2001: What is Berkshire's long-term competitive advantage?

AUDIENCE MEMBER: Good morning, gentlemen. David Winters from Mountain Lakes, New Jersey. Thank you for hosting “Woodstock for Capitalists.” (Laughter)

Berkshire seems to have an enormous long-term advantage in spite of its large size and high equity prices.

The structure of the company’s activities, non-callable capital, substantial free cash flow, and improving insurance fundamentals, permit Berkshire to capitalize on potential asset price declines and dislocations in financial markets, while most investors would not either have the money or the cool minds to buy.

Am I on the right track here?

WARREN BUFFETT: Well I think, in certain ways, you are. But we do have disadvantages, too.

But we have some significant advantages in buying businesses over time. We would be the preferred purchaser, I think, for a reasonable number of private companies and public companies as well.

And we — our checks clear. So we — (laughter) — we will always have the money. People know that when we make a deal, it will get done, and it will get done as fast as anybody can do it. It won’t be subject to any kind of second thoughts or financing difficulties.

And we bought, as you know, we bought Johns Manville because the other group had financing difficulties.

People know they will get to run their businesses as they’ve run them before, if they care about that, and a lot of people do. Others don’t.

We have an ownership structure that is probably more stable than any company our size, or anywhere near our size, in the country. And that’s attractive to people, so —

And we are under no pressure to do anything dumb. You know, if we do things dumb, it’s because we do things dumb. And it’s not — but it’s not because anybody’s making us do it.

So those are significant advantages. And the disadvantage, the biggest disadvantage we have is size.

I mean, it is harder to double the market value of a hundred billion dollar company than a $1 billion company, using our — what we have in our arsenal.

And that isn’t — I hope it isn’t going to go away. I mean, I hope we don’t become a billion dollar company and enjoy all the benefits of those. (Laughter)

And I hope, in fact, we have the agony of becoming, you know, a much larger company.

So, you are on the right track. Whether we can deliver or not is another question. But we go into combat every day armed with those advantages.

Charlie?

CHARLIE MUNGER: Yeah. This is not a hog heaven period for Berkshire. The investment game is getting more and more competitive. And I see no sign that that is going to change.

WARREN BUFFETT: But people will do stupid things in the future. Even — there’s no question. I mean, I will guarantee you sometime in the next 20 years that people will do some exceptionally stupid things in equity markets.

And then the question is, you know, are we in a position to do something about that when that happens?

But we do — we continue to prefer to buy businesses, though. That’s what we really enjoy.

When Charlie mentioned hog heaven, I thought we ought to open the peanut brittle here, which I recommend heartily. (Laughter)