Transcription
Good morning all. Um, after a spectacular night. Thank you, Lauren. And um, I'm going to be asking some questions, and we will go to the audience um a little bit later. So, uh, get your questions. Um, Warren, I, I'm going to start unusually with uh current events because last week you announced that you were buying the fifth largest auto insur auto insurance auto dealership in the country, Van Tile Group of Phoenix. Now, there may even be some people in the audience who think of the car business as ethically channel challenged, but um, at any rate, what I'd like you to do is spend a um, a a paragraph or two talking about what by Buffett standards is a good business, and then go into why does the car dealership business look like a good business to you.
>> A good business is the one that earns a high rate of return on on tangible assets. Pretty simple.
>> That's pretty simple. Yeah. And and uh uh the very best businesses are the ones that earn a high rate of return on tangible assets and and grow. But uh uh even ones that don't grow uh if they earn a high return on tangible assets and then of course if you don't pay too much uh uh they can be a good investment. They're a good business to start with by the high returns. If you pay too much for them, you can turn a a good business into a bad investment. But if you pay an appropriate price, uh you can uh you can do all right.
Now, the the big mistake which we made in the early years was to try and buy a bad business at a really cheap price. And uh it took me about 20 or 30 years to figure out that wasn't a good idea. But this is a the car business, the car dealership business, if run well, uh can be a very good business. You you have no receivables to speak of. Uh you floor plan your inventory. You can you can lease your uh real estate. We don't do that well. Own 95% of our real estate. So you can have very little capital actually invested in the business. And you do a you do a large volume. Uh Van Tile, which we bought uh has 78 dealerships. Uh they'll average over 100 million a dealership. So you can work on fairly narrow margins and still earn a high return on capital if you don't tie that much capital into 100 million of business.
And how many car dealerships are there in total in the United States?
>> There are over 17,000 car dealerships in the United States. And the interesting thing is if you go back 40 or 50 years, there were uh in the 30,000. So while the country has grown dramatically and actually the number of uh number of name plates in the uh in in the car business have grown. Uh you've cut the dealerships almost in half. Uh so the average dealer now does far far greater volume than when I was growing up.
Well, by all means, visit a Bircher Hathaway uh car dealership in the next year and report back. Now, um Ed, let's talk about let's go from that to some entirely different industry, the big banks of the United States.
>> Uh and the question of whether they are good businesses and the question of what's happened to that in the last few years, are they as good a business as they were a few years ago?
>> No. No. The uh banks earn on assets. They don't earn on net worth. uh you know you you calculate it eventually as to what they earn on equity or net worth. But they assets are the earning factors and they've changed the rules so that you have to have more net worth per per dollar of assets and obviously if you have more net worth per dollar of assets and you're earning a constant amount on assets your earnings on net worth go down.
Now they they were ungodly profitable or the better ones were uh back 15 years ago uh or 10 years ago even uh when they had high ratios of assets uh to net worth and some of them even cheated in terms of having even more assets than the regulators would have allowed and you had you had these civs as they were called. City Group had a whole bunch of them. uh uh so they were off balance sheet ways of even controlling more assets. But all of that sort of thing has been terminated and now now they're uh they've got much lower limits as to the assets to uh net worth ratios and the bigger the bank to some extent the bigger the bank the lower that ratio can be. So what was a very profitable business has been turned into a good business if executed well. Uh it's a pretty simple business. I mean, if uh you know, you get your money cheap, very cheap. The Wells Fargo will have a uh a trillion dollars roughly or close to that of of depositor's money and it's it's probably costing around 10 basis points. Now, most people think you get a trillion dollars of money and pay a tenth of 1% for it, uh would find some way to do something profitable.
The uh but the the banks have always gotten in trouble on the asset side. They've never gotten in trouble on the liability side basically, but they and they really haven't gotten in trouble too much on the expense side, but they go crazy occasionally on the asset side. And what they do is they start copying what their dumb competitors are doing. That's that's that happens in every business, but it's particularly virilent in the banking business. Uh uh John Stump once said, he said, "I don't know why we keep looking for new ways to lose money when the old ones were working so well." But then uh but they do and they and they copycat that that's a great danger in any business. I I warn our managers against it all the time. If anybody comes to me and says we want to do this because the other guy is doing it, you know, I say go back to square one and come up with a better reason. But human nature is such that you do want to do what others are doing. I one time was at a director's meeting where a leading property casualty insurance uh manager very well-known guy was making a presentation to buy a life insurance company and he was going through all these kind of silly reasons why they should do it and he realized that the crowd was kind of catching on to the fact these reasons weren't too good. So finally just throw up his hands and say said, "Oh, all the other kids have one."