2011: Don't measure every potential deal against the best deal you’ve ever made.
CAROL LOOMIS: This question is from Mike Rifkin (PH). He wants to ask about five transactions you’ve made in recent years with very different terms.
Goldman, 5 billion at 10 percent plus warrants; GE, five billion at ten percent plus warrants; Dow Chemical, 3 billion at 8.5 percent convertible to common; Wrigley- M&M Mars, 4.4 billion at 11.45; Swiss Re 2.7 billion at 12 percent.
Now, why the different interest rates you set and how about why the warrants in some cases, and why did the rich Mars family need 4.4 billion to do a deal, and at 11.45 percent?
WARREN BUFFETT: Well, we’ll let the Mars family speak for themselves.
But in terms of comparing those five deals, it was 3 billion with GE, and the Mars deal actually involved a $2.1 billion preferred stock, which has some usual characteristics, so you have to look at it as a package.
But the important thing is that every one of these deals was done at a different time, although the Goldman and the GE deals were done in close proximity with each other.
And market conditions — you know, you heard Charlie in the movie talk about opportunity costs. Our opportunity costs were different in every single one of those five transactions. And incidentally, we could have done a much better — I could have done a much better — job of allocating our money, you know, in terms of the post-panic period.
I was early on Goldman and GE, compared to the situation five months later. But, you know, we don’t have — we not only don’t have perfect foresight, sometimes it’s pretty bad.
But each deal — when I did the Swiss Re deal, I was not thinking about the Dow Chemical deal, which was committed to, maybe, a year-plus earlier. I was thinking about what else I could do with $2.7 billion, and that’s the way all the decisions are made.
So they are not related — they’re not related to each other. They go through a mind that is looking at everything available that day, including the amount of cash we have, the likelihood of being able to do something else next week or next month, what else we can do that day. And past deals we’ve made don’t really make any difference.
In fact, one of the things — one of the errors people make in business — and sometimes it can be a huge error — is that they try and measure every deal against the best deal they’ve ever made.
So they say, you know, I made this wonderful deal for, maybe, an insurance policy written, or it might be a company bought, it might be a stock bought, and they’re determined that they’re never going to make a deal that isn’t that attractive in the future.
So they, in effect — sometimes they take themselves out of the game.
The goal is not to make a better deal than you’ve ever made before. The goal is to make a satisfactory deal that’s the best deal you can make at the time. And Charlie relates it to marriage, and I’ll let him expand on that. (Laughter)
CHARLIE MUNGER: No, those are — of course, we’re going to make different deals at different times based on different opportunity costs. There’s no other rational way to make deals.