WEISS: I was wondering, Cal, in terms of when you were describing these two controversies in Washington-one over stock options, the other over depreciation of goodwill-the latter seems to me the more transparent than the former in that the question of whether to allow a tax write-off for goodwill is really a question about whether to indirectly subsidize takeovers. And what I am really interested in is you presented it as if, well, is it reasonable or rational to depreciate goodwill as an accounting matter and whether the issue was understood in those terms by the people who made the decisions, or whether your sense is that what the issue was understood as was to what extent should we provide a subsidy for takeovers?
JOHNSON: Exactly the opposite. The political pulse of the nation is intensely in favor of entrenched management. You can convince Congress to do anything, including repeal the General Utilities33 rule in 1986, if you will just tell them, "This will help my long-term local business from being taken over from those octopuses from Wall Street." The politics is intensely pro defense. Then somebody comes along with these fancy numbers and they say, hey, look, it's technical, it's accounting, you can't really expect to listen to this, 15-year write-offs is just a fair deal. No, amortization of goodwill was against the political will of the nation. The movement single-handedly swam upstream for about a mile and a half in order to get 15-year depreciation write-offs.
Professor Kitch identified what makes Berkshire and Buffett's letters unique with respect to disclosure relating to financial information as a willingness to provide expanded disclosure of accounting information beyond, apart from, and in addition to what GAAP requires and what others provide, including with respect to information about earnings per share. Professor Kitch suggested that more of that willingness would be desirable, though given securities law's endorsement of GAAP and risks of liability, he was not surprised that only Buffett and Berkshire do it. Mr. Buffett began the colloquy.
With the S&P 500 falling a double-digit percentage in the first half, most equity hedge fund managers struggled to keep their heads above water. The performance of the equity hedge fund sector stands in stark contrast to macro hedge funds, which are enjoying one of the best runs of good performance since the financial crisis. Read More
BUFFET: I can't recall, in the last fifteen years anyway, where we have even mentioned earnings-per-share. We're required to mention earnings-per-share in the five year summary by either the SEC or GAAP. For the reasons you've mentioned, so much attention is paid to the figure which I think has got very, very limited use and is far less useful than looking at the results unit by unit and so on. Literally, I have never, that I can remember, used earnings-per-share in the text of a shareholder letter.
COMMENT: If you were to summarize all the problems we've been discussing over the last two days, it could fall under the category of short-term shenanigans. You can summarize the Buffett-Munger philosophy as not only a commitment to the long-term, but a commitment to permanent ownership. Would a solution be if you changed the tax laws such that permanent owners would be rewarded? Now, this has been suggested before in a number of venues. Warren once suggested a 100% capital gains tax on gains taken within one year. Others have proposed adjusting capital gains depending on how long a security was held. Warren and Charlie's example has shown the great merits of permanent investing. Perhaps all our energies could be devoted towards introducing legislation that would reward permanent or near permanent investments.
KITCH: I don't think you would necessarily have to enact legislation. It's quite clear that you can see in the organic structure of Berkshire Hathaway efforts to induce shareholders to hold. For instance, Berkshire Hathaway is quite unusual in trying to lure its shares out of street name and into registered ownership. For example, you only can take advantage of the charitable giving plan if you register your shares. The securities industry, of course, has been pushing to get rid of registered shares-let's keep everything in book accounts at the brokerage firms and so on-because, of course, it makes them easier to sell.
COMMENT: That's the specific example of Berkshire which, of course, is completely admirable. But in terms of doing something that can be done with the stroke of a pen to begin to make corporate America conform to the Berkshire mold and those charitable contributions and so forth, that's all fine. But as far as taking some sort of a practical first step that does something like a tax on short-term capital gains.
REPETTI: That .has been discussed in the past, and I think there's a problem with the assumptions. I would argue that people who are investing for their own account should always want management to be taking the long-term perspective. Because if I am investing. for my own account, I know that the price I can sell this security at is going to be determined in part by the purchaser's perspective of the longer term prospects of the company. So, you would normally expect investors to want management to take the long-term account. I have suggested in the past that the real problem is with management-the problem isn't with the investors, except for the institutional investors who may not be investing for their own account-
COMMENT: I agree with that. I think that a large part of the problem is, as Charlie has pointed out, the social psychology of investors that they are demanding of that, and what they're demanding of is a short-term castle in the air.
REPETTI: Why would they demand that if they were behaving rationally? And, again, I'm not an advocate of the efficient market theory either, but the fact of the matter is-
LOWENSTEIN: But you're getting very close (laughter).
REPETTI: No, but I do believe that you have to assume that people will act in their best interest. And an investor should want somebody who has taken their money and is using it to grow a business to be maximizing the long-term prospects for the business. Because I know that the price that I sell it for tomorrow is going to be dictated by the price that the purchaser who buys it from me tomorrow can receive when he or she turns around and sells it again.
I think that we're dealing with a chicken and an egg phenomenon. I think that perhaps-and I'm hoping that they won't disagree with me but they probably will-I think that the beauty of their success is that since they themselves have such a large stake in the company, they can force management to take a long-term perspective that stockholders of public corporations haven't been able to do very effectively. So that, I would argue that in part maybe the investor is reacting to management's short-term perspective. Let us not forget that it's management who changes their jobs every two to three years, that as a result of the Harvard Business School approach to management, we manage by ratios, you can take somebody from Coca-Cola and put him into IBM. The idea of knowing a product in the market has been receded from to some extent and substituted with numbers, and I think that the focus really should be on trying to get management to take the long-term perspective.
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