Transcribed comments via Outstanding Investor Digest from the 1996 Berkshire Hathaway Annual Meeting:
Our cheap, plentiful float springs from
competitive advantage.
Buffett: You achieve that in this business only by having some kind
of competitive advantages. You won't do it just by having an ordinary
insurance company - because an ordinary insurance company is not a good
business.
We have it in certain respects because
of our attitude toward the business. Our financial strength gives
us certain advantages. And we have it in the case of GEICO
because of a very low cost operation. And it's up to us to try and figure out
ways to maximize each one of those competitive advantages over time.
We've built those advantages. In
1967, we weren't looked at that way in the insurance business. We've built a
position of competitive strengths. And GEICO had it without us. But we bought
into it over time.
Would I accept $7 billion for our
float? The answer is no....
Buffett: So it's a very important asset. And you ought to
pay a lot of attention over the years to what's happening with that asset -
both as to growth and cost. And that will aid you in calculating intrinsic
value....
But I will tell you this: We have $7
billion of float presently.... And if I were offered $7 billion for that float
and did not have to pay tax on the gain, but would thereafter have to stay out
of the insurance business forever - a perpetual non-compete in any kind of insurance
- would I accept that?
The answer is no.
That's not because I'd rather have $7
billion of float than have $7 billion of free money.
It's because I expect the
$7 billion to grow.
It would have been a mistake - and one
I'd have made.
Buffett: If I'd been offered that trade 27 years ago of $17 million
for the float we had at that time with no tax to be paid - float for which we'd
just paid $8.7 million - in return for us to have gotten out of the insurance
business, I might have said yes....
Munger: You would've.
Buffett: Yeah.
Munger: But he keeps learning. That's one of his strengths.
Buffett: That's probably true in this case. I'm not sure in other
cases. But it would've been a terrible mistake. It would have been a mistake to
do it 10 or 12 years ago with $300 million of float. And today, a tax-free
payment of $7 billion would not compensate us adequately for giving up the
opportunity of being in the insurance business forever at Berkshire - even
though it'd be a $7 billion pure addition to equity. So we wouldn't take it. In
fact, we wouldn't even think about it very long.
So, as Charlie says,
that isn't the answer we'd have given some years back. But it's a very
valuable business.
It's not automatic. But if they're run
right and nurtured....
Buffett: It has to be run right - as does GEICO, the
reinsurance business, National Indemnity and the homestate companies.... And
it's not automatic.
But they have the people, the
distribution, the reputation, the capital strength and other competitive
advantages in place. And, if nurtured, I think they become more valuable as
time goes by.
[H/T Linc]
[And if anyone happens to, by any chance, have a copy of the August 27, 1992
Outstanding Investor Digest issue that they could pass along, I'd be much appreciative. Thanks.]
