AUDIENCE MEMBER 00:08
My name is Alan Negan (PH) from Reston, Virginia.
I know you like to buy into success stories but you don’t like to buy high tech. And it seems to me, say in the case of Microsoft, that 10 years from now they’ll be doing software development, just like 10 years from now Coke will be selling sugared water.
And what I’m wondering is why you feel that way when it seems certain companies, high-tech companies, are predictable.
And it also seems that in the early ’90s you were — you mentioned you were going to buy a pharmaceutical company, which also seems like high tech to me. So that’s my question.
WARREN BUFFETT 00:56
Yeah. Well, we — I think we said that with the pharmaceutical companies we wouldn’t have known how to pick out which one. We would have thought the industry as a group would do well.
From those levels of 1993, you cannot buy high tech companies at anything like — at levels that are commensurate with the levels that the pharmaceutical companies were selling at in ’93.
You know, I would — and getting to the first part of your question, I think it’s much easier to predict the relative strength that Coke will enjoy in the soft drink world than the strength — the amount of strength — that Microsoft will possess in the software world.
That’s not to knock Microsoft at all. If I had to bet on anybody, I’d certainly bet on Microsoft, bet heavily if I had to bet. But I don’t have to bet. And I don’t see that world as clearly as I see the soft drink world.
Now somebody that has a lot of familiarity with software may very well see it that way and they’re entitled to — if it’s true they have superior knowledge and they act on it, they’re entitled to make money from that superior knowledge. There’s nothing wrong with that.
I know I don’t have that kind of knowledge, and I simply — and I do think that it’s — that if you have a general knowledge of business over decades, that you would regard the industry they’re in as less predictable than the soft drink industry.
Now it may also be that even though it’s less predictable that there’s a whole lot more money to be made, so that if you’re right, that the payoff is much larger.
But we are perfectly willing to trade away a big payoff for a certain payoff. And that’s the way we’re put together.
It does not knock the ability of other people to make those decisions. I mean, I asked — first time I met Bill Gates in 1991, I said, “If you’re going to go away on a desert island for 10 years, you had to put your stock in two companies in the high-tech business, which would they be?”
And he named two very good stocks. And if I’d bought both of them, we’d have made a lot more money than we made, even buying Coca-Cola.
But he also would have said at the same time that if he went away he’d rather buy Coca-Cola, because he would have felt sure about that happening.
It’s — you know, different people understand different businesses. And the important thing is to know which ones you do understand and when you’re operating within what I call your “circle of competence.”
And the software business is not within my circle of competence, and I don’t think it’s within in Charlie’s.
CHARLIE MUNGER 03:31
Well, I certainly agree with that. I think there are interesting questions, too, about how far the whole field can go.
Take jet airplane travel below the speed of sound. It’s been pretty static in terms of the technology for a long, long time. You know, the big Boeing airliner is much the same as it was 20 or 30 years ago.
And I think it’s — a lot of these businesses are quite dependent on the technology continuing to gallop and do more and more for people.
Take pharmaceuticals, if they had never invented any more pharmaceuticals, it would be a terrible business.
I don’t know what happens once you get unlimited bandwidth into the house and way more options, and —
Beyond a certain point, it strikes me that there might be a surfeit of anybody’s interest in the field. I don’t know where that point is, whether it’s 20 years out or 30 years out, but it would affect me a little.
WARREN BUFFETT 04:42
The Dilly Bar is more certain —
CHARLIE MUNGER 04:44
WARREN BUFFETT 04:45
— to be here in 10 years than any software application that we know. But that’s, maybe, because we understand Dilly Bars and not software.
In the whole United States, which is, you know, is by far the most prosperous country in the world — the whole United States, there are probably around 400 companies, 400 total companies, that are earning $200 million a year, after-tax.
Of those 400, you could name them. I mean, you could start, you know — if you say “bank,” you can say Citigroup and Chase and Wells Fargo, and you name 10 or 15 of them. And if you name consumer goods, you’re going to say Procter & Gamble and Coca-Cola and Gillette, and you can name a whole bunch of them.
You can almost, of those 400, you can probably name 350. If, five years from now, instead of 400 being on that list, there’ll probably 450 on the list, maybe 475.
A lot of those will be companies that are earning between $150 and $200 million now. So there’ll probably be 20 — some number like 20 — that, call it, come from nowhere.
Now if you look at the number of companies that are selling today at a price which implies 200 million or more of earnings right today, you will find dozens and dozens in the high-tech arena. And, you know, a very large percentage of those companies are not going to fulfill people’s expectations.
I can’t tell you which ones, but I know there won’t be dozens and dozens and dozens of those companies making a couple hundred million dollars a year. And I know they are now selling at prices that require them to be making that much money or more. It just doesn’t happen that often.
You know, biotech was all the rage some years back. How many of those companies are making a couple hundred million dollars a year? It just doesn’t happen.
It’s not that easy to make lots of money in a business in a capitalistic society.
People that are looking at what you’re doing every day and trying to figure out a way to do it better and to, you know, underprice you or bring out a better product, or whatever it may be. And a few companies make it.
But here in the United States, after all of these decades and decades and decades of wonderful economic development, we’ve got about 400 companies that have hit the level that would be required of a company that would have a market cap of $3 billion.
And some companies are getting $3 billion of market cap the day they come out, virtually, — so.
There’s some — you want to think about the math of all this.
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.