2004: Will technology increase ROE in aggregate?

AUDIENCE MEMBER: Good morning. James Easterlin (PH) from Durham, North Carolina.

My question — statement is, you have often written in reference to average corporate profitability remaining fairly consistent in the long run, such that return on equities are in the 12 percent range for U.S. companies, and after-tax profits as a percentage of GDP is sticky in the 4 to 6 1/2 percent range.

And the question is, given the advances in technology that brought the inventory-to-sales ratios down to historic lows, given the widespread adoption of the EVA principles by companies, might you think that might change over time?

WARREN BUFFETT: Yeah, I don’t think any of the factors that you mentioned will act to move corporate profitability out of the range that has historically existed.

It’s going to bob around, obviously, some, but I certainly don’t think EVA will do a thing for American corporations in terms of making them receive a greater share of GDP in profits.

Technology, that’s just as likely to reduce profits as to increase profits. I mean, as the economic machine of the United States works better and better over time, the main beneficiaries are going to be consumers.

If you took whoever you think is the best business manager in the United States and you put a clone of that person in charge of each one of the Fortune 500, the profits of the Fortune 500 would not necessarily go up, because there’s this competitive nature to capitalism where the improvement you get one day, your competitor gets the next day.

And it very much tends to work to the benefit of consumers but not to increase overall profitability.

We see that in the industries we’re in. Every — we were in the textile business for a long time and various new products — various new machinery — would come along and it would promise to deliver a 40 percent internal rate of return and get rid of 43 employees or something like that.

And, you know, we just did one after another of those, and when we got all through we didn’t make any money, because the other guy was doing the same thing.

And I liken it to everybody at a parade — you know, a huge crowd watching it and somebody stands up on tiptoes and, you know, 10 seconds later, everybody in the crowd is up on tiptoes and they’re not seeing any better and their legs hurt. Well, that was the textile business.

And there’s an awful lot of self-neutralizing things in capitalism. So I don’t really expect any of the factors you named, or any other factors that I can think of, that will move profits up as a percentage of GDP.

And indeed, I think that if you’re looking at GDP as being the national pie and profits being what investors get out of it, and the rest belonging to people who are out there working for a living every day, I don’t think the relative — the proportions — are inappropriate.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add to that.