Berkshire Hathaway 2013 Annual Meeting Audience Question # 56

The competitive moat of IBM

Warren Buffett:

OK. Station 8. We’re now going to the shareholder base. We’ve gone through the panels, and we’ve got about 45 minutes left and so we’re going to give the shareholders a chance to ask… answer… to ask all the questions… maybe answer them… ask all the questions from this point.

Station 8.

Audience Member:

Hi. Chris Hu from Tokyo, Japan.

Can you talk a little bit more about the IBM investment? Where do you see the moat for that business? And just in the spirit of full disclosure, I work for Microsoft.

Warren Buffett:

Yeah. Was your… what was your… the moat about which business?

Audience Member:


Warren Buffett:

Oh, IBM. Well, I would say that I do not understand the moat around an IBM as well as I understand the mote around a Coca-Cola. I think I have some understanding of it, but I feel I would have more conviction about the moat around a Coca-Cola, or a Wrigley or a Heinz, for that matter, than an IBM.

But I feel good enough about IBM that we’ve put a considerable amount of money in it. And there’s nothing that precludes both Microsoft, which you mentioned, and IBM being successful. In fact, I hope they both are.

We… I’ve got enough conviction about IBM’s position that we took a very large position.

I like their financial policies. I think the odds are good that their position is maintained in a strong way over time, but I don’t feel the same degree of conviction about that as I do about the BNSF railroad. I mean, you know, it’s very hard for me to think of anything that could go wrong with BNSF. I could think of some things that could go wrong with IBM.

They, incidentally, have a very large pension obligation. Now, they have a large pension fund, too, but you’re talking 75 or $80 billion of assets and liabilities that, you know, is a big… it is a big annuity company on the side.

And you can have… balls can take funny bounces in the annuity field. I would rather they didn’t have that, but that is a fact that I take into consideration when I buy. They show the assets and liabilities of being roughly equal, but the liabilities are a lot more certain than the assets over time.


Charlie Munger:

Yeah. Well, at least the IBM pension plan has the resources of IBM. Suppose you’re a big life insurance company now. All over the world, the life insurance companies have started to suffer the tortures of hell.

In Japan, they agreed to pay 3 percent interest, and, of course, there was no way to earn 3 percent interest once the Japanese policies had been in place a long time.

A whole lot of once revered, secure places look unsecure now.

And around Berkshire, you’ll notice the life operations are… where we have our own policies as distinguished from reinsurance… are pretty small, right?

Warren Buffett:

Yeah. We do not like giving options in this world, and people tend to… well, particularly they’ve got a sales force pushing them on, as you have in the life insurance industry. They have tended to give people options that have, in certain cases, cost them huge amounts of money.

It’s… you know, you always want to accept an option; you never want to give an option. But the life business is in just the reverse side of that.

Actually, the mortgage business… I mean, you know, Charlie and I were in the savings and loan business. The idea of giving somebody a 30-year mortgage where they can… if it’s a good deal for you… they can call it off tomorrow, and if it’s a good deal for them, they keep it for 30 years.

Those are terrible instruments. They’re good for you if you’re buying a house, and I recommend that you… I recommend everybody in this room get a 30-year mortgage immediately on a house for all they can.

If it’s a bad deal and rates go to 1 percent, you can refund it. If rates go to 6 or 7 percent, maybe you can buy it back for 70 cents on the dollar or something of the sort.

So the life companies have engaged in that big time… big, big time… in the last few decades, and a lot of them are paying the price, and some of them haven’t even realized exactly quite what the problems are.

They’re kind of like the fellow in the switchblade fight, you know, where the other guy takes a big swipe at him with a switchblade and the fellow says, “You didn’t touch me,” and the other guy says, “Well, just wait until you try and shake your head.” Well, that’s a little bit like where some of the life companies are right now.

Charlie? Anything further, Charlie?

Charlie Munger:

No, that’s gloomy enough.

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