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Collection: Warren Buffett - #104 Investing 'Japanese Stocks and Airline Industry'



Good afternoon, Mr. Buffett and Mr. Munger. My name is Jack Sutton (PH) from New York City. I have two questions.

The Japanese stock market has been likened to the U.S. market in 1974. With Japanese stocks selling at very low price-to-book values, as compared to U.S. stocks, would it not make sense to invest in a basket of Japanese stocks or an index fund of Japanese stocks?

Question number two: Berkshire Hathaway tends to invest in companies with high margins and high return on common equity. Berkshire’s investment in the airline business seems to have digressed widely from those principles.

Could you elaborate on why Berkshire invested in the airline industry, and would Berkshire consider new investments in the industry in the future?


I’m going to the first question. The reason that — and I don’t know the exact figures — that Japanese stocks would sell at a lower price-book ratio than U.S. stocks is simply because Japanese companies are earning far less on book than American companies.

And earnings are what determine value, not book value. Book value is not a factor we consider. Future earnings are a factor we consider. And as we mentioned earlier this morning, earnings have been poor for a great many Japanese companies.

Now, if you think that the return on equity of Japanese business is going to increase dramatically, then you’re going to make a lot of — I mean, and you’re correct, you’re going to make a lot of money in Japanese stocks.

But the return on equity for Japanese businesses has been quite low, and that makes a low price-to-book ratio very appropriate because earnings are measured against book. And if a company’s earning 5 percent on book value, I don’t want to buy it at book value if I think it’s going to keep earning 5 percent on book value. So a low price-book ratio means nothing to us. It does not intrigue us.

In fact, if anything, we are less likely to look at something that sells at a low relationship to book than something that sells at a high relationship to book, because the chances are we’re looking at a poor business in the first case and a good business in the second case.

What was the other question on, Charlie?


Buying — airlines.


Airlines. Yeah, I always repress everything on airlines. I don’t want to — (Laughter)

No, we’ve never bought an airline common stock that I can remember. So what we did was we lent money to USAir for a 10-year period and we had a conversion privilege there.

It looked like it — it was a terrible mistake. I made the mistake. But we got bailed out. But we — we never made the determination — when we bought our stock, USAir was selling at $50 a share or thereabouts, the common. And we didn’t have an interest in buying USAir at 50, or 40, or 30, or 20. And we got a chance to as things went along — (laughter) — all the way down to 4. (Laughter)

And we never bought it. And we’ve never bought American, or United, or Delta, or any other airline. It is not a business that intrigues us.

We did think it was intriguing to lend money to them with a conversion privilege and it’s worked out now because we got lucky, and because Steve Wolf came along and really rescued the company from right at the brink of bankruptcy.

But we’re unlikely to be in airlines, although again, we wouldn’t mind lending money to a lot of businesses that we wouldn’t buy common equity in. I mean, that could happen again in various industries, including the airline industry.

Charlie, do you have anything to say on either the airlines or the Japanese market?


Well, the airline experience was very unpleasant for us. The net worth just melted. It was (inaudible) a billion and a half, and it just went a hundred million, a hundred million, a hundred million, and finally the cash is running down. It is a very unpleasant experience.

We try and learn from those experiences but we’re very slow learners. (Laughter)


Japanese market (inaudible)?


Oh, the Japanese market.

I suppose anything — (Laughter as Buffett reaches for box of candy)

I suppose anything could happen. After all, we bought silver. (Laughter) But we have never made a big sector play on a country. In fact, we’ve almost never made a big sector play.


We would have to come to the conclusion that Japanese business, instead of earning whatever it’s earning on equity now, is going to earn appreciably more on equity.

I’ve got no basis for it — I wouldn’t argue if anybody else feels that way — I wouldn’t argue with them. But I have no basis for coming to that conclusion. And unless you come to that conclusion, you’re not going to make good returns. I mean, unless that happens, you’re not going to make good returns from Japanese stocks.

You can not — you can’t earn a lot of money from businesses that are earning 5 percent on — or 6 percent — on equity. And I look at the reports but I don’t see the earning power now. Now, maybe it’ll all change. I mean, there’s talk of — there’s already been a small temporary tax cut, but corporate tax rates are quite high, as you know, in Japan.

And they used to be 52 percent here in the United States, now they’re 35. So you could have things happen that increase corporate profits, but I don’t have any special insight into that that anyone that reads the press generally would not have.


There are also readings in corporate culture that have to be made. Owning stock in a corporation where you know that if shareholders or somebody else has to suffer, the choice is likely to be that somebody else will be chosen.

That is a different kind of a company to invest in than one that thinks that the principal purpose of life is to keep some steam boiler company going in a particular community or something, no matter how much the shareholders suffer.

I think it’s hard to judge corporate culture in the foreign countries as well as we can judge it in our own.


Area five?


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