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as a Coke addict myself I'm excited to report to you our worldwide promoter in Chief that the cokes in Beijing taste just as wonderful as in Omaha as the ex Zen monk today I feel like visiting the Buddha of the financial world we have an investment club with a name that ends in.com Believe It or Not which tells you that the frenzy.com friends even seduced Zen monks when we tried to follow you we find that uh Mrs Susan Buffett used to send Zen Buddhism books to her sority sisters that's probably why she always has a peaceful smile due to her low expectation of Life which according to Buddha is full of sufferings but Mr manger would tell me that Susan's smile is because you as the husband exceeded her low expectations that's right yeah and her father's even lower expectations anyway my question is uh did Susan also send those Zen books to your office or your bedroom and if you have read those books what are the key ideas that contributed to your investment tow which even made sense to secluded narrow-minded Zen monks like me thanks for the financial enlightenments you given us us today thank you I sent those books on to Charlie so I'll let him answer actually I tend to be a follower of confucious and I think this room is full of Confucian values you know if the first law of Confucianism is FAL piety particularly toward elderly males you can see why I like that system area four good afternoon Mr Buffett Mr Munger my name is Kevin Truitt from Chicago I have three questions for you Mr Munger at last year's shareholder meeting you stated that you didn't feel that the concept of the cost of capital made True economic sense would you explain why you felt this way and what you would do to replace it with anything uh my second question is to Mr Buffett you've stated the importance of an occasional big idea how were you able to in fact tell when you had a big idea and my third question Mr Buffett you have talked about the importance of the franchise and sustainable competitive Advantage companies like Kellogg and Campbell Sue are companies that most people would have said had those qualities however over time those qualities were lost as a result of a change in consumer taste what gives you confidence that the same things won't happen to coch or Gillette go ahead well cost of capital cost of capital first obviously considerations of cost are important in business and obviously opportunity costs which is a doctrine of Economics really a doctrine of lifesmall very important and we've always had that kind of basic thinking uh of course Capital isn't free and of course uh you could figure cost of capital when you're borrowing money or at least you can figure cost of loans but the theorists had to develop some theory for what Equity cost and there they just went Bonkers they they said if you earned 100% on Capital because you had some marvelous business your cost of capital was 100% And therefore you shouldn't look at any opportunity that delivered allous the 80% that is the kind of thinking which came out of the capital assets pricing models and so forth that I've always considered an anity what is berkshire's cost of capital we have this damn Capital it just keeps multiplying and multiplying what do its cost if you have perfectly good oldfashioned doctrines like opportunity cost you know any given time when we consider an investment we have to compare it to the best alternative investment we have at that time we had perfectly good old-fashioned ideas that are very basic to use but they weren't good enough for these modern theist so they invented all this ridiculous mathematics which concluded that the companies that made the most money had the highest cost of capital well all I can say is this not for us now the other half of that question I leave for Mr buff yeah what what you find of course is that the cost of capital is about a qu% below the return promised by any deal that the CEO wants to do very simple it uh you know we have three questions on Capital if it with capital is around and leaving aside whether we want to borrow money which we generally don't want to do and one is does it make it more sense to pay it out to the shareholders than to keep it within the company sub question on that is if we pay it out is it better off to do it by a repurchases or by a dividend the test for whether we pay it out in dividends is can we create more than a dollar of value within the company uh with that dollar than paying it out and you never know the answer to that but so far the answer is judged by results is yes we can and we think that perspectively we can but that's that's a that's a uh you know that's a Hope on our part and it's Justified to some extent by past history but it's not a certainty once we've crossed that threshold then do we repurchase stock well obviously if you can buy your stock at a significant discount from conservatively calculated intrinsic value and you can buy it in reasonable quantity that's a use for Capital beyond that then the question becomes if you have the capital you think you can create more than a dollar how do you create the most with the least risk and that gets to business risk it doesn't get to any calculation of the volatility I don't know the the risk in seiz candy is measured by it's stock volatility because the stock hasn't been outstanding since 1972 does that mean I can't determine how risky a business seed is because we don't have a daily quote on it no I can determine it by looking at the business and the competitive environment which it operates and so on so once we cross the threshold of deciding that we can deploy Capital so as to create more than a dollar of present value uh for every dollar retained uh that is just a question of doing the most intelligent thing that you can find uh and you know that is the cost of every deal we do is measured by the second best deal that's around at a given time including more doing more of some of the things we're we're already in and I listened to cost to Capital discussions at all kinds of corporate board meetings and everything else and and you know I've never found anything that made very much sense in it except for the fact that that uh it's what they learned in business school and that's what the Consultants talked about and and and most of the board members would nod their head without knowing what the hell was going on at uh and that's been my history with the cost of capital now moving on to the Big Ideas you know when you've got a big idea and I I can't tell you you know exactly what happens within your nervous system or uh brain at that time but uh we've had a relatively few Big Ideas good ideas over the years I don't know how many you think we've had an aggregate how me career maybe 25 each or if you took the top 15 out of berer haway most of you people wouldn't be here so roughly one every two years yeah one every year or two and sometimes there'll be a bunch of them like in 1973 and four um but the problem is for us is that big now really means big I mean it it has to be billions of dollars to to move the needle very much at at birkshire uh but I I I would say that when I would turn those pages 50 years ago in the Moody manuals I would know when I hit a big idea I've got a half a dozen of them that I keep the xeroxes from those reports around uh from 50 years ago just because it was so obvious that they they just they were incredible and that happens every now and then when I met when I met rmer Davidson you know in end of January 1951 and he spent four hours or five hours with me explaining gico I knew it was a big idea eight months later probably 10 months later I I wrote an article for the commercial and financial chronic on the security I like best it was a big idea when I found Western Insurance Securities I knew it was a big idea you know I couldn't put billi millions of dollars into it but I didn't have millions so it didn't make any difference and I we've seen things subsequently and we'll see you know we if we have a normal lifespan we'll see we'll see a few more before we get done uh but I I can't tell you that uh exactly how I I can't tell you exactly what transpires in my mind that that says uh you know flashes a neon sign up that says this is a big idea what happens with you Charlie actually in one of my well I I have a real system my idea of a truly big idea is one I get and I call Charlie and he only says no rather than that's the worst idea I've ever heard of but if he just says no it's a hell of an idea you know the game in our kind of life is being able to recognize a good idea when you rarely get it and or when it rarely is presented to you and I think that's something you have to prepare for over a long period what is the old saying that opportunity comes to the prepared mind and I don't think you can teach people in two minutes how to have a prepared mind but that's the game things we learned 40 years ago though will help and and recognize the next idea and on opportunity cost going back to that the current freshman economics text which is sweeping the country has right in practically the first page and it says all all intelligent people should think primarily in terms of opportunity cost and that's obviously correct but it's very hard to teach business based on opportunity cost it's much easier to teach the capital assets pricing model where you can just punch in numbers and outcome numbers and therefore people teach what is easy to teach instead of what is correct to teach it reminds me of Einstein's famous saying he says everything should be made as simple as possible but no more simple write that down
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