(Question)
WARREN BUFFETT: Yeah. We regularly told you,
for some years before the accounting change
was made here a year or so ago —
we told you, you should not count goodwill amortization.
You know,
it was required under GAAP,
and
we, obviously, complied with GAAP,
but we told you every year, virtually,
that I can remember,
we said, “This is not really an economic expense.”
And we ignore it
in our own calculations of earnings,
in terms of what we will pay for businesses.
We don’t care whether there’s a goodwill item or not,
because it’s immaterial to economic reality.
So, we have been quite willing,
at Berkshire, to tell our own owners
to ignore certain things. And if they
disagreed with us, they could look at the GAAP figures.
But we felt they were getting misled
by looking at the amortization of intangibles.
That doesn’t mean we think all intangibles were good,
but we just — we did feel that that was a —
that was an arbitrary
decision that didn’t make any sense at all.
And we felt — obviously, as we’ve talked about —
we felt the crazy pension assumptions
have
caused people to
record phantom earnings, in many cases.
So we’re willing
to tell you when we think there is data
that is more important in economic analysis
than GAAP figures. We’ll —
We’ll talk to you about it.
Not thinking of depreciation as an expense, though,
strikes us as absolutely crazy.
I can think of very few businesses
— I can think of a couple —
but I think of very few businesses where depreciation
is not a real expense.
Even at our gas pipelines, I mean,
you know,
at some point,
A, they’ll need
they’ll need repairs, but beyond that,
at some point they become obsolete.
I mean there won’t be gas there 200 years from now,
we know that.
So, it —
depreciation is real, and it’s the worst kind of expense.
It’s reverse float.
You know, you lay out the money before you get revenue.
And you are out cash with nothing coming in.
And depreciation
— any management that doesn’t regard depreciation
as an expense, you know, is living in a dream world,
but of course they’re encouraged to do that,
you know,
by investment bankers who talk to them about EBITDA.
And then,
you know,
certain people have built fortunes on misleading investors
by convincing them that EBITDA was a big deal.
And
when we see companies
that say, “Hey, we don’t pay any taxes, you know,
because we don’t have any earnings for tax purposes,
and don’t count depreciation and all of that,”
you know,
that’s coming — in our view,
many times that’s coming very close to a flimflam game.
You know, I get these people that show me — you know,
they want to send me books with EBITDA in it,
and I just tell them, you know,
“I’ll look at that figure when you tell me
you’ll make all the capital expenditures.”
If I’m going to make the capital expenditures,
there’s very few businesses
where I think I can spend a whole lot less than depreciation year after year
and maintain the economic strength of the business.
So I think
the EBITDA has been a term that has
cost a lot of investors a lot of money.
You saw it in the telecom field.
I mean the idea —
they were spending money so damn fast, you know,
I mean they couldn’t have it coming in the door fast
enough from investors.
And then they pretended the depreciation
was not a real expense.
That’s nonsense. I mean it couldn’t be worse.
And a generation of investors where sort of brought up to
to believe in that.
We, at Berkshire,
will spend more than our depreciation this year.
We spent more than our depreciation last year.
We spent more than our depreciation the year
before that. You know,
depreciation is a real expense,
just as much as, you know, the expenditure for lights.
It’s not a non-cash expense. It’s a cash expense.
You just spend it first, you know.
I mean the cash is gone,
and it’s a delayed recording of cash.
How anybody can turn that into something
they use as a metric that
talks about earnings is beyond me.
Charlie?
CHARLIE MUNGER: Yeah, I think you would
understand any presentation
using the word EBITDA,
if every time you saw that word
you just substituted the phrase,
“bullshit earnings.”
(Laughter and applause)
WARREN BUFFETT: I knew he’d do it sooner or later, folks.
(Laughter and applause)
CHARLIE MUNGER: And the man —
WARREN BUFFETT: He made it through the morning,
but never all day.
(Laughter)
CHARLIE MUNGER: And the man asked the question also, says,
“What remaining big accounting troubles exist?”
The real lollapalooza is pension fund accounting,
and, to some extent,
post-retirement medical liabilities.
