2014: Could technology disrupt any of Berkshire's businesses?

BECKY QUICK: Let’s see, this is a question that comes, and I hope I pronounce your name correctly, Michael.

It’s Michael — Michael Locheck (PH) and he says, “Energy Future Holdings’ likely bankruptcy is a consequence of unexpected and dramatic decline in prices of natural gas prices caused by a revolution in drilling technology. To what extent do you believe other assets held in Berkshire’s portfolio, debt, equity, et cetera, may be subject to disruptive technological or other changes that erode business models and barriers to entry?”

“For example, changes in consumer behavior and regulation could affect Coca-Cola. Revolution in payment systems could affect American Express, ever-increasing rate of change in technology and competitive landscape could affect IBM, wireless delivery of media content and urbanization could be disruptive to DirecTV.

“Could you also comment on whether participation of some sponsors of Energy Future Holdings, which include the very best of private equity, contributed to your decision to invest? Was it the degree of crowd mentality at play, and what lessons are to be learned from the experience?”

WARREN BUFFETT: Yeah, well. I would be unwilling to share the credit for my decision to invest in Energy Future Holdings with anybody else. I would think that’s very unfair of anyone to insinuate that they had anything to do with that decision.

That was just a mistake on my part. It was a big — it was a significant mistake, and we will make mistakes in the future.

All businesses should constantly be thinking about what can mess up their business model. And with Energy Future Holdings it was a fairly simple assumption that was made that just turned out to be wrong.

I mean, the assumption there was that gas prices would stay roughly as high as they were or go higher, and instead they went a whole lot lower.

And at that point the whole place toppled. They had a lot of reserve holdings and they had some futures positions which kept them alive for a while. But that was a basic error.

We look at all of our businesses as subject to change. A classic case would be GEICO. I mean, GEICO set out in 1936 to operate at low costs and pass on those low costs to the customer through lower prices for something that was a necessity, auto insurance.

And they originally did it by mail offerings, U.S. Postal Service, two people who were government employees. That’s where the name comes from, GEICO, Government Employees Insurance Company.

And they had to adapt over the years, and they adapted first to widening classifications. But they went from the U.S. mail, primarily, to the telephone, and later went to the internet, and onto social media.

But in there they stumbled one time, too, as they went to adapt, and they — when they left the government employees classification, at one point they became too aggressive about expanding and they almost — they really did go broke.

So there’s — change is going on all the time, and it’s going on with all of our businesses. And we want managers that are thinking about change, and what can — what’s going to be needed for their business model in the future. And we know they’re not going look the same five or ten years from now.

I mean, BNSF, something as basic as railroads, is looking big at LNG for its locomotives. Everything is going to change.

Our businesses generally deal from strength and they’re generally not subject to rapid change. But they’re all subject to change, and of course, slow change can be much harder to perceive, and can lull you to sleep easier, sometimes than when rapid change is clearly in sight.

So I would say, in answer to that question, A) I will make mistakes in the future. I mean, when you — that’s guaranteed.

We do not make anything like “bet the company” decisions that will ever cause us real anguish. That just doesn’t happen at Berkshire. But you’re not going to make a lot of decisions without making some significant mistakes.

And occasionally they work out very well. Charlie and I, and Sandy Gottesman, in 1966, bought a department store in Baltimore. Now, there’s probably nothing dumber than buying a department store in the mid-1960s. There were four department stores on the corner of Howard and Lexington Street in Baltimore in 1966, and none of them are there. And the number one store, Hutzler’s, went broke a little later than our store went broke.

But fortunately Sandy did a great job of selling it, so the $6 million invested in that department store became worth about $45 billion in Berkshire Hathaway stock as we did other things with the money as we went along.

So you do have to be very alert to what is going on in your businesses, and we want our managers to do that. But actually, it’s something that Charlie and I, and our directors, are going to think about, as well as our managers. Charlie?

CHARLIE MUNGER: Yeah, I spoke earlier about the desirability of removing your ignorance piece by piece, and there’s another trick, which is scrambling out of your mistakes. And we’ve been quite good at both, and it’s enormously useful.

Imagine Berkshire, a textile mill sure to go broke because power costs in New England were about twice as high as they were in TVA country, a sure-to-fail department store, and a trading stamp sure to be forced out of business by change in mode. Out of that comes Berkshire Hathaway. Talk about scrambling out of mistakes, I think of what we might have done if we’d had a better start. (Laughter)

WARREN BUFFETT: Yeah. The point was driven home to me — my great-grandfather started a grocery store here in Omaha in 1869. And my grandfather was running it in 1929, and he wrote my uncle who was going to be running it with him.

And the letter started out, this is in 1929, “The day of the chain store is over.” And that is why we ended up with one grocery store, which went out of business in 1969.

It — you really have to face facts around you, and the wish being father to the thought was, unfortunately, what overcame my grandfather.