Industries各行各业

We don’t play big trends like demographic trends. They just don’t mean that much. There’s too much money to be made year to year than worry about trends that take ten years to play out. I can’t think of one investment we’ve ever made based on a macro or demographic trend.

[CM: Not only that, but we’ve missed the biggest commodity boom in history – and we’ll continue to miss things like this!]

But we’ll search for new ways to fail! [Laughter]

I have thought about that a lot because you can put big money in it. I have even thought of buying the entire businesses. There is a fellow in Omaha actually that has done a little of that through Cal Energy. But I don't quite understand the game in terms of how it is going to develop with deregulation. I can see how it destroys a lot of value through the high cost producer once they are not protected by a monopoly territory.

I don't for sure see who benefits and how much. Obviously the guy with very low cost power or some guy has hydro-power at two cents a KwH has a huge advantage. But how much of that he gets to keep or how extensively he can send that outside his natural territory, I haven't been able to figure that out so I really know what the Industry will look like in ten years. But it is something I think about and if I ever develop any insights that call for action, I will act on them. Because I think I can understand the attractiveness of the product. All the aspects of certainty of users need and the fact it is a bargain and all of that. I understand. I don't understand who is going to make the money in ten years. And that keeps me away.

The production of electricity is a huge business and it's not inconceivable that we'd invest heavily here.

The Public Utilities Holding Company Act [PUCA], written in 1935, has a lot of rules about what the parent company of a utility can do. It was set up to check abuses that existed then, so it was appropriate at the time. But I don't think there's anything pro-social about limiting Berkshire Hathaway's ability to acquire utilities today. We might have done one or two acquisitions in past years but for PUCA.

[Regarding the Californian Power Crisis] With deregulation, the incentives [for power producers] were changed such that instead of wanting abundant supplies, they wanted tight supplies, which would result in higher prices.

You can't take utilities with a cost of X, invite new producers in with a cost of 3X, and expect prices to go down.

The old system strikes me as better for society.

[CM: "The old system had the NIMBY [not in my back yard] problem. If you let unreasonable, self-centered people make decisions, you'll get into trouble. We may be making the same mistake today with oil refineries."]

[Re: How Technological Change Might Affect the Utilities Business]

We’re going to earn a return on capital employed whether we transmit it the old way or whether some new way emerges. We strive to serve our customers and keep their costs down as much as possible.

Even in terms of choosing which generating sources we use, we follow the will of the people in the states we serve. If they want to pick a more expensive way to generate for some reason, that’s okay with us. I don’t think anything will change our economics. We certainly don’t buy a utility expecting to do something else with it.

Sure, there's room for more than one. I think Coke's market share will grow pretty much year after year. We're talking tenths of a percent, but tenths of a percent are important. The U.S. market is 10 billion cases, so one percent is 100 million cases. It's interesting how regional tastes can be: Dr. Pepper may have a far bigger market share in Texas than in Minnesota ... You can make money with a soft drink company that doesn't dominate the business. You can do a lot better with one that does dominate, but it's not winner take all. It's not like two newspapers in a town of 100,000 or 200,000. There are certain businesses that are winner takes all.

"The big problem is not aggregate costs, but costs versus competitors." Buffett recalled US Air's difficulties competing against Southwest and concluded, "If your costs are out of line, you're going to get killed eventually."

[Munger: "Airline pilot unions are really tough. It's interesting to see people paid as well as airline pilots to have such a tough union. No airline can afford a shutdown very long."]

If you're in a business that cannot take a long strike, then you're playing a game of chicken with labor. Ironically, if you're weak, you're in a stronger negotiating position.

