In 2018, CNBC launched the Warren Buffett (Trades, Portfolio) Archive, "the digital home to the world's largest video collection of Warren Buffett (Trades, Portfolio)." The website includes complete video footage from every Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) shareholder meeting since 1994, in addition to video clips from Buffett's appearances on CNBC dating back to 2005.
As discussed previously, my goal in this series is to share key takeaways from the meetings. I will select a handful of quotes from each section that I think are most insightful for investors. With that, let's take a look at the 2001 morning session.
Buffett's and Munger's mistakes
Early in the session, Buffett and his partner Charlie Munger were asked about the biggest investment mistakes they had made in their careers. These were their answers:
Munger: "The mistakes that have been most extreme in Berkshire's history are mistakes of omission. They don't show up in our figures. They show up in opportunity costs. In other words, we have opportunities, we almost do it, and in retrospect, we can tell that we were very much mistaken not to do it. Those are the ones in our history that have really cost the most. And very few managements do much thinking or talking about opportunity costs. But Warren, we have blown…"
Buffett: "Billions and billions and billions. I might as well say it."
Munger: "Right, right. And we keep doing it."
Buffett: "Some might say we're getting better at it."
Munger: "I don't like mentioning specific companies, because we may, in due course, want to buy them. But practically everywhere in life, and in corporate life, too, what really costs, in comparison with what easily might have been, are blown opportunities. I mean, it's just an awesome amount of money. When I was somewhat younger, I was offered 300 shares of Belridge Oil. Any idiot could've told there was no possibility of losing money and a large possibility of making money. I bought it. The guy called me back three days later and offered me 1,500 more shares. But this time, I had to sell something to buy the damn Belridge Oil. That mistake, if you traced it through, has cost me $200 million. And it was all because I had to go to a slight inconvenience and sell something. Berkshire does that kind of thing, too. We never get over it."
Buffett: "I might add that when we speak of errors of omission, of which we've had plenty, and some very big ones, we don't mean not buying some stock where a friend runs it, or we know the name and it went from one to 100. That doesn't mean anything. We only regard errors as being things within our circle of competence. So, if somebody knows how to make money in cocoa beans or in a software company and we miss that, that is not an error, as far as we're concerned. What's an error is when it's something we understand, and we stand there and stare at it, and we don't do anything. Or worse yet, what really gets me is when we do something very small with it. We do an eyedropper's worth of it when we could do it very big. Charlie refers to that elegantly - when I do that sort of thing - as sucking my thumb. We have been thumb suckers at times with businesses that we understood well. And it may have been because we started buying, the price moved up a little, and we waited around hoping we would get more at the price we originally started. But those are huge mistakes. Conventional accounting does not pick those up at all. But they're in our scorebook."
The Belridge Oil example jumps out to me because it speaks to the secondary considerations that often get in the way of intelligent investment decisions – stuff like avoiding capital gains or not wanting to exit a position that has not lived up to expectations (but selling would require the investor to admit a mistake).
In Munger's case, he avoided an investment decision with "no possibility of losing money and a large possibility of making money" because it demanded one extra step (selling something that he presumably liked less). In that case, inaction won out – and as Munger noted, that decision ultimately cost him $200 million.
