2018: What is Berkshire's normalized earnings power?

AUDIENCE MEMBER: I’m Richard Sercer (PH) from Tucson, Arizona.

“At Berkshire what counts most are increases in our normalized per-share earning power.” That was in your last letter. What is our normalized per-share earning power, as you estimate it?

WARREN BUFFETT: Well, I would say that what you saw in the first quarter, under these tax rates, would probably be a reasonable guess. You know, obviously, it depends on the economy in any given year. I would say that would — is a reasonable estimate.

But we have firepower we haven’t used. And we’ll have more firepower as we go along. So we do expect that normalized earning power to increase over time. And if it doesn’t, you know, one way or another, we’re failing you because we’re retaining those earnings.

So — I don’t see anything abnormal in our earnings, figured now at a 21 percent federal rate. But as I look at the 5 1/4 billion in the first quarter — seasonally, insurance is better in the first quarter — but seasonally, most of our businesses, the first quarter is not the strongest quarter for us. I don’t see anything abnormal with it.

And then I think you can expect, you should expect, we expect, substantial capital gains over time in addition to what comes from the operating businesses.

So how much you figure in for that — I would say that the retained earnings beyond dividends of our 770 billion of equities — in other words, how much they’re keeping from us, but that our share of the earnings, which can be used by them, whether it’s Apple or American Express or Coca-Cola or Wells Fargo or whatever, our share, you know, is in many billions of dollars annually. And one way or another, we think that those dollars will benefit us as much as if they had been paid out.

Now, in certain cases, they won’t. But in certain cases, they’ll excel the amount, in terms of market value created.

So there’s many billions of dollars we are not showing in our earnings that is being retained by our investees. And one way or another, I think we’ll get value received out of those.

So you can take 20 or 21 billion under present tax rates, present economic conditions, and then we should get something from that and we should get more when we get 100 billion of cash invested. And we should get more as we retain the earnings. So we hope it adds up to a bigger number as we go along.

Charlie?

CHARLIE MUNGER: Well, I don’t think our shareholders are going to see another increase in net worth of $65 billion in a single year. They may have to wait a while for another. But I don’t think that — I think eventually there — another will come, and then another. Just be patient. (Laughter)

WARREN BUFFETT: We don’t regard the present situation as, you know, as disadvantageous, except we’d like to get more money out. But we like the businesses we have. We like the businesses that we own part of. We are not reflecting — in the way we look at earnings — the dividends we get from those partially-owned companies falls far short of what they’re going to contribute, in our view, to Berkshire’s overall earnings over time. We wouldn’t own those stocks otherwise. So —

CHARLIE MUNGER: And you also like the Apple and airline stocks you’ve recently purchased better than the cash you parted with.

WARREN BUFFETT: Absolutely. Yeah.

CHARLIE MUNGER: And that’s quite a lot.

WARREN BUFFETT: Yeah, yeah, yeah. OK. We won’t pursue that further. Carol? (Laughter)