What's your opinion on investing in foreign stocks?
We have a number of businesses that derive very significant percentages of their revenue from international operations. Coca-Cola earns 80% or more from their international operations; Gillette will earn two thirds or more from international operations, so we get a lot from outside the United States. It's a slight advantage to us having U.S.-domiciled companies. For instance, we get better treatment on the dividends if they are domestically based because of the way the U.S. tax laws go. But if Coca-Cola were domiciled in Amsterdam or if Gillette was in London, we would still be attracted to them to virtually the same degree we are now. We look at businesses domiciled outside this country--many don't meet our size requirements, but that's true here, too--but we have nothing against buying companies that are domiciled outside the United States. We will keep looking; we need to look everywhere with the kind of money we have today available for investment. Charlie?
[Charlie Munger: Again, we have a wonderful way of playing the rapid development of companies outside the United States. So far, we haven't seen anything that has attracted us as being better. If you can sell Coca-Cola, do you really want to get into steel in Malaysia or something?]
Some things travel very well, and some things don't. Gillette travels, Disney travels, McDonald's travels, Coke travels; See's candy doesn't travel as well. It might if you spent 50 years working on it, but it's not an easy thing to travel. Actually, candy bars themselves don't travel very well; if you look at the top-selling candy bars in France or in England or in Japan, you don't find the similarity you find in terms of the best-selling soft drinks or movies or fast food hamburgers or razor blades.
[Charlie Munger: Except Snickers! (laughter) For some reason, Snickers.
Charlie's got a lot of experience. You may want to invest where we invest, but you don't want to eat where we eat. (laughter)
[Comments on investing in Europe]
One disadvantage to buying a stock in the UK is that you have to report your holding once you reach the 3% level. So, for a stock with a $5 billion market cap, we’d have to report [and likely run the stock up] once we’d acquired only $150 million. But in the past, we’ve owned Guinness, which is now owned by Diageo, so this is not an overwhelming disadvantage. We’d be very comfortable owning many UK companies.
Incidentally, contrary to what’s been reported, we do not have to report a 5% position within 10 days [referring to reports in The Wall Street Journal and elsewhere that Berkshire would have to file on its recently disclosed purchase of Anheuser-Busch stock if it held more than 5% of the shares outstanding].
[Charlie Munger: Recently we’ve preferred the currencies of socialized Europe over the U.S. dollar. A queer occurrence...]
I remember when I’d come back from Europe and couldn’t wait to convert my euros back to dollars.
Europe isn’t doing as badly as you might think. Its growth rate is lower than ours, but our population is expanding a lot faster, so on a per capital basis, the gap is not as wide as you’d think.
What are your requirements for investments outside the U.S.?
We rule out any markets that aren’t big enough. We need to make investments in the hundreds-of-million-dollar-size range, so that rules out a lot of markets.
Transparency matters; the accounting doesn’t matter so much to us. As long as we are able to value what’s underneath of it, we’ll invest. Remember though, that something like 53% of all the value of the public companies in the world is here in the U.S., so we are a big piece of the pie.
[RE: Declining U.S. Dollar]
We think the dollar, over time, unless policies change in a major way, will likely decline somewhat more against most major currencies. At one time, we backed this up with $22 billion in foreign currencies, but then the carry made that an expensive way to express that belief, so now we buy into companies that earn a lot in foreign currencies. It’s a factor, but not a 50% factor, in what we buy.
We’re following policies in this country that will lead to a decline in the dollar – the fundamental forces are fairly strong.
We own one currency position right now that will surprise you – we’ll tell you about it next year.
Munger: The inflation factor at Costco is zero. It’s perfectly amazing how well we’ve done so far.
Buffett: Look at oil going from $30 to $60 and the euro from 83 cents [per dollar] to $1.35, so the price of oil for Europeans has gone up very little – 25% vs. 100% for us. It’s easy to anchor on your own currency.
You’ll have to think more about currency than you have. Around the world, others think about currencies, but the average American hasn’t had to.
When looking at other countries Mr. Buffett, do you look at the country’s overall financial status or do you look at the financials of that specific company in a foreign country? You mentioned investing in Korean companies – do you ever look at the state of the country you are investing in?
