Berkshire Hathaway 2003 Annual Meeting Audience Question # 30

Warren: “I, frankly, don’t have the faintest idea how to evaluate telecommunications companies down the road”

Warren Buffett:

Number 7.

Audience Member:

Gentlemen, my name is Jim Maxwell. I am from Omaha, Nebraska.

You put your toe in the water, so to speak, with Level 3 when you gave a deal, or, you know, got involved in that deal with them.

And I’m wondering if there’s anything… any area… in the telecommunications industry that appeals to you now, or any specific company that appeals to you?

Much more importantly, I want to ask about Global Crossing. They’re in bankruptcy court right now. The U.S. military uses them for communications. Data, telecommunications, or something like that.

There are two companies that want to buy their assets out of the bankruptcy court. One is a Chinese company. One is a company from Singapore. The U.S. says, “No way, José.” They don’t want China to get control of the assets of Global Crossing, mainly because of the military security.

In the last week, the Chinese company has backed out. The Singapore company has come in and said, “We will buy the 80 percent stake and… that is now available.” But still, if that sale goes through Global Crossing will not be in U.S. hands.

Part of my concern is, if these two companies were in a relationship that was friendly, they were willing to be together, I could see the possibility that they would… the Singapore company would sell, later, its portion to the Chinese company.

Have you ever considered… and if not, why not… buying the assets out of the bankruptcy court, which would be a fire sale? I think that would be good for Berkshire Hathaway.

In addition, it would be good for the United States and for future generations. I would suggest that would be your civic duty, gentlemen.

Warren Buffett:

Well, I hope I don’t get arrested for leaving without doing this.

I, frankly, don’t have the faintest idea how to evaluate telecommunications companies down the road. That doesn’t mean I don’t understand, at all, what they do. I probably understand a little bit of what they do.

But in terms of figuring out the future economics in that business, what they’re going to… this player or that player is going to look like five or 10 years down the road, I simply don’t know.

And I think it’s… it looks like the people who thought they knew three or four years ago didn’t know either, I might add, but that’s another question.

Charlie, what do you know about the telecommunications business?

Charlie Munger:

A little less than you do.

Warren Buffett:

He’s in trouble.

We don’t have any idea. You know, if you take… pull out a name, BellSouth, Verizon, I have no idea how that all comes together five or 10 years from now.

I mean, I know people are going to be chewing Wrigley’s chewing gum or eating Hershey bars or Snickers bars five, or 10, or 15, or 20 years from now.

They’re going to be using Gillette blades, they’ll be drinking Coca-Cola, you know. And I have some idea what the profitability of each one of those will be over time and all of that.

I don’t have any idea how telecommunications shakes out. And I wouldn’t believe anybody in the business that told me they knew because, you know, what would they have been telling me five years ago? So, it’s just a game I don’t understand.

That isn’t… there’s all kinds of things I don’t understand. I don’t know what cocoa beans are going to do next year. You know? I mean, it’d be a lot easier if I did. I could just make all my money on cocoa beans and be much simpler than trying to run a whole bunch of businesses out of Berkshire.

But there’s… I don’t worry about what I don’t know. I worry about being sure about what I do know. And telecommunications doesn’t fall within that group.

Charlie Munger:

Mostly, Berkshire, in its history, has bought common stocks that practically couldn’t fail.

But occasionally, Berkshire just makes an intelligent gamble where there’s plenty of chance of failure, but there’s enough chance of success so the gamble is worth taking. And I think it’s fair to say that telecommunications falls in that so far.

Warren Buffett:

Yeah. We might buy some junk bonds in that business. In fact, we have in several areas.

But as I put in the annual report, we expect losses in junk bonds. We expect, over all the probabilities, we’ll have a decent result… maybe better than decent.

But we do expect losses, because we are dealing with institutions that have demonstrated that they don’t have large margins of safety in their operations. Sometimes… not at all in Level 3, but sometimes, we’re dealing with managements that are quite suspect.

And I would say that in the history of Global Crossing you had that, although that doesn’t attach itself to the assets now.

But very often in the field, when people get highly leveraged, sometimes they get tempted to do things that they wouldn’t be tempted to do otherwise. And that’s happened in the junk bond field, obviously, and always will happen.

But that’s the reason we expect to have significant losses, and actually we’ve… they haven’t been that significant.

We’ve had losses. And… but they… we haven’t seen our biggest loss yet, believe me, in junk bonds. But we’ll make a lot of money out of some of them, too.

It’s a different field. It’s like being an insurer of substandard risks. You’ll have more accidents, but you can charge a premium that makes it work out.

But our business… in general, when we buy businesses, we want to buy superior risks.

We don’t want to buy a hundred businesses for operation by ourselves, with the idea that 15 of them are going to be train wrecks and that the other 85 will take care of it. That’s not our approach to building Berkshire.

Charlie, got anymore?

Charlie Munger:

No.

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