2011: How does Berkshire differ from the go-go conglomerates of the 1960s?

CAROL LOOMIS: This is from Jeff — sorry, Jeff Cunningham of Directorship.

“Berkshire’s corporate strategy resembles that of the go-go conglomerates of the 1960s: Geneen’s ITT, Teledyne, Textron.

“Small corporate team, tight financial controls, sector neutrality, and little involvement in subsidiary operations, and ultimately not fully valued for the sum of their parts. If you disagree with this, how does Berkshire differ?”

WARREN BUFFETT: Yeah, it — we are a conglomerate and, you know, people shy from that name, but that’s exactly what we are.

And I think I laid out in the annual report at least one of the advantages of being a conglomerate, namely the tax-efficient transfer of money from businesses that do not have good ways of using it to businesses that have better ways of using it, which is, if it’s carried out intelligently, is a very significant plus.

The conglomerates you mentioned — and I’m familiar with all of them — really became sort of stock issuance machines, where the idea was to get your stock to sell at a very high multiple, and then trade it for something else that was selling at a lower multiple, and voilà, you know, earnings per share went up, and then people said you’ll do it again.

So it was — it was really accepted and endorsed by Wall Street that if you had this sort of semi-Ponzi scheme of issuing shares constantly for things that had lower P/E ratios, everybody knew what the game was, but they thought the game would continue to succeed. And for a while it did.

And the Gulf and Westerns of the world, and the Littons of the world, and there were numbers of them, it was almost like an unspoken conspiracy that nobody will point out that this is kind of a perpetual motion machine, and if they don’t it will keep working.

But if something says anything about it, somebody says, “The emperor has no clothes,” it will all collapse.

The interesting thing, of course, you mentioned Teledyne in there. Teledyne played that game, and then it ended, and all of this stuff came back to Earth, but then Teledyne went into reverse and bought in stock like crazy when their stock got underpriced.

So they issued stock like crazy when it was overpriced, and they bought it in to an extraordinary degree when it was underpriced, and it created a sensational record.

Most of those companies, though, I think have very little relationship to Berkshire.

It’s true that, I think, some of them were pretty decentralized, although I remember — didn’t Harold Geneen have some famous room that he brought everybody in —

CHARLIE MUNGER: Yes.

WARREN BUFFETT: —chewed them out, you know, monthly for not making their projections, so they learned to make them whether they were actually really making them or not.

The managers were — if you took Charlie Bluhdorn at Gulf and Western, or, you know, take the group, they were primarily thinking about how — Jimmy Ling at LTV — they were primarily thinking about how they could pump the stock up to a level where they could buy big established businesses that were selling at lower P/E ratios and sort of have this perpetual motion game going. And it came to an end.

I don’t think there’s — you know, at Berkshire we are not in that game. We are in the game of trying to buy very good businesses that we’re going to keep forever and having them grow their earnings and have them also throw off cash that we can use to buy more similar businesses.

It is a conglomerate. Conglomerates, generally, are unpopular, and I don’t disagree with why they are. But I think it’s a very rational way of running the business as long as you keep it focused on running businesses and not as a stock-issuance machine.

Charlie?

CHARLIE MUNGER: Well, yes, and some of those companies got into really pretty heavy manipulation of the numbers.

One of them said, “I know what I’m going to report, I just don’t know how I’m going to do it.” (Laughter)

That’s not the attitude around this place.

WARREN BUFFETT: Yeah, we don’t know what we’re going to report. (Laughs)

CHARLIE MUNGER: No, no. And sometimes we don’t know how to do it, either. (Laughter)