We care about the country where the company is run. There is a disadvantage being outside of the US. A few years ago we were looking to invest in either PetroChina or Yukos in Russia. We ended up picking PetroChina because the political situation was more stable. It turned out to be a good decision. I care about the country and the geopolitical environment I am investing in.
The whole company was selling for $35 billion. It was selling for one-fourth of the price of Exxon, but was making profits equal to 80% of Exxon. I was reading the annual report one day and in it I saw a message from the Chairman saying that the company would pay out 45% of its profits as dividends. This was much more than any company like this, and I liked the reserves. If it were a US company, it would sell for $85 billion; it’s a good, solid company. I don’t understand the Chinese culture like I understand the US culture. However it said right in their annual report that they will payout 45% of their earnings as dividends, basically they say if they make money they will pay it out. I invested $450 million and its now worth $3.5 billion. I decided I’d rather be in China than Russia. I liked the investment climate better in China. In July, the owner of Yukos, Mikhail Khodorkovsky (at that time, the richest man in Russia) had breakfast with me and was asking for my consultation if they should expand into New York and if this was too onerous considering the SEC regulations. Four months later, Mikhail Khodorkovsky was in prison. Putin put him in. He took on Putin and lost. His decision on geopolitical thinking was wrong and now the company is finished. PetroChina was the superior investment choice. 45% was a crazy amount of dividends to offer but China kept its word. I am never quite as happy as I am in the US, because the laws are more uncertain elsewhere, but the point is to buy things cheap. Russia is just a bad geopolitical environment. On the other hand, China has kept their word on paying the dividends. In fact, when the dividends check comes in, it is calculated out 10 or so decimals, these guys keep their word. I don’t know the tax laws in China, but you can buy a good business cheap. At Berkshire Hathaway, you have to spend hundreds of millions of dollars to move the needle. We have a problem of finding things worth investing in.
1/8th of world is in India. Why aren’t you investing in India?
Warren Buffett: That is a good question. We have connections there. In insurance, there are distinct restrictions at what we can do in India. As of yesterday, I agreed next March to go to India, because of what our Iscar business is doing there. India will grow, and Iscar belongs in every industrial country in world. We have good sized operation there. We don’t rule out India. Posco – they have big plans for India.
Charlie Munger: One trouble that India presents is that the government is causing paralysis, endless due process. Planning, approvals, zoning is hard. Wise founder of modern Singapore said that China will grow faster than India because government causes less paralysis. Countries are different, and while we kind of admire the democracy that causes the paralysis, we still don’t admire the paralysis.
Warren Buffett: Countries learn much from each other, and many have learned from USA. Maybe they can steal some ideas, and improve on us. We ought to figure out a lot of ways to do business in those countries. My preference is insurance which I understand. Both China and India do limit us right now, of what we can own and how much. Why put my managerial talent to work on something where we only own 20% vs 100%? But we remain interested because people in China and India will live better 20 yrs from now.
How large is the universe of companies whose intrinsic value you know? Why invest in South Korea or China?
Warren Buffett: Our immediate decision is whether we can figure it out. We are thought to be rude sometimes, when really we are just being polite in not wasting someone’s time. We know very early in a conversation whether what someone is talking about is actionable. We don’t worry about stuff we miss. We know there are many things that we won’t know enough about when we finish thinking about it, so we throw it out. We make a decision in five minutes. We know about a lot of industries, and there are some things we don’t understand. We like to expand our universe of knowledge. If we can’t make a decision in five minutes, we can’t learn enough in five months. If we get a call, with a business for sale or I am reading a paper or 10-K [annual company SEC filing], we will move right then if there’s a big difference between price and value.
Charlie Munger: We can make a lot of decisions about a lot of things very fast and very easily, and we are unusual in that. The reason is that there is such an enormous amount of things we don’t look at. If you don’t do star- tups, you blot a lot of complexity out of your life. What we found out is that there are still a lot of things to look at and that are available, even if we filter out all those things.
Warren Buffett: There are a lot of giveaways in the first sentence or two. We waste a lot of time, but we waste it on things we want to waste it on.
Investing in Brazil?
