2010: In the financial crisis, why did Berkshire lean towards investing in debt rather than equity?

ANDREW ROSS SORKIN: This question comes from Victor and Amy Liu (PH) who are shareholders from Santa Monica, California.

And they ask, “When you made investments during the financial crisis in February of 2009, why did you lean towards debt instruments rather than equity?

“For example, why did you invest $300 million in Harley-Davidson at 15 percent interest instead of buying equity when the shares were at $12? Today, they’re at $33.

WARREN BUFFETT: Well, I would say that if I were writing that question now, I might write the same question. But I’m not so sure you would have written the same question in February.

Now, there were different risk profiles, obviously, in investing. And the truth is, I don’t know whether Harley-Davidson equity is worth $33 or $20 or $45. I just have no view on that.

You know, I kind of like a business where your customers tattoo your name on their chest or something. But — (laughter) — figuring out the economic value of that, you know. I’m not sure even going out and questioning those guys I’d learn much from them. (Laughter)

But I do know, or I thought I knew, and I think I was right, that, A) Harley-Davidson was not going out of business. And that, B) 15 percent was going to look pretty damned attractive.

And the truth is, we could probably sell those bonds, I don’t know, probably at 135 or something like that. So we could have a very substantial capital gain, a lot of income.

I knew enough to lend them money; I didn’t know enough to buy the equity. And that’s frequently the case. And, you know, we love buying equities, but we love buying the Goldman preferred at 10 percent.

Now, let’s say Goldman, instead of offering me the 10 percent preferred and warrants had said, “You can have a 12 percent preferred, non-callable,” I might have taken that one instead. I mean, the callable — so there’s a tradeoff involved in all these securities.

And obviously, if I think I can make very good money, as we did on Harley-Davidson, with a very simple decision, just a question of, “Are they going to go broke or not?” as opposed to a tougher decision, “Is the motorcycle market going to get diminished significantly? And, you know, are the margins going to get squeezed somewhat?” And all of that. I’ll go with a simple decision.

Charlie?

CHARLIE MUNGER: Well, of course your one good answer, that you simply didn’t know enough to buy the stock but you did know enough to buy the bond, is a very good response.

The other side to that is, after all, we are a fiduciary for a lot of people, including people with permanent injuries and et cetera, et cetera. And to some extent, we are constrained by how aggressively we buy stocks versus something else. And you mix those together, why, you get our investment policy.

I think, generally speaking, you raise a very good question. I think very often, when you’re looking at a distress situation and buy the bonds, you should have bought the stock. So I think you’re looking in a promising area.

WARREN BUFFETT: Yeah. Ben Graham wrote about that in 1934, actually, in “Security Analysis,” that in the analysis of senior securities, the junior securities usually do better, but you may sleep better with the senior securities.

And we, as Charlie points out, we have 60 billion of liabilities to people in our insurance operation that, in some cases, extend out for 50 years or more.

And we would never have all of our money in stocks. I mean, we might have very significant amounts, but we are running this place so that it can stand anything.

And a couple years ago, we felt very good about where that philosophy left us.

I mean, we actually could do things at a time when most people were paralyzed, and we’ll keep running it that way.