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2019: What is the regulatory impact of holding more than 10% of a company’s stock?
GREGG WARREN: Warren and Charlie. While I understand Berkshire’s need to trim its stake in Wells Fargo and any other banks you hold, each year, in order to bring Berkshire’s ownership stake below the 10 percent threshold required by the Federal Reserve for bank holdings, given the ongoing share repurchase activity that’s taking place in the industry.
I was kind of surprised, though, to see you move to trim all of your holdings, where possible, on a regular basis to eliminate the regulatory requirements that come with ownership levels above 10 percent, which in my view limits the investment universe that Berkshire, or at least Warren, can meaningfully invest in longer term, given that Warren manages a large chunk of Berkshire’s $200 billion equity portfolio.
Could you elaborate more on the regulatory impact for Berkshire of holding more than 10 percent of any company’s stock, as well as how you feel about the Fed’s recent proposal to allow investors like Berkshire to own up to 25 percent shares of a bank without triggering more restrictive rules and oversight?
Basically, if that proposal were to come to fruition, would you be willing to forego that 10 percent threshold self-imposed that you’ve done, and put money to work in names that you’re already fairly comfortable with?
WARREN BUFFETT: Yeah, the 10 percent, there’s a couple reasons —
CHARLIE MUNGER: That’s the right answer. Yeah. (Laughter)
WARREN BUFFETT: We will — there’s two factors beyond in the case of banks. There’s the Federal Reserve requirement there. But many people probably don’t even — might not know about this, but if you own over 10 percent of a security — common stock — and you sell it within six months at a profit, you give the money over to the company, the short-swing profit that you give them.
And you match your — any sale against your lowest purchase. And I think if you sell it and then buy it within six months — I’m not as positive about that, because I haven’t reread the rule for a lot of years. But I think if you sell and then buy within six months, and the purchase is below the price at which you made the sale, you owe the money to the company.
There used to be lawyers that would scan that monthly SEC report that I used to get 30 or 40 years ago. They would scan it to find people that inadvertently had broken that rule, and they would get paid a fee for recovering it for the company.
So, it restricts enormous — it restricts significantly your ability to reverse a position or change your mind or something of the sort.
Secondly, I think you have to report within two or three business days every purchase you make once you’re in that over 10 percent factor. So, you’re advertising to the world, but the world tends to follow us some, so it really — it has a huge execution cost attached to it.
Nevertheless — and those are both significant minuses, and they’re both things that people generally don’t think about.
We did go over recently, for example, in Delta Airlines, that was actually an accident, but I don’t mind the fact at all that we did.
And if the Federal Reserve changes its approach, we won’t have to trim down below that. We don’t want to become a bank holding company and we don’t want to —
We went in many years ago and got permission with Wells, but then our permission expired, and we went in again a few — a couple years ago. And we spent a year or so, and there were just a million questions that Wells got asked about us and so on.
So, it’s been a deterrent. It’ll be less of a deterrent in the future, but it does have those two —
The short-swing thing is less onerous to us than it would be to most people who buy and sell stocks, because we don’t really think in terms of doing much.
CHARLIE MUNGER: But if we didn’t have all these damn rules, we would cheerfully buy more, wouldn’t we?
WARREN BUFFETT: Sure, sure. Well, any time we buy we do it cheerfully, but —
Yeah. And we will — you’ll probably see us at more than 10 percent in more things. And if the Fed should change its rules, there will be companies where we drift up over 10 percent simply because they’re repurchasing their shares. That’s been the case with Wells, and it’s been the case with an airline or two in the last year or so.
So, if we like 9.5 percent of a company, we’d like 15 percent better, and you may see us behave a little differently on that in the future.
CHARLIE MUNGER: Well, one more awkward disadvantage of being extremely rich.
WARREN BUFFETT: Yeah. (Laughter)
And it really is. Yeah, and people following you. I mean, the followers problem can be a real problem.