• Banking is a good business - many banks earn high returns on tangible equity
• “Charlie and I have been surprised at how much profitability banks have, given that it seems like a commodity business.”
• Underestimated how sticky customers are and how unaware they are of fees banks charge them
• WFC - $4.00 per share after full taxes on $15 of tangible equity
• If you have a well run bank, you don’t need to be the #1 bank in an area
• Bank ROA is not highly correlated to size
• You may have to pay 3x tangible equity to buy a bank
• Only problem with banks is that sometimes they get crazy and do dumb things...’91 was a good example
• If a bank doesn’t do dumb things on the asset side, it will make good money

We've been somewhat surprised at how well banks have done. Some have generated 20% or greater returns on tangible equity over many years, though this is in part due to increasing leverage.

[CM: "We misdiagnosed it and, even worse than that, we haven't changed."

Banking, if you can just stay away from following the fads and making bad loans, has been a remarkably good business. Since WW II, ROE for banks that have stayed out of trouble has been good. Some large well-run banks earn 20% ROE. I've been surprised that margins in banking haven't been competed away.

[CM: What you're saying is that we screwed up, because banking has turned out to be better than we thought. We made a few billion [dollars] from Amex while we misappraised it. My only prediction is that we will continue to make mistakes like that.]

It's pretty extraordinary that institutions competing against each other without real competitive advantages can all make high returns. Part of it is higher loan to value ratios than in past years. Some banks get into trouble making bad loans, but you don't have to.

Financial companies are more difficult to analyze than other companies. They can report whatever earnings they want – it’s an easy game to play. For banks, earnings depend on loans and the reserves set aside. It’s easy to change and manipulate the reserves.

With a company like WD-40 or a brick company, the financials are easy to analyze. But with financial [companies] it’s tough, especially when you throw in derivatives.

There were very high grade, financially sophisticated people who were on the boards of the GSEs [Government-Sponsored Enterprises, such as Fannie Mae and Freddie Mac] and they were not negligent, but it’s very tough [to detect the shenanigans that went on].

Charlie and I were on the board of Salomon and Charlie was on the audit committee, and [it’s just impossible to evaluate thousands of transactions]. You’ll just have to accept that with insurance companies, banks and other financial companies – it’s just a more dangerous field to analyze.

With GEICO it’s easier because the statistics are quite accurate – it’s short-tailed insurance. It’s not like asbestos.

I wouldn’t fault the ratings agencies. Even the big-name auditors didn’t catch it.

[CM: Where you have complexity, by nature you can have fraud and mistakes. You’ll have more of that than in a company that shovels sand from a river and sells it. This will always be true of financial companies, including ones run by governments. If you want accurate numbers from financial companies, you’re in the wrong world.]

[Q - Small regional banks - what would you look at before you buy?]

WB: It is hard to make a categorical decision about regional banks. So much depends on the character of the institution. It will be a reflection of the CEO you have. A bank can mean anything. It can be an institution that is doing all sorts of crazy things. The Bank of Commonwealth was an example. We owned a bank in Rockford, Illinois, run by Dean Aback—he would always run a super, sound bank. You should know the culture of the management and the institution before making the decision to buy a bank. We own Wells Fargo and M&T, but it doesn’t mean they are immune. But likely they are immune from institutional stupidity. There was a wise man that said there are more banks than bankers. If you think about that a while, you will get my point.

CM: The questioner is on to something. So many large banks have cast a pall over the entire industry. You are prospecting in a likely territory.

WB: If you took the 20 largest and the 20 smallest banks in Florida, I don’t know if you could tell the difference.

CM: It is a territory that has some promise.

WB: That is a wildly bullish statement from Charlie. I may need to go start buying! [laughter]

No sector is a good buy unless you understand the business. However, I do believe that there is good value and great opportunity now in the financial sector because it is extremely unpopular. Sector’s themselves don’t make good buys, companies that are undervalued make good buys. You know how to value a business, you project the future cash flows discounted to present and buy with a margin of safety. The earnings prospects need to be greater than the current value. Anything that is unpopular is always great to look at. If I was getting out of school right now, I would take a look.

I don’t know about which stocks to recommend, but, as long as we’re talking about the legal ones, gambling companies will have a perfectly good future. The desire of people to gamble is very high, including in stocks. Day trading comes very close to gambling. People like to gamble. If there’s a football game, especially if it’s boring, you’ll enjoy it more if you bet a few bucks. The human propensity to gamble is huge.

