Berkshire Hathaway 2019 Annual Meeting Audience Question # 13

Berkshire’s investment in Amazon is also a value investment

Warren Buffett:

Becky?

Becky Quick:

This question is from Ken Skarbeck in Indianapolis. He says, “With the full understanding that Warren had no input on the Amazon purchase, and that, relative to Berkshire, it’s likely a small stake, the investment still caught me off guard.

“I’m wondering if I should begin to think differently about Berkshire looking out, say, 20 years. Might we be seeing a shift in investment philosophy away from value-investing principles that the current management has practiced for 70 years?”

“Amazon is a great company. Yet, it would seem its heady shares ten years into a bull market appear to conflict with being fearful when others are greedy. Considering this and other recent investments, like StoneCo, should we be preparing for change in the price-versus-value decisions that built Berkshire?”

Warren Buffett:

Yeah. It’s interesting that the term “value investing” came up. Because I can assure you that both managers who… and one of them bought some Amazon stock in the last quarter, which will get reported in another week or ten days… he is a value investor.

The idea that value is somehow connected to book value or low price/earnings ratios or anything… as Charlie has said, all investing is value investing. I mean, you’re putting out some money now to get more later on. And you’re making a calculation as to the probabilities of getting that money and when you’ll get it and what interest rates will be in between.

And all the same calculation goes into it, whether you’re buying some bank at 70 percent of book value, or you’re buying Amazon at some very high multiple of reported earnings.

Amazon… the people making the decision on Amazon are absolutely as much value investors as I was when I was looking around for all these things selling below working capital, years ago.

So, that has not changed.

The two people… one of whom made the investment in Amazon… they are looking at many hundreds of securities. And they can look at more than I can, because they’re managing less money. And their universe… possible universes… is greater.

But they are looking for things that they feel they understand what will be developed by that business between now and Judgement Day, in cash.

And it’s not… current sales can make some difference. Current profit margins can make some difference. Tangible assets, excess cash, excess debt, all of those things go into making a calculation as to whether they should buy A versus B versus C.

And they are absolutely following value principles. They don’t necessarily agree with each other or agree with me. But they are very smart. They are totally committed to Berkshire. And they’re very good human beings, on top of it.

So, I don’t second guess them on anything. Charlie doesn’t second guess me. In 60 years, he’s never second guessed me on an investment.

And the considerations are identical when you buy Amazon versus some, say, bank stock that looks cheap, statistically, against book value or earnings or something of the sort.

In the end, it all goes back to Aesop, who, in 600 B.C., said, you know, that a bird in the hand is worth two in the bush.

And when we buy Amazon, we try and figure out whether the… the fellow that bought it… tries to figure out whether there’s three or four or five in the bush and how long it’ll take to get to the bush, how certain he is that he’s going to get to the bush, you know, and then who else is going to come and try and take the bush away and all of that sort of thing. And we do the same thing.

And it really, despite a lot of equations you learn in business school, the basic equation is that of Aesop. And your success in investing depends on how well you were able to figure out how certain that bush is, how far away it is, and what the worst case is, instead of two birds being there, and only one being there, and the possibilities of four or five or ten or 20 being there.

And that will guide me. That will guide my successors in investment management at Berkshire.

And I think they’ll be right more often than they’re wrong. Charlie?

Charlie Munger:

Well I… Warren and I are a little older than some people, and…

Warren Buffett:

Damn near everybody.

Charlie Munger:

And we’re not the most flexible, probably, in the whole world. And of course, if something as extreme as this internet development happens, and you don’t catch it, why, other people are going to blow by you.

And I don’t mind not having caught Amazon early. The guy is kind of a miracle worker. It’s very peculiar. I give myself a pass on that.

But I feel like a horse’s ass for not identifying Google better. I think Warren feels the same way.

Warren Buffett:

Yeah.

Charlie Munger:

We screwed up.

Warren Buffett:

He’s saying we blew it.

And we did have some insights into that, because we were using them at GEICO, and we were seeing the results produced. And we saw that we were paying $10 a click, or whatever it might’ve been, for something that had a marginal cost to them of exactly zero. And we saw it was working for us. So…

Charlie Munger:

We could see in our own operations how well that Google advertising was working. And we just sat there sucking our thumbs.

So, we’re ashamed. We’re trying to atone.

Maybe Apple was atonement.

Warren Buffett:

When he says, “Sucking our thumbs,” I’m just glad he didn’t use some other example.

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