Berkshire Hathaway 2017 Annual Meeting Audience Question # 21

Why Berkshire invested in USG

Warren Buffett:

OK. Station 7.

Audience Member:

Thank you, Mr. Buffett and Mr. Munger, for all you’ve done and the opportunity to learn even more from your approach to investing and life.

My name’s Harry Hong, and I’m a respirologist from Vancouver, British Columbia.

The question involves, back in 2001, you made an initial investment in USG, shortly before the company declared bankruptcy due to the mounting asbestos liability.

You held those shares through the bankruptcy process, even though standard wisdom says that the equity in Chapter 11 is usually worthless. Can you explain why USG’s equity was a safe investment?

Warren Buffett:

Well, I don’t really remember all the details then.

Charlie Munger:

It was very cheap. Very cheap.

Warren Buffett:

Yeah, but I would say this. USG, we own… I’m not sure what percent, but it’s very significant percentage. I don’t know what…

Charlie Munger:

Twenty percent, or something.

Warren Buffett:

Probably 30 percent or something like that. But USG, overall, has just been disappointing because the gypsum business has been disappointing.

And I think… I may be wrong… I think they went bankrupt twice, first from asbestos going back and then, subsequently, because they just had too much debt. So it has not been a brilliant investment.

Now if gypsum prices were at levels that they were in some years in the past, it would have worked out a lot better.

Charlie Munger:

But it hasn’t been terrible.

Warren Buffett:

No, it hasn’t been terrible, but it… gypsum took… has taken a real dive several times, and there has been too much gypsum capacity.

And then when it comes back, the managements have been… not necessarily at USG, but including USG perhaps… they’ve gotten more optimistic about future demand than they should have. And it…

And they like… going back historically a way… they like to build new plants. And it’s a business where the supply has been significantly… potential supply… has been significantly greater than demand in a lot of years. I mean, it…

You’ve seen housing starts in… since 2008 and 2009… not come back anywhere near as much as people anticipated. So gypsum prices have moved up but not dramatically.

So just put that one down as not one of our great ideas. Not one of my great ideas. Charlie wasn’t involved in that. It’s no disaster, though.

Charlie Munger:

No it isn’t. It’s…

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