When it was only legal in Nevada, you had to travel or break laws to gamble, but now states are legalizing it. The easier it is, the more people who will gamble. I bought a slot machine a long time ago and put it on the 3rd floor of my house. I could then give my children any allowance they wanted, as long as it was in dimes, and I’d have it all back by nightfall. I wanted to teach them a good lesson. My slot machine had a terrible payout ratio, by the way. [Laughter]

People will always want to gamble. I’m not a prude about it, but to quite an extent, gambling is a tax on ignorance. You just put it in and guys like me don’t pay the taxes – it relieves taxes on those who don’t gamble. I find it socially revolting when a government preys on its citizens rather than serving them. A government shouldn’t make it easy for people to take their social security checks and [waste them pulling] a handle. It’s not government at its best. I think other [negative social] things flow from [gambling] over time.

Munger: I would argue that casinos use clever psychological tricks [to get people to gamble], some of which are harmless, but a lot of grievous injury has been done. You won’t find a lot of gambling companies in Berkshire’s portfolio. [Applause]

We looked at healthcare costs, which were exploding a few years ago. Workman's Comp costs have risen dramatically, and are huge for us. $6,000-$7,000 per employee. That's in inflationary part of the US economy and we and our employees can't control it.

Health costs will keep growing and we don't have any answers. But Charlie runs a hospital, so maybe he'll have some insights.

[CM: The quality of the medical care delivered, including the pharmaceutical industry, has improved a lot. I don't think it's crazy for a rich country like the US to spend 15% of GDP on healthcare, and if it rose to 16-17%, it's not a big worry.

But if other countries spend 7-8% [of GDP on healthcare] and have good systems, are we getting a good deal?

[CM: We're not on a dollar for dollar basis. But I'm not [troubled by how much we spend].]

[Re: The Pharmaceutical Industry]

That industry is in a state of flux right now. It’s historically earned very good returns on invested capital, but it could well be that the world will unfold differently in the future than in the past. I’m not sure I can give you a good answer on that.

[CM: We just throw some decisions into the “too hard” file and go onto others.]

We get paid not for jumping over 7-foot bars but for finding 1-foot bars that we can step over.

[CM: A lot of people have made a lot of money selling health insurance. I’ve seen it as Chairman of a central-city hospital [the Good Samaritan Hospital in Los Angeles]. You’re right that there have been a lot of bad ethics. A lot of good ethics, too.

Generally, [investing in the healthcare area] goes into the “too hard” pile – unless Warren’s been keeping something from me.]

No, we’ve never done anything in healthcare.

[CM: You [the shareholder who asked the question] are right though – the worst of the ethics is really bad.]

[Re: fixing the U.S. Healthcare System]

Munger: It’s too tough. We can’t solve that one. We try to look for easy problems. We don’t try tough things. Sometimes life hands you a very tough problem you have to wrestle with – not financial problems for us, but personal ones.

If we were looking at a private-sector solution, we’d look for low distribution costs. You don’t want a lot of revenue soaked up in frictional costs, but I don’t know how to do that. If we’re paying 15% of GDP [for healthcare], you’d think someone would figure it out. Maybe this will come up in the upcoming presidential campaign.

[Re: Pharma? How do you value the pipeline of drug companies?]

WB: Unlike many businesses, when we invest in pharma, we don’t know the answer on the pipeline, and it’ll be a different pipeline 5 years from now anyway. We don’t know whether Pfizer or Merck, etc, have a better chance, or which of those will come out with a blockbuster. But we do feel we have a group of companies bought at a fair price that, overall, will do well and should offer chances for decent profits. These companies are doing very important things. I could not tell you the potential in the pipeline. A group approach makes sense. It is not the way we would go at banks. If you buy pharma at a reasonable multiple, you will probably do okay 5-10 years from now.

CM: You now have a monopoly on our joint knowledge of pharmacology.

