This portion of the Berkshire Hathaway AGM looks at the brilliance of Amazon CEO Jeff Bezos, and explain why they missed out.
Berkshire Hathaway is a huge player in renewable energy. Warren Buffett was asked why the group has been investing more money into, especially wind and solar power generation.
Donât look at it as having more solar capacity than we need or anything like that. Itâs really a question of what comes along and the projects that are internally generated, theyâre externally offered to us and we have a big appetite for wind or solar. Just based on those figures, we have seen more wind lately, but we have no bias toward either one. If we saw 5-billion attractive solar projects, we could do it and didnât happen to see any wind during that period, it wouldnât slow us down from the 5-billion, or vice versa, so we have a huge appetite for projects in either area. Weâre particularly well situated, I think Iâve explained or talked about it in the past, because we pay many taxes and therefore, solar and wind projects all involve a tax aspect to them and we can handle those much better than many other, certainly electric utilities.
Most electric utilities really A, donât have that much money left over after dividends and frequently the taxes arenât that significant. At Berkshire, we pay many taxes and we have lots of money, so itâs really just a question of doing the math on the deals as they come along. Weâve been very fortunate in Iowa in finding many projects that made sense and as a result, weâve had a much lower price for electricity than our main competitor in the state, weâve had a lower price than in any states that touches .Weâve told the people of Iowa they wonât have price increase for many years, we guaranteed that.
So, itâs worked out extremely well, but if somebody walks in with a solar project tomorrow, and it takes a billion Dollars or it take $3bn, weâre ready to do it, thereâs no specific and the more the better. Thereâs no specific preference between the two and it obviously depends where you are in the country. Iowa is terrific for wind and obviously, Californiaâs terrific for sun and there are geographical advantages to one or the other but from our standpoint, we can do them any place and we will do them any place. Okay, station four?
Hi, my name is Joey and Iâm an MBA candidate at Wharton. Thank you for having us. Amazon has been hugely disruptive due to the brilliance of Jeff Bezos, whom Charlie earlier called âThe business mind of our generationâ. What is your current outlook on Amazon and why hasnât Berkshire bought in?
Well, because I was too dumb to realise what was going to happen. Even though I admired Jeff, Iâve admired him for a long time and watched what he was doing, but I did not think that heâd succeed on the scale he has and I certainly didnât even think about the possibility of doing anything with Amazon web services or the cloud, so if youâd ask me, the chances that while he was building up the retail operation, that he would also be doing something that was disrupting the tech industry, that would have been a very long shot for me and I really underestimated the brilliance of the execution.
Itâs one thing to dream about doing this stuff online, but it takes a lot of ability and you can read as 1997 annual report and he laid out a roadmap and heâs done it and done it in spades and if you havenât seen his interview on Charlie Rose, three or four months ago, (see below) go to and listen to it because youâll learn a lot, at least I did, so I just plain, it always looked expensive and I really never thought that he would be where he is today. I thought he was really brilliant, but I did not think he would be where he is today when I looked at it three, five, eight, twelve years ago, whenever it may have been. Charlie, how did you miss it?
It was easy. What was done there was very difficult and it was not at all obvious that it was all going to work as well as it did. I donât feel any regret about missing out on the achievements of Amazon, but other things were easier and I think we screwed up a little.
No, we wonât pursue that line.
Well, I meant Google.
Oh, though weâve missed a lot of things.
Yes, we have missed a lot of things and weâll keep doing it.
Yes, and weâll have a –
Luckily we donât miss everything, Warren, thatâs out secret, we donât miss them all.
Okay, weâd better move on I think, you know. He may start getting specific, Carol?
The creator of this question, Jim Kiefer of Atlanta, has even higher expectation for Warrenâs longevity than Charlie does. âMr Buffett, we all hope you win the record as mankindâs oldest living person, but at some point you and our Charlie will go and Berkshireâs stock may then come under selling pressure. My question is; if Berkshireâs stock falls through a price where share repurchase is attractive, can we count on the board and top management to repurchase shares? I ask this question, both because of past comments you have made about not wanting to take advantage of shareholders and because some of the passages and the ownerâs manual lead me to believe this might be an instance when the board does not choose to repurchase shares. Can you clarify what course of action we might expect about repurchases in the circumstances I have outlined?â
As far as Iâm concerned theyâre not taking advantage of shareholders if they buy the stock when itâs undervalued, thatâs the only way they should buy it and they should, but in doing so, there were a  few cases back when Charlie and I were much younger, where there were very aggressive repurchases or the equivalent of repurchases by people (and the repurchases instantly made  lot more sense than they do now), but they were done by people who either, for various techniques tried to depress the shares and if youâre trying to encourage your partners to sell out at a depressed price by various techniques including misinformation, but thereâs other techniques, I think thatâs reprehensible, but our board wouldnât be doing that.
