Thursday, March 24, 2011

Growth does not drive our investment decisions: Warren Buffett, Berkshire Hathaway

Warren E Buffett, CEO of Berkshire Hathaway Inc is on his first visit to India, scouting for possible buys for his investment firm Berkshire Hathaway and to also persuade wealthy Indians to pledge money towards charity. Except for the threat of nuclear, chemical and biological warfare, the future could not be brighter, said the legendary investor in conversation with Archana Rai and R Sriram of The Economic Times as he explained why the US economy will rebound led by innovation from entrepreneurs such as Steve Jobs and companies such as Microsoft and Amazon rather than through fiscal stimulus provided by the Federal Reserve.

You are today what JP Morgan was 100 years ago - as powerful and far wealthier. What is it that drives you when you lend your name, invest and back a bank that's about to fail? Is it saving the market, spotting an investment opportunity or simply playing Buffett?

It's what I like to do. I just spend the day working with businesses. Working with people I like. I like watching Berkshire grow. It is never a finished painting. Everyday when I go to office I feel like there is a chance to add to the painting. I can't think of anything I would rather do in the world.

Citibank's Vikram Pandit said political and social tensions and not economics will be the dominant theme in the next ten years. Do you agree? If yes, how do you think financial markets should handle such risks?

They may be right in some aspects as to how they see the world. That does not change what we do one bit. I don't care what Citibank is forecasting. There will always be things going on with governments in the world and it won't make any difference. What makes the difference is whether we own the right businesses, run by the right people, and whether we are delivering the products and services that people want. My partner Charles Munger and I have worked together for 50 years. We don't discuss the world economy or what may happen when we look at buying a business. This is because we are buying businesses for keeps and the world's going to be here ten years from now and we want businesses that will serve more and more people when that time comes.

You have plans to invest in India. What are the sectors you will look at? Which ones do you regard as the growth engines?

We don't look for growth sectors. We love growth when we find it but we are perfectly willing to buy businesses that are relatively slow growth. Growth does not drive our investment decisions. Competitive advantage, good management, honest management, a sensible price and the ability to see where the company will be in five or ten or twenty years, that's what drives our investment decisions. I do not rank industries by their growth potential. I am willing to go into businesses that are not growing at all if they are good, solid, fundamental businesses.

Asian central banks, in their endeavour to stay ahead of the curve, or avoid criticism that they have fallen behind the curve, have been increasing rates. Are they on the right track?

Central banks have to look at each country's obligations and conditions. The conditions in Brazil are not the same as in the US or in Germany. So, each central bank has a responsibility in terms of its own charter. We've given our own central bank in the US the dual responsibility of curbing inflation and unemployment. I have no idea about any given country's central bank policy now. I do think that in the US the central bank has used most of the bullets that it had when it gets interest rates down to practically nothing.

We have this great fiscal stimulus going on and a budget deficit of 10% of the GDP. Fiscal and monetary policies are important tools in an economy. But I think they are far less important than the natural resilience, say in the United States, of the capital market system. The United States will progress out of recession, helped in some way by fiscal and monetary policies. But, overwhelmingly, it will be produced by individuals who are thinking as we speak here about how to turn out something better tomorrow. Whether Steve Jobs will come up with something better at Apple or Microsoft comes out with something new or Amazon figures out a better way to distribute goods - these things that move the economy forward are far more important in the end than the central bank.

Do you think Ben Bernanake's decision to initiate QE2 was correct?

I think chairman Bernanke was a huge hero in the fall of 2008 and made some very courageous, major decisions that kept panic from developing into something far worse than it did. It is no longer that important to have the Central Bank's foot on the pedal of expansion as it was back then. I am no fan of more fiscal stimulus or monetary stimulus.

What is the biggest risk to the US economy now? Jobs growth, deficit......

There is no risk to the US economy in the long-term. It is going to do wonderfully over the decades. If you take the next 100 years, there will be 15 years that will be difficult - I don't know which 15 years, and nobody else does either. It's the nature of capitalism and the markets that they overshoot and overleverage. We have had 15 recessions or panics since the US was founded and there will be more. But in the end, we always end up going forward and that will continue. I have no worries about the US economy over time.

