1997: Why does Berkshire under promise and over deliver?

AUDIENCE MEMBER: Mr. Buffett, my name is J.P. from Singapore. I flew 24 hours to get here.

Mr. Buffett, throughout your life you have repeatedly under promised and over delivered. For many recent years, for example, you’ve targeted Berkshire Hathaway’s long-term book value growth at 15 percent. Yet you have come through at about 24 percent. That is a big gap of 9 percent between your modesty and the outcome. Perhaps the biggest dose of modesty in corporate history.

May I ask, why is there such a big gap between your modesty and the outcome? (Laughter)

WARREN BUFFETT: I don’t think it was modesty. I think it was —

For one thing, we’ve had a terrific market that has reappraised all businesses in the last ten or 15 years. So when we really started worrying about future performance, the key factor was having larger amounts of capital. And there’s no question that the larger the amount of capital you work with, the more difficult the job is.

Now, we were fortunate that that ascension in capital happened to coincide with things that just lifted all the boats substantially. And so we’ve had better luck than I would have guessed we would have had ten years ago, or five years ago.

But it’s been aided by a huge tailwind. And absent that tailwind we would not have done as well. I think maybe we would have done relatively as well, but we would not have done as well in absolute terms.

And we won’t have that tailwind in the future, I can assure you of that. But we will have a larger amount of capital, which is the anchor that works on it.

So, if Charlie and I could make a deal to increase the intrinsic value of Berkshire at 15 percent a year over the next ten years, we would sign up now. And I don’t want you to even tempt us with lower numbers, because those numbers get astounding.

If we paid no dividend at all over a ten-year period, you can figure out where a 15 percent rate would take us. And we hope to get there, but we think that is absolutely the tops.

And I think it’s very likely for a period when the market starts underperforming businesses, that the rate could be very substantially lower than that.

Charlie, do you want to expand on that?

CHARLIE MUNGER: Well, the questioner came from Singapore, which has perhaps the best economic record in the history of developing an economy. And therefore he referred to 15 percent per annum as modest. It’s not modest, it’s arrogant. (Laughter)

Only somebody from Singapore would call it modest. (Laughter)

WARREN BUFFETT: Yeah. Yeah. Be careful, Charlie, or they’ll have a voice vote that we should move to Singapore, I mean —

This is the group that wants performance.

Large quantities of money are not going to compound at super rates — at super compound rates. Small sums probably aren’t either, but large sums aren’t.

And if anybody that manages large sums of money that promises or implies that they can achieve really outstanding returns, you know, I’d stay away from them.

The numbers just get too big. And you know, you’ve seen some of that with certain money management organizations in recent years. And you know, 15 percent on an intrinsic value which is substantially greater than our book value gets to be a very, very big number.

And we need huge ideas. We don’t need thousands of ideas. I mean, we might need them, but we could never come up with them. So what we look for is the very large idea.

But we’re not finding them now. And we’ll keep looking, and every now and then we will find something.

But really, if you think we’re going to have any chance of doing better than 15 percent, and believe me, that is no number that I’d want to sign my name to, but you really shouldn’t — you’re going to be disappointed in Berkshire. And we don’t want to disappoint you, so that’s the reason we try to be realistic about expectations.