Read also:Â Berkshire AGM transcribed â Living happily; and the rise and rise of Amazon
Iâll take exception to the first part of it, but Iâll still answer the second. I think the stock is more likely to go up but if I died tonight, I think the stock would go up tomorrow and thereâd be speculation about breakups and all that sort of thing, so it would be a good Wall Street story, but this guy thatâs obstructed breaking up something where some of the parts might sell for more than the whole, there wouldnât necessarily be, itâd probably be worth less than the whole, but it might sell temporarily for more than whole and that wouldnât happen.
So, I would bet in that direction, but if for some reason it went down to a level thatâs attractive, I donât think the board is doing anything in the least thatâs reprehensible by buying into stock at that point, no false information, no nothing and their buying, means that the seller would get a somewhat better price, but many sellers would get a mildly better price than if they werenât buying and the continuing stockholders would benefit, so I think that itâs obviously what they would do and I would think that itâs obvious that itâs pro shareholder to do it and I think they would engage in pro shareholder acts and as far as the eye can see, we have that sort of board, Charlie?
Well, I think you are. I might suddenly get very stupid very quickly, but I donât think our board is going to have that problem.
I want to think about that one. Okay, Jonathan?
#BRK2017: Buffett praising Jeff Bezos again this year – The CEO simultaneously of two businesses he started from scratch – Retail and Cloud.
— Alec Hogg (@alechogg) May 6, 2017
Warren, in the past youâve enjoyed discussing accounting for options grants. Iâm curious whatâs your view of the new accounting standard which mandates that companies report lower tax provisions based on so-called excess tax benefits enjoyed when share-based compensation ends up being more profitable for the grantees than what is initially modelled? These so-called excess benefits used to go through the shareholderâs equity line on the balance sheet, which accounting method makes more sense to you, the old method or the new?
Johnny, I think you know a lot more about it than I do, so if I were asked to answer that question, Iâd probably call you up and say, âWhat should I say?â Itâs not a factor that will enter into Berkshire, so I really am not â I mean Iâve heard just a little bit about that accounting standard, but I really donât know anything about it, Charlie?
Itâs not a big deal, Warren.
Yes, well I know that. There are a few things in accounting we really disagree with and whether they might be material to somebody trying to evaluate Berkshire and you know, that primarily gets in amortisation of intangibles, it certainly gets them to realise capital gains and that sort of thing and we will go to great lengths to try to tell our partners, basically, not all of them, our accounting experts or anything and we will try to make clear to them, at least what our view is, the same way as if I had a family business and I was talking to my sisters or something about it, but unless itâs material, weâll probably stay away from trying to plan on any new accountings standards. If itâs material to Berkshire, weâll go to great lengths to at least give our view, Charlie?
Well, I certainly agree with that. What heâs talking about is not very material to Berkshire.
No, it isnât and it really wonât be.
Yes, I know.
Some of these other are though and we will bring those up if they come up. We are reporting 400 and some million Dollars less in our earnings if Precision Cast Parts had remained a public company. Well, are the earnings of Precision Cash Parts less real, is the cash list real, is anything because itâs moved the ownership, Â I donât think so and I want to convey that belief to shareholders and they can debate whether itâs right or wrong, but I think itâs a mistake not to comment and just assume that the owners understand that because itâs a fairly arcane point and so we pointed out, but we also point it out if we think the depreciation is inadequate as for evaluation purposes, the depreciation is inadequate at very capital intensive business like BNSF, which we, I must say, still love, anyway, Charlie any more?
No.
Okay, section five.