Our problem with many markets is that we have to put out a lot of money because we’re so big. We have to invest hundreds of millions of dollars, which really narrows the companies and countries we can look at. In the case of PetroChina, the biggest company in the world’s most populous country, we were only able to invest $400 million.
In Brazil, there’s a great beer company a friend ran and we should have invested in it. He’s a great manager. Brazil wouldn’t be off limits, but we would have to be able to invest a lot of money in a good business we can understand at a good price. And it would have to be cheaper than a comparable U.S. company, to compensate for the extra risk and our relative lack of knowledge about the market.
Investing in Russia?
In 1998, via our ownership in Salomon Brothers, we were in the oil business and drilled for oil in Siberia. They were happy to have us drill, but when it came time to take the oil out, it was harder. Given that experience, [we won’t be rushing back to invest in Russia].
About three years ago, I had breakfast in Sun Valley with Mikhail Khodorkovsky [the former CEO of Yukos], who was considering a listing on the New York Stock Exchange. He’s now in jail and Yukos is in bankruptcy with tax claims. It’s a little hard to develop a lot of confidence that [Russia] has changed vis-a-vis its views toward capital, especially outside investors and capital.
[Charlie Munger: [This reminds me of a story that ends:] “If they ever do find any oil, that old man will steal it.” I’m afraid we have the same problem today in many countries with oil.]
Charlie, didn’t we have the livelihood of our guys threatened [in Russia]? We sent guys to get the [oil-drilling] equipment and they were told that not only would they not get the equipment, but if they tried, the guys wouldn’t get out either. It wasn’t that long ago.
Investing in Africa?
[Q - In respect to Africa how would you find above average stocks given the information costs and limitations in Africa? What is your best advice about obtaining acceptable information? ]
There aren’t too many companies in Africa that are big enough for Berkshire to look at, except for maybe DeBeers, Anglo-American, or SAB Miller. Also, there isn’t a lot of information on these companies. I know South Africa has stock information available. The key is to get good information.
In comparison, Korea has plenty of information available. There is Kissline online. Within seconds I can get Korean Stock Exchange Information, Annual and even quarterly information. I’m not sure if the same is available online for South Africa. This is OK because I don’t need to win every game, just the ones I play.
I have three mailboxes in my office – IN, OUT, and TOO HARD. I was joking with the MIT students that I should have a TOO HARD bin and they made me one, so now I have it and I use it. I will only swing at pitches that I really like. If you do it 10 times in your life, you’ll be rich. You should approach investing like you have a punch card with 20 punch-outs, one for each trade in your life. I think people would be better off if they only had 10 opportunities to buy stocks throughout their lifetime. You know what would happen? They would make sure that each buy was a good one. They would do lots and lots of research before they made the buy. You don’t have to have many 4X growth opportunities to get rich. You don’t need to do too much, but the environment makes you feel like you need to do something all the time.
May I ask you your reasons for coming to Germany?
Warren Buffett: We want more family owners of German businesses. We want more owners who, when they think of the need to monetize, have Berkshire on their radar screen. We aren’t as prominent in Germany as we are in the US. We are looking for good companies and we want them to know us. We should be better known in a month.
Charlie Munger: Germany is particularly impressive—an advanced civilization, especially in engineering and industrials, with German advancement and inventiveness. It is amazing the impact Germans have had on field after field in America. Look at all the machines in factories with German names.
Warren Buffett: Sounds like Charlie should go to Germany.
Are you concerned with the effects of foreign economies and their weak currencies? These have played a role in Coca-Cola’s profitability recently - and Coke is trading at P/E multiple of 75. (1999)
I don’t have anything to offer on selling Coke [as an investment]. The dollar [and other currencies relative to the dollar] doesn’t concern me; it doesn’t affect my decision. In the last couple of years, yes, the dollar’s strength has hurt. But it’s in Coke’s best interests to have countries do well in the long run, to grow and increase the income of its population. The share of market and what we call the “share of mind” are the important things in Coke’s business.
It’s true that case growth slowed last year and continues to be slow, but that’s happened before. We’ll be around with Coke ten years from now.
Do you foresee Berkshire buying any businesses in India or China in the near future?
