IMD Transcript - WEB Q&A

Official IMD Transcript:

I will open the floor to questions now.Question: What margin of safety do you apply when you buy a family business?

When investing in marketable securities you can change your mind tomorrow, and sell them if you feel that you made a mistake. When we buy a business, we buy that business to keep. Our margin of safety is not in the price we pay but being virtually certain that we are buying into a business that has competitive advantage, good economics, one that is run by people with passion, and one that we will run the same way next year the way the family ran it the year before. Our margin of safety gets more into qualitative characteristics than the quantitative aspects you are probably referring to. When you are buying a business you are buying to keep and you better make sure that it is a business you are going to like 20 years from now and a management that you are going to love.

Question: Mr Buffett, do you have any plan to buy any Brazilian companies?

We would certainly buy a Brazilian company. We would buy any business in any country in the world if we understood the country and company well enough. But it would have to be a large enough company to meet the criteria we set forward in the annual report. We are looking for things that are earning at least US$75 million pre-tax. Brazil is a large country, but the smaller the country the fewer the businesses that meet that criteria will be there. We would feel very comfortable however buying a Brazilian company. You may have noticed in our annual report that the Brazilian Real is the only currency we have held outright in the last year and at $1.65, I’m very glad we did so.

Question: You met yesterday with family-owned companies in Germany. Are you going to strike a deal? Are you going to make a deal before the end of the week?

I can guarantee that we will not make a deal before the end of the week.If I’m lucky I might buy one or two a year. We don’t buy when we are ready to buy. We buy when others are ready to sell. If you have a good private company, you are already rich. You do not need us to put a number on it to validate the value of the business. The best thing to do is not to sell. If you have a business it is probably worth a billion dollars, a billion dollars next year and three billion after that. All businesses will get sold eventually. And if they’ve got a reason to sell, I want them to call me.

Question: There has been bad feeling in Europe, especially in Germany about American investors. Why do you think family business should be looking to investors such as yourself for their future growth?

Whether it be businesses with no heirs, or businesses with siblings, or parents who can’t agree who should take over, if it is to simply get the best price they should simply auction it off. If they have been building up their business for decades and decades, if they care, and they want to make sure it doesn’t get sold a few years later based on the fashions of Wall St. they should invest with us.

Question: You have been so far investing in American companies. Now you are looking for good opportunities in Europe. Are you disappointed in US companies or the American way of doing business? What are your main criteria to invest in Swiss companies?

I’m not disappointed in US companies. I hope we buy an American company tomorrow or in the next couple of years. We are better known in the US, even after a trip like this to Europe. A great number of people in the US have sold us a business in the US and we are in the minds of business owners in the US more than here because we have been around so long there. I love buying businesses in the US and in Switzerland. You’ve got some fine businesses here. The criteria are exactly the same. There isn’t a column A for the US and column B for the rest of the world.

Question: We talk about Europe, but central and Eastern Europe is Europe too. Are you going to invest in this part of Europe?

We don’t rule out any country. There are certain countries where we may worry about the rule of law. But apart from that, most countries would qualify.The bigger the country the more likely we are to find a business. I accept phone calls from a lot of countries that I haven’t visited.

Question: Which sectors and companies do you like in Switzerland? Have you an investment target here?

We do not look for specific sectors. We do look for business that we understand. Meaning when I have confidence in my ability to know what they are going to look like 5-10-20 years from now. It is not that I don’t understand the software products. But I don’t know how that industry will develop over 10 or 20 years. I didn’t know that Google was going to come along. Anything that is rapidly developing, I don’t understand Google for example. We are looking for businesses that are quite understandable. For example, Nestlé, anyone can figure out where it will be in 5 to 10 years from now. Nestlé isn’t going to be on the list, but we are looking for businesses like that. I don’t go out looking for steel industry, or whatever, office equipment industry. I can understand that business. I understand the economics, the distribution system, their accomplishments, their competitors. So I will have a fix on their business.

Question: You have been fairly critical in the past about how the US currency is being devalued and how it has been handled by the US administration. How much of your trip is about diversifying away from the US dollar?

It is not really a factor, but it does mean that I’m not worried about buying in at currency rates. 80% of the earnings of this company which we have owned for a long time come from around the world, and it has benefited from the fact that other currencies have appreciated against the US dollar. But I’m not here for that. If the Euro was 180 or 110 I’d be here. I’m perfectly happy to earn money in Euros whether it is through US companies or whether it is through companies domiciled here and I’m not unhappy about buying in Swiss Francs or Euros and earning in Swiss Francs or Euros. It is not really a big factor.

