Hi, I’m Howard Winston (PH) from Cincinnati, Ohio. First, I wanted to thank you and Charlie for sharing your time with us today. WARREN BUFFETT
Thank you. AUDIENCE MEMBER
My question is, you’ve repeatedly said that you see many wonderful stock ideas but can’t invest because they’re too small. Given that many in the audience today have a lower dollar investment threshold — (Laughter) WARREN BUFFETT
“Do these stocks have names?” (Laughter) AUDIENCE MEMBER
Yeah. Well said. (Laughter) WARREN BUFFETT
Well, the answer to that is that we don’t look anymore. We assume that there are a reasonable number of opportunities as you work with smaller amounts of capital because it’s always been true. I mean it was — over the years, as I looked at things, clearly, you run into companies that are less followed as you get smaller. And there’s more chances for inefficiency when you’re dealing with something where you can buy $100,000 worth of it in a month, rather than 100 million. But that is not because I am carrying around in my head the names of 25 companies that we could put 100,000 in. I just don’t look at that universe anymore. I — Sometimes, people send me annual reports, or I get letters from managers and they say, you know, “I’ve got this wonderful thing.” I look — I usually know ahead of time, but I mean, I would first look at the size. And if the size isn’t right — and it isn’t going to be virtually any time — I don’t look any further, because there’s just no time to be looking at all kinds of smaller opportunities. I do think, if you’re working with very small amounts of money, that there almost always are some significant inefficiency someplace — to find things. I’ve mentioned to some people, when I started out, I actually went through all of the Moody’s manuals and the Standard and Poor’s manuals page by page. And you know, it was probably 20,000 pages, but there were a lot of things that popped out, and none of them were in any brokerage report or anything of the sort. They were just plain overlooked, and you had to — You could find out about them, but nobody was going to tell you about them. And my guess is that continues to be true, but not on anything like the scale it was then. Charlie?
Well, I can remember when you bought one membership in some duck club that had oil under it, when you were young. WARREN BUFFETT
Yeah, that was a company called Atled — CHARLIE MUNGER
When you get down to one duck club membership, well, you’re really scavenging for cigar butts. (Laughter) But — WARREN BUFFETT
Not a bad cigar butt. There were 98 shares outstanding. It was the Delta Duck Club. And the Delta Duck Club was founded by a hundred guys who put in 50 bucks each, except two fellows didn’t pay, so there were only 98 shares outstanding. They bought a piece of land down in Louisiana, and one time somebody shot downward instead of upward, and oil and gas started spewing forth out of the ground. (Laughter) So, they renamed it Atled, which is Delta spelled backwards, which was — sort of illustrated the sophistication of this group. (Laughter) And a few years later, they were taking up — at $3 a barrel oil — they were taking about a million dollars a year in royalties out of the place. And the stock was selling at $29,000 a share, and it was earning $10,000 a share — No, it was earning about $7,000 a share after-tax, about 11,000 pretax, and it had about 20,000 a share in cash. And it was a long-lived field. So, you know, I use that sometimes as an example of efficient markets, because somebody called me and offered me a share of it, and those things, you know — is that an efficient market or not? You know, 29,000 for 20,000 of cash, plus 11,000 of royalty income at 25 cent gas and $3 oil? I don’t think so. You can find things out there. I’ll give you hunting rights on all my duck clubs in the future. (Laughter)
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
Being small is an advantage because market tend to overlook small businesses which create more chances for inefficiency.