As always, Jeff Bezos' shareholder letter is always the best thing this side of Warren Buffett's. https://t.co/gFKswHqIyO
— Tim O'Reilly (@timoreilly) April 13, 2017
Thank you and good afternoon. Iâm Adam Burtman with Sterling Capital in Virginia Beach Virginia. Earlier today, Mr Munger commented on the valuation of China versus the US market. My question for you is, is market cap to GDP and cyclically adjusted PE still valid ways to consider market valuation and how do those influence Berkshires investment decisions? Thank you.
Well, instructed to – I guess Charlieâs overall values are in China. I would say that both of the standards you mention are not paramount at all in our valuation of securities. Itâs harder, people are always looking for a formula and there is a ultimate formula, but the trouble is you donât know what to stick in for the variables, but thatâs the value of anything, being the present value of all the cash itâs ever going to distribute, but the PE ratios, I mean every number has some degree of meaning. It means more sometimes than others, but evaluation of business, itâs not reducible to any formula where you can actually put in the variables perfectly and both of the things that you mentioned, yet themselves get bandied around a lot. Itâs not that theyâre unimportant, but sometimes they can be very important, sometimes they can be almost totally unimportant.
Itâs just not quite as simple as having one or two formulas and then saying the market is undervalued or overvalued, or a company is undervalued or overvalued. The most important thing is future interest rates and people frequently plug into the current interest rates saying thatâs the best they can do. After all, it does reflect a marketâs judgement and the 30 year bond should tell you what people who are willing to put up money for 30 years and have no risk of Dollar gain or Dollar loss at the end of the 30 year period, but what better figure can you come up with? Iâm not sure I can come up with a better figure, but that doesnât mean I want to use the current figure either. So, I would say that I think Charlieâs answer will be, that it does not come up with China versus the US market based on what youâve mentioned as yardsticks, but no, Charlie you tell them.
All I meant that, like I said before, that the first rule of fishing is to fish where the fish are, is that a good fisherman can find more fish in China if fish is the stock market, thatâs all I meant. Itâs a happier hunting ground.
This doesnât really directly relate, I want to go back to one question that was mentioned earlier. I really think, if you want to be a good evaluator of businesses, an investor, you really ought to figure out a way without too much personal damage to run a lousy business for a while. I think you can learn a whole lot more about business by actually struggling with a terrible business for a couple of years than you learn by getting into a very good one where the business is so good that you canât mess it up. I donât know whether Charlie has a view on it or not, but it certainly was a big part of our learning experience and I think a bigger part in the sense that being involved in good business was actually being involved in some bad businesses and just seeing â
How awful it was.
How awful it is and how little you can do about and IQ does not solve the problem and a whole bunch of things. Itâs a useful experience, but I wouldnât advise too much of it, donât you think so Charlie?
It was very useful to us. Thereâs nothing like personal painful experience if you want to learn and we certainly had our share of it.
Okay, Becky?
This question comes from Tom Spendveller and heâd like be called Tom Spend from Pennsylvania. He says, âIn life, business, and investing, strategies often work until they donât work, other than a massive insurance loss, any thoughts on what could cause the Berkshire enterprise to not work?â
Good question.
Yes, well if there were something changed, if we got some infection, outside agent of some sort to change the culture in some major way, you know, an invasion of different thought, but as a practical matter, I donât think anything, and you know, itâs the things you can think of, but I canât think of anything that can harm Berkshire in a material permanent way except weapons of mass destruction, but I donâtâ regard that as a low probability. It would take a recession, a depression, a panic, hurricanes, earthquakes, it all would have some effect, and in some cases it might even lead that we would do better because of them.
If there were a successful, as measured by the aggressor, nuclear chemical, biologic or cyber-attack on the United States and there are plenty of people who would like to pull that off or organisations and maybe even a few countries, it could disrupt society to such an extent that it would harm us, but I think with the variety of earning streams with the asset positions, with the general philosophy of the play to call, I think that we would be very close to the last one affected, but if somebody figures out how to kill millions of Americans and totally disrupt society then all bets are off, Charlie?
I agree it would take something really extreme and just take the question like, British Petroleum took a huge loss with one oil well blowing and Berkshire has all of these independent subsidiaries and they really are independent. The parent company is well armoured, if thereâs one horrible accident somewhere, we would tend to pay of course, maybe more than our legal liability but we are not, one accident in one subsidiary that caused a big lot of damage, weâre better protected than most companies. Yes, in every way Berkshire is structured to handle stresses.