WB: He gets cranky at the end of the day. [laughter]

No. Health insurance is so ingrained into national policy that it is a tough business. It’s pretty adversarial. I’m not really that excited about it from a business perspective. I don’t want to write policies with high loan loss ratios. That being said, I would buy the stock of an undervalued healthcare insurer.

Insurance is an interesting business. You know, we underwrote a two year life insurance policy on Mike Tyson. I wanted an exclusion against women shooting him, but they wouldn’t let me.

They would have advanced raw materials. How we value a business is what the game is all about. If you cannot value a business, you cannot value a stock. The efficient market theory equates to "nobody knows anything". Investment-finance teaching in the US needs to focus on and not miss the opportunity to promote thinking intelligently about how to invest — and in doing so, the person becomes a better manager.

I don't have the faintest idea how to evaluate what telecom companies will look like down the road. I only understand a little of what they do. I suppose if you gave me some information, I could regurgitate it back to you but in terms of understanding their economic characteristics down the road, I don't know. Charlie, what do you know about the telecom business?

[CM: Less than you do.]

Then you're in trouble. I know people will be drinking Coke, using Gillette blades and eating Snickers bars in 10-20 years and have rough idea of how much profit they'll be making. But I don't know anything about telecom.

It doesn't bother me. Somebody will make money on cocoa beans, but not me. I don't worry about what I don't know -- I worry about being sure about what I do know.

[CM: Berkshire in its history has made money betting on sure things.]

We might buy some junk bonds in that business [telecom], and we have, but we expect losses in junk bonds -- though we expect a decent result -- because we're dealing with institutions that have demonstrated problems. In some cases -- not at all with Level 3 -- there are management issues. We expect to have significant losses, and we haven't seen our biggest loss yet, believe me. It's like being an insurer of substandard risks -- you'll have more accidents, but can charge a premium.

We don't buy businesses in which 15 will be train wrecks and 85 will work out OK.

There are all kinds of businesses where you can't predict what they're going to earn, so we try to favor a few where we can.

At Level 3, they are fine people and they acknowledge that they borrowed too much money. I have yet to see an electron and have no working relationship with them at all. I don't know anything about the technology at all, but I understand the people involved. It's of a different sort [of investment] than we usually do, but we're happy we did it.

[GM CEO] Rick Waggoner and [Ford Chairman] Bill Ford have both been handed, by past managers, extremely difficult hands to play. They’re not the consequences of their own doing, but they have inherited a legacy cost structure, with contracts put in place decades ago, that make it very difficult for them to be competitive in today’s world.

GM and Ford don’t sign long-term contracts to pay high amounts for steel, but that’s what they’ve done with annuity and healthcare payments to employees. The result is such expenses are far higher than that of competitors, so it’s not a fair fight.

GM once had 50% market share, and it’s fallen to 25%. Even if it was still 50%, they’d still be in trouble.

I’m not sure what I’d do if I was elected CEO of GM. It reminds me of what Bill Buckley said when asked what he would do if he actually won his race for New York mayor back in 1965 and he said, “The first thing I’d do is ask for a recount.” (Laughter) Well, that’s what I’d do at GM.

The UAW says, “We have a contract and we have a deal.” GM has set aside $90 billion for pensions and another $20 billion or so for healthcare, yet has a market cap of only $14 billion. That’s not sustainable.... Something will have to give.

If a company had to pay an extra $2,000 per car more for steel, everyone would realize there was a crisis and demand a quick solution, but that’s not happening.

Part of the problem arose because [the actions of previous managements] bore no accounting consequences. Back in the 1960s, companies didn’t have to account for pension costs on an accrual basis, and didn’t have to do so for healthcare costs until the late 80s or early 90s. But those costs are very real...

