Collection: Warren Buffett - #242 'The Value of Berkshire's "Loyalty Effect" '



[Transcript]

AUDIENCE MEMBER 00:00

Yeah, hi. I’m James Halperin from Dallas, Texas. And I’ve been a shareholder since 1995. And I feel great about it, so thank you.


This question has to do with Berkshire’s so-called permanent holdings and whether, when making investment decisions, you somehow mathematically calculate a value to Berkshire’s reputation for loyalty to its public investees.


Let’s say you are confident enough that Pepsi or Procter and Gamble would grow cash flow faster than Coke or Gillette would. And that the replacement value of the stock was less expensive enough to more than make up for the taxes.


Would you then sell Coke, for example, to buy Pepsi? And if not, why not? And how do you value this reputation for loyalty aspect in those decisions?


WARREN BUFFETT 00:55

Well, I think that’s a very good question.


I don’t think we would ever — I think it’s very unlikely we would come to the conclusion that we were that certain that — you mentioned P&G and Pepsi versus the ones — but that some major consumer products company would do better than the ones we’re in.


We might very well decide that some other one is going to do quite well and buy that additionally.


As a practical matter, if I’m on the board of a company, or Charlie were to be, representing Berkshire, it’s very difficult — I would say it’s almost impossible for us to trade in their securities.


It just — it creates too many problems. People would think we knew something we didn’t. Or, you know, particularly if we were selling it, you know, we would have people questioning very much whether we had detected something within the company that was not available to the rest of the world.


So we really give up an enormous amount of investment mobility when we go on a board.


And so I don’t even think about doing what you’re suggesting, although I might very well if I were just a money manager running the business.


We certainly, and we’ve laid it out in the ground rules in the back of the — in our Owner’s Manual back in the annual report — we’ve certainly said, in terms of businesses we buy control of, that they just aren’t for sale. And a fancy price will not tempt us.


And that we lay out that exception relating to businesses where we think there’s a permanent loss of cash for as far as the eye can see, or businesses where we have labor troubles, which we — I described earlier in the day, we might’ve had at The Buffalo News at that one period.


But otherwise, simply because we can use the money better someplace else, we’re not interested in it.


You know, I can’t really dig into my psyche and tell you how much of that is because I think that will help us buy businesses in the future if we behave that way, or how much is just my natural inclination that when I make a deal with somebody and I’m happy with how they behave with me, that I want to stick with them. It’s probably both, you know?


And I wouldn’t want to try and weight the two. I’m happy, you know, with the results of the first and I’m happy with the way I feel, essentially, about the second.


I just think it’s crazy — I know if I owned all of Berkshire myself, I wouldn’t dream of trading around businesses with people that have trusted in me and that I like and have been more than fair with me.


I wouldn’t dream of trading around businesses so that my estate was 105 percent of some very large number instead of 100 percent of some large number. I just would regard that as a crazy way to live.


And I don’t want the fact I run a public company to cause me to behave in a way that I would be uncomfortable behaving if we were a private company.


But I also feel that you, as shareholders, are entitled to know that that’s an idiosyncrasy of mine. And therefore, I lay it out, and have laid it out for 20 years, as something that you should understand, as an investor or before you become an investor.


I’m sure it helps us in acquisitions over time. But whether that in any way compensations the opportunity costs that Charlie talks about of making an occasional advantageous disposal, I don’t know and it’s something I’ll never calculate.


Charlie?


CHARLIE MUNGER 04:24

Well, I do tend to calculate it, at least roughly. And so far, I think that the loyalty effect is a plus in our life.


WARREN BUFFETT 04:34

Would you regard that as true though in both public — I mean, both marketable securities and owned businesses?


CHARLIE MUNGER 04:42

Oh, no. I don’t think the loyalty effect in lots of public companies is nearly as important as it is with the private companies.


WARREN BUFFETT 04:52

You can say it’s a mistake for us to be directors of companies, because we give up huge amount of flexibility in investment because we are directors. I — and there’s no question that we do.


It’s — if you’re thinking solely of making money, you do not want to be a director of any company. So there’s just no question about that. Area 7.


(Source: https://buffett.cnbc.com/2001-berkshire-hathaway-annual-meeting/)

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[YAPSS Takeaway]

What a character!


"I just think it’s crazy — I know if I owned all of Berkshire myself, I wouldn’t dream of trading around businesses with people that have trusted in me and that I like and have been more than fair with me.


I wouldn’t dream of trading around businesses so that my estate was 105 percent of some very large number instead of 100 percent of some large number. I just would regard that as a crazy way to live.


And I don’t want the fact I run a public company to cause me to behave in a way that I would be uncomfortable behaving if we were a private company.


But I also feel that you, as shareholders, are entitled to know that that’s an idiosyncrasy of mine. And therefore, I lay it out, and have laid it out for 20 years, as something that you should understand, as an investor or before you become an investor." ~Warren Buffett