Berkshire Hathaway 2009 Annual Meeting Audience Question # 49

Berkshire will get decent returns from its utility investments

Warren Buffett:


Becky Quick:

This question is from Jim Mitchell from Costa Mesa, California, who wants to know from both of you.

He says, “Years ago, you taught us to beware of capital-intensive businesses, like electric utilities, that may be overstating profits due to understating depreciation.”

“Now that you are investing in utilities and gas pipelines, have you discovered the secret of long life for power plants? Or do we need to discount your utility earnings?”

Warren Buffett:

Well, the utility earnings, pretty much, come about through a return on equity capital allowed by the jurisdictions in which you operate.

So, for example, if something like pension costs or something of the sort, you get surprises on, you do get to earn that back over time. But you don’t get any bonanzas, either.

So I would say the capital-intensive businesses that scare me more are the ones outside of the utility field, where you just pump in more money without knowing that you’re going, in a general way, to get, more or less… within a range, anyway… a guaranteed return.

So I do not have… there’s no way we get rich on our utility investments. But there’s no way we get poor, either. And we get decent rates of return on the equity that we leave in it.

And we’ll probably get those returns with or without inflation. Now, inflation may diminish the value of getting an 11 or 12 percent return on equity, if you get into very high rates of inflation.

So in that sense, I’d agree with Jim, who I know, incidentally. He used to work with my daughter out there at Century 21. He’s a good investor.

But the… on balance, if you can find a good business that’s not capital intensive, you’re going to be better off than in a capital-intensive business over time.

I mean, the world, they’re hard to find. But the best businesses are the ones that don’t require much capital and, nevertheless, make good money.

They’ve got some moat protecting them, other than the capital required as entry in the business that’s protecting them.

And if you can find those that are durable, you’ve got a great investment and one that will do the best in inflation, which, as we mentioned earlier, seems fairly likely to come along.


Charlie Munger:

Yeah, unfortunately, a lot of moats have been filling up with sand lately, you know, the daily newspaper, the network television station, all these castles with their lovely moats. The moats are filling up.

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