Question: Would you comment on the quality of earnings in capital-intensive businesses, like utilities?
Capital-intensive industries outside the utility sector scare me more. We get decent returns on equity. You won’t get rich, but you won’t go broke either. You are better off in businesses that are not capital intensive.
Munger: A lot of moats have been filling up with sand lately.
Source: BRK Annual Meeting 2009 Bruni Notes
Question: Please talk about the shift to investing in capital intensive business and the ultimate impact on intrinsic value. Help us understand the time value of the necessary capital expenditures.
Buffett: It’s clear you understand the question well, and it as important a question as you can ask. We are putting big money in big businesses with good economics, but not as good as when we were dealing with smaller amounts. $40m of capital required in See’s and it earns much more than that. If we could put in more we would. But wonderful businesses don’t soak up capital – we had $2.2b operating earnings in Q1. We have to put it out as intelligently as we can. When we find them, we’ll buy them. Can we put it to work intelligently? We think capital intensive businesses we have bought are good, working well. But it can’t work brilliantly, we can’t spend all that money and still get high returns. But does that mean we should pay out excess capital instead? No, because we think they can earn a good return even with the need to make capital investments in certain businesses. We are better paying it out only if we can’t translate it into more than $1 of present value. In our judgment with BNSF we did it, but scorecard will only come in 10 to 20 yrs. In MidAmerican, we have done it. But it won’t be a Coca-Cola – which doesn’t need as much capital. I hope we don’t disappoint you. If anyone expects brilliant returns from this base at Berkshire, we don’t know how to do it.
CM: I’m just as good at not knowing as you are.
Source: BRK Annual Meeting 2010 Boodell Notes