AUDIENCE MEMBER 00:08
Hi, Howard Winston (PH) from Chicago, Illinois. I wanted to thank Charlie and you for your hospitality.
My question is, Berkshire has benefitted enormously over the years from the low cost of its float. Do you think the internet will make the insurance business more competitive and, therefore, raise the cost of your float?
WARREN BUFFETT 00:28
Well, that’s a good question. I would say that the internet, from what I see now, is unlikely to increase the cost of Berkshire’s float.
It will have different effects on different aspects of our insurance business. And it will change the insurance industry in some ways, not — and I can’t tell you exactly what. But I —
You know that any system of distribution is going to be affected by something that changes the economics of distribution as much as the internet does. So there’s no question it’ll have an impact.
I think in the end, the competitive advantages we have among our group of insurance companies, net, will not be hurt by the internet. But I could be wrong on that. And therefore, I don’t think that our cost of float will be changed much.
I don’t think industry economics, in aggregate, for insurance companies, are going to be changed very much. The economics haven’t been that good. I think they’ll be about, you know, in that same range.
And I don’t think our competitive advantage will be cut. So therefore, I think our cost of float, in the future, is going to be higher than it has been in the past. But that’s for reasons other than the internet. I still think we’ll have an attractive cost of funds over time on float.
It’s a good business for us. I don’t think it’s necessarily a good business for the average company.
CHARLIE MUNGER 01:43
Well, there’s a marvelous issue buried in your question. Will the internet, by making competition so much more efficient, make business generally harder for American corporations, meaning more competitive, lower returns on capital? And my guess would be yes.
WARREN BUFFETT 02:06
Yeah. My guess would be yes, too. I would say that, on balance, for society, the internet is a wonderful thing. And for capitalists, it’s probably a net negative.
CHARLIE MUNGER 02:15
So all of you can be happy that the progress of the species will affect your economic futures for the worse. (Laughter)
WARREN BUFFETT 02:30
A sacrifice, at which our ages, we’re willing to do. But we wouldn’t be at your age. (Laughter)
That — incidentally, that — there’s plenty to think about there.
The internet, I mean, if you analyze it, you have to think it’s much more likely that it will reduce the profitability of American business and improve it.
It will improve the efficiency of American business. But all kinds of things improve the efficiency of American business without making it more profitable.
And I think that the internet is likely to fall into that category. So far, it’s improved the monetized value of American business.
But that will eventually follow the underlying economics of what the internet does. And I think it’s way more likely to make American business, in aggregate, worth less than compared to what it would’ve been otherwise.
CHARLIE MUNGER 03:26
By the way, that’s perfectly obvious and very little understood.
WARREN BUFFETT 03:35
So there. (Laughter) OK, number 3.
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