Berkshire Hathaway 2017 Annual Meeting Audience Question # 18

Warren: “We’d love to buy high-return-on-assets, very light-capital-intensive business”

Warren Buffett:

OK. Station 6.

Audience Member:

Good morning. It’s Marcus Burns from Sydney, Australia.

My question, Mr. Buffett, is, you used to buy capital-light, cash-generative businesses, but now buy lower-growth, capital-consumptive businesses.

I realize Berkshire generates a lot of cash flow, but would shareholders have been better off if you had continued to invest in capital-light companies?

Warren Buffett:

Well, we’d love to find them. I mean, there’s no question that buying a high- return-on-assets, very light-capital-intensive business that’s going to grow beats the hell out of buying something that requires a lot of capital to grow.

And this varies from day to day, but I believe… and I don’t think it’s sufficiently appreciated. I believe that probably the five largest American companies by market cap… and some days we’re in that group and some days we aren’t… let’s assume we’re not in that group on a given day… they have a market value of over $2 1/2 trillion, and that 2 1/2 trillion is a big number.

I don’t know whether the aggregate market cap of the U.S. market is, but that’s probably getting up close to 10 percent of the whole market cap of the United States. And if you take those five companies, essentially, you could run them with no equity capital at all. None.

That is a very different world than when Andrew Carnegie was building a steel mill and then using the earnings to build another steel mill and getting very rich in the process, or Rockefeller was building refineries and buying tank cars and everything.

Generally speaking, over… for a very long time in our capitalism, growing and earning large amounts of money required considerable reinvestment of capital and large amounts of equity capital, the railroads being a good example.

That world has really changed, and I don’t think people quite appreciate the difference.

You literally don’t need any money to run the five companies that are worth collectively more than $2 1/2 trillion, and who have outpaced any number of those names that were familiar, if you looked at the Fortune 500 list 30 or 40 years ago, you know, whether it was Exxon or

General Motors or you name it.

So we would love… I mean, there’s no question that a business that doesn’t take any capital and grows and has, you know, almost infinite returns on required equity capital, is the ideal business.

And we own a couple of businesses… a few businesses… that earn extraordinary returns on capital, but they don’t grow.

We still love them, but if they had… if they were in fields that would grow, believe me, we wouldn’t… you know, they would be number one on our list.

We aren’t seeing those that we can buy and that we understand well.

But you are absolutely right that that’s a far, far, far better way of laying out money than what we’re able to do when buying capital-intensive businesses.

Charlie?

Charlie Munger:

Yeah. The chemical companies of America, at one time, were wonderful investments.

Dow and DuPont sold at 20-some times earnings, and they kept building more and more complicated plants and hiring more Ph.D. chemists, and it looked like they owned the world.

Now, most chemical products are sort of commoditized and it’s a tough business being a big chemical producer. And in comes all these other people like Apple and Google and they’re just on top of the world.

I think the questioner’s basically right that the world has changed a lot, and that the people who have made the right decisions in getting into these new businesses that are so different from the old ones have done very well.

Warren Buffett:

Yeah, Andrew Mellon would be absolutely baffled by looking at the high-cap companies now. I mean, the idea that you could create hundreds of billions of value essentially without assets… without tangible assets…

Charlie Munger:

Fast.

Warren Buffett:

Fast, yeah. But that is the world. I mean, there is…

When Google can sell you something that… where GEICO was paying 11 bucks or something every time somebody clicked something… that is a lot different than spending years finding the right site and developing, you know, iron mines to supply the steel plants and, you know, railroads to haul the iron to where the steel is produced and distribution points, and all that sort of thing.

Our world was built… you know, when we first looked at it, our U.S…. our capitalist system, basically, was built on tangible assets, and reinvestment, and all that sort of thing, and a lot of innovation and invention to go with it.

But this is so much better, if you happen to be good at it, to essentially be able to build hundreds of billions of market value without really needing any capital.

That is a different world than existed in the past. And I think, listen, I think it’s a world that is likely to continue. I mean, the trend is, I don’t think the trend in that direction is over by a long shot.

Charlie Munger:

A lot of the people who are chasing that sort of thing very hard now in the venture capital field are losing a lot of money. It’s a wonderful field, but not everybody’s going to win big in it. A few are going to win big in it.

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