2002: Will the sheer size of Berkshire's float eventually force a change in investment style?

AUDIENCE MEMBER: Good afternoon. David Winters, Mountain Lakes, New Jersey.

Mr. Buffett and Mr. Munger, thank you for hosting “Woodstock for Capitalists.” I know it’s a lot of fun for everybody, and I think a lot of fun for you, too.

Assuming growth of low-cost float and the sins of the past do not impede progress, does the sheer size of the float create constraints that change the allocation of future investments to more high-quality fixed-income obligations rather than equity coupons or workouts that can grow over time?

It seems otherwise Berkshire is incredibly well positioned if valuations ever decline.

WARREN BUFFETT: Well, I think the answer is we probably are pretty well positioned if valuations decline.

And it’s a good question. If you have 37 billion of float, are you going to be more constrained to conventional investments than if you were working with a half a billion or a billion, as we were not so long ago?

As long as you have a huge capital position, which we have and will continue to have, and as long as you have a lot of outside earning power, which we have and will continue to have, I don’t think we’re constrained very much.

I mean, that — we’ll always want to have a significant level of liquidity, relative to any kind of payment pattern that we see for a good length of time.

But we will probably be operating with so much capital and with so much earning power, independent of the insurance business, and with so much liquidity, that we really will be able to make decisions as to where — as to how — the assets should be deployed, in terms of, simply, where we see the best returns and virtually no risk.

And sometimes we see virtually no risk in equities when they’re extremely cheap. We don’t see that situation now, but we could see it again. And I don’t think we’ll be much — I don’t think we’ll be very constrained when the time comes.

Charlie?

CHARLIE MUNGER: Yeah, our constraint doesn’t come from structure, it comes from a lack of enthusiasm for stocks generally. The bonds are held as a default option.