Berkshire Hathaway 2017 Annual Meeting Audience Question # 28

Berkshire’s next CEO must have proven capital allocation ability

Warren Buffett:

OK. Station 9.

Audience Member:

I’m from… Shankar Anant from Gurnee, Illinois. Thank you for doing everything you do for us. I have a question.

The two of you have largely avoided capital allocation mistakes by bouncing ideas off of one another.

Will this continue long into Berkshire’s future? And I’d like to… I’m interested in both at headquarters and at subsidiaries.

Charlie Munger:

It can’t continue very long.

Warren Buffett:


Don’t get defeatist, Charlie.

Any successor that’s put in at Berkshire, capital allocation abilities, and proven capital allocation abilities, are certain to be uppermost in board’s minds or in, in the current case… in terms of my recommendation, Charlie’s recommendation, for what happens after we’re not around.

Capital allocation is incredibly important at Berkshire. Right now we have 280 or -90 billion, whatever it may be, of shareholders’ equity. If you take the next decade alone, you know, nobody can make accurate predictions on this.

But in the next 10 years, if you just take… and depreciation right now is another seven billion a year, something on that order.

The next manager in the decade is going to have to allocate, maybe, 400 billion or something like that, maybe more. And it’s more than already has been put in.

So 10 years from now, Berkshire will be an aggregation of businesses where more money has been put in in that decade than everything that took place ahead of time. So you need a very sensible capital allocator in the job of being CEO of Berkshire. And we will have one.

It would be a terrible mistake to have someone in this job where, really, capital allocation might be… might even be their main talent. It probably should be very close to their main talent.

And of course, we have an advantage at Berkshire, in that we do know how important that is and there is that focus on it.

And in a great many companies, people get to the top through ability, and sales sometimes, if they come from the legal side, something like that… all different sides… and they then have the capital allocation, sort of, in their hands.

Now, they may not establish strategic thinking divisions. And they may listen to investment bankers and everything, but they better be able to do it themselves.

And if they’ve come from a different background or haven’t done it, it’s a little bit, as I put in one of my letters, I think… it’s like getting to Carnegie Hall playing the violin, and then you walk out on the stage and they hand you a piano.

I mean, it is something that… Berkshire would not do well if somebody was put in who had a lot of skills in other areas but really did not have an ability to capital allocation.

I’ve talked about it as being something I call a “money mind.” I mean, people can have 120 IQs or 140 IQs or whatever it may be, very similar scoring abilities in terms of intelligence tests. And some of them have minds that are good at one kind of thing and some of them another.

I’ve known very bright people that do not have money minds, and they can make very unintelligent decisions. They can do all kinds of other things that most mortals can’t do. But it just doesn’t, it isn’t the way their wiring works.

And I’ve known other people that really would not do that brilliantly. They do fine, but on an SAT test or something like that. But they’ve never made a dumb money decision in their life. And Charlie, I’m sure, has seen the same thing.

So we do want somebody… and hopefully they’ve got a lot of talents… but we certainly do not want somebody that… if they lack a money mind.


Charlie Munger:

Well, there’s also the option of buying in stock, which… so, it isn’t like it’s some hopeless problem. One way or another, something intelligent will be done.

Warren Buffett:

And a money mind will recognize when it makes sense to buy in stock and doesn’t. You know, and…

In fact, it’s a pretty good test for some people, in terms of managements, how they think about something like buying in stock, because it’s not a very complicated equation if you sort of think straight about that sort of a subject.

But some people think that way and some don’t, and they’re probably miles better at something else. But they say some very silly things when you get to something that seems so clear as whether, say, buying in stock makes sense.

Anything further, Charlie?

Charlie Munger:


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