2005: Does Buffett have any non-financial criteria for investing?

AUDIENCE MEMBER: Hello. I’m Rory Johnson (PH). I’m from Suffolk in the U.K.

Do you have, or are there, any appropriate criteria, beyond purely financial returns, in assessing the success or otherwise of your investments?

WARREN BUFFETT: Well, I would say that the financial returns, achieved in a way that we want them to be achieved, are the determinant of whether we’ve made an intelligent commitment.

Now, we don’t get rid of companies that don’t meet our original expectations. There’s a section in the back of our annual report on the economic principles. And I forget which one it is. It’s toward the end.

But we say that Charlie and I have this quirk, which business schools would teach is a mistake, in that if we have a business that’s underperforming and we could sell it and put — and achieve greater returns someplace else, we don’t do it.

We say that if a business is going to permanently lose money, we’ll get rid of it. If it has major labor problems over a period of time, we might get rid of it. But we are not going to engage in what we call gin-rummy type management where we pick up one card and discard another.

And so we will not — if a business has been disappointing to us, but we like the people there and we’re not having — not because of labor problems — and we’re not going to have to put money in incessantly, we will stay with it when business school theory and management theory would say get rid of it and do something else.

We don’t disagree with the people that do it that way. It’s just that we don’t want to live our lives that way. And if we owned 100 percent of Berkshire we wouldn’t do it that way.

And we don’t — we just — we want the shareholders to know that we have this mindset that may produce slightly suboptimal returns because of our attitude. But that’s the way we’re going to play it, and we tell people ahead of time that that’s the way we’re going to play it.

We like being associated with the managers that we are, even the ones that are in — facing headwinds. I mean, but in a sense you almost identify more with the ones that are facing headwinds because they’re doing a hell of a job under very tough conditions.

And every business decision or investment decision isn’t going to work out perfectly. And some businesses are going to run into unexpected surprises.

But the people that have gone in with us have stuck with us in times like that. And our attitude is we’ll stick with them.

So to the — I would say that how the people behave with us after we buy the business is an important part of how we feel about, you know, the whole relationship as well as the returns achieved.

Charlie?

CHARLIE MUNGER: Yeah. I think he’s asking in part, are there some businesses we won’t have as subsidiaries in Berkshire even though they’re wonderful businesses? So, are we rejecting some business opportunities on moral grounds?

WARREN BUFFETT: Yeah, well we’ve referred in past meetings to one we did on that basis. We will own stocks of companies where we wouldn’t want to own the whole business. I mean, you know, you can —

I’m not sure that the logic is perfect on that, but we would not have trouble owning stock in a cigarette company. We wouldn’t want to manufacture cigarettes, you know. We might own a retail company that sells cigarettes. I mean, there’s all kinds of gradations.

But we do not — there are things we don’t want to own and be responsible for their businesses, where we have no problem owning their stocks or bonds. And some years back, Charlie and I went down to, where, Memphis?

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah, we looked at a — and we were invited down, and we looked at a company that made a product that — perfectly legal — probably one of the best businesses I’ve ever seen, in terms of the economics of it.

CHARLIE MUNGER: Absolutely.

WARREN BUFFETT: Still doing very well. And we met in the room with — we went to a hotel. We met in the room with the people that had the business. And people were perfectly decent people. And they described the business to us. And we went down in the lobby.

And as I remember, we sat down in the lobby and just decided that we didn’t want to be in that business. And, you know, the lines are not perfect on this sort of thing.

I mean, it — I’m sure that there may be ads in the Buffalo News that are selling some investment service or something that I would cringe at if I knew the people involved or what they were selling.

And it — if you own a big retail establishment, a retailer, general merchandise, you know, you’re probably going to be selling cigarettes when you don’t think that you should smoke yourself or that your children should smoke. And it’s — they’re not perfect.

But we have turned down some — the most dramatic being that one because we went — took us a trip of 1,000 miles or so to finally face up to the fact that we didn’t want to own it.

Charlie, you have anything to add on it?

CHARLIE MUNGER: No, but that was interesting because we were young and poor then by modern standards. And, you know, we’re very human. And we could see it was just, like, putting $100 million in a bushel basket and setting it on fire as we walked away. And — (Laughter)

WARREN BUFFETT: You’re making me feel bad. (Laughter)

CHARLIE MUNGER: We made the decision all right and with no difficulty. But there was a certain twinge. (Laughter)