Itâs the kind of thing we think about all the time and weâve thought about it ever since we started, but I really donât know any company that could take more general adversity and specific adversities, but if you get into what could happen with weapons of mass destruction, that is something we canât predict, but if that ever happens, thereâll be more to worry about the price of Berkshire, Jay?
Berkshire Hathaway specialty insurance generated $1.3bn of premium volume in 2016. This business is on the smaller end of the commercial property casualty insurers in terms of scale, although its volume did grow 40% last year. In a highly competitive commercial PNC environment, what gives you confidence that Berkshire Hathawayâs specialty is destined to become one of the worldâs leading commercial PNC insurers as you said in this yearâs annual letter?
Yes, I think it will be and I think how fast it grows did depend very much on the market. We are not interested in trying to be a price cutter in a market where the prices already arenât that attractive, but we have built the scale worldwide and a lot of it has just been added in recent month in just over the past year. We will grow a lot, but if the market should turn hard for any reason, we would grow a lot faster, but we are destined at Berkshire Hathaway especially to be one of the leading PC firms in the world, just as we were destined to have, when a cheap came in, even though we had nothing, we were destined to become a very important re-insurer throughout the world and in certain ways, almost the only re-insurer for certain types of risks in the world and we have the people, the capital, the reputation.
There is no stronger company in the insurance world and there wonât be, than the Berkshire Hathaway Insurers. We have the talent there. Therefore, it will grow, it may grow slowly some years, it may have big jumps just like the re-insurance operation did many years ago, but itâs a very important edition to Berkshire that brought that on. I just wish we could have started it a little earlier, but you had to have the right people and they came to us and as you say, whatever was the billion, we were a billion for last year and weâll bite more this year, but we wonât bite as much as if were in a hard market, station six?
Good afternoon, my name is Sally Byrne from Australia, but I currently reside in Austin Texas. My question, Mr Buffet, I have heard that Mr Munger says that your greatest talent is that youâre a learning machine, that you never stop updating your views. What are the most interesting things youâve learned over the last few years?
Well, it is fun to learn. Charlie is much more of a learning machine than I am. Iâm a specialised one and he does as well as I do in my specialty and then he has a much more general absorption rate than I have about whatâs going on in the world, but itâs a world that gets more fascinating all the time and a lot of fun can occur when you learn you were wrong on something. Thatâs when you really learn that the old ideas werenât so correct and you have to adapt new ones and that of course is difficult. I donât know that I would pick out, well, I think actually whatâs going on in America is terribly interesting, and politically, all kinds of things, but just the way the worldâs unfolding. Itâs moving fast, I do enjoy trying to figure out narrowly what going to happen, but whatâs even happening now, but I donât think I have any special insights that would be useful, but maybe Charlie does.
Well, I think buying the Apple stock is a good sign in Warren and, no, he did run around Omaha, and as he was, he could take his grandchildrenâs tablets away and he did market research. I do think we keep learning. More importantly, we donât unlearn the old tricks and that is really important. You look at the people who try and sole their problems by printing money and lying and so forth, take Puerto Rico, who would have guessed that a territory of the United States would be in bankruptcy? Well, I would have predicted it because they behave like idiots.
We did not buy any Puerto Rico bonds.
No, and if you go to your Europe, look at the government bond portfolios weâre required to hold in Europe, there are no Greek bonds and the bonds are nowhere but Germany, just everywhere you look in Berkshire somebody is being sensible and that is a great pleasure and if you combine that with being very opportunistic, so that when something comes along like a panic, itâs like playing with two hands instead of one in a game that prefers two hand. It helps to have a fair-sized repertoire and Warren, weâve learned so damn much. There are all kinds of things weâve done in the last ten years we would not have done 20 years ago.
Yes, thatâs true. Itâs interesting, Iâve mentioned this before, but one of the best books on investment was written, I think in 1958, I think I read it around 1960, by Philip Fisher called âCommon Stocks and Uncommon Profitsâ.
All the companies went to hell eventually.
It talked about the importance or the usefulness of what he called a âscuttlebutt methodâ and that was something I did learn from Graham but every now and then itâs turned out to be a very useful. Now, it doesnât solve everything and there are a whole lot of voices.
Or you do it with American Express and the Salomon scandal, bet youâre all doing it on Apple, you know Dick Anglesey.
