2014: What are the benefits of entire businesses versus stocks?

AUDIENCE MEMBER: Hi, Mr. Buffett and Mr. Munger. My name is Dev Contessaria (PH) and I’m a fund manager from Philadelphia.

You’ve touched on some of this already today, but I wanted to ask, if you could expand on how you think about comparing investment opportunity.

In the past, you haven’t been afraid to make a single position a large portion of your portfolio, such as Coca-Cola.

So when there is a chance to buy more of your favorite names, as in 2008 and early 2009, how did the case of buying more of companies like Coca-Cola or even a Moody’s, which had dropped from 75 to 15, as examples, compare with other things that you actually did?

Could Berkshire have achieved its historical returns with a more simple, concentrated portfolio of your favorite names with positive characteristics such as durable competitive advantage, pricing power, strong organic growth, et cetera, versus the larger, more complex collection of businesses which exist today? Thank you.

WARREN BUFFETT: Yeah. Well, depends which favorite name we might have hit harder back in the 2008 and 2009 period.

In the first instance, I spent a considerable part of our cash reserves too early, looking back, too early in the 2009 panic. The bottom of that was reached early in March in 2009, and that bottom was quite a bit lower than September and October of 2008 when we spent 16 or so billion.

Now, we were committed to finance Mars for 6.6 billion, and that commitment had been made many months earlier, so we didn’t really have much choice in terms of the timing of that.

But we did fine on the expenditures we made during that period, but obviously we didn’t do as well, remotely as well, as if we’d kept all of the powder dry and then just spent it all at once at the bottom.

But we’ve never really figured out how to do that, and we won’t figure out how to do that.

So, the timing could have been improved dramatically. On the other hand, as late as the late fall of October of 2009, when the economy was still in the dumps, really in the dumps, you know, we were able to buy BNSF, which will be an enormous part of our future.

So, overall we did reasonably well going through that period. But looking back, the most money would have been made just by buying a bundle of stocks.

When we were buying Harley Davidson bonds at 15, looking back we should have been buying the stock. But that’ll always be the case.

Overall, we would love the idea — what really we want to do at our present size and scope, and with the objectives we’ve got for our shareholders, is we want to buy big businesses with good management at reasonable prices and then try to build them over time.

I mean, when we start 2014, we’ve got a really good group of businesses, some of them very big. Those businesses will earn more over time, and then the — what we’re trying to do is add onto them and make sure we don’t issue any shares in the process. So it’s not a complicated process.

And looking back we’ll always be able to do it better than we’ve done it. That’s just the nature of things. But I don’t — I feel the game is still a very viable one, and will be for some time. It won’t be forever, it can’t be forever. But it’s still got some juice left in it. Charlie?

CHARLIE MUNGER: Well, what’s happened, of course, is the private businesses that we control have gotten to be a bigger and bigger percentage of the thing. For a great many of the early years we had more in common stocks than the total value of the company. And so we were — it was like a big portfolio of common stocks and a lot of businesses thrown in as extras.

And now, of course, the private companies are worth way more than the stocks. And, I would guess that that will continue, wouldn’t you Warren?

WARREN BUFFETT: Sure, it’ll continue. And the difference is when we’re right about stocks, it shows up in market value and in net worth.

When we’re right about businesses, it shows up in future earning power, which you can see, but it doesn’t jump out at you the same way changes in stock values do. So it’s a different sort of buildup of value, and one is somewhat easier to see than the other.

But the other is more enduring and does not require going from flower to flower. And they’re both fine, but we’ve moved into phase two. Say that’s fair, Charlie?

CHARLIE MUNGER: Yeah, well, if you’re just investing moderate amounts of capital in the middle of some panic, you take the bottom tick, it’s a very attractive price. But no significant volume of the shares could have been purchased at that price.

And so when we buy these businesses, we can get huge chunks of money into things. And now if we’d wanted to go much heavier into Moody’s, we couldn’t have bought that much anyway.

WARREN BUFFETT: No, no.

CHARLIE MUNGER: Yeah, so, we are sort of forced by our own past success, more into these bigger positions represented by the private companies.

But really, that’s in the advantage of all of us, I think.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: I love it when we buy transmission lines in Alberta. I don’t think anything horrible is going happen to Alberta. And nor do I think transmissions —

WARREN BUFFETT: If it does, we won’t know it.

CHARLIE MUNGER: Yeah, right, right. (Laughter)

And — no, I think we’ve adapted pretty well to changes in our circumstances.

And that, again, is part of life. I mean, since change is inevitable, how well you adapt to it is terribly important. And I would say the changes that many of you have watched in Berkshire over the years have been very much in our interest, and then there may be future changes that are just as desirable.

WARREN BUFFETT: We bought a fair amount of Wells Fargo, for example, really over the last few years. And because the economy came back, really, the most money, if you were buying at the bottom, came from buying the banks of lesser quality because they — their weaknesses drove them down even further in price, and they needed a good economy to come back.

But they were kind of like a marginal copper producer or something, that you make more money if copper goes up, not if you buy the best copper company but, usually, if you buy the worst one, because it — they have the highest marginal cost, but that gives it the biggest kick on profits.

To some extent that’s been true, for example, the banks. But we felt 100 percent comfortable buying Wells Fargo, and we might have felt 50 percent comfortable buying some others and so we went where we were comfortable.

Looking back, you can say we should have just bought them all. And in fact, bought the ones that had had the worst record going into 2008 or ’09, because they had the greatest recovery possible, simply because they’d fallen so far. Andrew?