2011: How can shareholders tell how well Buffett is allocating capital?
AUDIENCE MEMBER: Hi, Charlie. I think I have an easy question. My name is —
WARREN BUFFETT: Give it to me then. (Laughter)
AUDIENCE MEMBER: My name is Stuart Kaye from Matarin Capital Management in Stanford, Connecticut.
And, Warren, you’ve often described a big part of your job is allocating capital.
Going forward, by just looking at Berkshire’s financial statements, how can we determine how good of a job you have done at allocating capital?
WARREN BUFFETT: Well, the real test will be whether the earnings progress at a rate that’s commensurate with the amount of capital that’s being retained. And over time, a market value test — but markets can be very volatile and capricious — but over time, obviously, we — unless the market value of Berkshire is significantly greater than the amount of capital that we have kept from you, retained, and used to buy businesses, you know — the verdict is against us if we ever start selling at a discount to that factor.
But you just have — and, you know, it is not a perfect measurement and certainly is not on any three-month or six months or even one-year basis, but over time, if we’re going to keep your money, we have to earn a better-than-average return on that money we keep and that has to translate into the stock selling at a premium over the money we retain from you.
And so far we’ve done OK on that, but the job gets tougher every year.
Charlie?
CHARLIE MUNGER: Yeah. We have continued to beat the market averages. We just aren’t beating our own past record. And I guarantee that will continue, at least the last half of it. (Laughter)
WARREN BUFFETT: Yeah. Only the last half of it, right?
CHARLIE MUNGER: Yeah.