AUDIENCE MEMBER 00:08
Mr. Buffett, my name is John Shayne (PH) from Nashville, Tennessee. I want to join the other shareholders and thank you for the results you’ve achieved, but also for the example that you’ve set for business, generally.
My question is about float proceeds and whether they can go into common stocks. You’ve been asked that question before in prior years. Once, I asked you something on that. And I think at least one other shareholder has.
But I’m wondering if you might go into a little more detail. If I’ve understood you in the past, you’ve said, “Yes, you can — the float’s available to go into common stocks.”
I think it’s an important question because it affects the intrinsic value of that float. If that float is locked into fixed income, it’s worth one thing. If it could go into stocks at one point, it’s obviously worth quite a bit more.
What I’ve had trouble understanding is, I think you must have some way that you can guarantee that the policyholders will be protected. Obviously, you can invest everything in a low market, and the market goes even lower.
Is it simply the size of the capital you’ve got that you think that’d be extraordinarily unlikely? Or do you use future insurance revenues, premium revenues, to pay off claims? Would you borrow to pay off claims?
If you could give some detail on that, maybe we could get some comfort as to how you’re thinking about that.
WARREN BUFFETT 01:32
Yeah. The float, in no way, is limited to fixed-income securities. The float is really available for anything that we feel is the most intelligent at any given time.
And the reason we can say that, and other insurance companies can’t say that, is because we have an incredible abundance of capital, plus other streams of earning power which are unrelated to the insurance business.
So we could have the float entirely in equities. And we have had that, in the past, or tantamount to that. And we could have a lot of it in operating businesses. We can have it anyplace it makes the most sense.
But the only reason we can do that is because we have extraordinary capital. And we don’t have much debt.
We run the business differently than, or think about it differently, than probably 90 percent of managements do.
We look at the assets on a consolidated basis with a few little exceptions. We look at the asset and the liability side — completely absent any linkage for specific assets and liabilities.
So our job at Berkshire is to get the liabilities as cheaply as possible. We want all the liabilities we can get and not have any worries about fulfilling as cheap as we can, plus a lot of capital. And then we want all the assets to be employed as intelligently as possible.
And we don’t match up, you know, a billion dollars of assets on the asset side against a billion of specific liabilities on the right-hand side. There’s one or two exceptions to that, but that’s — where we’re required to — but that’s the basic approach.
So, when Charlie and I think about Berkshire, we’re thinking about, how do we get as much money as we can as cheap as we can without, in any way, endangering our ability, ever, to pay anybody, under any circumstances?
And then, how do we put it out in a way that we feel the most comfortable on the asset side, at the best returns? And frequently, that will be equities. And it has been, over the past. Sometimes, we — it won’t be. We can’t find them. But that’s the goal.
And float is available just like — in virtually all cases — just like common equity. We don’t distinguish those in our mind.
And that gives us — that flexibility gives us some edge and, perhaps, quite an edge, at times, over other — over our competitors.
CHARLIE MUNGER 04:15
Well, yeah, you can see that in the results to date. We have used that edge in the past. And we hope to use it in the future.
WARREN BUFFETT 04:26
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
The float, in no way, is limited to fixed-income securities. The float is really available for anything that we feel is the most intelligent at any given time. And the reason we can say that, and other insurance companies can’t say that, is because we have an incredible abundance of capital, plus other streams of earning power which are unrelated to the insurance business. ~Warren Buffett