2009: How well did Berkshire's other money managers do?

CAROL LOOMIS: Perhaps I should have said one other thing at the beginning. Those of you who read the annual report carefully know that Charlie and Warren were to be given no clue as to what any of the three of us were going to ask. So don’t think that they have gotten a little list. They have seen nothing.

This question, I got many versions of this question. This one happened to come from Jonathan Grant of New York City. It concerns the four investment managers you have said are in the wings as possible successors to you.

“Can you please tell us, without naming names, but preferably in both quantitative and qualitative terms, how each of the four did in 2008 with the money they are managing — they were managing — for their clients.

“You said you hoped to pick people who would be able to anticipate things that had never occurred before. While the world has seen credit crises before, there were a lot of things that happened in 2008, especially in the last few months of the year, that few were predicting and that you, yourself, have described as almost unprecedented.

“How would you rate the way that these managers — these four managers — did in managing against these low-probability risks? Are all four still on the list?

WARREN BUFFETT: Well, the answer is all four are still on the list. Let me just make one point first, though, because it got misreported a little bit.

We have three candidates for the CEO position. And this is always a major subject of discussion at our director’s meetings. All of them are internal candidates. You should know that.

That’s been said before. But it got misreported here once or twice. And it got confused, I think, because of the four possibilities for the investment job. And you could have all four come to work for us in that case.

We won’t have three CEOs or two CEOs. But we might have multiple investment managers after I’m not around. Or we might just have one. That would be up to the board at that time.

They are both inside and outside the organization. And we don’t preclude anything in terms of where they come from. So we could have a whole big list from outside the organization.

That will not be true about the CEO position. The person that follows me will come from within Berkshire Hathaway.

The four, I don’t have precise figures from them, although I’ve got a fair amount of information on some of them. I would say they did no better than match the S&P last year, which was minus 37 after adding back dividends.

So I would say that in terms of 2008, by itself, you would not say that they covered themselves with glory. But I didn’t cover myself with glory, either. So I’m very tolerant of that in 2008. (Laughter) They —

Charlie, you know some of the records pretty well. Wouldn’t you say that’s true?

CHARLIE MUNGER: Yeah. What’s interesting to me is that practically every investment manager that I know of in America, and regard as intelligent and disciplined and with a unusual record of past success, they all got creamed last year. (Scattered laughter)

WARREN BUFFETT: The group — I don’t hear a lot of laughter about that. (Laughter)

I think you’re hitting a nerve out there, Charlie.

The four have a better-than-average record over time. If you’d asked me at the start of the year, if you’d said, “There’s going to be a minus 37 percent year, will this group do better than average?” I would’ve said yes.

But I think I would’ve been wrong. And like I said, I haven’t got audit returns from every one of them. But I would say I would be wrong.

I would say that their record over 10 years has been, in each case, has been anywhere from modestly to significantly better than average. And I’d be willing to be that would be the case over the next 10 years.

But certainly, last year, you know, there were a lot of things that didn’t work. And our group was not exempt from them.

I have not changed the list. That doesn’t mean that we’re always looking with the idea of finding more people to add to it.

And as opposed to the CEO job, you know, if I dropped dead tonight, the board needs to put somebody in as a CEO tomorrow morning. And they will do so. And they know who it is. And they feel very good about it.

Not too good, I hope, but — (Laughter)

But on the investment officers — one or more, and it could easily be more — they don’t need to do something the next day or the next week.

I mean, the portfolio isn’t — everything doesn’t stop because of that. So that can be a somewhat more leisurely decision they’ll have. And it will be made, in an important way, in consultation and agreement with the new CEO.

So that is something that you shouldn’t expect the next day to hear an announcement on the investment managers. But you should expect to hear, you know, within a month or something like that.

CHARLIE MUNGER: I don’t think we would want a manager who thought he could just go to cash based on macroeconomic notions and then hop back in when it was no longer advantageous to be in cash. Since we can’t do that ourselves —

WARREN BUFFETT: Yeah, we think it’s impossible if we can’t do it ourselves.

CHARLIE MUNGER: Yeah, right. (Laughs)

So we’re not looking for a type who went to cash totally.

WARREN BUFFETT: Yeah, that would — in fact, we would leave out anybody that did that.

CHARLIE MUNGER: Yeah, we would exclude them.

WARREN BUFFETT: Yeah. That —

CHARLIE MUNGER: They’re not dumb enough for us. (Laughter)