I began attending the annual meeting of Berkshire Hathaway in 1987 after purchasing one share of the stock in my IRA account, and my motivation for attending was to hear Warren Buffett and Charlie Munger answer questions about their company, but also hear their comments about investing in general.  I had entered the securities business twenty years earlier and unfortunately for me—as with most stockbrokers—I had found no recognized path of education for my field.  As a result, my track record in investing on behalf of my clients, up until around 1990, was not a good one.  Fortunately the Q&A period each year lasted almost six hours and it provided a wealth—an appropriate pun—of information that would help my clients.  

At the 1994 meeting, I asked Mr. Buffett and Mr. Munger about their preference for buying entire businesses for Berkshire Hathaway versus simply investing in the common stocks of public companies.  You can hear my question and their answer here.

Or you can read the Q & A below:  

TIM MEDLEY:  Mr. Buffett, Mr. Munger, last year — I’m Tim Medley from Jackson, Mississippi — last year the question was asked about your preference for purchasing entire businesses versus parts of public companies.

You mentioned you prefer to buy private businesses because of the tax advantages and your attraction to the people in those businesses.

Are you finding today that there are better purchases within the private market versus in the public securities market?

WARREN BUFFETT:  Well, I would answer that no.

We do not — we very seldom find something to buy on a negotiated basis for an entire business. We have certain size requirements. A big limiting factor is it has to be something we can understand. I mean, that eliminates 95 percent of the businesses.

And we don’t pay any attention to them, but we get lots of proposals for things that just are totally outside the boundaries of what we’ve already said we’re interested in.

Counter to that is we can usually get more for our money in wonderful businesses, in terms of buying little pieces of them in the market, because the market is far more inefficient in pricing businesses than is the negotiated market.

You’re not going to buy any bargains, and I mean, you shouldn’t even approach the idea of buying a bargain in a negotiated purchase.

You want to buy it from people who are going to run it for you. You want to buy it from people who are intelligent enough to price their business properly, and they are. I mean, that’s the way things are.

The market does not do that. The market — in the stock market, you get a chance to buy businesses at foolish prices, and that is why we end up with a lot of money in marketable securities.

If we absolutely had our choice, we would own a group of — we would own three times the number of businesses we own outright.

We’re unlikely to get that opportunity over time, but periodically we’ll get the chance to find something that fits our test.

And in between we will, when the market offers us the right prices, we will buy more, either businesses we already own pieces of, or we’ll buy one or two new ones. Something’s usually going on.

There are tax advantages to owning all of them, but that’s more than offset by the fact that you’ll never get a chance to buy the whole Coca-Cola Company or the whole Gillette company.

I mean, businesses like that, sensational businesses, are just not available. Sometimes you get a chance to make a sensible purchase in the market of such businesses.

CHARLIE MUNGER: Well, I think that’s exactly right. And if you stop to think about it, if a hundred percent of a business is for sale, you’ve got — the average corporate buyer is being run by people who have the mindset of people buying with somebody else’s money. And we have the mindset of people buying with our own money.

And there’s also a class of buyers for a hundred percent of businesses who are basically able and assured financial promoters. I’m talking about the leveraged buyout funds and so on.

And those people tend to have the upside, but not the downside, in the private arrangements they’ve made with their investors. And naturally, they tend to be somewhat optimistic.

And so we have formidable competition when we try and buy a hundred percent of businesses.

WARREN BUFFETT: Most managers are better off, in terms of their personal equation, if they’re running something larger. And they’re also better off if they’re running something larger and more profitable.

But the first condition alone will usually leave them better off. We’re only better off if we’re running something that’s more profitable. We also like it if it’s larger, too.

But our equation, actually, our personal equation is actually different than a great many managers in that respect. Even if that didn’t operate, I think most managers psychically would enjoy running something larger. And if you can pay for it with other people’s money, I mean, that gets pretty attractive.

You know, how much would — and let’s just say you’re a baseball fan — well, how much would you pay to own whatever your hometown, the Yankees?

You might pay more if you were writing a check on someone else’s bank account than if you were writing it on your own. It’s been known to happen. (Laughter)

It’s very interesting to me, because they’ll say that — they’ll have somebody else manage their money in terms of portfolio securities. Well, all that is is a portfolio of businesses.

And I’ll say, “Well, why don’t you pick out your own portfolio?” And they’ll say, “That’s much too difficult.”

And then some guy will come along with some business that they never heard of a week before and give them some figures and a few projections, and the guy thinks he knows enough to buy that business. It’s very puzzling to me sometimes.