Transcribed comments via Outstanding Investor Digest from the 1996 Berkshire Hathaway Annual Meeting:
Our cheap, plentiful float springs from competitive advantage.Buffett: You achieve that in this business only by having some kind of competitive advantages. You won't do it just by having an ordinary insurance company - because an ordinary insurance company is not a good business.
We have it in certain respects because of our attitude toward the business. Our financial strength gives us certain advantages. And we have it in the case of GEICO because of a very low cost operation. And it's up to us to try and figure out ways to maximize each one of those competitive advantages over time.
We've built those advantages. In 1967, we weren't looked at that way in the insurance business. We've built a position of competitive strengths. And GEICO had it without us. But we bought into it over time.
Would I accept $7 billion for our float? The answer is no....
Buffett: So it's a very important asset. And you ought to pay a lot of attention over the years to what's happening with that asset - both as to growth and cost. And that will aid you in calculating intrinsic value....
But I will tell you this: We have $7 billion of float presently.... And if I were offered $7 billion for that float and did not have to pay tax on the gain, but would thereafter have to stay out of the insurance business forever - a perpetual non-compete in any kind of insurance - would I accept that?
The answer is no.
That's not because I'd rather have $7 billion of float than have $7 billion of free money.
It's because I expect the $7 billion to grow.
It would have been a mistake - and one I'd have made.
Buffett: If I'd been offered that trade 27 years ago of $17 million for the float we had at that time with no tax to be paid - float for which we'd just paid $8.7 million - in return for us to have gotten out of the insurance business, I might have said yes....
Munger: You would've.
Munger: But he keeps learning. That's one of his strengths.
Buffett: That's probably true in this case. I'm not sure in other cases. But it would've been a terrible mistake. It would have been a mistake to do it 10 or 12 years ago with $300 million of float. And today, a tax-free payment of $7 billion would not compensate us adequately for giving up the opportunity of being in the insurance business forever at Berkshire - even though it'd be a $7 billion pure addition to equity. So we wouldn't take it. In fact, we wouldn't even think about it very long.
So, as Charlie says, that isn't the answer we'd have given some years back. But it's a very valuable business.
It's not automatic. But if they're run right and nurtured....Buffett: It has to be run right - as does GEICO, the reinsurance business, National Indemnity and the homestate companies.... And it's not automatic.
But they have the people, the distribution, the reputation, the capital strength and other competitive advantages in place. And, if nurtured, I think they become more valuable as time goes by.
[And if anyone happens to, by any chance, have a copy of the August 27, 1992 Outstanding Investor Digest issue that they could pass along, I'd be much appreciative. Thanks.]