Yesterday, the president of the Dallas Federal Reserve said that the US is close to insolvency and that they have reached a tipping point. Do you agree?

No. The US couldn't be further from insolvency. It is true that we are running deficits that we should cut back on and we will, I hope, very soon but we may not. But we ran the national deficit to 120% of the GDP during World War-II and we came out of it with great prosperity subsequently. If you look at the resources in the US, the plants, the products, the innovation and also we have this advantage which very important - we owe money in our own currency. You avoid a lot of problems by owing money in your own currency. The United Sates is wealthier now in the real sense than it's ever been and it will get more wealthy as it goes along, as will India.

You are also in India for the Giving Pledge. Do you find Indian promoters lukewarm to the idea? How will you convince them?

We are not trying to convince them. We are just trying to tell them what we have done. We have not convinced everyone in the US. Everyone is entitled to do what they want with their own wealth. What we are saying is that we think this is a good idea for us, we have adopted it. Many people have agreed with us, many people have not. I believe it was 1917 when Mr Tata set up a trust (Sir Ratan Tata Trust was set up in 1919) which was before Andrew Carnegie. So, giving is something that transcends borders. It is an act of humanity and you have very humane people here and very rich people. As they think about what to do with their wealth, some will decide to give it back to the people. Some won't, but that is true even in the US, Germany or wherever. When people join the Giving Pledge, their act has some influence on others. Our hope is that if people join in on this now, 20 or 50 years from now, more people will think about giving away a significant part of their wealth back to society.

Succession plans are now a hot topic of debate in Indian boardrooms. What does the succession plan at Berkshire looks like?

When our board of directors meets, a majority of the time is spent talking about succession and the board has identified four people. Anyone of the four could step into my shoes and in many respects do a better job. So, if I die tonight, the board will meet tomorrow morning and they know exactly who they will put in my job as chief executive. That is a responsibility that I have and the board has to always have a reservoir of at least a few people who could take my position and have in mind which one they would actually choose if it happened immediately. It's the primary job of the board and we are in very good shape on this. We weren't in good shape on this 30 years ago. I mean we did not have the reservoir then. Many years ago my partner Charlie Munger would have followed me but he is older than I am. Between the two of us, we are 167 years old. So, he is not in a position to do so and now we have at least four (potential successors).

What will be the biggest challenge your successor will face?

The biggest challenge is that they will get compared to what I have done and they will have to establish their own credentials. People are used to me, managers are used to me, people who come to sell their business know how I will behave when they sell their business to me. When someone new comes along, people are going to spend the first year forming new judgements about that person so that person will have to put in his own spurs but it will happen. But the important thing they have to preserve is the culture of Berkshire Hathaway which is letting really talented managers run their own businesses, being a wonderful home to people who may have to sell (businesses) for one reason or another and that could be done and it will be done.

As you look to invest in India, what are the biggest risks you think to the Indian economy?

The biggest risk to the world is nuclear, chemical and biological threats whether it's from rogue countries or rogue organisations. That threat won't go away. There will always be people who wish harm on their neighbours. Thousands of years ago, if you wished to harm your neighbours, you would pick up a rock and throw it at them. That was the extent of the damage. Then, we went on to bows and arrows and so on. Eversince the atomic bomb came in, the capacity to inflict harm on others has increased. Unfortunately, we have lots of people in the world who are psychotics, megalomaniacs, religious fanatics who would like to inflict harm. The world has to learn to unite to minimise danger. Other than that, the future cannot be brighter.

You are a hero to retail investors across the world. How do you handle such adulation?

I just keep doing what I have been doing all my life. It's nice to have a lot of investors come to Berkshire Hathaway. I am just painting the same painting I have been doing for over 60 years and it does not change my life. I go to work at the same time, I am eating the same food, wearing the same clothes. I have a privileged life, but it's an unchanged life. I work with people I love, they make my life easy. I just have nothing to complain about. I would like to find something to complain about but I just don't know what it would be

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