2000: What is Berkshire's criteria for selling a company?

AUDIENCE MEMBER: I’m Mark Chere (PH) from Hong Kong.

And Mr. Buffett, I’d like to ask you a couple of questions. The first one is how many insurance companies does Berkshire Hathaway own?

WARREN BUFFETT: Let me —

AUDIENCE MEMBER: I can’t figure out the total.

WARREN BUFFETT: Let me answer that and then you go on to your second one.

We have a great number of companies because, in many cases, a given strategy or a given operation operates through multiple companies.

The company we announced the purchase of the other day is really one business, but it has three companies.

I wouldn’t be surprised — I’ve never looked at the number — but it wouldn’t surprise me if we have 20 insurance companies or something. Maybe 25 or 30, who knows?

We have about nine or 10 basic insurance operations for which a given management has responsibility, but there’s a lot of state laws applicable to insurance companies and different regulations.

It’s often advantageous to have a number of companies operating under one management to achieve one operational goal.

The big operations are General Re, and GEICO, and the National Indemnity reinsurance operation run by Ajit [Jain].

And then we have a group of about five different operations that are all very decent businesses, but are not as big as the three I mentioned. Go ahead.

AUDIENCE MEMBER: Thank you. Yeah, my main question is this. Much has been written by you, and a lot more by other people, about your criteria, or the criteria you use when you make a purchase of a company, either in full or in part.

But almost nothing has been written by you, at any rate as far as I can tell, on your criteria for selling a company that you have already — you have previously purchased.

And I wonder if you could outline the criteria you might apply today to a sale of a company, and whether you would go — well, the simplest way to put it is this: Would you agree with Philip Fisher, who said there were two reasons to sell a company — or a stock?

One was when you’d discovered you’ve made a mistake in your analysis and the company was not what you thought it was.

And the second when — was when the — something within the company had changed, the management had changed or so on, so it no longer met your original criteria.

Would you — are those the principles that you apply or would you say there are different ones or others? Thank you.

WARREN BUFFETT: I’m glad you brought up Phil Fisher, because he is a terrific mind and investor. He’s probably in his 90s now, and — but his —

A couple of books he wrote in the early ’60s are classics and I advise everybody here who’s really interested in investments to read those two books from the earlier ’60s.

And he’s a nice man. I went out to — 40 years ago, I dropped into his office in San Francisco, a tiny office. And he was kind enough to spend some time with me. And I’m a huge admirer of his.

The criteria that we use for selling a business that we own control of are articulated in the annual report, under the ground rules.

So in terms of businesses that we own, we have set forth — and I direct you there — we’ve written those same ground rules every year since 1983. And actually, we had those in our head for decades before that.

And we have this quirk, which you should understand, and we want our shareholders to understand it, that even though we got offered a price that was far above its economic value, as we might calculate it going in — but if we got offered a price for that for a business that we have now, we have no interest in selling it.

You know, we just — we don’t break off the relationships that we develop simply because we get offered a fancy price for something. And we’ve had a chance to do that sometimes.

That may help us, actually, in acquiring businesses, because both of the companies that I’ve committed to buy in the last few weeks, both of them are very concerned about whether they have found a permanent home or not.

And people who build their businesses lovingly over 30, or 40, or 50 years, frequently care about that. A lot of people don’t care about that.

And that’s one of the things we evaluate when buying a business. We look at the owner, and we say, “Do you love the — ” in effect, we ask ourselves, “Does he love the business or does he love the money?”

Nothing wrong with liking the money. In fact, we’d be a little disappointed if most of them didn’t like the money. But in terms of whether the primacy is loving the money or loving the business, that’s very important to us.

And when we find somebody that loves their business — and likes the money — but loves their business, we are a very, very desirable home for them, because we’re just about the only people that they can deal with, of size, where we can commit that they are going to be part of this operation, really, forever, and be able to deliver on that promise.

I tell sellers that the only person that can double-cross them is me. I can double-cross them. But there’s never going to be a takeover of Berkshire. There’s never going to be a management consultant come in and say, “I think you’d better do this.”

There’s never going to be a response to Wall Street saying, “Why aren’t you a pure play on this or that and therefore you ought to spin this off the—?” None of that’s going to happen.

And we can tell them, with a hundred percent assuredness, that for a very long time — that if they make a decision to come with Berkshire, they — that decision will be the final decision as to where their company resides.

So, unless those couple conditions, which are extremely unusual, that are described in the ground rules prevail, we will not be selling operating businesses, even though someone might offer us far more than, logically, they’re worth.

The question about stocks is, we’re not quite with Phil Fisher on that, but we’re very close. We love buying stocks where we think the businesses are so solid, have such economic advantage, that we can essentially ride with them forever.

But you’ve heard me talk about newspapers earlier today. We would have thought newspapers — 20, 25 years ago, I think Charlie and I probably thought a daily newspaper, you know, in a single newspaper town — which practically all are — is probably about the solidest investment you could find.

We might have thought a network TV-affiliated station was about as solid as you could find. And they were very solid.

But events have, over the last 20 or 25 years, have certainly changed that to some degree and maybe to a very, very big degree.

So we will occasionally reevaluate the economic characteristics that we see 10 years out from the ones that we saw 10 years ago and maybe come to a somewhat different conclusion.

The first 20 years of investing for me — or maybe more — my decision to sell almost always was based on the fact that I found something else I was dying to buy.

I mean, I sold stocks at — you know, at three times earnings to buy stocks at two times earnings 45 years ago, because I was always running out of money. Now, I run out of ideas. I’ve got a lot of money but no ideas, and — (Laughter)

You know, I’d — I’m not sure which is better. What do you think, Charlie? (Laughter)

CHARLIE MUNGER: I think you were way better off when you had 50 years ahead of you — (laughter) — and less money.

WARREN BUFFETT: I still think I have 50 years ahead of me, Charlie. (Laughter)

You want to elaborate any more on selling?

CHARLIE MUNGER: Yeah. We almost never sell an operating business. And when it does happen, it’s usually because we’ve got some trouble we can’t fix.