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Collection: Warren Buffett - #263 'Creative Accounting'


Video Link: https://youtu.be/Toz0oufgl-c


In this episode, Warren Buffett and Charlie Munger were asked to comment on creative accounting and whether Coca-Cola lay off much of the capital in the system onto the bottlers is a form of creative accounting?


In this episode, you’ll learn:

  • Why creative accounting is an absolute curse to a civilization?

  • The importance of trademark.

To check out all Collection: Warren Buffett <click here>

 

[Transcript]

(Source: https://buffett.cnbc.com/2002-berkshire-hathaway-annual-meeting/)

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.

AUDIENCE MEMBER 00:00

Hi, I’m Steve Rosenberg (PH). I’m 22, from Ann Arbor, Michigan. I have three quick questions for you.


The second involves the role of creative accounting in the stories of tremendous growth and success over many years. GE, Tyco, and IBM immediately come to mind for me, but I was hoping you could also discuss that issue in relation to Coke.


Some people have said that their decision to lay off much of the capital in the system onto the bottlers, who earn low returns on capital, is a form of creative accounting.


On the flip side, others counter that Coke’s valuation, at first glance on, say, a price-to-book metric, is actually less richly valued than it seems because they earn basically all the economic rents in the entire system.


CHARLIE MUNGER 00:47

Well, he asked about creative accounting and he named certain companies. I wouldn’t agree that all those companies were plainly sinful, although I’m sure there are significant sins in the group as a whole.


Creative accounting is an absolute curse to a civilization. You can argue that one of the great inventions of man was double-entry bookkeeping, where we could keep our economic affairs under better control.


And it was a north Italian development, spread by a monk. And anything that sort of undoes the monk’s work by turning this great system into kind of a tool for fraud and folly, I think, does enormous damage to the country.


Now, I think a democracy is ordinarily set up so it takes a big scandal to cause much reform. And there may be some favorable fallout from Enron because that was certainly the most disgusting example of a business culture gone wrong that any of us has seen in a long, long time.


And what was particularly interesting was it took in, eventually, a lot of nice people that you wouldn’t have expected to sink into the whirlpool.


And I think we’ll always get Enron-type behavior, but it may be moderated some in the next few years.


WARREN BUFFETT 02:33

A question of accounting and the economic profits to be gathered in the bottling system versus the production of the syrup, Coke. I’ve just gotten through reading the annual reports of Coca-Cola FEMSA and Panamco, which are two big Latin American bottlers.


And I mean, they make pretty decent money, quite significant money. And there is more money in owning the trademark. It isn’t the plants that make the syrup or anything to sell. The trademark is where a huge amount of value is.


The trademark is where a huge amount of value is in See’s Candy. You know, those are big, big assets.


And I would say that you can make good money as a bottler. A lot of bottlers have become rich over the years. If I had a choice between owning the trademark and owning a bottling business, I’d rather own the trademark, but that doesn’t mean the bottling business is a bad business at all.


And it’s riding on the back of a trademark. I mean, that is why a bottling system is valuable, is because it has the right to sell a trademarked product, which hundreds of millions of people every day are going to go in and ask for by name. And the right to distribute that product is worth good money.


And it really — I don’t see any accounting questions in that sort of thing. In other words, if the Coca-Cola Company did not own a share in any of its bottlers, and for many years it either owned a hundred percent of a bottler, or a large part, or — and very few of those — or none of it.


But if they owned no interest in their bottlers, I think the economics would be very, very similar to what they are now.


I mean, the bottlers would still be able to borrow a lot of money because they would have contracts with the Coca-Cola Company, and that were important, and that would allow them to make decent money distributing the product.


But they don’t make the kind of money that you make if you own the trademark. That’s just the way it works.

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