Berkshire in 20 years
Later in the meeting, Buffet and Munger were asked about Berkshire's insurance business, along with their plans for the years and decades to come. Buffett started the answer:
Buffett: "I don't remember whether it was in the 1980 annual report, but at least 20 years ago, we did say that we thought insurance would be our most significant business over time. We had no idea that it would get to be as significant as it is. But we've always felt that insurance was likely to be our largest business. Right now, it's not our largest business in terms of employment. It's our largest business in terms of revenue. And we would hope it gets a lot bigger over time. We don't have anything in the works that would make that happen, although we will have natural growth in what we already own. But we will just keep acquiring things. Some years we'll make a big acquisition, some years we'll make a few small acquisitions - we'll do whatever comes down the pike. If there's a phone call waiting when this meeting is over and it's an interesting acquisition, it'll get done. We don't have a master plan. Charlie and I do not sit around and strategize or talk about the future of various industries or do anything of that sort. It just doesn't happen. We don't have any reports. We don't have any staff. We don't have any of that. We look at what comes in. We try to survey the whole financial field. We try to look at what comes in and look for things we understand, where we think they have a durable, competitive advantage, where we like the management, and where the price is sensible. We had no idea two or three years ago that we would be the 87% owner of the largest broadloom carpet company in the world. We don't plan these things. But I would tell you in a general way that 20 or so years from now, we will own a lot more businesses. I mean, I think it's certain that insurance will be a bigger business for us in 20 years than it is now. Probably much bigger. And I think it's also likely it will be our biggest business still. But that could change. I mean, we could get a deal offered to us tomorrow, a $15 billion or $20 billion deal, and then we've got a lot of money in that industry at that point. So, we have no more master plan now than we had back in 1965 when we bought the textile mill…"
Munger: "I think it's almost a sure thing that 20 years from now there'll be way more strength and value behind each Berkshire share. I also think it is an absolutely sure thing that the annual percentage rate of progress will go way down from what it has been."
Buffett: "No question about it."
The lack of a master plan has been one of Berkshire's biggest advantages over the past 50 years. Buffett and Munger were never burdened by the constraints felt by the managers of singularly focused companies. Instead, their only limitation has been the ability to find sensible deals, along with the financial resources to fund them.
In hindsight, we can see that this has led them into dozens of areas beyond the textile mill, including insurance, retail, a railroad, the candy business and utilities, among others.
The cost of expansion
Towards the end of the session, Buffett and Munger were asked about the opportunity to take successful businesses like GEICO into new markets. Here's what Buffett said:
Buffett: "Clearly, when you've got a business model that works as well as GEICO has in this country and it continues to work well and has that fundamental advantage of being a low-cost operator, we think about every possible way that we can take that idea and extend it. It's been remarkably hard to do that. The management has tried various things, ever since Leo Goodwin started the company in 1936, to take it into other areas, and those efforts have been modestly successful at certain things like life insurance, but then they got out of it, and various other things. But it's an idea still. We have 4% or so of the market in the United States. This market is so huge. And as we look at the drain on human resources involved in extending it into other countries, and we've looked at it a lot, and it may be something we'll do at some time. But we've never felt that the possible gain, considering the rigidities both in Europe and in Asia of breaking in - it's not easy to get into those markets. And the cost, the time, we just felt it would be better to concentrate those same resources in this country. It's not a question of capital at all. We'd put the money in in a second. And we're doing it in something like NetJets in Europe. There's a human cost to it, there's a financial cost to it. Financial cost bothers us not at all. Human cost is a real question because it gets back to Charlie's opportunity cost. We have talented managers, but we have a finite number of them. And I would rather have Tony Nicely and Bill Roberts and their crew focusing on how to gain additional market share in this country at the right rates than I would starting in a project in Europe or Asia now. But it's a very good question. It's something I can guarantee you we think about all the time and will continue to think about. We've tried to extend geography. Coca-Cola (KO, Financial) has been the most successful company in the world in extending geography. We've tried to do it with See's Candy, and it's had very limited success. I mean, we've tried 50 different ways, because the trials are relatively cheap to do. And we think it should work, we just haven't been able to make it work."
This answer speaks to the realities of running a business, as opposed to spit balling ideas from the cheap seats. As Buffett notes, the inability to aggressively expand a business doesn't necessarily come down to financial considerations; instead, it's the strain on management's time and attention that often constrains further growth.
A good example in today's world is Dollar Tree (DLTR, Financial), where I would argue that the company's focus on the turnaround at Family Dollar has potentially had a detrimental impact on the results at the namesake banner. It's a reminder that business decisions are not solely dependent upon financial considerations.
Disclosure: Long Berkshire Hathaway Class B
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