[CM: Warren just gave a very optimistic prognosis in my view. Just because the full consequences haven’t yet hit, doesn’t mean there isn’t a huge problem. It’s as if someone jumped out of a window on the 42nd floor. As you go by the 20th floor, you’re still OK, but that doesn’t mean you don’t have a real problem. (Laughter)

If I was the President of the U.S., Governor of Michigan or the CEO of GM, I wouldn’t wait. I’d address the problem right now because no one’s coming to save you.]

People will always want to be entertained and informed, but the choices for doing so were far fewer 50 or 60 years ago. As the years have gone by, technology has produced a variety of new ways to be informed or entertained, but we still only have two eyeballs and 24 hours per day. And any time there’s more competition, generally that’s bad for business.

Newspapers are still highly profitable, especially compared to tangible capital employed, but the outlook isn’t nearly as rosy as it was 20-30 years ago. The audience is going down and that has to erode the economics over time. People also like to talk about how more competition [is good for business, but it’s not true].

At one time, [the major television networks] had a license from the government and were the only three highways to the eyeballs of hundreds of millions of people for advertisers like GM, Ford and Gillette to choose from. But now there are many highways. It’s hard to imagine these businesses [the networks] getting better in aggregate over time.

The key would have been to buy the NFL [National Football League; e.g., content] at inception.

We still own World Book [encyclopedias]. At one time, we sold 300,000 sets for $600 each. The problem is [that with the advent of the Internet] you could get a good bit of the same information without cutting down tress, delivering the books, etc. The problem wasn’t that the product wasn’t worth the money, it’s that people have other alternatives. I don’t see anything that will change this.

[CM: It’s simplicity itself that its future will be way worse than its past.]

What multiple would you pay for a business earning $100 million, which is going down 5% per year, versus the same business with earnings growing 5% per year? I’m not saying those are the numbers I’d use for newspapers, by the way. I do not think newspaper circulation, or ad pages, will be larger in five years – even in areas of the country that are growing [in population].

Newspaper multiples are uncomfortably high if you believe profits are going to decline. Prices today do not reflect earnings declining at 5-6% per year. There’s also the risk that [owners of newspaper businesses] don’t fully recognize the situation and will buy other newspapers at too high a price.

This comes from someone who loves newspapers and couldn’t do without them. I read five newspapers every day. Charlie does too. But people can [do without them]. The decline, if anything, has accelerated somewhat. When they take people to the cemetery, they’re losing readers, but when they graduate from college, they’re not gaining any readers. The virtuous cycle isn’t true anymore, but prices don’t reflect this.

We love them as products and thought they were the greatest of companies with bulletproof franchises. We were wrong.

[CM: I have a greater sin to confess to. I once thought GM was a bulletproof franchise.

But we have a method of coping: we just put it in the “too hard” basket. If something is too hard, we move on to something that’s not too hard. What could be more simple?]

It used to be the easiest business model to understand.

In the 1991 annual report, I wrote about [advertising] preprints, and how there was nothing magical about the newspaper, but that it brought the preprints inside the house. [I’m not sure what Buffett was talking about here – the word “preprint” doesn’t appear in the 1989-1992 annual reports, but his discussion in his 1991 letter of the declining economics of the media business is fascinating and his conclusion was amazingly prescient: “Most media properties continue to have far better economic characteristics than those possessed by the average American business. But gone are the days of bullet-proof franchises and cornucopian economics.”]

It has been interesting for me to watch both direct owners and investors in the newspaper business resist seeing what’s right in front of them. It [newspapers’ superior economics] went so long the other way. You couldn’t make a mistake buying a monopoly newspaper business [meaning a town in which there was only one newspaper] until 1975 or 1980.

[CM: If the technology hadn’t changed, they’d still be great businesses. Network TV [in its heyday,] anyone could run and do well. If Tom Murphy was running it, you’d do very well, but even your idiot nephew could do well.

Fortunately, carbide cutting tools [such as those made by Iscar] don’t have these types of substitutes.]

What advice do you have for long-suffering New York Times shareholders and what do you think of its dual-class share structure?

