Why Warren Buffett Says Consumer Behavior Is Key to Investing | Berkshire 2024

[Transcript]

AUDIENCE MEMBER: My name is Stephan Uhrenbacher. I am a shareholder from Hamburg, Germany.

My question to Warren, your favorite holding period is forever, holding American Express or Coca-Cola for decades. Berkshire recently went in and out of Markel, and you, I believe, sold and later bought Oxy, which I think happens to everyone all the time. But can you maybe [explain] to us, give examples of your thought process when you exit positions? Thank you.

WARREN BUFFETT: Well, there are various reasons for exiting positions. One is if you need the money, but that doesn’t happen very often with us. But it used to happen on every decision I made when I started when I was 20 years old, which I consider the post-Graham variant, although I actually started in 1942, if you just talk about buying stocks.

But in any event, the decision process is really quite interesting in certain ways because we made — Charlie and I made decisions extremely fast. But in effect, after years of thinking about the parameters that would enable us to make the quick decision when it presented itself. People have speculated on how I’ve decided to really put a lot of money into Apple, and for a reason I can’t — One thing that Charlie and I both learned a lot about was consumer behavior. That didn’t mean we thought we could run a furniture store or anything else. But we did learn a lot when we bought a furniture chain in Baltimore. And we quickly realized that it was a mistake. But having made that mistake, made us smarter about actually thinking through what the capital allocation process would be and how people were likely to behave in the future with department stores and all kinds of things that we wouldn’t have really focused on. So we learned something about consumer behavior from that. We didn’t learn how to run a department store.

Now, the next one was See’s Candies. And See’s Candies was also a study of consumer behavior. We didn’t know how to make candy. You know, we didn't — There were all kinds of things we didn’t know. But we’ve learned more about consumer behavior as we go along. And that sort of background, in a very general way, led up to the study of consumer behavior in terms of Apple’s products.

And in that case, while I watched what was happening at the furniture mart, in terms of people leaving the store, even though we were selling Apple products at a price where we weren’t even making any money, but it was just so popular that if we didn’t have it, people left the store and went to Best Buy or someplace.

And if you know the Blumkins, they can’t stand anybody leaving the store, so they behave accordingly. But then you learned — that had the interest in the brand, and then you had a million different inputs. But I think the psychologists call this apperceptive mass. But there is something that comes along that takes a whole bunch of observations that you’ve made and knowledge you have and then crystallizes your thinking into action. Big action in the case of Apple. And there actually is something, which I don’t mean to be mysterious, but I really can’t talk about, but it was perfectly legal, I ensure you that. (Laughs) But it just happened to be something that entered the picture that took all the other observations.

And I guess my mind reached what they call apperceptive mass, which I really don’t know anything about, but I've — I know the phenomenon when I experience it. And you know that is, we saw something that I felt was, well, enormously under price. Maybe I’ve used this example before, but if you talk to most people, if they have an iPhone and they have a second car, the second car cost them $30- or $35,000, and they were told that they never could have the iPhone again, or they could never have the second car again, they would give up the second car. But the second car cost them 20 times. So now, people don’t think about their purchases that way, but I think about their behavior.

And so we just decide without knowing. I don't know, have the faintest — There may be some little guy inside the iPhone or something. I have no idea how it works. But I also know what it means. I know what it means to people, and I know how they use it. And I think I know enough about consumer behavior to know that it’s one of the great products, maybe the greatest product of all time. And the value it offers is incredible.

And I think it has, and Tim Cook, I think it has somebody that, in his own way, is the equivalent of a partner, partner with Steve Jobs that could do one thing extraordinarily well and more than one application, but one thing. And Tim was the perfect partner to serve sequentially with him. So it’s, you sort of know it when you see it.

I actually saw it with GEICO when I, I went there in 1950. I didn’t know exactly what I was seeing, but Lorimer Davidson on a Saturday, in 4 hours, taught me enough about what — I understood what auto insurance was, and I knew what a car was, and I knew what people went through people's minds, you know, I knew they didn't like to buy it, but I knew they couldn’t drive without it. So that was pretty interesting. And then, but he filled in all the blanks in my mind as I sat there on that Saturday afternoon.

And, you know, every now and then it happens. You know, why do you have this — the person you met you know there are all these different potential spouses in the room, and then something happens that you decide that this is the one for you. You know, I think was it Rodgers and Hammerstein that “Some Enchanted Evening,” wrote about that. Well, our idea of an enchanted evening is to come up with a business, Charlie and me. (Laughter)

And there is an aspect of knowing a whole lot and having a whole lot of experiences and then seeing something that turns on the light bulb. And that will continue to happen. And I hope it happens a few times to you, but you can’t make it happen tomorrow, but you can prepare yourself for it happening tomorrow, and it will happen sometimes.

GREG ABEL: Hey, Warren, he mentioned Oxy, which I think is a great example where you made the original decision basically on a weekend with some thought. But as — the more you learned about Oxy and the, the asset position they had, their ability to operate in an exceptional manner, and then a strong CEO around capital allocation. I think your confidence, which was reflected in continuing to acquire more shares, is sort of that type of process.

WARREN BUFFETT: Yeah, it’s exactly to the point. I mean, I just learned more as I went along. I learned enough. You know, I’d never, I’d heard of Occidental Petroleum. Occidental Petroleum happens to been a descendant or something, not a descendant, but it’s a continuation of Cities Service, which was the first stock I bought. And, of course, I knew a lot about the oil and gas business, but I didn’t know anything about geology, so I knew the economics of it. I had a lot of various things stored in my mind about the business, but I never — I never heard of Vicki Hollub until, I guess, it was a Friday or Saturday, and we met on Sunday morning. We made a deal, but that was one sort of deal.

And then as time passed, all different kinds of different events happened. And you know, Icahn came in. And I mean, there are a million things you couldn’t predict at the start, and I formed certain opinions as I went along, but then, I learned more as I went along. And then at a point when I heard an investor call that Vicki was on, it put things together for me in a way — It didn’t mean I knew I had a sure thing or anything like that. I don’t know what the price of oil was going to be next year, but I knew that it was something to act on. So we did, and we’re very happy we did, and we still don’t know what the price of oil is going to be next year, and nobody does. But I think the odds are very good that it was, but not a cinch that it was a good decision, and you know, we’ve got options to buy more stock, and you know when we get through with it, it could be a worthwhile investment for Berkshire. And we’re in it, and we’re in it for keeps.

Oh, incidentally, I should just throw this out, since there’s been speculation on it. We’ve sold. A, I was 100% responsible for the Paramount decision. I read speculation that either Ted or Todd had some involvement in that. No, it was 100% my decision, and we sold it all, and we lost quite a bit of money, and that happens in this business, too.

But actually owning Paramount made me think even further. I like to think deeper, but I certainly thought harder even about the whole question of what people do with their leisure time and you know what the governing principles are of running an entertainment business of any sort, whether it’s sports or movies or whatever it might be.

And I think I’m smarter now than I was a couple years ago. But I also think I’m poorer because I acquired the knowledge in the manner I did. But I just want to be very clear that, A, we lost money on Paramount, and, B, you know I did it all by myself, folks. (Laughter)

Source: https://buffett.cnbc.com/2024-berkshire-hathaway-annual-meeting/

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