2004: Why doesn't Berkshire buy IPOs?

AUDIENCE MEMBER: Good day. My name is Martin Krawitz. I’m a shareholder from Sydney, Australia. (Applause)

And thank you so much for some of your wonderful hospitality here. We’ve had a chance to get on some of Omaha’s 65 golf courses, and it’s just great being in the second-best country in the world. (Laughter)

My question to you, sir, is regarding two IPOs. We had one of the authors about a book on yourself visit us in Sydney last year, and apparently, you dislike IPOs.

My question is, there are some really poor businesses that try and get passed off, but there are some good ones. There’s some government privatizations, or decentralizations, the demographics of baby boomers, and we have some friends wanting to exit some really good businesses.

Could we as investors, and Berkshire Hathaway, not apply some of your disciplines to look at investing in some of these?

And finally, would your answer be different in its applicability to Berkshire Hathaway as a company, as opposed to us as investors? Thank you, sir.

WARREN BUFFETT: Charlie?

CHARLIE MUNGER: Well, the first question, is it entirely possible that you could use our mental models to find good things to buy among IPOs? The answer is sure.

There are a zillion IPOs every year. And buried in those IPOs, I’m sure there are a few cinches that a really intelligent person could find and pounce on. So, welcome.

But the average person buying IPOs is going to get creamed.

So, if you’re talented enough, why sure, that will work. The second question, I forget.

WARREN BUFFETT: About the government offering (inaudible).

CHARLIE MUNGER: About government spin-offs?

WARREN BUFFETT: Give him the spotlight again. There he is.

CHARLIE MUNGER: What was the second question?

AUDIENCE MEMBER: It was just would the attitude of Berkshire Hathaway be different if it was opposed to investors?

WARREN BUFFETT: Oh.

AUDIENCE MEMBER: Thank you.

CHARLIE MUNGER: Yeah, because the IPOs are normally small enough, so that they won’t work for us, or they’re high-tech, where we couldn’t understand them. And so, by and large, if Warren is looking at them, why, I don’t know about it. (Laughter)

WARREN BUFFETT: Yeah, I mentioned earlier how an auction market, prevailing in the stock market, will offer up extraordinary bargains sometimes, because somebody will sell a half a percent, or one percent of a company at a price that may be a quarter of what it’s worth, whereas in negotiated deals, you don’t get that.

An IPO situation more closely approximates a negotiated deal. I mean, the seller decides when to come to market in most cases. And they don’t pick a time necessarily that’s good for you.

So, it has — I think it’s way less likely that, in scanning a list of a hundred securities that are trading in the auction market, well, in the — a hundred IPOs, if you scan a hundred IPOs, you’re going to come up with something cheaper than scanning a hundred companies that are already trading in the auction market.

It is more of a negotiated sale. And negotiated transactions are very hard to get bargains.

If you take the houses in Omaha, you know, somebody that lives next door to somebody who sold their house for $80,000 or — dollars, and their house is more or less comparable, they’re not going to sell it for $50,000.

It just doesn’t happen. People are — it’s too important an asset, and they’re cognizant of what it brings — what is being brought for similar properties. That’s what happens in negotiated sales.

Now if, on the other hand, there were some — a whole bunch of entities that owned one percent of each house in Omaha, and you had an auction market on those one percentage points, they might sell at damn near anything. And occasionally, they sell at crazy prices.

So you’re way — in my view — you’re way more likely to get incredible bargains in an auction market. It’s just the nature of things.

And the IPO is closer — sometimes there will be IPOs in terrible markets, and they may come very cheap. But by and large, that is not when IPOs come. They come when the seller thinks that the market is ready for them.

And they come with an informed seller thinking it’s a pretty good time to go public. And, you know, you’ll make better buys, in my view, in an auction market.