Warren Buffett: We would like to. The odds are somewhat against buying anything outside of the USA. MiTek has possibilities outside the USA. If we get lucky, we’ll buy one or two businesses in the next 3 or 4 years. Where they’ll be, who knows? We wouldn’t rule it out. We looked at insurance in India and China, but they restrict ownership in any domestic insurance company. The limit is 25% in China, and I think 25% in India. We probably don’t want to go in to own [only] 25%. We want to have more ownership to make it worthwhile. You will see the day that Berkshire owns businesses, in my view, in both countries.
Charlie Munger: Nothing to add.
Please talk about Greece, the future of the Euro and fiscal discipline in the world. Greece and other countries are clearly in trouble and BRK has investments in Europe. How is BRK positioned for currency failures? What is your advice to investors regarding the future of the Euro?
Warren Buffett: Charlie and I haven’t talked about Greece recently, I’m interested in his opinion. We have a lot of exposure in many countries, but we have it both on asset and liability side. We have much net worth in euro assets, but also substantial liabilities in Euro as well. When we reinsured Equitas we took on billions of liabilities around the world and we were paid in USD. If Euro depreciates we benefit with Equitas, but we lose on other areas. I can’t tell you our net exposure on Euro or Sterling on any given day, we have no dramatic exposures in any currency. Doesn’t mean it isn’t important. Charlie will now clearly explain how important the Greek situation is and its affect on the global economy. [laughter]
Charlie Munger: We are generally agnostic about currencies, about relative values. We are not agnostic about direction. Greece is an interesting example. Past conservatism in US gave the country wonderful credit. We used it to win World War II, help Germany and Japan in one of the most constructive foreign policy decisions in history of world. Now the US doesn’t have as good credit since it has been using it so heavily. Greece is just a start. It is dangerous when governments push their credit so hard. When you have blown it in past, it’s not as good today. Responsible voices are realizing we are nearer trouble from lack of government credit than ever before in my lifetime.
Warren Buffett: You have to distinguish between borrowers in their own currency (like US and Japan) and those who borrow in other currencies because creditors don’t trust them. When weaker credits borrow in other currencies, it can really put you out of business really quickly. They can’t print USD. That has caused failures. The EU – it is a really interesting situation. Greece is sovereign but can’t print their own currency – they have Euro. Euro was an experiment, and it is a test case playing out here – of a country using a common currency but is sovereign on promises to citizens. I don’t know how it ends, but I’m not forecasting anything – I just try not to watch movies like that. This will be high drama. We don’t make big currency plays, and we did one a few years ago and did okay. I would say this - that events of last few years make me more bearish on ALL currencies holding value over time. If you really could run deficits of 10% of GDP and do it a long time – world would have done it more, because that is really fun! Most understand it can’t be kept up. How world weans itself off deficit financing will be interesting to watch. As long as US borrows in USD, there is no possibility of default. If world won’t take USD debt, we have problem. You don’t default when you print your own currency.
Charlie Munger: Published statistics are misleading. Debts are stated in government bonds outstanding. The unfunded promises are miles bigger than bonds outstanding. They don’t bind if you grow GDP at 3% per annum per person, but if you get to where growth stops, you will have enormous social strains, and god knows what the impacts will be.
What is the most important thing you learn from China?
Warren Buffett: China is an amazing economy. Growth on a per capita basis is amazing. There were 290M people in 1790 (and only 4M in the US) in China but for some reason for 170 yrs very little progress was made. The potential of the Chinese is now being realized. It is a sight to behold. However, they haven’t taught me to eat Chinese food.
Charlie Munger: China has some very rare people in BYD. No other lesson is as important as that one.
Warren Buffett: Sprite outsells Coke 2:1 in China. Amazing economy, growth will last a long time. In 1790, there were 4mil people in the US, and 290m in China. And there was very little growth in quality of living in China over those 200 years through 1990. They have major resources of land and minerals. Potential of Chinese is huge. Charlie and I are going over there at the end of September. They haven’t taught me how to eat Chinese food.
Charlie Munger: I always knew Chinese people had potential for huge and rapid progress. I could see in Chinese Americans. They came to America as coolies or slaves, and they rose so fast. I underrated how fast it could happen – they are setting record for advancement of human civilization.
