Warren Buffett Q&A Transcript || Fortune MPW (2014)
"There is nothing about the price action of the stock that tells you whether you should keep owning [it]," said Buffett.
On October 7, 2014, Warren Buffett sat down for an interview with his close friend, Carol Loomis, at Fortune’s MPW (Most Powerful Women) event.1 For nearly forty minutes, he spoke about the American economy and stock market, Berkshire Hathaway’s recent entry into the automotive industry, his role in some of the most pivotal moments of the Global Financial Crisis, and much more. Enjoy!
Carol Loomis: I’m going to start, unusually, with current events — because, last week, you announced that you were buying the fifth-largest auto dealership in the country, Van Tuyl Group of Phoenix.2 There may even be some people in the audience who think of the car business as ethically challenged, but at any rate what I’d like you to do is spend a paragraph or two talking about what — by Buffett standards — is a good business and then go into why does the car dealership business look like a good business to you?
Warren Buffett: A good business is the one that earns a high rate of return on tangible assets. (Laughs)
Very simple.
It’s pretty simple, yeah. The very best businesses are the ones that earn a high rate of return on tangible assets and grow. But even ones that don’t grow, if they earn a high return on tangible assets — and, of course, if you don’t pay too much — they can be a good investment. They are a good business to start with, by the high returns, [but] if you pay too much for them you can turn a good business into a bad investment. But if you pay an appropriate price, you can do alright.
The big mistake, which we made in the early years, was to try and buy a bad business at a really cheap price. It took me about 20 or 30 years to figure out that wasn’t a good idea. (Laughs)
The car dealership business, if run well, can be a very good business.3 You have no receivables to speak of. You floor plan your inventory. You can lease your real estate, [though] we don’t do that — we’ll own 95% of our real estate. So you can have very little capital actually invested in the business — and you do a large volume.
Van Tuyl, which we bought, has 78 dealerships. They’ll average over $100 million a dealership, so you can work on fairly narrow margins and still earn a high return on capital if you don’t tie up much capital into $100 million of business.4
How many car dealerships are there in total in the United States?
There are over 17,000 car dealerships in the United States. The interesting thing is if you go back 40 or 50 years, they were in the 30,000s. So, while the country has grown dramatically — and, actually, the number of nameplates in the car business have grown — you’ve cut the dealerships almost in half. So the average dealer now does far greater volume than when I was growing up.
[To audience] Well, by all means, visit a Berkshire Hathaway car dealership in the next year and report back.
Let’s go from that to an entirely different industry — the big banks of the United States — and the question of whether they are good businesses and the question of what’s happened to them in the last few years. Are they as good a business as they were a few years ago?
No. Banks earn on assets. They don’t earn on net worth. You calculate it eventually as to what they earn on equity or net worth, but assets are the earning factors. And they’ve changed the rules so that you have to have more net worth per dollar of assets. And, obviously, if you have more net worth per dollar of assets and you’re earning a constant amount on assets, your earnings on net worth go down.
They were ungodly profitable — the better ones were — back 15 years ago or 10 years ago even when they had high ratios of assets to net worth. And some of them have even cheated in terms of having even more assets than the regulators would have allowed. You had these SIVs5 as they were called — Citigroup had a whole bunch of them — so there were off balance sheet ways of controlling more assets.
But all of that sort of thing has been terminated and now they’ve got much lower limits as to the assets-to-net-worth ratio. To some extent, the bigger the bank, the lower that ratio can be. So what was a very profitable business has been turned into a good business if executed well.
It’s a pretty simple business. You get your money cheap. Very cheap. Wells Fargo6 will have a trillion dollars roughly — or close to that — of depositors’ money and it’s probably costing around 10 basis points. Most people would think that if you can get a trillion dollars of money and pay a tenth of 1% for it, [you] would find some way to do something profitable. (Laughs)
But the banks have always gotten in trouble on the asset side. They’ve never gotten in trouble on the liability side, basically. They really haven’t even gotten in trouble too much on the expense side, but they go crazy occasionally on the asset side. What they do is they start copying what their dumb competitors are doing. That happens in every business, but it’s particularly virulent in the banking business.
John Stumpf7 once said, “I don’t know why we keep looking for new ways to lose money when the old ones were working so well.” (Laughs) But they do — and they copycat. That’s a great danger in any business.
I warn our managers against it all the time. If anybody comes to me and says, “We want to do this because the other guy is doing it,” I say, “Go back to square one and come up with a better reason.” But human nature is such that you do want to do what others are doing.
One time, I was at a directors meeting where a leading property casualty insurance manager — a very well-known guy — was making a presentation to buy a life insurance company. He was going through all these kind of silly reasons why they should do it and he realized that the crowd was kind of catching onto the fact that his reasons weren’t too good, so finally he just threw up his hands and said, “All the other kids have one!” Basically, there’s a lot of business decisions made because all the other kids have one. (Laughs)
Let’s move to the stock market — a subject of great interest to everyone here, I’m sure. Over the years, you’ve generally been reluctant to frame a big cosmic position on the stock market.
I’ve done it about five times.
I know. But I think last spring, if I’m remembering correctly — and correct me if I’m not — you said that stocks were neither greatly expensive nor really cheap.
Right.
What would you say now about stocks?