2014: What are Berkshire's weak points?
CAROL LOOMIS: This question comes from an astute fellow named Richard Sercer of Tucson, who spotted an opening and is going for it.
And it actually reminds me of a question that you, Warren, or Charlie, could’ve thought up yourself.
“In an interview on April 23rd, 2014 about the Q&A session, Warren said, quote, ‘I hope we will get questions that probe at our weak points.’ My question is, what is our weak points and what can be done to address them?” (Laughter)
WARREN BUFFETT: Well, that would spoil all the fun for the journalists. (Laughs)
They’re the ones that are supposed to look for the weak points.
We have a lot of weak — we point them out. You know, I’ve just pointed out one.
Probably, I would say if you’d — if we’d — executed a sweep account for all our subsidiaries some years ago, you know, we would have a few more dollars than we have now.
You know, it — who knows what they’re doing with some of those balances in terms of — we wouldn’t — it wouldn’t be because we do riskier things. But we — you know — we are very disciplined in some ways. And by ordinary business standards, we’re sloppy in other ways.
And, oh, well, a clear weak point of mine would be I’m slow to make personnel changes. I mean, I like the managers we have.
And Charlie and I had a wonderful friend who couldn’t have been a greater guy. And, you know, we were slow to make a change there. We loved the guy. And it wasn’t killing us in our business.
And how long would you say we went beyond where somebody else would’ve acted in that case, Charlie?
CHARLIE MUNGER: Well, I don’t know exactly.
But that, turning to the sweep account system, reminds me of a friend I had when I was in the Air Corps and he was a very skinny man. And he decided to give blood. And they put the needle into his arm and the blood stopped flowing.
And the nurse just started stripping his arm as though it were the udder of a cow. And he got the impression that he was going to — they were going to get that blood whether it took all he had. And he fainted.
It was a very unpleasant occurrence. And I don’t think a sweep account is all that pleasant to sit there and just — every little dollar comes in, somebody sweeps it away.
WARREN BUFFETT: Charlie, our —
CHARLIE MUNGER: I like the tone of our business.
WARREN BUFFETT: Our managers are listening here. I mean, don’t give them that illustration to use when I ask for money. (Laughter)
CHARLIE MUNGER: But, you know, I’ve seen people subject to — Teledyne and Litton, those people, swept every dime every day, basically.
And it was a little more economic, but it created a tone in the company that — which I think is less desirable than ours.
WARREN BUFFETT: We’ve waited too long on managers, though, sometimes, Charlie.
CHARLIE MUNGER: Well, sure. You and I participated in taking one man directly from an executive chair into a Alzheimer’s home. There was no — (Laughter)
WARREN BUFFETT: You’re hitting a sensitive subject here, Charlie. (Laughter)
CHARLIE MUNGER: We’d arranged that he could do no harm, and we loved him well enough so that we just made it easy for him.
I’ve never regretted it, have you?
WARREN BUFFETT: No. Not —
CHARLIE MUNGER: No.
WARREN BUFFETT: Not at all. Not at all. It —
CHARLIE MUNGER: On the other hand, I want to be pretty careful.
WARREN BUFFETT: It — we will be slow. And we — there will be times when what you might call our lack of supervision over subsidiaries, you know, we’ll miss something.
Now, we think that giving our managers the degree of freedom that they enjoy will also accomplish a lot.
So someone will come along someday and say, “If you’d had many more checks and oversight and all of that sort of thing,” you know, something — well, something will happen at Berkshire and they’ll say, “That wouldn’t have happened if you’d followed the procedure that some other company followed.” And they’ll be right.
But what they won’t be able to measure is how much on the positive side we have achieved with dozens and dozens of people because we gave them that same sort of leeway.
I mean, we operate differently in terms of the level of control and supervision. You know, we don’t have a general counsel’s office at Berkshire. We don’t have a human relations department at Berkshire.
And that would be almost unthinkable to other companies. And we’re not saying that’s a 100 percent benefit in all ways. We think — but we think on balance, it’s a benefit.
But when the down side of such a procedure shows up, people will say, “Well, you should of done it differently and you should’ve been spending lots of money over the years and restricting the activities more of your subsidiary managers,” and so on.
And our reaction will be that they are wrong. But we will look bad in that individual case.
Wouldn’t you say that’s true, Charlie?
CHARLIE MUNGER: Yeah. The — by the standards of the rest of the world, we over trust. And so far, our results have been way better because we carefully selected people because they were going to be over trusted. And it’s worked very well for us.
And, I think a lot of places work better when they create a culture of deserved trust. And that’s been our system. And some people regard that as a weakness.
And this modern accounting treatment, when everybody’s measured on internal controls, I think it’s going to do more harm than good. (Applause)