2014: Would Berkshire IPO individual operating units?

JAY GELB: Warren, this question is on Berkshire’s intrinsic value.

In the annual letter, you appear to strongly signal that Berkshire’s shares are undervalued, especially relative to intrinsic value.

Aside from share buybacks, what actions can Berkshire take to narrow the discount between the current share price and intrinsic value? For example, would you ever consider an IPO of Berkshire’s individual operating units?

WARREN BUFFETT: The answer to the last part is no.

But the — I think we try to explain —my guess is I’ve never seen an annual report that uses the term, “intrinsic value,” or even talks about the intrinsic value of its units or business, as much as Berkshire does.

So, Charlie and I really devote considerable effort to explaining which of our businesses — where there’s really a significant discrepancy between what carrying value is, or book value — call it carrying value — and the true value, or the intrinsic value, of the business.

And I got very specific in the case of GEICO in the past year, for example.

And I said that GEICO, which is carried at about 1 billion over tangible assets, may be worth as much as 20 billion over tangible assets. And I wouldn’t be surprised if five years or ten years from now that that figure itself will be a lot larger.

So we’ve talked about it. We said we are willing to buy — not only willing, but eager to buy — stock at 120 percent of book value.

Well, with book value being close to 230 billion now, that obviously means we think that at $45 billion, roughly, over that figure, we are getting a bargain, in relation to intrinsic value.

But we’re never going to try and put out an exact number because we don’t know an exact number.

And it’s — A, it changes from day to day. And — although not a lot day to day, but certainly changes, you know, over the quarters and over the years.

And the second reason is, if you ask Charlie and me to write down a figure as we sit here as to the intrinsic value of Berkshire, we’d probably be within 5 percent of each other.

But we might very — we probably would not be within 1 percent of each other.

And so we will continue to try to give shareholders information about the important units.

It isn’t — the small ones are not unimportant to us, but they are — they do not have a big impact on the overall intrinsic value.

We’ve got a few businesses. I mean, we have some businesses that may be carried at a few hundred million that might be worth a billion or maybe 2 billion, even.

But that isn’t where the big, undisclosed by the balance sheet, values are.

You know, they’re in the railroad, they’re in the insurance business, they’re in our utility business.

And we — they add up to some pretty big numbers. We try to tell you exactly the numbers and, really, and use the words that we use when we’re thinking about those businesses ourselves, in terms of estimating their value. But we don’t want to go further than that.

The 120 percent, obviously, is a loud shoutout as to a figure that we think is very significantly below intrinsic value, or we wouldn’t use it to repurchase shares.

We only believe in repurchasing shares when we can do so at a significant discount from intrinsic value.

Some companies talk about — Coca-Cola does — they talk about buying in shares to cover options. That actually isn’t the best reason to buy in shares.

I mean, the stock could be overpriced, and even though you issued on options, you shouldn’t be buying it in.

But that’s become sort of a mantra throughout corporate America, that if you buy shares to cover the option exercises that you’ve negated the dilution to shareholders.

But again, if you buy shares — if you buy a dollar bill for 90 cents, you’re doing your shareholders a favor. And if you buy it for $1.10, you are doing them no favor at all.

Charlie?

CHARLIE MUNGER: Well, I don’t believe we’ve ever wanted to get the stock way over intrinsic value so that we can issue it to other people and get an advantage for ourselves and a disadvantage for them.

And, I think the people that want the stock up very close to intrinsic value, or higher, really want egg in their beer. It’s okay if it’s a little below.

And we’re not in the game of ballooning our stock up as high as we can get it so we can issue it more at a profit to ourselves.

I think over the long term, our system will work pretty well. And I think the stock will eventually go above intrinsic value, whether we like it or not.

WARREN BUFFETT: Yeah. But we have — we really watched a lot over the years of certain managers attempting to get their stock to sell for way more than it was worth, so they could use it to trade for other companies. I mean, that was all the rage in the late ’60s.

One of the reasons that I wound up my partnership was that that activity was going on so much and it affected all other values.

And it was really a game. And it was a game that some people played sort of halfway honestly, and other people really cheated like crazy, because if you’re trying to get your stock to be overpriced, you’re very likely to cheat on your earnings and cheat on projections. Cheat on everything.

And it works, incidentally. It doesn’t work indefinitely, but it works.

Some companies, whose names you know, were, to some extent, built on that principle.

That’s a game that we not only don’t want to play, we really found it very distasteful, because we saw a lot of these people in action.

And it comes in waves. And we just — we don’t want to come close to playing it.

Unless I’m careful, Charlie will name names, so we’d better move on to shareholders. (Laughter)