Berkshire Hathaway 2017 Annual Meeting Audience Question # 3

How Warren and Charlie bought See’s candies

Warren Buffett:

OK. Station 1. The shareholder.

Audience Member:

Hi, Warren and Charlie. My name is Bryan Martin and I’m from Springfield, Illinois.

In the HBO documentary, “Becoming Warren Buffett,” you had a great analogy comparing investing to hitting a baseball and knowing your sweet spot.

Ted Williams knew his sweet spot was a pitch right down the middle. When both of you look at potential investments, what attributes make a company a pitch in your sweet spot that you’ll take a swing at and invest in?

Warren Buffett:

Well, I’m not sure I can define it in exactly the terms you would like, but the…we sort of know it when we see it.

And it would tend to be a business that, for one reason or another, we can look out five, or 10, or 20 years and decide that the competitive advantage that it had at the present would last over that period.

And it would have a trusted manager that would not only fit into the Berkshire culture, but that was eager to join the Berkshire culture. And then it would be a matter of price.

But the main… you know, when we buy a business, essentially, we’re laying out a lot of money now based on what we think that business will deliver over time. And the higher the certainty with which we make that prediction, the better off… the better we feel about it.

You can go back to the first… it wasn’t the first outstanding business we bought, but it was kind of a watershed event… which was a relatively small company, See’s Candy.

And the question when we looked at See’s Candy in 1972 was, would people still want to be both eating and giving away that candy in preference to other candies?

And it wouldn’t be a question of people buying candy for the low bid. And we had a manager we liked very much. And we bought a business that was… paid $25 million for it, net of cash, and it was earning about 4 million pretax then. And we must be getting close to $2 billion or something like that, pretax, that was taken out of it.

But it was only because we felt that people would not be buying, necessarily, a lower-price candy.

I mean it does not work very well if you go to your wife or your girlfriend on Valentine’s Day… I hope they’re the same person… … and say, you know, “Here’s a box of candy, honey. I took the low bid.” You know, it doesn’t… it loses a little as you go through that speech.

And we made a judgment about See’s Candy that it would be special and… probably not in the year 2017… but we certainly thought it would be special in 1982 and 1992. And fortunately, we were right on it. And we’re looking for more See’s Candies, only a lot bigger.

Charlie?

Charlie Munger:

Yeah, well, but it’s also true that we were young and ignorant then. And…

Warren Buffett:

Now we’re old and ignorant. Yeah.

Charlie Munger:

And yes, that’s true, too.

And the truth of the matter is that it would have been very wise to buy See’s Candy at a slightly higher price. You know if they’d asked it, we wouldn’t have done it, so we’ve gotten a lot of credit for being smarter than we were.

Warren Buffett:

Yeah, and to be more accurate, if it had been 5 million more, I wouldn’t have bought it. Charlie would have been willing to buy it, so, yeah.

Fortunately, that we didn’t get to the point where we had to make that decision that way. But he would’ve pushed forward when I probably would’ve faded.

It’s a good thing that a guy came around… actually the seller was the… well, he’s the grandson of Mrs. See, wasn’t he, Charlie? He was Larry See’s son. Am I correct? Or Larry See’s brother.

But he was not interested in the business. And he was interested in… more interested in girls and grapes, actually. And he almost changed his mind. Well, he did change his mind about selling.

And I wasn’t there, but Rick Guerin told me that Charlie went in and gave a… an hour talk on the merits of girls and grapes over having a candy company.

This is true, folks. And the fellow sold to us, so that… … I pull Charlie out in emergencies like that. He’s…

Charlie Munger:

We were very lucky that, early, the habit of buying horrible businesses because they were really cheap. It gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom.

And that early experience was so horrible, fixing the unfixable, that we were very good at avoiding it, thereafter. So, I would argue that our early stupidity helped us.

Warren Buffett:

Yeah, yeah. We learned we could not make a silk purse out of a sow’s ear.

Charlie Munger:

No, we learned…

Warren Buffett:

So, we went out looking for silk after that.

Charlie Munger:

But you have to try it for a long time and fail and have rub… have your nose rubbed in it to really understand it.

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