2001: How do Berkshire's newer investments reinvest?
AUDIENCE MEMBER: Good morning. My name is Mark Dickson (PH) from Sarasota, Florida. And I’d like to thank you for providing this forum for all of us. It’s wonderful.
In past years, you’ve been very specific about some of the numbers related to Coca-Cola, Wells Fargo, Rockwood — specifically like with Coca-Cola — cost of aluminum, and sugar, and all that. It goes into the bottom line of Coca-Cola.
Can you provide some of the specific numbers that go into some of your more recent purchases over the last couple years?
WARREN BUFFETT: Well, they have such different characteristics. That’s very difficult. I mean, we have service businesses such as FlightSafety, and Executive Jet is a service business.
And, you know, in many of those companies, the big cost is personnel. I mean, we need people with — at a FlightSafety, we’ve got a lot of money invested in simulators. We’ll put over $200 million into simulators this year, just as we did last year.
So we have a big capital cost in that business, and then we have a big people cost because we are training pilots. And that’s very person-on-person intensive. NetJets, part of Executive Jet, very people-intensive. I mean, we are absolutely no better than the people that interact with our clientele.
You get into something like the carpet business, and maybe only 15 percent of your revenues will be accounted for by employment costs. And you’re a very heavy raw material buyer. I mean, you’re buying lots of fiber.
So it varies enormously by the kind of business you’re in.
I mean, when we’re in the insurance business, you know, we’re in the business of paying future claims. And that’s our big cost. And that’s — obviously, involves estimates because sometimes we’re going to pay the claim five, 10, or 20 years later. We’re not going to know about it sometimes till 20 years later.
So, it’s very hard to generalize among the businesses.
If you’re in the retail business, which we are in the furniture and jewelry in a significant way, purchased goods are very — obviously — very important. We don’t manufacture our own goods to any extent in those businesses.
And then, the second cost, of course, is labor in a business like that.
But we don’t have any notions as to what we want to buy based on how their costs are segmented. What we really are looking for is an enduring competitive advantage. I mean, that’s what’s going through our mind all the time.
And then we want, obviously, top-notch people running the place, because we’re not going to run them ourselves. So those are the two factors we look at.
We want to understand the cost structure, but Charlie and I can understand the cost structure of many companies — there’s many we can’t — but we can understand a good many companies.
And we don’t really care whether we’re buying into a people-intensive business, a raw material-intensive business, a rent-intensive business. We do want to understand it and understand why it’s got an edge against its competitors.
Charlie?
CHARLIE MUNGER: Yeah, basically, to some extent we’re like the hedgehog that knows one big thing. If you generate float at 3 percent per annum and buy businesses that earn 13 percent per annum with the proceeds of the float, we have actually figured out that that’s a pretty good position to be in. (Laughter)
WARREN BUFFETT: It took us a long time. (Laughter)
Incidentally, I would hope that we would — and actually expect that — absent a mega-catastrophe — that 3 percent figure will come down over the next, well, in the near future.
But a mega-catastrophe could change all of that. I mean, if you had a $50 billion insured catastrophe — Tokyo earthquake, California earthquake, Florida hurricane — I mean, those — we’re in the business of taking those risks.
We’re the largest insurer, as you may know, of the California Earthquake Authority. I have a sister here who is from Carmel, and she used to call me when the dogs and cats start running in circles. (Laughter)
So we’re exposed to some things that could change.
But absent a mega-catastrophe, experience is going in the right way at both — at really at all of our insurance companies. And I would expect that to continue for a while. And then at some point I’d expect it to reverse itself. Isn’t that helpful? (Laughter)