2004: Which asset classes will Berkshire invest in?

AUDIENCE MEMBER: Warren and Charlie, good morning. My name is Mo Spence from Waterloo, Nebraska.

Years ago, you listed the four or five investment vehicles you considered appropriate for Berkshire, including, I believe, common stocks, long-term debt, and arbitrage opportunities.

In light of your comments in this year’s annual report, I was wondering if you could review that list, in order of preference, and specifically comment on them, including the current environment for arbitrage.

WARREN BUFFETT: Yeah. Well, the items you name — and you could break that down by high-grade bonds, you know, versus junk bonds.

The items you mention are all alternatives. You know, Charlie and I sit around and think about what’s the best thing to do with Berkshire’s money. It’s a fairly simple proposition.

And we have a number of things that we feel competent to make judgments on, and we have a number of things that we’re not competent to make judgments on. So we narrow — we hope to narrow the field to investments that we think we can understand. And there are a reasonable number of those, although there are a lot that we can’t understand.

Anything I would say today, you know, can change tomorrow. We don’t think about the categories by themselves.

Now, in a period like summer to mid-fall of 2002, when junk bonds became very attractive, we bought a lot of them. But we didn’t make some great decision to buy junk bonds, we just started seeing things, individual items, that started screaming at us, you know, “buy, buy, buy.” And then that came to an end.

And so we don’t go to the office in the morning thinking what category — how do we prioritize our categories. You know, we have an open mind and whatever we see that day that overcomes, or that crosses the threshold to where we take money out of short-term cash and move into it.

It could be arbitrage — it’s unlikely to be arbitrage now, because that’s a game that, to play on a scale that would have a meaningful effect at Berkshire, is hard to do.

I mean, take very big deals, and it’s something we’ve done successfully in the past. We’ve made a lot of money over the years in arbitrage and quite consistently sometimes in the past.

But we don’t — Charlie and I do not have a checklist that we talk about every day, or every month, or every year, in terms of prioritizing categories.

We just hope — I hope he gets a good idea, he hopes I get a good idea. And when we get one, we move in a big way.

They have to be big now and that’s a limiting factor in terms of what’s available for us.

As you know, if you read the annual report, you know, we took a significant position in currencies. We’re buying viatical settlements, in terms of the transaction I mentioned a little earlier.

We’re open to anything we can understand. Charlie?

CHARLIE MUNGER: Yeah, you really asked us to determine an order of precedency among two or three activities we don’t have much interest in at the moment. And that’s not something we spend a lot of time at.

In other words, we have all this cash because we don’t much like any of those fields at the moment. And spending all the time thinking about orders of precedency among things you clearly are not going to do is pretty fruitless for us.

WARREN BUFFETT: Yeah, I thought I had a slide here but I don’t. But it — when we were buying junk bonds in the summer to fall of 2002, we were literally buying securities — and we limited it to the kind of junk bonds we can understand, which is far from the whole universe — but we were literally buying things on a 30, 35, 40 percent yield to maturity basis.

Now, we buy those with a mental attitude of buying common stocks.

Interestingly enough, within 12 months, some of those same securities that were yielding 30 or 35 percent went to prices where they yielded only 6 percent. I mean, that is truly remarkable when you think about that happening in a country that was not in the throes of depression or anything.

I mean, prices do amazing things in securities markets. And when they do something that strikes us as amazing in our direction, you know, we will act.

But we do not know today what we’re going to be doing tomorrow. We have — you know, we have some things — a few things we may be doing. They’re likely — It’s likely we’re doing them tomorrow, but there’s — we don’t hold any committee meetings on this.

And there’s, you know, this business where somebody says, “You should have 50 percent of your money in bonds and 35 percent, you know, in equities, and 15 —.” We don’t go through anything like that. I mean, we regard that as nonsense.

Any further thoughts, Charlie?

No further thoughts, evidently. (Laughter)