Yes, in certain cases, you actually can learn a lot just by asking a lot of questions and I give Philip Fisher credit. That book goes back many years but as Charlie said, some of the companies he picked as winners forever did sort of peter out on him, but the basic idea that you can learn a lot of things just by asking in some cases. If I got interested in the coal industry, just say to pick one out of the air, when I was much younger, more energetic, if I went and talked to the heads of ten coal companies and I asked each one of them, way later into the conversation after they got feeling very – felt like talking and I would just say if you had to go away for ten years on a desert island and you had to put all of your familyâs money into one of your competitors, which one would it be and why?
Then Iâd ask them if they had to sell short one of their competitors for ten years, with all their family, why and everybody loves talking about their competitors and if you do that with ten different companies, youâll probably have a better fix on the economics of the coal industry than any one of those individuals has. There are ways of getting at things and sometimes theyâre useful, sometimes theyâre not, but sometimes they can be very useful and the idea of just learning all the time about it. Iâm more specialised than that by far than Charlie. I mean, he wants to learn about averting and I just want to learn about something and we’ll, Berkshire, but itâs a very useful attitude to have toward the world and of course, I donât know who said it, but somebody said, âThe problem is not in getting the new ideas, but shedding the old onesâ and thereâs a lot of truth to that.
We would never have bought Iscar if it had come along ten years earlier; we would never have bought Precision Gas Parts if it had come along ten years earlier. We are learning and my God, weâre still learning.
Okay, Andrew?
Hi Warren, this is my final question. In 2012, you were quoted as saying, âI think the healthcare problem is the number one problem of America and of American businessâ. We have not dealt with that yet. Do you believe that the current administrationâs plan to repeal and replace ACA will ultimately benefit the economy in Berkshire or not?
Yes, well Iâll give you two answers here. The first one being that if you go back to 1960 or thereabouts, corporate taxes were about 4% of GDP having to, bounced around some and now theyâre about 2% of GDP and at that time, healthcare was 5% of GDP and now itâs about 17% of GDP, so when American business talks about taxes strangling our competitiveness sand that sort of thing, theyâre talking about something that as a percentage of GDP has gone down from 4% to 2% while medical costs, which are borne to a great extent by business, have gone from 5% to 17%. So, medical costs are the tapeworm of American economic competitiveness, if youâre really talking about it. Business knows that and they donât feel they can do much about it, but the tax system is not crippling Berkshireâs competitiveness around the world or anything of the sort.
Our health costs have gone up incredibly and will go up a lot more and if you look at the rest of the world over a half a dozen countries that were around our 5% if you go back to the older years and while we were a 17%, theyâre a 10% or 11%, so they have gained a five or six-point advantage the world and even in these countries with fairly high medical costs.
Thatâs with socialised medicine.
Yes, so itâs huge. Whatever I said then goes and is accentuated now and that is the problem that society is having problem with and itâs going to have more trouble with and regardless of which party is in power or anything of the sort, it almost transcends that. In terms of the new act, those past couple of days ago, versus the Obama Administration Act, itâ a very interesting thing. All I can tell you is, the net effect of that act on one person, is that my federal income taxes would have come down 17% last year if what was proposed went into effect.
It is a huge tax cut for guys like me and youâll have to figure out the effects of the rest of the act, but the one thing I can tell you is, if it goes through the way the house put in, anybody with $250 000.00 a year of adjusted gross income and a lot of investment income, is going to have a huge tax cut and when thereâs a tax cut, either the deficit goes up or they get the taxes from somebody else, so as it stands now, that is the one predictable effect if it should pass and senator will do something different and go to the conference and who knows what happens, but that is in the law that was passed a couple of days ago, Charlie?
I certainly agree with you about the medical care. What I donât like about the medical care is that weâre getting too much medicine, thereâs too much chemotherapy on people that are all but dead and all kinds of crazy things going on in medicare and in other parts of the health system. There are so many vested interests that itâs very hard to change, but I donât think any rational person looking objectively from the outside at the American system of medical care, we all love the new lifesaving stuff and the new chemotherapies and the new drugs and all that, but my God, the system is crazy and the cost is just going wild. It does put our manufacturers at a big disadvantage with people, where the government is paying the medical bills and so on. I agree with Warren totally.
