1995: Where does Buffett see Salomon going over the next two or three years?

AUDIENCE MEMBER: Good morning. I’m John Nugier (PH) from Kingsburg, California. And my question relates to Salomon.

And where — I’m just asking if you could take us out the next two or three years in your vision. It started out as a good investment. You got a good return on it, or your interest.

And it’s clearly had some problems. And we have gotten in deeper and deeper as those problems have continued. And it doesn’t look like it’s superbright.

So, it — you must understand where it’s going. But could you just give us where you see it going in the next two or three years?

WARREN BUFFETT: Well, no, I think it’s very difficult to forecast where Salomon or, really, almost any major investment bank, slash, trading house will do over actually the next two or three months, let alone the next two or three years.

The nature of that business is obviously far more volatile than the blade and razor business. Now the — and the tough part is assessing over a longer period of time whether — because of volatility, it’s much harder to assess whether — what the average returns might be from a business.

And the answer is, Charlie and I, probably, if we were to try and write the forecast for the next two or three years, we would not have a high — a feeling that we had a high probability of being able to predict what that company, or other companies in that industry either, would earn three years out or would probably have in the way of average earnings.

Our own commitment is to a $700 million preferred issue, which has five redemption dates starting in October 31st of this year and then every year thereafter.

On those dates, we can either take cash or stock. And that’s an advantage, obviously, to have an option. Any time you have an option in this world, it’s to an advantage — it’s to your advantage.

It may be a very small advantage, but it’s — giving options is generally a mistake, and accepting options is usually a good idea, if it doesn’t cost you anything.

And we will — the other thing about options is you don’t make a decision on them until you have to make a decision. But — so, we, in addition to that $700 million of preferred, which in our view is a hundred percent money-good — I mean, we’d like to own more of that.

But we also have about 6 million-odd shares of common, which we paid perhaps $48 a share for, or something in that area. In any event, considerably more than the present market of 35 or ’6. So, we have a loss of probably 80 or $90 million, or some number like that, at market in the common.

The preferred has actually treated us fine. We’ve received $63 million a year.

Incidentally, by owning the amount of common we own, this probably isn’t generally known, but — or recognized — if you own 20 percent of the voting power of a company, you have a somewhat different dividends-received credit. You have somewhat different tax treatment than if you own less than 20 percent.

So, until we own that common, we paid somewhat more tax on our preferred dividend than we now pay. It’s not a huge item, but it’s not immaterial, either.

Charlie?

CHARLIE MUNGER: Well, I certainly agree, it’s hard to forecast what’s going to happen in the big investment banking, dash — slash, trading houses.

I would like to say that Berkshire Hathaway was a large customer of Salomon long before we bought the preferred, and that we’ve had marvelous service over the years.

I think Salomon’s going to be around for a long time, rendering very good service to various clients.

WARREN BUFFETT: We sold —

CHARLIE MUNGER: Satisfied clients.

WARREN BUFFETT: We sold our first debt issue of Berkshire, I think, in 1973, through Salomon. So, we’ve had an investing banking relationship for 21 or 22 years there. And actually, we’d done business with them before that in various other ways. So, it’s a long-term relationship.

But there’s no question about Salomon being around. The question — and that’s why our preferred is absolutely money-good.

But the question is what the average return on capital will be. And we knew that was difficult to predict when we went in. And we found out it’s even more difficult to predict than we thought.