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good morning mr. Buffett mr. Munger my name is steve Hayes I'm from Chicago I'm Berkshire shareholder and this is my sixth year coming to this meeting I'd like to thank you for all your time and advice through the years it's been great I'd also like to thank all those wonderful people who sold virture this year for giving us an opportunity to purchase more of the world's greatest company for dirt cheap prices we will convey your thanks from them I own another stock which sells for four times current trailing earnings every quarter we get a report earnings go up sales go up cash flow goes up the equity base expands they gain market share and the stock goes down the company has a 60 percent five-year annualized growth rate and sells at four times earnings I have two related questions first is this a growth stock or a value stock and could you please give us your definitions of these terms second the company sells recreational vehicles demographic trends in the recreation and leisure areas RVs cruise lines golf equipment etc seem to be quite good you see any opportunities for Berkshire here thanks well the question about growth and value is that we've addressed in past annual reports but in there they are not two distinct categories of business every business is worth the present if you knew what it was going to be able to disgorge in cash between now and Judgment Day you could come to a precise figure as to what it is worth today now elements of that can be the ability to use additional capital at good rates and most growth companies companies that are characterized as growth companies have that as a characteristic but there is no distinction in our minds between growth and value every every business we look at as being a value proposition the the potential for growth and the likelihood of good economics being attached that growth are are part of the equation in in in in evaluation but they're all value they're all valued decisions a company that pays no dividends growing a hundred percent a year you know is losing money now that's that's a value decision you have to decide how much value you're going to get actually it's very simple at the first investment primer one would you guess it was written the first investment primer that I know of and it was pretty good advice was delivered ends about 600 BC by ESOP an esop you'll remember said a bird in the hand is worth two in the bush incidentally Saab did not know it was 600 BC he was smart but he wasn't that smart that done now ESOP was onto something but he didn't finish it because there's a couple of other questions that go along with that but it is an investment equation a bird in the hand is worth two in the bush he forgot to say exactly when you were going to get the two in them from the bush and he forgot to say what interest rates were that you had to measure this against but if he'd given those two factors he would have defined investment for the next twenty six hundred years because a bird in the hand is you know you will trade a bird in the hand which is investing you lay out cash today and then the question is as an investment decision you have to you have to evaluate how many birds are in the bush you may think there are two birds in the bush or three birds in the bush and you have to decide when they're going to come out and when you're going to acquire them now if interest rates are five percent and you're going to get two birds from the bush in five years we'll say versus one now two birds in the bush are much better than a bird in the hand now so you want to you want to trade your bird in the hand and say I'll take two birds in the bush because that if you're going to get them in five years that's roughly fourteen percent compounded annually and interest rates are only five percent but if interest rates for 20 percent you would decline to take two birds in the bush five years from now you would say that's not good enough because of 20 percent if I just keep this bird in my hand and compounded I'll have more birds than two birds in the bush in five years now what's all that got to do with growth well usually growth people associate with a lot more birds in the bush but you still have to decide when you're going to get them and you have to measure that against interest rates and you have to measure it against other bushes and other you know other equations and that's all that's all investing is it's a value decision based on you know what it is worth how many birds are in that Bush when you're going to get them and what interest rates are now if you pay five hundred billion dollars and when we buy a stock we always think in terms of buying the whole enterprise because it enables us to to think as businessmen rather than as stock speculators so let's just take a company that has marvelous prospects is paying you nothing now and you buy it at a devaluation of 500 billion now if you feel that 10 percent is the appropriate rate of return and you can pick your figure that means that if it pays you nothing this year but starts paying next year it has to be able to pay you fifty five billion in perpetuity each year but if it's not going to pay and so the third year then it has to pay you sixty point five billion in perpetuity in perpetuity to justify the present price every year that you wait to take a bird out of the bush means that you have to they got more birds it's that simple and I question in my mind whether sometimes whether people who pay 500 billion dollars implicitly for a business by buying 10 shares of stock at some price are really thinking of the mathematical the mathematics implicit in what they are doing to deliver let's just assume it's there's only going to be a one-year delay before the business starts paying out to you and you want to get a 10% return and you pay 500 billion that means 55 billion of cash that they have to be able to disgorge to you a year after year after year to do that they have to make perhaps 80 billion dollars or close to a pre-tax now you might look around at the universe of businesses in this world and see how many are earning 80 billion pre-tax or 70 or 60 or 50 or 40 or 30 and you won't find any so it requires a rather extraordinary change in profitability to give you enough birds out of that particular Bush to make it worthwhile to give up the one that you have in your hand second part of your question about whether we'd be willing to buy a wonderful business at four times earnings I think I could get even Charlie interested in that sum but let's hear it from Charlie I'd like to know what that is he was hoping you would ask that that fella that's got all his net worth in his stock and who has a captive audience tell us what it is you got to tell us we're begging you you want the name of the company you want the name of the company we're dying to get the name where do I get my pencil it's called national RV and it's based in California and they sell recreational vehicles okay well you've got a crowd of people with who have birds in the hand and we will see what they do terms of national RV Charlie do you have anything further on growth and value etc watch him carefully folks well I agree that all intelligent investing is value investing you you have to acquire more than you really pay for and that's a value judgment but you can look for more than you're paying for in a lot of different ways you can use filters to sift the investment universe and if you stick with stocks that can't possibly be wonderful to just put away in your safe deposit box for 40 years but are under priced then you have to keep moving around all the time as they get closer to what you think the real value is you have to sell them and then find others and so it's a it's a it's an active kind of investing the investing where you find a few great companies and just sit on your ass because you've correctly predicted the future that is what it's very nice to be good at the movie was g-rated even though is that it charlie
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