If you had to bet ten years from now, will it be higher or lower than 17% of GDP? Â
If present terms continue, itâll get more and more. There are huge vested interests in having this thing continue the way it is and theyâre very vocal and happier than the rest of us, who are indifferent. So, naturally we get a terrible result and I would say that on this issue both parties hate each other so much that neither one of them can think rationally and do I donât think that helps either.
It is kind of interesting that the federal government spends or raises say $3.5tn or something like that and do we have a concern that everybody has that all, but thatâs say fairly steady in the 18% or so GDP plus or minus a couple of points, but $3tn plus is spent on healthcare and everybody wants the best and itâs perfectly understandable, but itâs a big number compared to the whole federal budget. I mean thereâs some overlap and all of that, but if you talk about world competitiveness of American industry, itâs the biggest single variable where we keep getting more and more out of whack with the rest of the world and itâs very tough for political parties to attack, yet it basically is a political subject.
Itâs deeply immoral. If you have a group of hospital people and doctors, thereâs a feasting like a bunch of jackals on a carcass on some dying person, itâs not a pretty sight.
Tell them about that group up in California that –
Oh yes, this is Redding, this is one of my favourite stories. There are a bunch of very ambitious cardiologists and heart surgeons in Redding and they got the thought that really what a heart was, was a widow maker, so every patient that came in, they said, âYouâve got a widow maker in your chest and we know how to fix itâ and so they recommended heart surgery for everybody. Of course, it involved a huge volume of heart surgery and they got very wonderful results because nobody comes through heart surgery better than the man who doesnât need it at all and they made so much money that the hospital chain, which was Tenet, brought all its other hospitals, why canât you be more like Redding?â This is a true story and it went on and on. Finally, there was some beloved Catholic priest and they said,
âYouâve got a widow maker in your chestâ and he didnât believe them and he blew the whistle.
He was a priest; you can see why he didnât believe them.
At any rate, well when youâve got a routine you just keep using it, you know. If a heart is a widow maker, itâs a widow maker. Later I met one of the doctors who threw these people out of the medical profession and I said to him, âIn the end, did they think they were doing anything wrong?â He said, âNo, Charlie, they thought that what they were doing was good for peopleâ. That is why itâs so hard to fix these things. The delusion that comes into people as they make money and get more successful by doing god awful things, should never be underestimated and a lot of that goes on and youâve been under such gross craziness and you thought little Wells Fargo looks like innocence here, they had a little trouble with this incentive system, but the heart surgery rate was 20 times normal or something, youâd think youâd notice if youâre running a hospital, but they did notice they wanted the other hospital to be more like it.
They had a terrific success ratio, okay Greg?
Thank you, Warren. As you look forward in taking into consideration some of the headwind space in the US based utilities including weaker electricity demand growth as increasing energy envisages the impacts demand distributed generation which hits vertically integrated utilities doubly hard as they face both declining energy sales revenue and increased network constant support reliable delivery and third, higher interest rates, which would increase borrowing costs, what are the key attributes that Berkshire Energy would be looking for in future acquisition candidates? In particular, are there advantages or disadvantages attached to say, transmission assets relative to generation assets that would make you favourable one over the other?
Yes, well generation assets even if itâs a habit, is inherently more risk because some them are â
Be stranded.
Be stranded and yes, obsolete, but now the question is how they treat stranded and all that sort of thing. We, on the other hand, more of the capital investment than the generating assets, so that tends to be where a good bit of the capital base is, we like the utility business okay, the electricity demand is not increasing like it was as you point out. Theyâre going to be stranded assets, if theyâre stranded because of rank foolishness, they will probably be less inclined or the utility commissions will be less inclined to let you figure that in your rate base as you go forward as opposed to things that are more sociable, demands are changing, but we still think the utility business is a very decent asset. The prices are very high, but thatâs what happens in a low interest rate environment.
I would be surprised if t en years from now we donât have significantly more money in not only wind and solar, but weâll probably own more utility systems than we own now. Weâre a buyer of choice with many utility commissions. In fact thereâs a slide which shows something about our pricing compared to other utilities and Greg Abel and his group have done an extraordinary job, theyâve done it in safety, theyâve done it in reliability, theyâve done in price, theyâve done it renewables.
Itâs hard to imagine a better operation than exists at Mid American Energy and people want us, with that record, to come to their state in many cases, but when prices get to the levels they have, some utilities are sold at extraordinary prices and we canât pay up and have it make sense for Berkshire shareholders, but just because we canât do it this year doesnât mean it wonât happen next year or the year after, so I think weâll get a chance.
