The Oracle Preaches Moderation

OMAHA -- Moderation is a good thing.

And for the nearly 12,000 faithful congregating here to hear the Oracle's gospel, the future seems to hold long doses of moderate returns.

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That was the message from Warren Buffett as he answered questions from Berkshire Hathaway shareholders about the company he chairs, its subsidiaries, the markets and a plethora of other topics during the nearly six-hour marathon cast as the company's annual meeting.

"I think the chance of [Berkshire] achieving 15% earnings growth over a long period of time is so close to zero that it's not even worth discussing," Buffett said in response to a question about profit expectations. "It just can't happen over time. We will have years we will do it but it won't [happen regularly]. Nor do we think any large company can do it over a long period of time. There may be a couple that do, but predicting which ones is almost impossible."

And he chided companies that make such promises. "I think it is a mistake for any company to predict 15% a year growth," he opined. "Unless the U.S. economy grows at 15% a year, that number eventually catches up with you."

While some companies will exceed the norm, Buffett thinks mid-single digit returns in the equity markets will be the rule in coming years. "Stocks are a perfectly decent way to make 6%-7% returns over the next 15 or so years," he said, adding, "But to expect 15% or more in equities ... is unrealistic."

Even with recent pullbacks in the stocks, Buffett, who has viewed the market as "speculative" in recent years, believes most equities remain close to full value.

His stage partner, Berkshire Vice Chairman Charlie Munger, concurred. In fact, he sees such excessive profit predictions continuing to proliferate, not moderate. "I see more predictions of future earnings growth at a higher rate, not less," said Munger. "It's what the analysts want to hear."

While Munger said 15% growth for Berkshire is "virtually impossible," he did provide hope for current and future shareholders. "It is simply crazy for this group to have high expectations," he quipped. "Moderate expectations will serve us just fine."

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In addition to comments about the markets and corporate America, Buffett and Munger took questions on a variety of topics, including Berkshire's recent interest in electric utilities.

Nearly two years ago, Berkshire announced its intent to acquire MidAmerican Energy, a power generator and electric utility headquartered in Omaha. Buffett said then he might have an interest in additional "large" investments in the sector and, more recently, indicated an interest in investing more than $10 billion in the power business. He confirmed that interest -- both past and future -- noting that the Public Utility Holding Company Act, or PUHCA, is the primary roadblock in the way of additional investments.

"We might well have, in the last year or two, bought an entire utility if not limited by that statute," he said, arguing that PUHCA, enacted in 1935, has outlived its purpose. "That act was put on the books because the holding companies of the 1920s had many abuses. I don't think there is anything [gained by] limiting Berkshire's ability to buy into other utilities."

Congress is considering repealing PUHCA, which may spur additional Berkshire acquisitions in the power business.

Focused on Businesses: Here and Abroad

Given that Berkshire made nearly $8 billion in acquisitions in the past year (almost entirely for cash), Buffett acknowledged he currently finds more value in privately owned businesses than in marketable securities, and is happy to focus on the former. "Our first preference is always to be buying outstanding operating businesses and we've had a little more luck in that respect lately," he said. As for securities, "We bought many of those in the mid-1970s. The climate hasn't been as friendly for marketable securities lately."

Going forward, Buffett is inclined to focus on building Berkshire's stable of operating companies with a continued focus on insurance. "I would tell you -- in a general way -- in 20 or so years we will own a lot more businesses," he noted. "I think certainly insurance will be a bigger business in 20 years and I think it is also likely that it will be our largest business."

However, Buffett was quick to admit that he has no grand scheme for the future of Berkshire. "We don't have a master plan," he conceded proudly. "We don't sit around and strategize and talk about the future. It just doesn't happen. We try to look at what comes in and look for things we understand, where we think they have a durable competitive advantage, where we like the management and where the price make sense."

Berkshire's sheer girth is a challenge. "The bigger you are, the fewer the opportunities you are going to get," Buffett said. " What we would really like to do is make a $10 billion to $15 billion acquisition ... The most significant disadvantage we have is size."

But while Buffett is quick to boast that Berkshire "would be the preferred purchaser for a reasonable number of private and public companies," Munger said the landscape is becoming more competitive.

"This is not a hog-heaven period for Berkshire," said Munger. "The investment game is getting more and more competitive and I see no sign that is going to be changing."

In response to domestic competition, Buffett is casting a net overseas, and telegraphed his interest in international acquisitions during a recent trip to the continent. "The reason we haven't [made an international acquisition] is our phone hasn't rang," Buffett said. "I left my phone number in a lot of places. Maybe now it will ring."

What did the Oracle have to say about the once high-flying Internet stocks he has steadfastly avoided? Click here to read the second part of this column.