How will Buffett invest in China in the future? What will happen to the purchasing power of China’s large holdings in U.S. Treasuries?
Buffett: We respond to opportunities as we see them. We will see things to do over time. Some things are restricted to U.S. [investors] in China. We can’t own more than 24.9% of an insurance company in China. China is a huge market. We would have bought more than 10% of BYD, if they had let us. If we run a $250 billion trade deficit with China, they have $250 billion to do something with. The Chinese can’t get rid of their dollar holdings. Chinese dollar assets will increase as long as they run a [trade] surplus with the U.S. To date, they’ve acquired mostly U.S. government bonds. It’s a major problem for them to decide what to do with U.S. dollars. Anyone who owns dollar obligations outside the U.S. will have less purchasing power in the future.
Munger: If I were a Chinese finance minister, I would do what they’re doing. China has one of the most progressive economic policies in the world. I have nothing but admiration for Chinese economic policies. They will be very hard to compete with all over the world.
Why is car insurance business not expanding globally? Why not China?
Warren Buffett: We’ve known for a long time that there is no shortage of drivers around the world. In China and India, we can only own a 24.9% stake, so we’d rather have our managers work hard on 100% than 24.9%. We have gone from 2.5% to 8% market share in Geico. We don’t think we can build those advantages in other markets in any reasonable time. I agree with Tony’s decision that now and probably for a long time to come that there is so much opportunity here in the US that we aren’t as interested in other places. Though we keep looking, and are well aware of possibilities. We didn’t not go because we didn’t know there were cars there.
What are your thoughts about Japan?
My thoughts about Japan? I am not a macro guy. Now I say to myself Berkshire Hathaway can borrow money in Japan for 10 years at one percent. One percent! I say gee, I took Graham's class 45 years ago and I have been working hard at this all my life maybe I can earn more than 1% annually, it doesn't seem impossible. I wouldn't want to get involved in currency risk, so it would have to be Yen-denominated. I would have to be in Japanese Real Estate or Japanese companies or something of the sort and all I have to do is beat one percent. That is all the money is going to cost me and I can get it for 10 years. So far I haven't found anything. It is kind of interesting. The Japanese businesses earn very low returns on equity - 4% to 5% - 6% on equity and it is very hard to earn a lot as an investor when the business you are in doesn't earn very much money.
Now some people do it. In fact, I have a friend, Walter Schloss, who worked at Graham at the same time I did. And it was the first way I went at stocks to buy stocks selling way below working capital. A very cheap, quantitative approach to stocks. I call it the cigar butt approach to investing. You walk down the street and you look around for a cigar butt someplace. Finally you see one and it is soggy and kind of repulsive, but there is one puff left in it. So you pick it up and the puff is free--it is a cigar butt stock. You get one free puff on it and then you throw it away and try another one. It is not elegant. But it works. Those are low return businesses.
But time is the friend of the wonderful business; it is the enemy of the lousy business. If you are in a lousy business for a long time, you will get a lousy result even if you buy it cheap. If you are in a wonderful business for a long time, even if you pay a little bit too much going in you will get a wonderful result if you stay in a long time.
I find very few wonderful businesses in Japan at present. They may change the culture in some way so that management gets more share holder responsive over there and stock returns are higher. At the present time you will find a lot of low return businesses and that was true even when the Japanese economy was booming. It is amazing; they had an incredible market without incredible companies. They were incredible in terms of doing a lot of business, but they were not incredible in terms of the return on equity that they achieved and that has finally caught up with them. So we have so far done nothing there. But as long as money is 1% there, we will keep looking.
Does the Japanese economy affect your outlook?
We don’t really concern ourselves with the macro issues. We can’t rely on the macro to bail us out of a wrong decision on a [specific] business.
Look at See’s Candies. We bought it in 1972 and look what happened right afterwards. In 1973, the Arab oil embargo happened. Then inflation, followed by political turmoil. If we would have had a road map of 1972 to 1982, we’d have seen more inflation, a 20% prime rate, worldwide dissension. But knowing all those macro issues wouldn’t have helped us make a better decision to buy See’s Candies. It’s just more important to recognize a great business when you see it than it is to predict macro issues.
© 1996- The Buffett