As for the “long suffering”, as you put it, shareholders of the New York Times, I don’t blame the Sulzbergers for what’s happened. [Here is the bio of Arthur Sulzberger Jr., the Chairman and Publisher of the New York Times Co., and here is a 2005 BusinessWeek article about the family, the company and the challenges they face.] We’ve said for a long time that we thought newspapers were overpriced because investors were looking in the rear-view mirror.

As for different share classes [which the NYT has], I own about 30% of Berkshire A and B shares, so there’s no voting difference.

The woes of the newspaper business have nothing to do with the dual-class structure.

Let’s suppose Mr. Gutenberg [Johannes Gutenberg was the inventor of modern printing] in the 1500s [actually 1400s; he lived 1400-1468] had become a day trader or hedge fund manager instead, so that we never had printing. But along came the Internet and cable TV [as we have today]. Now imagine that someone came along saying, “I have a great idea: let’s chop trees down, buy expensive printing presses and buy a fleet of delivery trucks, all to get pieces of paper to people to read about what happened yesterday.” I don’t think we’d be backing him. [Buffett’s point is that if newspapers didn’t exist, no one would create them now.]

It happened that newspapers came first and people have become accustomed to them. They have momentum on their side from the past, but I don’t care how smart you are, you’re not going to be able to do much to reverse their decline.

Some smart guy came to the Los Angeles Times and said he was going to take circulation up to 1.5 million. Well, it’s now at 800,000. I don’t know if even William Randolph Hearst could do much to change this.

The same thing happened to us with the World Book Encyclopedia – its sales have dropped from 300,000 to 22,000.

The companies that have not had dual-class structures have fared just as badly. For example, we own The Buffalo News, and earnings are down 40% from the peak. Despite terrific management and high market share, earnings are going down. It’s a fact of life.

Munger: He said the dual-class structure is intrinsically wrong. It was in the original contract when the New York Times Co. went public. Stamping your foot if you don’t like it strikes me as immature.

Buffett: Sulzberger [Arthur Sr.] would not slash staff and did not follow the typical business school approach – and look at his success. All the others fell by the wayside. I don’t know if 10-15 years from now, the New York Times will be viewed as having played an inferior hand.

The Los Angeles Times will have more trouble monetizing their reputation on the Internet when compared to the New York Times.

[Q - Would there be a compelling price at which Buffett would add another newspaper to Berkshire’s portfolio?]

Buffett: There’s an evolutionary situation with newspapers. I read five a day and so does Charlie. We’ll be the last people reading a newspaper, with a land line by our sides. [laughter] Most newspapers in the U.S. we would not buy at any price. Twenty to forty years ago, they were essential to customers and advertisers. They had pricing power, but they’ve lost their essential nature—essentiality has eroded. Erosion accelerated dramatically, and it won’t end based on anything on the horizon. We do not see anything to reverse it. They are essential to advertisers only as long as they’re essential to readers. Ten years ago, the head of The Buffalo News said that on an economic basis, Berkshire should sell The Buffalo News. We could have sold the business for hundreds of millions. Not so today. As long as we’re not losing money forever and there are no union problems, we won’t sell. There are around 1,400 daily U.S. papers, and nobody has found the model that works. We’ll play it out as long as we can.

Munger: One hundred percent right. Monopoly daily newspapers were impregnable. It’s a national tragedy for newspapers to die off. They kept government more honest than they otherwise would be. What replaces it will be less desirable.

[Q - Are you still down on newspapers? Ipad and other e-reading technologies – will it end up with contraction in earnings retained by content provider or by distributor?]

WB: When money at newspapers came from advertising – it was on average about 75%, they used to be only game in town, and what a difference that makes, when you aren’t the only game in town. It is very tempting, without substantial circulation, but the math is tough – printing costs are high and distribution is tough. But I don’t understand it, and I can’t make an affirmative decision. [ABC] puts out Fast Facts, I look at circulation of many papers. In Buffalo we were down less than many places. SF Chronicle was down 20%, Dallas too – many people are dropping the paper. World has changed about the essential value of newspapers. Nothing looked more bullet proof than daily newspapers 40 years ago, and that has melted away. It is a form of news and entertainment that has lost its immediacy, it is not the essential place to get information. You looked for stocks and weather and sports – advertisers were there because it was best and only microphone. The problem is self-reinforcing, subscribers leave and advertisers leave too.

