Berkshire Hathaway 2006 Annual Meeting Audience Question # 14

Holding a lot of cash is better than doing dumb deals

Warren Buffett:

We just got an estimate of the attendance at 24,000, which was about what it looked like from the tickets we had gotten. I thank you all for coming, on that note.

Even better, the Furniture Mart, which had sales in 1997 of 5-and-a-fraction million, 2003 sales of 17 million, sales last year of 27 million, is up so far 2 1/2 million, with the best yet to come.

So we’re… I would say we’re likely to do over 30 million at the Furniture Mart. And that, incidentally, is about equal to a normal monthly volume for the store. So you’re doing your part. Thank you.

Number 2?

But you can do more.

Audience Member:

Good morning. My name is John Norwood from Des Moines, Iowa.

I have a two-year rule for my closet. If I don’t wear a particular pair of pants or a shirt within two years, I give it away to Goodwill so that someone else can put it to better use.

With 40 billion in cash, I’m wondering whether Berkshire Hathaway should have a similar closet rule for deployment of surplus shareholder cash.

Warren Buffett:

It won’t go to Goodwill, I promise you that.

Audience Member:

Thank you. And wouldn’t it be better if you had a smaller budget and fewer gifts you needed to… you and Charlie needed to shop for? Wouldn’t you have more time for the beach and a better chance of hitting some home runs?

Warren Buffett:

Yeah. I don’t think we’ll hit any home runs, under any circumstances. But the… you might consider a normal level of cash at Berkshire as being about 10 billion, although we… you know, there could be circumstances where we’d go below that.

But because of the catastrophe insurance business we’re in and all of that, we do not… you know, we do not scrape the bottom of the barrel, but we don’t need anything like 40 billion.

I think you’ll see in the 10-Q that we have… I think it was about 37 billion at the end of March… double check that… and I’m not counting the cash and the finance business… yeah, 37- something… and we’re spending 4 billion on ISCAR.

We’ve spent… we’re spending some money on some other things as well.

But we would be happier… much happier… if we had 10 billion of cash and all the balance in things that we liked very much.

And we work toward that end at all times. But there is nothing even about the way businesses come to us.

We’ve got one idea at present, low probability, but that would take… could take… as much as 15 billion or close to 15 billion of cash. And whether it comes to fruition or not, who knows, but we do work on them.

And, what we care more… we don’t like having excess cash around. We like even less doing dumb deals because we do them forever.

I mean, if we make a dumb deal, it just sits there. We don’t resell it three months later by having an IPO of it or something of the sort.

So you’re right to say that we should be very uncomfortable about the fact that we’ve got the cash. But it’s also important that we not be so uncomfortable that we go out and do something just to be doing something.

I would say it’s likely, but far from certain, that three years from now we have significantly less cash and, I hope, significantly more earning power. But the goal of that cash is to be translated into permanent earning power over time.

Like I say, with the 4 billion that we’ve just committed on ISCAR, you know, we love having that 4 billion employed there instead of sitting around in short-term securities.

And that’s our job. Charlie and I don’t do anything else, except appear in movies and that sort of thing.

But the… you know, you’re right to keep jabbing us on that because… but we jab ourselves. You know, we… neither one of us is… basically likes cash.

We always want to have adequate cash and we always will have adequate cash. And we are the biggest player in the world in cat insurance, and people come to us because they know we’re going to run a place that’s very strong financially. But it doesn’t have to be as liquid as we are now.

We spent 5 billion… well, we didn’t spend that much. At the Berkshire level, we spent about 3 1/2 billion on PacifiCorp.

You know, we contracted (this part of the audio is inaudible) earlier, but we will get more chances, I think, in that field, but you never can tell when they’ll come.

So come back next year, and I hope we have less cash.

OK. We’ll go to 13 now.

OK. Charlie, would you like to add anything on that?

Charlie Munger:

Yeah. I think you may get some perspective on what bothers you if you go back to the annual report of Berkshire ten years ago and then compare that report with the last one.

Despite the great difficulties of deploying cash, we managed to put an awful lot of wonderful stuff into Berkshire in the last ten years. So, we aren’t altogether gloomy about that process continuing.

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