During the 2018 Berkshire Annual Meeting, Warren Buffett and Charlie Munger explained why they still invest in capital intensive businesses. Here’s an excerpt from the meeting:
AUDIENCE MEMBER: Mr. Buffett, my name is Daphne Collier Starr (PH). I’m eight years old and live in New York City. I’ve been a shareholder for two years and this is my second annual shareholders meeting.
Berkshire Hathaway’s best investments on which the company built its reputation have been in very capital-efficient businesses — (laughter) — such as Coke, See’s Candy, American Express, and GEICO.
But recently, Berkshire has made really big investments in a few businesses that require huge capital investments to maintain and that offer only a regulated low rate of return such as — (laughter) — Burlington Northern Railroad.
My question to you, Mr. Buffett, is could you please explain why Berkshire’s largest recent investments have been departed from your old capital-efficient philosophy?
And why specifically have you invested in Burlington Northern instead of buying a capital-efficient company like American Express? (Applause)
WARREN BUFFETT: You’re killing me, Daphne. (Laughter) Yeah.
CHARLIE MUNGER: I’m certainly glad she’s not nine years old.
WARREN BUFEFTT: Yeah. (Laughter)
I’m just sitting here thinking which of the six panelists we’re going to bump next year and put you in. (Laughter)
Well, I thought I was doing well when I bought that City Service at 11. (Laughs)
The answer is that we have — we’d love — we always prefer the businesses that earn terrific returns on capital, like a See’s Candy when we bought it or a good many of the businesses.
And, we’ve — and, you know, American Express, you know, earns a terrific return on equity, and has for a very long time.
The fact that we buy a Burlington — BNSF, Burlington Northern — means that, essentially, we can’t get more money deployed in capital-light businesses at prices that make sense to us. And so we have gone into more capital-intensive businesses that are good businesses.
But wouldn’t it be wonderful if we could run the railroad without trains, and track, and tunnels, and bridges, and a few things?
We get a decent return on the capital-intensive businesses. We bought most of them at very decent prices, and they’ve been run very well since we bought them.
We still love a business that takes very little capital and earns high returns, and continues to grow, and requires very little incremental capital.
We can’t deploy as much money as we have in doing that. And so as the second-best choice, still a good choice, the answer is yes. It’s not as good as the best choice.
Charlie?
CHARLIE MUNGER: Yes, I like the aspiration of that young lady. She basically wants her royalty on the other fellow’s sales. And of course that’s a very good model, and if everybody could do that, why, nobody would do anything else.
The reason we’re satisfied with our utility returns and our railroad returns is they’re quite satisfactory. And we — and the — quite satisfactory. I wish we had two more just like them. Don’t you, Warren?
WARREN BUFFETT: Yeah.
CHARLIE MUNGER: So —
WARREN BUFFETT: Definitely.
CHARLIE MUNGER: So the answer is they’re good enough, and you’re asking us to get perfection if you would want us to have all our money in Coke at, say five percent of what it’s now selling for.
WARREN BUFFETT: Yeah. And a business like Apple really doesn’t take much capital.
But — so, you’ve got to spend a lot of money to buy businesses like that. Very few are for sale.
And the answer is we have not foregone any opportunity to buy businesses that earn high returns — very high returns — on equity capital, when we could buy them at a sensible price, to buy these other businesses.
So they haven’t shoved anything else off the table. But you are — you definitely have a job in our capital allocation department. (Laughter)
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