2011: Which subsidiaries will handle inflation best?

BECKY QUICK: This question comes from Mark Jordan (PH) in Charleston, South Carolina.

He writes, “In a period of high inflation, which particular businesses owned by Berkshire Hathaway will perform the best, and which will perform the worst and why?”

WARREN BUFFETT: Well, the businesses that will perform the best are the ones that require little capital investment to facilitate inflationary growth and that have strong positions that allow them to increase prices with inflation.

And, you know, we have a candy business, for example, and the value of the dollar since we bought that candy business has probably fallen at least 85 percent, I would say — 80 to 85 percent — and that candy business sells 75 percent more pounds of candy than it did when we bought it, but it has ten times the revenues and it doesn’t take a lot more capital.

So that kind of a business — any business that can — that has enough freedom to price to offset inflation and doesn’t commensurate invest — or huge investment — to support it, will do well.

Businesses like our utilities which get, in effect, a bond-like return but require — you know, if you’re going to build a generating plant and it costs twice as much per kilowatt hour of capacity, and all you’re going to get is a fixed return and yields on bonds go up, perhaps dramatically, to get high inflation, is not going to do that well in an inflationary period, just because it has certain aspects of a bond-like investment, and bonds generally are not going to do well in inflation.

Charlie?

CHARLIE MUNGER: Well, but like our insurance operations, our capital intensive railroad business is certainly one of the best railroads in the world. And our utility operations are certainly one of the best utility operations in the world.

And so it isn’t all bad to be up there, world class, in your main businesses.

WARREN BUFFETT: Our railroad — the government has talked about building a high-speed rail system in California.

I think they’re talking about 800 miles of track, and their estimated cost was about 43 billion, and estimated costs on construction and things like that go up dramatically much more often than they get reduced even by a minor amount.

And, of course, we paid 43 billion, counting debt assumed, for our rail system, which has 22,000 miles of main track and 6,000-plus locomotives, and 13,000 bridges, if you ever want to buy a bridge.

So that — the replacement value of that asset during inflation already is huge and it would grow dramatically, and the world — our country will always need rail transportation. So it — it is a terrific asset to own, I’ll just leave it at that.