Berkshire Hathaway 2003 Annual Meeting Audience Question # 13

Buying good businesses was a better long-term investment strategy than buying “cigar-butt” companies

Warren Buffett:

Number 2.

Audience Member:

Hello, my name is Kevin Truitt and I’m a shareholder from Chicago, Illinois.

Mr. Buffett and Mr. Munger, thank you for putting on this marvelous event for your shareholders and partners. I thoroughly enjoy and love coming here.

I get so much education from this, in that the people here are just wonderful.

I have three, hopefully short, questions. The first two questions are for you and Mr. Munger, and the third question is for you.

My first question is, Mr. Munger, you are largely credited with moving Warren away from the cigar-butt approach to investing, as it was practiced by Ben Graham. It’s been stated that it was the purchase of See’s Candy that taught you this important lesson of buying good businesses.

At what point did you realize that this concept of buying good businesses was a better long- term investment strategy? And what was it in your discussions with Warren that allowed you to persuade him to move in that direction?

Mr. Buffett, what was it in Mr. Munger’s arguments for buying good businesses that persuaded you to abandon the cigar-butt approach and move in his direction?

My second question is, in both your experience have you or Mr. Munger ever known of a company that has regained or replaced its competitive advantage once it was lost?

My third question for you, Mr. Buffett, is, early in his career Richard Rainwater sought you out and asked you what it took to become a successful investor. Can you tell us what he asked you and what you told him? Thank you.

Warren Buffett:

The last question, I don’t remember at all. I mean, Rainwater called me a couple of times, but I don’t really remember the conversation.

That was a lot of years ago and I probably said the same… I would have said the same thing to his as if I got a question asked in this meeting.

So I’ve really had no contact with Richard Rainwater over the years. Like I say, I think I met him once, I believe, and he called a couple of times, so…

Charlie, do you want to answer the first question about how you…

Charlie Munger:

Yeah, well, I think there’s some mythology in this idea that I’ve been this great enlightener of Warren Buffett.

Warren hasn’t needed much enlightenment, but we both kept learning all the time, so that the man we were five years earlier was less sensible than the man who ultimately was there.

And See’s Candy did teach us both a wonderful lesson. And it’ll teach you a lesson if I tell you the full story.

If See’s Candy had asked $100,000 more, Warren and I would’ve walked. That’s how dumb we were at that time.

Warren Buffett:

Ten-thousand more.

Charlie Munger:

And one of the reasons we didn’t walk is while we were making this wonderful decision we weren’t going to pay a dime more, Ira Marshall said to us, “You guys are crazy. There are some things you should pay up for,” quality of business… quality, and so forth. “You’re underestimating quality.”

Well, Warren and I instead of behaving the way they do in a lot of places, we listened to the criticism. We changed our mind.

And that is a very good lesson for anyone. The ability to take criticism constructively is… well, think of all the money we made from accepting that one criticism.

And if you count the indirect effects from what we learned from buying See’s, you can say that Berkshire’s been built, partly, by learning from criticism. Now, we don’t want any more today.

Warren Buffett:

We also like the peanut brittle, too.

The… Charlie explained, I had learned investment, and got enormous benefit out of that learning, from a fellow who concentrated on the quantitative aspects, Ben Graham.

And who didn’t dismiss the qualitative aspects, but he said you could make enough money focusing on quantitative aspects, which were a more sure way of going at things and would enable you to identify the cigar butts.

He would say that the qualitative is harder to teach, it’s harder to write about, it may require more insight than the quantitative.

And besides, the quantitative works fine, so why try harder?

And on a small scale, you know, there was a very good point to that.

But Charlie really did… it wasn’t just Ira Marshall… but Charlie emphasized the qualitative much more than I did when I started.

He had a different background to some extent than did, and I was enormously impressed by a terrific teacher, and for good reason.

But it makes more sense, as we pointed out, to buy a wonderful business at a fair price, than a fair business at a wonderful price.

And we’ve changed our… or I’ve changed my focus anyway, and Charlie already had it… over the years in that direction. And then of course, we have learned by what we’ve seen.

I mean, we… it’s not hard when you watch businesses for 50 years, you know, to learn a few things about them, as to where the big money can be made.

Now, you say when did it happen? It’s very interesting on that. Because what happens, even when you’re getting a new, important idea, is that the old ideas are still there. So there’s this flickering in and out of things. I mean, there was not a strong, bright red line of demarcation where we went from cigar butts to wonderful companies.

And it… but we moved in that direction, occasionally moved back, because there is money made in cigar butts.

But overall, we’ve kept moving in the direction of better and better companies, and now we’ve got a collection of wonderful companies.

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