WARREN BUFFETT: We are putting money into good — big money — into good businesses from an economic standpoint. But they are not as good as some we could buy when we were dealing with smaller amounts of money.
You know, if you take See’s Candy, it has 40 million or so of required capital in the business, and, you know, it earns something well above that.
Now, if we could double the capital, if we could put another 40 million in at anything like the returns we receive on the first 40 million, I mean, we’d be down there this afternoon with the money.
Unfortunately, the wonderful businesses don’t soak up capital. That’s one of the reasons they’re wonderful.
At the size we are, we earn operating earnings, $2.2 billion, or whatever it was in the first quarter, and we don’t pay it out, and our job is to put that out as intelligently as we can.
And we can’t find the See’s Candies that will sop up that kind of money. When we find them, we’ll buy them, but they will not sop up the kind of money we’ll generate.
And then the question is, can we put it to work intelligently, if not brilliantly? And so far, we think the answer to that is yes.
We think it makes sense to go into the capital-intensive businesses that we have. And incidentally, so far, it has made sense. I mean, it’s worked quite well. But it can’t work brilliantly.
The world is not set up so that you can reinvest tens of billions of dollars, and many, many tens over time, and get huge returns. It just doesn’t happen.
And we try to spell that out as carefully as we can so that the shareholders will understand our limitations.
Now, you could say, “Well, then aren’t you better off paying it out?”
We’re not better off paying it out as long as we can translate, as you mentioned, the discounted value of future cash generation. If we can translate it into a little something more than a dollar of present value, we’ll keep looking for ways to do that.
In our judgment, we did that with BNSF, but the scorecard will be written on that in 10 or 20 years.
We did it with MidAmerican Energy. We went into a business, very capital intensive, and so far, we’ve done very well, in terms of compounding equity.
But it can’t be a Coca-Cola, in terms of a basic business where you really don’t need very much capital, if any, hardly. And you can keep growing the business if you’re lucky, if you’ve got a growing business.
See’s is not a growing business. It’s a wonderful business, but it doesn’t translate itself around the world like something like Coca-Cola would.
So I would say you’ve got your finger right on the right point. I think you understand it as well as we do. I hope we don’t disappoint you, in terms of putting money out to work at decent returns, good returns.
But if anybody expects brilliant returns from this base in Berkshire, you know, we don’t know how to do it.
CHARLIE MUNGER: Well, I’m just as good at not knowing as you are. (Laughter)
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Having too much money is a challenge for Berkshire because achieving brilliant returns is tougher at their current size. Therefore, investing in capital-intensive businesses might not be a brilliant idea, but it still proves effective.