2008: What returns will the stocks Berkshire recently bought produce?

AUDIENCE MEMBER: Good morning. My name is Marc Rabinov from Melbourne, Australia.

My question is, Berkshire has bought a lot of shares over the last 12 months in listed companies. Do you expect the return on these investments to be between 7 and 10 percent per annum over many years, which is, I would say, well below what Berkshire has achieved in the past?

WARREN BUFFETT: The answer to that is yes. (Laughs)

The — we would be very happy if we could buy common stocks where our expectation over a long period, pretax, from a combination of dividends and capital gains — we’d be very happy if we thought it was going to be 10 percent, and we would probably settle for a little less than that.

And there’s no question — absolutely no question — that returns from owning Berkshire will be less in the future than they have been in the past.

There’s no question that we will not do as well with the common stocks at Berkshire that we own in the future as we have over the last, really, 40 years or thereabouts.

We operate now in a universe of marketable stocks that — where we’re talking about companies with market caps of at least 10 billion but really, in most cases, to have a meaningful impact on Berkshire, we’re talking much bigger than that, maybe 50 billion and up.

Well, that universe is not as profitable a universe to operate in as if you have the entire universe of thousands and thousands of companies.

So we — if we — just take an example. If we find a company with a market cap of 10 billion and we can buy 5 percent of it — and usually that’s what we can buy without disturbing things — we can have a $500 million investment.

Let’s say it doubles over a period of time. That’s 500 million. You pay a 35 percent tax. You have 325 million. That’s less than two-tenths of 1 percent in terms of Berkshire performance.

So our universe has shrunk enormously, and we will not do as well in that universe — remotely as well — as we would if we were the operating in a much wider universe and could do all kinds of things.

We’ve found little things to do from time to time where we’ve made some money. I may refer to them a little later, a couple things. And they’re nice, but they don’t move the needle very much at Berkshire.

So anyone that expects us to come close to replicating the past should sell their stock. I mean, because it isn’t — it isn’t going to happen.

And, you know, I think we’re going to get decent results over time, but we’re not going to get indecent results. And in this field we prefer indecent, but we’re not going to get them.

Charlie?

CHARLIE MUNGER: I think you can take Warren’s promises to the bank.

We are very happy making money at a rate in the future that is way less than the rate at which we made money in the past. And I suggest that you adopt the same attitude. (Laughter)

WARREN BUFFETT: Well, I wouldn’t condemn them to that. I think if you’re working with small amounts of money — I’ve talked —

CHARLIE MUNGER: Oh, yeah.

WARREN BUFFETT: Yeah. Then you may have something very much better to do with your money than to buy Berkshire.

I mean, if you’re working with small amounts of money, and you want to put in significant amounts of time, and examine thousands of securities, you will find things that are more intelligent to buy than Berkshire.

You know, we still think Berkshire is an attractive investment over a long period of time. We think that it stacks up reasonably well with other very large companies.

We don’t think it’s the most attractive investment in the world, in terms of what you can find if you’re willing to go through those thousands of possibilities, which is what Charlie and I used to do many years ago. It’s not feasible for us to do it now and wouldn’t have any impact on Berkshire.

What we really like at Berkshire is buying good-sized to very large first-class businesses with first-class management and just sitting there. Because the nice thing about that is you don’t have go from flower to flower. You can just sit there and watch them produce more and more every year and give you capital and you can buy more businesses.

That’s a nice formula. It’s a formula that will work, I think, for us. It won’t produce returns like the past.