2001: Should companies hoard cash or either put it to work or return it to shareholders?

AUDIENCE MEMBER: Good morning. I’m Murray Cass from Markham, Ontario.

The financial community relies heavily on the P/E ratio when evaluating prospective investments.

When you buy a company, you must certainly consider not just the future stream of earnings but also the company’s financial condition, among other things. By financial condition, I’m speaking mainly of cash and debt.

But the P/E doesn’t take into consideration either cash or debt. Occasionally, you see a company with consistently positive free cash flow trading just over cash value, effectively giving away the future earnings. In cases like this, the P/E looks terribly overstated unless adjusted for cash and debt.

I’ve always preferred companies with oodles of cash to those burdened with lots of debt. And then I read Phil Fisher’s book, “Conservative Investors Sleep Well.”

Well, I haven’t slept well since. He really confused me when he commented that “hoarding cash was evil.” He wrote that instead, “Companies should either put the cash to good use or distribute it to shareholders.” Can I get your thoughts on this?

WARREN BUFFETT: Well, there are times when we’re awash in cash. And there have been plenty of times when we didn’t have enough cash.

Charlie and I, I remember in the late ’60s, we were — when bank credit was very difficult — we were looking for money over in the Middle East. You remember that, Charlie?

CHARLIE MUNGER: Yes, I do.

WARREN BUFFETT: Yeah, and —

CHARLIE MUNGER: They wanted us to repay it in dinars.

WARREN BUFFETT: Yes, and the guy that wanted us to repaint it — repay him — in dinars — or “deeners,” or whatever the hell they call them — (laughter) — was also the guy that determined the value of those things.

So, we — (laughter) — were not terribly excited about meeting up with him on payday and having him decide the exchange rate on that date. (Laughter)

But we, obviously, are looking every day for ways to deploy cash.

And we would never have cash around just to have cash. I mean, we would never think that we should have a cash position of X percent. And I — frankly, I think these asset allocation things that tacticians in Wall Street put out, you know, about 60 percent stocks and 30 — we think that’s total nonsense.

So, we want to have all our money — (applause) — working in decent businesses. But sometimes we can’t find them, or sometimes cash comes in (un)expectedly, or sometimes we sell something, and we have more cash around than we would like.

And more cash around than we would like means that we have 10 or 15 cents around. Because we want money employed, but we’ll never employ it just to employ it. And in recent years, we’ve tended to be cash heavy, but not because we wanted cash per se.

In the mid-’70s, you know, we were scraping around for every dime we could find to buy things. We don’t like lots of leverage, and we never will. We’ll never borrow lots of money at Berkshire. It’s just not our style.

But you will find us quite unhappy over time if cash just keeps building up. And I think, one way or another, we’ll find ways to use it.

Charlie?

CHARLIE MUNGER: I can’t add anything to that.