2008: How would Buffett hedge currency risk?

AUDIENCE MEMBER: Hi. My name is Johann Freudenberg (Ph) from Germany.

How would you, as a European investor that invests in U.S. equities, hedge the U.S. dollar risk? Thank you.

WARREN BUFFETT: How would I what?

CHARLIE MUNGER: How do you hedge the U.S. dollar?

WARREN BUFFETT: Oh. Well, whether you’re thinking about starting in Germany and hedging the dollar risk of investing here or vice versa, we are happy to invest in businesses that earn their money in euros in Germany, or whether it’s there, or France, or Italy, or earn their money in sterling in the UK, because we do not have a feeling — at least I don’t have a feeling — that those currencies are likely to depreciate in a big way against the U.S. dollar.

That would be how we would get hurt. We could offset that by borrowing the money in those countries and borrowing in their currency to make the purchases.

But, overall, I think that the U.S. is going to continue to follow some policies that have made the dollar weaker in recent years.

So if I had to bet my life one way or another over 10 years, I would probably bet that the dollar would weaken against other major currencies, and, therefore, I feel no need — if we buy companies whose earnings primarily arise elsewhere in major countries — I feel no need to try and hedge those purchases.

I mean, if I landed from Mars today with a billion of Mars dollars or whatever they call them on Mars, and I was thinking about where to put my money, you know, I went to the local — wherever my UFO landed — and went to the bank and said, “I’ve got this billion of Mars currency,” and they said, “Well, what would you like to exchange here?” I don’t think I’d put all the billion in U.S. dollars.

So it doesn’t bother me to buy businesses around the world, unhedged in terms of their currency, and have a fair amount of our earnings coming from earnings that originate in other currencies and which I will convert at current rates to dollars at some time in the future.

If you take Coca-Cola — we own 200 million shares of Coca-Cola. And if their earnings are roughly $3 a share, that means our share of the earnings of Coca-Cola are $600 million a year.

And of those earnings of 600 million, you know, maybe close to 500 million will be from around the world — all different kinds of currencies.

Basically I like that. I think that that will be a net plus to us over time, and it certainly has been a net plus to us in recent years.

So we are not in the business of hedging currencies, basically. We do not have a lot of hedges set up.

Charlie?

CHARLIE MUNGER: Nothing to add.