Another version of the Transcript - was added to VIA earlier.
Warren Buffett IMD Q&A Transcript
(Note: This is all paraphrased by me. Do not take any of this as an exact quotation, but rather a general idea of what was said here . I made this because these videos are difficult to share and take a while to sit through, so hopefully you will find this to be helpful.) from Streetcapitalist.com

Q: How do you evaluate family business acquisitions? same as stocks?
A: When buying marketable securities use Benjamin Graham’s margin of safety
When buying businesses, you buy to keep. Margin of safety is in crossing the threshold of being virtually certain of buying a business with competitive advantage and a passion for the business. Margin of Safety is qualitative instead of quantitative when buying whole businesses. Ben Graham is very quant. focused, buying businesses is a much different look
Q: Any plan to buy stakes in Brazilian Cos because of its new status as investment grade?A: We would buy in any country as long as they understand risks well enough. Has to be a large enough criteria (75mm dollars pre-tax, etc) Would feel very comfortable owning a business in Brazil, owned the Brazilian Real.
Q: Anything you like in Germany? Strike a deal before the end of the week?
A: Guarantee not by end of the week. If lucky, run into two possible deals. We don’t buy when ready to buy — buy when the owner has a reason to sell. Advises owners not to sell their wonderful private businesses, don’t need a number put on it to validate it. Doesn’t call or pester owners to sell. I don’t go around delivering sales talks, wonderful businesses should be kept by owners until there is a reason to sell.
Q: Some bad feeling in Europe/Germany about American Investors. Why family businesses should look to investors like yourself?A: If they have a reason to sell, maybe no heirs, siblings don’t agree — this is a reason to sell. If it’s simply getting a best price, then they should auction it off. If they care about a business over decades and decades, and want it to be in a home where everything will continue as it has before, where they are dealing from great financial strength and never have to see Wall Street - Go to me. Berkshire Hathaway and its culture is what they’re buying into and it’s a very rare and hard to replicate culture. It’s large so a very big business can join. We’re a logical alternative.
Q: Known to invest in American Cos. Why Europe? Are you disappointed by American Cos / American way of businesses? Criteria to invest in Swiss companies?A: Not disappointed by US… will buy a US company probably in a couple years. We’re in the minds of more owners in the US than in Europe. Trip to Europe is a move towards correcting that. I love buying Businesses in the US, but I love businesses in Switzerland too. The criteria for buying in Switzerland is exactly the same as buying that is listed in the annual report. Wherever they can buy they will buy.
Q: You speak about Europe but — Are you ready to invest in Eastern Europe? Are you happy?A: Yes — I am happy. We don’t rule out any countries but smaller companies have less opportunities. Some companies we worry about the rule of law. I accept phone calls from a lot of companies I have not visited.
Q: Which sectors and companies do you like in Switzerland?A: We don’t look for specific sectors. We look for businesses that I can understand. Where I have a high degree of confidence where I can see where they will be 5-10-20 years from now. I didn’t know that Google would come along. Anything rapidly changing I would not understand. I look at businesses that are reasonably easy to evaluate their products - how they will fit in the economic picture - how the economics will look. We’re looking for understandable businesses (like Nestle). But I don’t go out saying I’m looking for the steel industry, etc.
Q: You’ve been fairly critical in the past about how the US currency has been devalued and Handled. How much of your trip to Europe is about diversifying away from the USD?A: Not really a factor but does not mean I ignore currency rates. I’m not here because of small differences in the euro. It’s not a big factor. I certainly feel that overtime — long period (10 years) I do not worry about them (Euro currencies) depreciating against the US dollar. If we don’t change the USD policies we will have weaker currency.
Q: Have you seen any challenges with EU Family businesses / Compared to US Businesses?A: Same challenges, many diverse reasons. Bought twice when there was a successor issue that could hurt the family — I can solve the problem in a way that their solution cannot. There are all kinds of situations that can come up. I would guess that the reasons are diverse in Europe/Asia as they are here, in the US.
If you go 100 years - there will come a time when certain hatreds develop. I had one call some years back from a large family business where they were all hating each other.
I had a call from a young woman, a thousand miles from Omaha, I never met her. She said, “Mr. Buffett the family has some split — we feel that you’re the only person who can come here and solve this.” Then I said to her, “Tell me one thing, do you want to win, or do you want your bother to lose?” She paused and said “Don’t bother to come down.” I was not going to make a solution that could cause anyone to suffer. You get into situations where things break up sometimes. You get great results for family businesses but sometimes it comes to an end.
Q: You’ve teased biz schools for teaching arcane subjects (Option Pricing). What would you teach?
A: It wouldn’t keep all the professors permanently employed. It would teach
1. How to value a business.2. How to think about the market.
As a general part of the curriculum, I would add two subjects not emphasized in business school. I think that the ability to communicate both orally and in writing is enormously important. All students I meet benefit immensely by working on those two skills. They would have a pay off that is enormously disproportionate that would pay off more than learning modern portfolio theory.
The way someone speaks or write can have an enormous impact. Those subjects are under-taught and can have an impact on all schools.
Q: You like real economy - real business. What do you think about what’s going on in the banks. What advice would you give to these bankers?
