Berkshire Hathaway 1994 Annual Meeting Audience Question # 56

Berkshire will be better off if the stock market goes down

Warren Buffett:

Zone 2?

Audience Member:

Yes, Mr. Buffett, Steve Lang from Toronto.

I was just curious about when you were saying that one of the best things that could happen to shareholders is the… the market goes down and you’re able to buy good businesses at foolish prices.

And then a little on, you were saying that we could judge your ability to do what it is that you feel you should be doing by how much cash you have in the account at any given point in time, and…

Warren Buffett:

By what?

Audience Member:

By the amount of cash that you have in the account. In other words, I guess, what you feel you’re supposed to be doing is investing the cash in good businesses.

So I’m just wondering about that kind of dichotomy. Where does the cash come from if the market does go down, if you’ve been successful in your first ability? Would that be from the cash flow on the operations of the business from the float?

Warren Buffett:

Yeah.

Audience Member:

Is that…?

Warren Buffett:

Yeah.

Audience Member:

So really, the success of the company then is, to some degree, the fact that you’re able to dollar-cost average into the market on an ongoing basis? Is that right?

Warren Buffett:

Well, it isn’t that precise. But A, we do generate cash in considerable amounts, so that we will not husband cash, simply because we think the market’s going to go down, in order to buy something.

But obviously, as cash comes in, we’re always looking for things to do. And the cheaper that the market is generally, the more likely it is that we will find something that we understand and that we like, and that the price will be attractive, and that we will do it.

But it isn’t like we can change around the whole portfolio then, because that doesn’t gain us anything. I mean, we’d be selling things at lower prices to buy things at lower prices.

But to the extent that we have net cash coming in… which we do, and which we will have… on balance, we’re, you know, we’re adding to our businesses at more attractive prices than would be the other case.

And it’s no prediction on any given company. I mean, whether it’s Gillette or Coke, or anything.

It might be something we already own, it might be something we don’t own. But we welcome the chance to buy more shares.

We’re not wishing it on anybody. But if you asked us next month whether Berkshire would be better off if the whole stock market were down 50 percent or where it is now, we would be better off if it was down 50 percent, whether we had any cash on hand now or not, because we would be generating cash to buy things.

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