Warren Buffett says he's got a 'big appetite' for a solar or wind project – https://t.co/Is8HZpqKq4
— Futubot (@futubot) May 7, 2017
Our utilities are also not normal. The way Greg has run those things; theyâre so much better run in every way than normal utilities. Theyâre better regarded by the paying customers, theyâre better regarded by the regulators, they have better safety records, HR, just everything about is way the hell better and itâs a pleasure to be associated with people like that and have assets of that quality and itâs a lot safer. If somebody asked Berkshire to build a $50bn nuclear plant, we wouldnât do it.
Yes and we have public power here in Nebraska. Itâs been sort of the pride of Nebraska for many decades. Itâs all, there are no private utility systems and itâs totally public power end and those utilities have no requirements for earnings on equity, they can borrow at tax exempt rates, we have to borrow at taxable rates and Nebraska, itâs not that much different than Iowa and weâre selling electricity across the river, a few miles from here at lower prices than exist I Nebraska. So itâs an extraordinary utility and it was lucky when we got involved in, I think Walter Scott, a director from introducing me to it, almost 17 or 18 years ago or so but I donât think the utility business as such, if I were putting together a portfolio of stocks, I donât think there would be any utilities in that group now, but I love the fact that we own Berkshire Hathaway Energy.
Itâs radically different and better.
A lot better actually, station seven?
Hi, Iâm from beautiful historic St Augustine Florida. Iâve been a fan of yours and Berkshire since I was a kid looking through the stock pages and seeing one crazy stock that traded for $10 000.00 a share. Unfortunately, I wasnât able to convince my parents to buy it at that point, but now Iâm a shareholder as an adult and Iâm here with my daughters, Mabel, who is seven and Willa who is one year old, and my wife.
I voraciously read the letter every year and I love the stories from the different companies ,GEICO and Seeâs, BNSF, that kind of t each investing lessons and this year when I was looking through the accounting information of that, I noticed that one company, McLane contributes a lot of revenue, a large portion of Berkshireâs revenue and to a lesser extent earnings but I donâtâ ever see much about it in the annual report, so Iâm curious why we donât hear more about that company and are there any investing lessons like we get from Seeâs and GEICO that you can share about that company?
McClain, the reason you see their figures separately is because the FCC has certain requirement that are based on sales and McLane is a company that has an extraordinary amount of sales in relation to intrinsic value or to net income. It basically is a distributor of â well, itâs a hug customer, for example, of the food companies, the candy companies, the cigarette companies that go up and down the line of anything that goes into convenience stores, but we bought it from Walmart and Walmart is our biggest customer. I canât tell you the precise volume, but to get Walmart and Samâs together, youâre getting up to 20% plus, but itâs nationwide.
In the end it operates on about 6% gross margins and 5% operating expenses, so it has a 1% pre-tax margin and obviously a 1% pre-tax margin only works in terms of return on capital if you term your equity extraordinarily fast and thatâs what McLane does. Being a wholesaler, itâs moving things in, moving things out very fast, very efficiently and it does this, it also has a few liquor distribution subsidiaries that have wider margins, but the basic line business is $45bn plus makes 1% pre-tax on sales, but the return on capital is very decent. However, it has an outsized appearance simply because of this huge volume of sales that go through it. Brady who runs it, is exceptional. He was there when we bought it from Walmart; whatever it was a dozen years ago and Iâve been there once. We got thousands and thousands of trucks, big distribution centres all over the country.
It was a major factor in moving goods and wholesale, I mean if your Mars candy or something of the sort, I mean weâll be the biggest customer, but that pretty well describes the business. Itâs a business that earns good returns in relation to invested capital and in relation to our purchase price, but every tenth of a percent is important in the business and moving ir-receivables exceptionally fast and consequently and the payables moving big time, so the sales are 30 times receivables and 30 times payables, youâve got maybe 35 or so times inventory. I mean this is a business thatâs moving a lot of goods, but itâs an important subsidiary, but not as remotely as important as what would be indicated by the sales. Itâs still very important making the kind of money that goes up in the 10K, Charlie?
You said it all.
That was an interesting thing Walmart wanted to sell it, they came to see us.