AUDIENCE MEMBER 00:00
Steve Casbell (PH) from Atlanta.
My question concerns Gillette. Do you think their goal of trying to grow earnings at 15-plus percent kind of got them into their current inventory problems at the trade?
And as well, the Duracell acquisition. I know at the time, neither one of you were the biggest fans of the deal. I just want to know how you feel about it now.
WARREN BUFFETT 00:26
Well, I would say it’s a mistake. And I’ve said it. I think it’s a mistake for any company to predict 15 percent a year growth. But plenty of them do.
For one thing, you know, unless the U.S. economy grows at 15 percent a year, eventually any 15 percent number catches up with you. It just, it doesn’t make sense.
Very, very few large companies can compound their earnings at 15 percent. It isn’t going to happen.
You can look at the Fortune 500, and if you want to pick 10 names on there that will compound their growth from — other than some extraordinarily depressed year, I mean, if they had a year where they just broke even so the number’s practically zero.
But if you pick any company on there that currently has record earnings, and you want to pick out 10 of them that over the next 20 years will average 15 percent or greater, I will, you know, I will bet you that more than half of your list will not make it.
So, I think it’s a mistake, and as I’ve said in the annual report, I think it leads people to stretch on accounting. I think it tends to make them change trade practices.
And you know, I’m not singling out Gillette in the least, but I can tell you that if you look at the companies that have done it, you will find plenty of examples of people who have made those sort of mistakes.
And I think that, in connection with Duracell — I mean, obviously, Duracell has not turned out the way that the management of Gillette, at the time, hoped that it was going to do. And the investment bankers who came in and made the presentations, those presentations would look pretty silly now.
CHARLIE MUNGER 02:03
I think that kind of stuff happens all the time. It will continue to happen. It’s just built into the system.
I see more predictions of future earnings growth at a high rate, not less. I mean, a few people have sort of taken an abstinence pledge, but it’s very few. It’s what the analysts want to hear.
WARREN BUFFETT 02:33
It’s what the investor relations departments want the managements to say. It makes their life easier, you know. But they don’t have to be there 5 years from now or 10 years from now doing the same thing. It’s —
If we predicted 15 percent from Berkshire, you know, 15 percent means that — assuming the same multiples — I mean, that means in 5 years, 200 billion. In 10 years, 400 billion. You know, 15 years, 800 billion. A trillion-six in 20 years. And the values get to be crazy.
And you know, if you have a business with a market value of 4- or 500 billion — and you had a few of those not so long ago — just think of what it takes to deliver, in the way of future cash, at a 15 percent discount rate to justify that.
If you’ve got a business that’s delivering you no cash today and it’s selling for $500 billion, you know, to give you 15 percent on your money, it would have to be giving you 75 billion this year.
But if it doesn’t give you 75 billion this year, you know, it has to be giving you 86 and a quarter billion next year. And if it doesn’t do it next year, it has to be giving you almost a hundred billion in the third year.
It just — those numbers are staggering. I mean, the implications involved in certain market valuations really, you know, belong in “Gulliver’s Travels” or something. But people take them very seriously.
I mean, people were valuing businesses at $500 billion a year, a year-and-a-half ago, and there’s just no mathematical — almost no mathematical calculation you could make that would — if you demanded something like 15 percent on your money — there’s almost no mathematical calculation you could make that would — could possibly lead you to justify those valuations.
Charlie, have any more?
CHARLIE MUNGER 04:36
You know, I said on another occasion that, to some extent, stocks sell like Rembrandts. They don’t sell based on the value that people are going to get from looking at the picture.
They sell based on the fact that Rembrandts have gone up in value in the past. And when you get that kind of valuation in the stocks, some crazy things can happen.
Bonds are way more rational, because nobody can believe that a bond paying a fixed rate of modest interest can go to the sky, but with stocks they behave partly like Rembrandts.
And I said, suppose you filled every pension fund in America with nothing but Rembrandts? Of course, Rembrandts would keep going up and up as people bought more and more Rembrandts, or pieces of Rembrandts, at higher and higher prices.
I said, “Wouldn’t that create a hell of a mess after 20 years of buying Rembrandts?” And to the extent that stock prices generally become sort of irrational, isn’t it sort of like filling half the pension funds with Rembrandts? I think those are good questions.
WARREN BUFFETT 05:52
Once it gets going, though, people have an enormous interest in pushing Rembrandts. I mean, it creates its own constituency. Zone 1?
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