Berkshire Meeting: Valuing Businesses Can't be Reduced to a Formula

Features Dow Jones Newswires

A decade ago, a teenage boy asked Warren Buffett what impact the internet would have on Berkshire's businesses. He's back Saturday and today he asked the same question, but substituted artificial intelligence for the Internet.

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Mr. Buffett's answer is that AI would "result in significantly less employment in certain areas, but that's good for society."

Mr. Buffett then went into a role play where one could assume that a person with AI could push a button and create all of the output in this country. If that's all done by one button instead of 150 million people, he argues, the world is better off.

The externality of this situation--or unintended consequence--however relates to politics and is similar to what's happening in trade today.

International trade has big benefit society. But people who see the benefits, such as a lower price for socks at Wal-Mart, only see small benefits. The man or woman who lost their job because of trade, on the other hand, sees significant pain.

Thus, those hurt have more political vitriol than those helped and therefore there is a larger political impact.

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Mr. Munger isn't as worried. He said productivity is better, society is better and it's not like all of these changes are coming overnight.

You don't have to worry about productivity coming on 25% a year, said Mr. Munger, and he's more worried about less than 2% a year anyway.

Click here to see the full live coverage of Warren Buffett at Berkshire Hathaway's annual meeting:

http://www.wsj.com/livecoverage/berkshire-hathaway-2017-annual-meeting-analysis

Write to Geoffrey Rogow at geoffrey.rogow@wsj.com

Everyone wants to ask Warren Buffett his formula, copy it, and then make money. It isn't that simple.

The last question was about using various price-to-equity models in evaluating stocks, specifically related to valuing a stock in the U.S. compared with one in China. Mr. Buffett says numbers all have some degree of meaning, but that valuing a business can't be reduced to just some formula.

Moreover, the "the most important thing is future interest rates."

Mr. Munger adds that when comparing China to the U.S., he does think there are broadly more opportunities in China. Using his fishing analogy, he said a good fisherman can simply find more fish in China.

"It's a happier hunting ground," he adds.

Click here to see the full live coverage of Warren Buffett at Berkshire Hathaway's annual meeting:

http://www.wsj.com/livecoverage/berkshire-hathaway-2017-annual-meeting-analysis

Write to Geoffrey Rogow at geoffrey.rogow@wsj.com

(END) Dow Jones Newswires

May 06, 2017 16:08 ET (20:08 GMT)