2009: How did Buffett think about opportunity costs during the financial crisis?

AUDIENCE MEMBER: Jack Benben (PH) from Haworth, New Jersey. First, I’d like to thank you. This is — I’ve been to about a dozen meetings. This is probably the best one.

So thank you very much for the new format. And thank you very much to the journalists who’ve really helped out a lot. (Applause)

WARREN BUFFETT: Yeah, thank you.

AUDIENCE MEMBER: At past meetings, you and Mr. Munger have talked at great length about opportunity cost. Excuse me. The past year has presented you with many unusual opportunities.

Can you discuss some of the more important opportunity cost decisions of the past year? And were those decisions at all affected by the macroeconomic picture? Thank you.

WARREN BUFFETT: Well, certainly opportunity cost has been much more in the forefront of mind in the last 18 months.

When things are moving very fast, when both prices are moving, and in certain cases, intrinsic business value is moving at a pace that’s far greater than we’ve seen for a long time, it means that in terms of calibrating A versus B, versus C, it’s tougher.

It’s more interesting. It’s more challenging. But it’s — and it can be way more profitable, too. But it’s a different task then when everything was moving at a more leisurely pace.

And I described earlier, you know, we face that problem. And it’s a good problem to have. We faced that problem in September and October. Because we want to always keep a lot of money around.

We have all kinds of levels — extra levels of safety — that we follow at Berkshire. And we will never get so we’re dependent on banks or other people’s money or anything else. We’re just not going to run the company that way.

So we were seeing things happen. I mean, we got a call — we got lots of calls. But, most of them, we ignored. But the calls that we got that we ignored helped us calibrate the calls that we paid attention to, too.

And if we got a call from a Goldman Sachs, I think it was on a Wednesday, maybe, you know, that was a transaction that couldn’t have been done the previous Wednesday and might not be done the next Wednesday.

And we’re talking real sums, 5 billion in that case. And we had certain commitments outstanding. We had a $3 billion commitment out on Dow Chemical. I think at that point, I could be wrong exactly on the day when we made it.

We had a $5 billion commitment out on Constellation Energy. We had 6 1/2 billion we were going to have to come up with in early October on the Wrigley-Mars deal. So we were faced with opportunity cost-type considerations.

And as I said earlier, we actually sold something that under normal circumstances we wouldn’t have thought about selling if it was 10 or 15 points higher, in Johnson & Johnson. But we just didn’t want to get uncomfortable.

So you are faced, in a chaotic market, particularly where people needs large sums — so you’re not talking about buying a hundred million dollars’ worth of something that, you know, one day and a hundred million the next day — but all of a sudden you’re called on for billions, if you’re going to play at all.

We faced that opportunity cost calculation frequently during that period. I mean, when we decided to commit to buy Constellation Energy, we had to be willing to come up with $5 billion seven or eight months down the line. And you didn’t know exactly when because it would be subject to public utility commission approval.

But if something chaotic happened in the market next week, we would get phone calls. Or we would see stocks selling or bonds selling at prices we liked. And if the relative values, against what we held, were interesting, we might sell things.

Now, it’s harder to sell things in huge quantities than it is to buy things in huge quantities during a period like that. So you have to measure whether you can actually get the offsetting transaction done to move from one to another.

We have a much — if we’re going to move billions from one to another, it’s much different than the problem you may have in moving hundreds of thousands or tens of thousands of dollars from one holding to another. We really can have big transactional costs unless we’re careful.

But that’s the kind of calculation we go through. And we love the fact we get the opportunity to make those calculations. It’s a sign of opportunity around.

And you know, we’ll — we haven’t had the flurry of activity like we had last year for a long time. So it was the first time we really faced the question, you know, can we raise a couple billion dollars in a hurry, to be sure that we’ve offset the cash needs of what we’re committing to on the purchase side.

On the Johnson & Johnson we sold, we actually made a deal where we got — I had a floor price on what we sell that for, just because the markets were so chaotic, that we wanted to be absolutely sure that we would not end up a couple billion dollars less than comfortable when we got all through.

Our definition of comfortable is really comfortable. We want to have billions and billions and billions around. And then we’ll think about what we do with the surplus.

Charlie?

CHARLIE MUNGER: Again, I’ve got nothing to add.