2001: Will Berkshire compound its float at 10% over time?
AUDIENCE MEMBER: Good morning, gentlemen. Marc Rabinov from Melbourne, Australia. I had a question on two of our key operating businesses.
Firstly, Executive Jet. Once this becomes a mature business, would it be fair to say that its net margin should be about 5 percent?
And secondly, would it be fair to say that our current insurance businesses are likely to grow aggregate float at about 10 percent over time?
WARREN BUFFETT: Well, it’s really anybody’s guess. I mean, I don’t expect Executive Jet to become a mature business for decades. I mean, it — there’s a whole world out there on that one.
And we have something over 2,000 customers in the United States at the current time. We have a little over a hundred, but in Europe.
But there are tens and tens and tens of thousands, and perhaps hundreds of thousands, of people or businesses where it does make sense over time. So it’s going to be long time.
I mean, there are only 700, roughly, jets a year being produced. And of course, up until a few years ago that was limited to people who wanted to buy single planes.
But you won’t change that output much in the next five years. But — so, you couldn’t really take on —
We can take on about 600 customers a year, just in terms of the delivery schedule that we have built into our business. And we couldn’t change that — we couldn’t double that — because the planes simply aren’t available in the next year or two, although we have orders further out.
But I would say it will be a long time until Executive Jet is a mature business, and I would say that — a long, long time.
I mean, we’re going to, when we get Europe — as we make progress in Europe, we’ll move to Asia. We’ll move to Latin America over time. And so we’re going to be, I think, growing that business significantly for a very long time.
When it becomes mature, or close to it, you know, if you’re talking 5 percent after-tax margins, I’d say that that’s probably a reasonable figure. But we’re so far away from even thinking about that, that, you know, it’s pure speculation.
WARREN BUFFETT: In our insurance business, we’ve grown our float and then we’ve purchased businesses to add to the float.
This year, I would certainly expect, unless one — a big transaction would fall through or something — I would certainly expect our float to grow at least 2 1/2 billion. And that is close to 10 percent of the beginning of the year float.
That’s a rational expectation. But whether it can grow 10 percent a year, you know, how far you can do that — I would say the total float of the property-casualty industry in the United States is — I’m pulling this out from making some other calculations in my head as I talk — but it wouldn’t be much more than 300 billion.
So, we are close to 10 percent of the entire U.S. float now, and I don’t think the U.S. float — the aggregate float — you know, is going to grow at a 10 percent rate.
So when you’re as big a part of the pie as we are, it may be difficult to sustain a 10 percent rate. But we’re doing everything possible that makes sense to grow float. I mean, that is a major, major objective. But the even bigger objective is to keep it low-cost.
I don’t think you can see — unless the world changes in some way — I don’t think you can see 10 percent growth over 25 years. But we’ll do our darnedest to get it, you know, at the rate you suggest for at least the near future.
Charlie?
CHARLIE MUNGER: Well, I certainly agree that long term, it’s not going to happen. Good, but not that good. (Buffett laughs)
WARREN BUFFETT: But we’ve been surprised at what’s happened. I mean, there’s no — I mean, when we bought Jack Ringwalt’s company in 1967, you know, my memory is Jack had a float of, you know, less than 15 million.
And would we have ever guessed that we might hit something close to 30 billion this year? We never dreamt of it. But we just kept doing things, and we’ll keep doing things.
But it can’t be at huge rates for a long period of time, because we’re too big a part of the pie now. We were nothing initially, and we kept grabbing a little more of the pie as we’ve gone along. And we like that, but it can’t go on forever.
CHARLIE MUNGER: Yeah. That’s what I call really low-cost float. If it ever should be advantageous for us to go into what I would call higher-cost float, that might change the figures upward, in terms of growth of float.
WARREN BUFFETT: Yeah. Although, that won’t be — I mean, it could happen that we could take on incrementally some higher-cost float under very special circumstances if we saw unusually good ways to use it, but that — we don’t even like to think about that.
We certainly don’t want the people running our businesses to think about that. Because keeping it low- cost, you know, that is the big end of the game.
Anybody can generate float. I mean, if we gave our managers a goal of generating 5 billion of float next year, they could do it in a minute, you know, and we would be paying the price for decades to come.
You can write dumb insurance policies, you know. There’s an unlimited market for dumb insurance policies. And they’re very pleasant, because the first day the premium comes in and that’s the last time you see any new money. From then on, it’s all going out. And that’s not our aim in life.