A: There are more banks than bankers. I think that the head of any bank or financial inst. needs to be the Chief Risk Officer. You have no biz in running a financial institution if you’re not looking at risks. Unless willing to take on CRO job, you shouldn’t be a CEO. We’re seeing the consequences of people not understanding the vehicles they’re sitting up and the risks they’re facing.
CDOs squared can be 750,000 pages just to understand one instrument. Designed to make money for the seller. Huge mistakes have been made by these institutions and they will make similar mistakes in the future. I’d buy a bank bank depending on banker.
Q:Some criticism towards SWFs. Is it fair? Have you ever looked at a Norwegian co.?A: I’ve looked at one or two Norwegian cos. Not a lot I could put 500 mm in (minimum investment for marketable security). SWFs interesting. We’ll have them as we continue to force-feed dollars to the rest of the world. Not the best policy to blame these people when it’s us who push the dollars onto them.
Q: What will solve the food crisis? Will you invest in food cos like Nestle?A: Some talk of speculators — does not look like a speculator situation. Prices of corn are largely dependent on supply/demand. If producing 86 million bb a day of oil and using 86 million — that is how supply and demand intersect. There has been a case to some degree of corn — part of the corn supply being used on fuel is spilling over, farmers may plant more corn because he sees the the affect on corn, affecting other crops. We’re likely to see higher prices over time if we follow the same policies. We don’t own any commodities, we use them in our businesses. All these factors (price increases) has a real affect on the consumer.
Q: How does it feel to be the richest man in the world? You still friends with Bill Gates?A: Bill and I are extremely good friends. Nothing has changed. I’m giving away the stock as I go along so I wont stay there.
Q: Over the last few years, a number of energy industries have come to Switzerland. Would you own an energy company?
A: Sure. We can understand energy companies. I understand the energy business, we’ve bought stocks and natural gas pipelines. Frequently they’re large so I would not be reluctant.
Q: Why and how do you support Barack Obama? What do you do for the people from Burma and China who have been affected by natural disasters?A: Before both Hillary and Barack were running I told I would support both of them. I told them that I’d hold more fundraisers for them. They are outstanding candidates. In terms of the philanthropic efforts, I’ve outsourced that to 5 foundations. Largest portion goes to Bill & Melinda Gates Foundation. Biggest so far has been health. A portion in there goes towards emergency type relief. In various crises in the past they’ve always contributed something. They handle that. My funds will end up being half what they dispense annually. They handle that. I support them.
Q: You bought a 3% stake in SwissRe. A 20% share in their PnC Business. Do you understand Cat Bonds, Longevity Bonds? What do you think of insurance securities?A: I would prefer to write them for our own account. I’d rather take the risk myself and get paid the premium. There are plenty of people in that business who are good at it. Investment banks have been making cat bonds which is competition against Berkshire.
Q: We’re in Switzerland, the country of Luxury Goods. Would you be interested in buying something here?A: Our Ben Bridge subsidiary is the largest seller of Rolex (I believe). We have 80-90 stores, Rolex is a significant portion of our business. Those are great companies (companies like Rolex). They know my phone no. but haven’t called.
Q: You keep telling us that you want the family owned businesses and want the family owners to call you. What phone number should they use?A: 402-346-1400. I was a little bothered the other day, a letter came in that said Supreme Idiot - Berkshire Hathaway. I see all of my mail. Every phone call that comes in, people are asked what they are calling about. If people are calling about a serious idea, they have no trouble getting through to me or sending a fax. I bought half a dozen companies just starting with a fax. It’s easy to get through. You can call collect if you have a good deal.
Q: One of the most difficult tasks for you must be to find a guy who can get in and follow you?A: There are three people we’ve identified. It’s all we (the board) talk about. The board knows. People on the board have almost 1/2 their net worth in berkshire stock. They care about it. My successor will be a lot better in certain things than I am. They will walk into a very well-defined culture. There will be a little bit of a problem in that people don’t know him yet. That will get overcome.
Sam Walton died 15 years ago, Walmart was Sam Walton, but Walmart isn’t Sam Walton. Walmart was institutionalized. Berkshire’s culture is institutionalized.
Q: A question about your charity activities and corporate activities. Suppose you have corporations that you invest in, that might not be impeccable in corporate governance. Can charity be a balance for a corporate governance flaw?
A: We on stock in companies where I don’t agree with everything, but my children don’t either. We can’t expect 100% adherence. We don’t feel a responsibility about that. If we have control over a company, we want it run in a way that you could describe it on the front of the paper and not feel embarrassed.
For businesses we own, I say keep following your own charitable policies, don’t check in with us. In my own case every share I own will go to charity. But it’s no sacrifice, but it’s what I believe should happen. I don’t believe it is my job to take the shareholder’s money to be allocated to whatever charity I believe in. They should allocate their own funds.
Q: Any calls from finance ministers that you didn’t show up to their countries?A: No. No complaints either! I would be delighted to find the right business in any country. Europeans should feel comfortable about the US. US should feel comfortable about Europe. All of these countries believe in the right things. Wonderful businesses are built all over, no reason to rule one country off the list. I’d be equally to get a call from any company even one I haven’t visited. Call at 402-346-1400.