightly stupid, massively stupid. (Laughter)
WARREN BUFFETT: And this is a message, incidentally, if you think about it. I mean, nobody has any interest in saying this — a financial interest in saying it — whereas people have all kinds of financial interest in saying just the opposite.
I mean, so you do not get an information flow — if you listen to the financial world or read the financial press — you do not get an information flow that is balanced in any way, in terms of looking at the problem, because the money is in believing something different.
And money is what, you know, it’s what causes people to become prominent, or it flows from becoming prominent in the investment world in terms of whether you go on television shows, or whether you manage money, or are trying to attract it through funds, or whatever it may be.
I don’t think if you were an actuarial consultant and you insisted that the companies that you gave your actuarial report to use a 6 percent investment rate, I don’t think you’d have a client.
So, it’s almost impossible for the advisors, in effect, in my view, to be intellectually honest on it. Don’t you think so, Charlie?
CHARLIE MUNGER: Yeah. There was a very smart — there is a very smart investment advisor in my town, and he said that, “Years ago, some risk arbitrage firm would tell his clients, ‘We know how to make 15 percent per annum year in and year out.’”
And he said, “Years ago, everybody said, ‘That’s impossible.’” He says, “Now in this climate, they say, ‘So what?’” You know, who’s interested in a lousy 15 percent?
WARREN BUFFETT: And it was easier in the earlier climate, obviously, because the money hadn’t been attracted into it.
CHARLIE MUNGER: Generally speaking, there’s more felicity to be gained by — from reducing expectations than in any other way. It is simply crazy for this group to have very high expectations. Moderate expectations will do fine for all of us.