2001: Should Berkshire basket investment in the tech sector like Buffett suggested he should have done in Pharma?

AUDIENCE MEMBER: Good morning, Mr. Buffett, Mr. Munger.

If you want to trade a share of Berkshire A for 30 shares of Berkshire B, as you had mentioned before, a personal stock split, or vice versa, is this considered a wash sale for tax purposes?

Also, I’d like to ask you a question which you’ve heard before, but in a slightly different context. A few years ago, you said you had made a mistake by not buying shares of the major pharmaceutical companies around 1993.

You cited their value to society, as well as their terrific growth, high profit margins, and great potential. You said that while you didn’t know which companies would do the best, you could’ve made some kind of sector play, because the entire sector had been decimated.

These exact same words, including those about not knowing which businesses will dominate over time, can also be used to describe another industry, which has recently been decimated.

This is industry is, of course, technology. How do you see these two investment ideas, pharmaceuticals in ’93 and technology now, and what difference in the two situations makes the first a good opportunity for Berkshire, and the second not one?

WARREN BUFFETT: Well, Charlie answers all the questions about mistakes, so I will turn the second question over to him. (Laughter)

CHARLIE MUNGER: Personally, I think that the future of the pharmaceutical industry was easier to predict than the future of the high-technology sector.

In the pharmaceutical sector, almost everybody did well, and some companies did extremely well. In the other sector, why, there are many permanent casualties in the high-tech sector.

WARREN BUFFETT: Yeah, I would say that there’s certainly nothing obvious to us about the fact that the tech sector — as a group — viewed in aggregate — would be a good buy or be undervalued.

Whereas we should have had enough sense to recognize that the pharmaceutical industry, as a group, was undervalued.

But the pharmaceutical industry has a far, far better record of returns on large amounts of equity over time, and with a high percentage of the participants having those returns, than the tech industry. I wouldn’t regard those two as comparable at all.