For many companies, wealth is a mirage -- Buffett

For many companies, wealth is a mirage -- Buffett
AGENCIES

OMAHA, APRIL 30: Holding forth in what promised to be another marathon annual meeting before more than 10,000 Berkshire Hathaway shareholders on Saturday, Buffett said that "bursts in the market ... get corrected eventually." He said that a company that in the end never makes any money but changes hands many times doesn't create real wealth.

Asked the predictable question -- why Berkshire doesn't invest in technology stocks -- Buffett said, "We have no religious belief that we don't buy into technology companies. But we've never found one where we think we know what the business will look like in 10 years."

He also said he was unsure what threats and opportunities technology would bode but "it will become an increasingly important issue on how it affects our businesses."

Noting that among Berkshire's properties is the Buffalo daily newspaper, Buffalo News, he said, "Newspapers are a category that is very threatened by the Internet." He said the Internet had a distinct advantage over newspapers in that it had virtually no delivery costs. He also said that in "not too many years" the newspaper would look "very very different" because of the Web.

As a result, he said he was "puzzled" over what some people are paying for newspaper properties today. "They have their billfold in the past," he said.

Buffett also predicted that the Internet will have a significant albeit uncertain impact on Berkshire's various retailing businesses. "They are all threatened one way or another by the Internet," he said.

Buffett and his sidekick, Berkshire vice-chairman Charles Munger, also dispensed considerable cautionary advice to the rapt audience about current high stock prices and market valuations.

"We've seen a lot of cases where valuations on the high side are unbelievable," Buffett said. As a result, he said it makes finding the bargains that he and Munger are famous for discovering ever more difficult. "We don't see any great cases of dramatic undervaluation in this market," Buffett said. He said with "so much money sloshing around" it makes many companies prohibitively expensive.

He and Munger also criticized the high paychecks some senior executives are taking home. "What happens on the top level is really unbelievable," Buffett said, adding that the primary pay gap these days is between the rich and the super-rich. "It's motivating a lot of compensation," he said.

Munger, who punctuated his remarks with often pithy metaphors, likened some corporate compensation today to "putting a rat colony in a granary." Obviously the two thought shareholders were being poorly served by such compensation packages.

They also indicated they thought there was a high degree of risk in some of the stock option plans currently proliferating on Wall Street. Buffett said he thought many of those receiving those options "inherently know they have a lottery ticket."

Buffett noted the extremes in some company market valuations today. He said some companies may have a market cap of $10 billion but would be unable to borrow even $100million if they went to the bank. Yet their individual owners could borrow 20 times that amount. Of such imbalances Buffett said, "This is as extreme as anything that has happened -- including the 20s." Munger called it the most extreme event in modern capitalism.

Buffett called the current situation "precautionary to us" as professional investors. "It does not spell opportunity." But, he said, "The ability to monetize share holding ignorance has never been exceeded."