2005: Why doesn't Berkshire buy more U.K. companies?

AUDIENCE MEMBER: Hi, this is Peter Webb from London, U.K.

The question I wanted to ask you: I’ve been an investor for many years and done very well following a similar sort of style to yourself. So thank you for that.

The big question I have is —

WARREN BUFFETT: Would you want to quantify that? You can always send us a check. (Laughs)

AUDIENCE MEMBER: But if there’s a deal to be had, maybe we can speak afterwards.

WARREN BUFFETT: OK. (Laughs)

AUIDENCE MEMBER: The question that I have for yourself and Charlie is, over the time I’ve bought many different companies in the U.K. and Europe, and I’ve seen many American value funds buying the same companies, but I see very little activity from Berkshire and its subsidiaries.

And I didn’t know whether that was a reflection on your views on U.K., Europe, and the world. Whether you just see a lack of investment opportunity? Is it outside your sphere of competence? Or is there some other reason that I see less activity from you in Europe?

WARREN BUFFETT: Yeah, it’s a good question. We own, of course, as you know, 80 percent or so of MidAmerican Energy, which has a very large business in the U.K., but that’s an operating business.

As you know, in the U.K. there’s a rule that requires reporting when you own three percent of a company’s stock. And actually, there’s some conditions under which the ownership will be reported even sooner than that three percent.

There’s a provision that — I think if there is an inquiry or anything, that it has to be responded to.

So, if you take a company with a market cap of, you know, £5 billion, if we bought £150 million of it, we would have to report, and that tends to mess up subsequent purchases.

So, we bought stock — we own stock in Diageo, which was Guinness at the time. We’ve owned stock in some other U.K. companies.

But we’ve thought twice before going over three percent, because of the reporting requirements, and then we’d have to report if we were selling, and all of that.

So that’s a deterrent, but it’s not an overwhelming deterrent. And if we, you know, if we get a chance to buy a significant piece of something that we think is cheap, particularly if we could buy it in one purchase. But there’s a lot of special rules that kick in, over in the U.K., that do not in the United States.

Incidentally, there was something in the Journal the other day that said that we had to report if we bought over five percent of a company within 10 business days in the U.S.

That is not true. That was a mistake in the report. But it is the case in the U.K. that at 3 percent, reporting is triggered.

But there — we would feel very comfortable with lots of U.K. businesses. And, you know, they’d have — it’d be the same criteria we applied over here: a durable competitive advantage, and a management that we like and trust, and a reasonable price.

And we have seen some of those. There was an insurance company in the U.K., a year or so back, that I would very much have liked to have bought, but we couldn’t come to terms on price.

But we have no bias whatsoever against buying businesses in the U.K. And as I say, we’ve — at Yorkshire and Northern Electric, you know, we have a business that, shows in our report, made close to $300 million after-tax.

And actually, considering my views on currency, you know, I would have — I’d give a slight edge to buying something where the earnings would be in sterling in the future, rather than in dollars.

Charlie?

CHARLIE MUNGER: Well, I regard it as kind of amusing that we ended up preferring the currencies of Europe when it’s so much more socialized than the United States is. That’s a queer occurrence.

WARREN BUFFETT: You actually prefer them or not, Charlie? (Laughs)

CHARLIE MUNGER: Well, certainly in recent — over a considerable period of recent months — we’ve actually preferred the currencies of socialized Europe to our own currency.

I just regard that as an odd occurrence for both of us. That wouldn’t have happened.

WARREN BUFFETT: No. Up till three years ago, if I came back from Europe and I had a euro in my pocket I couldn’t wait to run to the bank or someplace. I was afraid it would depreciate before I could get rid of it. But I changed my views a few years ago.

We hope to buy businesses, and stocks, other places in the world. And Charlie mentions the difference in political climate.

One thing: you read about slow growth in Europe and Japan and all those, and it’s true. But usually — but the growth figures that you see are usually not on a per capita basis. And since the population of Europe has been, generally, very little changed, whereas the population of the United States grows one or one- and-a-half percent a year, if you look at growth figures in the United States and somebody says three- and-a-fraction percent, that’s not on a per capita basis.

I mean, you’ve got to — you have to deflate that by the growth in population. Whereas, if you read about the growth in Europe, generally, you’re dealing with a population base that hasn’t changed.

So the differences in growth rate on a per capita basis are not as wide as the headlines would suggest.