CM: Independent newspapers due to accidents of history became dominant in their towns. The world was better because they were strong, because they kept the government in check – they were called the fourth estate. We are losing something that we have no substitute for. I don’t have the faintest idea what to do about it.

WB: Our newspaper hit 300k at peak on Sunday, and now down 100k. Philadelphia, was down 40k in a single year. The advertiser doesn’t need you. Your ability to price evaporates. We met Lord Thompson who owned paper in Council Bluffs. We asked him, “Have you ever been there?” “I wouldn’t dream of it” he said. We asked, “You seem to increase price every year. What can they do about it?” He replied “Nothing, I tell my US managers to price to make 40% pretax and above that it may be gouging.

CM: Politicians are not behaving better as newspapers are weakening. We are going to miss the newspapers’ power.

I don’t think the railroad industry will be a lot more exciting, but the competitive position of the railroads has improved somewhat since 20 years ago. There’s been progress on labor issues and an improved competitive position vis-a-vis truckers. Higher oil prices hurt railroads, but hurt truckers more by a factor of four. What was a terrible business 30 years ago, operating under heavy regulation, has become decent and could be better over time. But it will never be a fabulous business – it’s too capital intensive.

Buffett: We have the largest wind farm capacity in the country. We are a net exporter of wind energy in Iowa. Iowa has been very receptive and progressive in wind energy. We haven’t raised rates in Iowa in about 10 years. We can use Iowa’s tax credits. We’ve developed a lot at PacifiCorp in wind. You’ll see more and more wind generation by MidAmerican [Energy Holdings].

Munger: Berkshire subsidiaries will be leaders in practically anything that makes sense for utilities. You bought a pipeline in about two hours, didn’t you?

Buffett: A durable advantage is that we can act fast. We went from a noontime phone call to a formal offer for Constellation [Energy] by that evening. It didn’t work out. We don’t ask the lawyers before we do it, we just do it. We can move fast when the time [is right]. We’ve got the money, and we’ve got the managers to handle the properties.

[Comment - If Berkshire has the largest wind generating capacity in the country, somebody needs to tell FPL Group, which makes the same claim. To date, wind power has been the most successful among the alternative energy sources.]

We don’t worry too much about that. If you’d look at the 1930s, nobody could have predicted how much the automobile and airplane would transform the world. There were 2000 car companies, but now only 3 left in the US and they are hanging on barely. It was tremendous for society, but horrible for investors. Investors would have had to not only identify the right companies, but also identify the right time. The net wealth creation in airlines since Orville Wright has been next to zero. If a capitalist had been at Kitty Hawk and shot him down, would have done us a huge favor. Or look at TV manufacturers. There are hundreds of millions of TV’s, RCA & GE used to produce them, but now there are no American manufacturers left.

If you want a great business, take Coca-Cola. The product is unchanged, they sell 1.5 billion 8 ounce servings per day 122 years later. They have a moat; if you have a castle, someone’s going to come after you.

Gillette accounts for 70% of razor sales at 80% gross margins and it is the same over time. Men don’t change much. Shaving might be the only creative thing they do, like painting the Sistine Chapel.

Snickers has been the #1 candy bar for the past 40 years. If you gave me $1 billion to knock off Snickers, I can’t do it. That’s the test of a good business. You don’t knock off Coke or Gilette. Richard Branson is a marketing genius. He came in with Virgin Cola, we’re not sure what the name means, perhaps it turns you back into one, but he couldn’t knock off Coke. We look for wide moats around great economic castles. Growth is good too, but we prefer strong economics. In the upcoming annual report I have a section titled “The Great, the Good, and the Gruesome” where I talk about these.