2014: How does Berkshire benefit from being a conglomerate?

CAROL LOOMIS: This question concerns another uncertainty. It’s from Chris Gotcho (PH) of Gotcho Capital Management in New York City.

“You’ve been looking for a credentialed bear to ask questions at this meeting. I’m not it. In fact, selling short on Berkshire would be quite silly.

“However, in the long term, Berkshire has a business model of owning over 70 non- financial, unrelated businesses — bricks and chocolate, for example — which is a model that has almost universally not worked well in the past 100 years of American business.

“The model has worked well for you two, Mr. Buffett and Mr. Munger, who are uniquely talented.

“But the question is, the probabilities do not seem likely to be favorable that their successors will be able to have it continue to work nearly as well.”

So that is my question.

WARREN BUFFETT: OK. Actually, the — it’s interesting.

The model has worked well for America. I mean, if you look at all these disparate businesses in America, they’ve done extraordinarily well over time.

So if you want to look at the Dow Jones average as one entity — now, it was a changing group of companies over a 100-year period — but, you know, any business unit that goes from 67 — or 66 — to 11,497 while paying you out a fair amount of money every year, actually is a model that’s worked pretty well. But it hasn’t been, of course, under one management.

But owning a group of good businesses is not a terrible business plan. A good many of the conglomerates were put together to perform financial magic of one sort or another.

They were based upon — you know, if you go back to the Litton Industries and the Gulf and Westerns and just — you could name them by the hundreds. They were really put together — Ling-Temp — LTV, and — on the idea of serial issuance of stock, where you issued stock that was selling at 20 times earnings to buy businesses that were at ten times earnings.

And it was the idea that somehow you could fool people into continuously riding along on this chain letter scheme, without the primary thought being given to what you were actually building in the management.

I think our business plan makes nothing but great sense, to own a great group, a group of great businesses, diversified, outstanding managers, conservatively capitalized.

And with one enormous advantage, which people don’t really understand. I mean, capitalism is about, in an important way, it’s about the allocation of capital. And we have a system at Berkshire where we can allocate capital without tax consequences.

So we can move businesses from See’s Candy, to generate surplus capital, to other areas. It doesn’t hurt See’s in the process, and we can move it, as the textbooks say, to places where capital can be usefully employed, like wind farms or whatever it may be.

So we are — you know — there’s nobody else really better situated to do that than Berkshire Hathaway, and it makes perfectly good sense.

But it has to be applied with business-like principles, rather than with stock promotion principles. And I would say a great many of the conglomerates have been — have had, as their underlying premise, stock promotion.

You know, you saw what happened with Tyco or — the serial acquirers were usually interested in issuing a lot of stock.

I think if you had to look at one of the primary indicators of what sort of species you’re viewing, you would see whether somebody’s issuing — if they’re issuing stock continuously, one way or another, they’ve probably got a chain letter game going on. And that does come to a bad end.

I think our method of acquiring for cash, and acquiring good businesses, and building many, many sources of growing earning power, I think, is a terrific model.

Charlie?

CHARLIE MUNGER: Well, I think there’re a couple of differences between us and the people who are generally thought to have failed at a conglomerate model.

One is we have an alternative when there’s nothing to buy in the way of companies. We’ve got more securities to buy in the insurance company portfolios. And that’s an option which most of the other conglomerates didn’t have.

Number two, they were hell bent to buy something or other quite regularly. And we don’t feel any compulsion to buy. We’re willing to just sit until something makes sense.

We’re quite different. We’re a lot more like the Mellon brothers than we are like Gulf and Western. And the Mellon brothers did very, very well for what, 50, 60, 70 years.

And they were willing to own minority interest, they were willing to grow companies, they were a lot like us.

And so I don’t think we’re a standard conglomerate. And I think we’re likely to continue to do very well, sort of like if the Mellon brothers had just kept young forever.

WARREN BUFFETT: Now you’re talking.

CHARLIE MUNGER: Yeah. (Laughter)