Those are horribly understated now in America,
and they’re very big numbers.
WARREN BUFFETT: I’ve looked at financial statements,
and you’ve seen them too
in the last few months,
where companies are recording pension income
in the hundreds of millions,
while at the same time
being underfunded in their pension plan
in the many billions.
And,
you know, they just aren’t facing up to reality at all,
and they don’t want to because they want to take the hit.
And they’re this — you know,
it’s the same mentality as stock option expenses.
And
they are paying people with stock options.
But,
you know, we pay people with cash bonuses,
and I suppose, you know — well,
it isn’t really true,
but we might like it if we didn’t have to record
cash bonuses as an expense.
I mean it’s a way we pay people.
And you can say,
“Well, why don’t you put it in the footnotes
and leave it out of the income account
like they do with option expenses,”
which is a form of compensation, too.
But the — you know,
the answer is that a bunch of people who cared very much about
having their stocks float to unreasonable prices,
at least in our view,
found they could do it a lot easier
if they didn’t count compensation expenses.
And,
you know,
why not put all expenses in footnotes?
Just have an item there that says “sales”
and then have the same figure for net profit.
And then just have all the — (laughter) —
all the expenses in the footnotes, you know.
And people with a straight face, you know, say,
“Well, it’s in the footnotes,
so therefore everybody knows about it
and we don’t have to count it —
put it in the income account.”
It’s amazing
what people with high IQs will do
to rationalize their own, you know,
their own pocketbooks.
And Charlie has another explanation for why
there’s been this denial of
the reality of expense — option expense —
in terms of people’s ego getting involved with their own records.
You want to elaborate on that, Charlie?
Don’t name names.
(Laughter)
CHARLIE MUNGER: No, I’m so tiresome on this subject,
and I’ve been on it for so many decades.
It’s such a rotten way
to run a civilization. To make the basic accounting wrong
is very much like making the engineering wrong
when you’re building a bridge.
And
when I see
reputable people
making these perfectly ridiculous arguments
to the effect that
it’s unthinkable that options be expensed.
WARREN BUFFETT: Or it’s too difficult to value them.
CHARLIE MUNGER: Well, because it’s too difficult to value,
or God knows what reason.
And
a lot of them are people you’d be glad to have marry your daughter.
(Laughter)
WARREN BUFFETT: Yeah, because they’re rich,
for one thing. (Laughter)
CHARLIE MUNGER:
Yet, the truth of the matter is they’re somewhere between crazy and crooked.
(Laughter)
WARREN BUFFETT:
Put him down as undecided.
(Laughter)
It’s really astounding.
The interesting thing is, of course, now,
is that the
four auditing firms left,
what they call the Final Four now in the
auditing — (Laughter)
They have now —
and listen, I’m glad they did it, too.
And I tip my hat to them for doing it.
But they’ve now said that they really do think options are an expense.
So this is —
You know,
it kind of reminds of you
what happened during the Reformation, isn’t it? You know,
when you’d have these places sway back and forward,
you know,
as they get carried by one argument or the other.
In fact, I think there was that famous vicar of Bray who
who would swing from Catholicism
to Luther, back and forth, as this little town went back and forth
in Germany.
And finally, the townspeople gathered and they said
to the vicar — they said,
“It’s understandable that we’re confused by all that’s going on in theology,
and we really don’t know much about it,
and so we swing back and forth.”
But they said,
“We find it a little disgusting
that you, a man of the cloth,
would also keep swaying back and forth.”
And they said, “Have you no principle?”
“And he said, “Yes, I have one principle.”
He says, “It’s to remain the vicar of Bray.”
(Laughter)
I think we’ve seen a little of that in the auditing profession,
but I think they’ve actually found the true religion now,
so I don’t want to sit here and criticize them.
But,
you know, you now have four firms
that lobbied against options being counted as an expense
in 1993 that
have written the FASB and say that
options should be an expense.
And
I don’t know how in the world something
could have not been an expense in 1993
and be an expense in 2003.
Certainly didn’t apply to utility bills or,
you know, raw materials or anything of the sort.
But that’s
that’s the human condition.