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Part - III

Q: I was struck by that statement you made during the height of the bubble. That you didn't understand the technology business. You are a smart guy. What aspect of it didn't you understand that prevented you from investing in it? I mean people knew that there was a technological revolution of sorts going on. You understood that.

A: Sure. It's important. Still is important. But what I didn't understand is who had permanent competitive advantage. Very long term competitive advantage. I know who has competitive advantage in chewing gum. It's Wrigley's. I know who has competitive advantage in candy in California. It's our brand, sees. Those are the easy things to figure. You would bet your life on the fact that Gillette would dominate the razor and blade business 10 years from now. Or that Coke would dominate world wide the soft drink business. I don't think you'd bet your life on who would dominate some particular aspect of software.

The Vision

Q: What about the economy? What do you see? You've got your hands in a number of businesses that obviously give you some feed back about what's going on?

A: We see what other people see. That the consumer economy is doing pretty well. Our furniture stores are doing exceptionally well. Our jewelery stores aren't doing quite as well. The business economy went on a binge egged on by the capital markets. Particularly in telecom, and a few things like that. Essentially, the American public offered a blank cheque book to anybody who'd go out and buy something and create a business plan around it. So you had this capital goods binge. It may take a long time to work that off. We'll work it off eventually. I am a bull long term on America. But I am not a bull in terms of expecting stock returns to be anything like they what they were in the 80s-90s.

Q: The concept of 'Reversion To The Mean' can be very fuzzy. When you have 17 years where the S&P goes up better than 15% a year, 'Reversion to the Mean' can suggest you're going to be down for a number of years. Not just go back to a 10% average return.

A: It happened from 1929-48. Actually the market ended up at half as measured by the Dow. By 1948, the American economy had gone far beyond where it was in 1929. But it took a generation to loose the memories of that earlier period. We had one set of memories that developed in the 60s and 70s and then we had another set of memories in the 80s and 90s. Let's see what kind of memory we develop in this current period. But it won't be anything like those of the past periods.

Q: People have a memory of something you said post-September 11. Having to do with the virtual certainty of some sort of nuclear event in the United States. You said maybe 10 minutes, may be 10 weeks, maybe 50 years.

A: If you have something that has one chance in 20 of happening in a given year, in 50 years it becomes virtually a certainty. Compared to 50 years ago, this world probably has more psychotics, more megalomaniacs, and more religious fanatics today. Because as the population grows, you get more of such people. There are a large number of people who wish us ill. See, 2000 years ago, if you wished somebody ill, you picked up a rock and threw it at him. That's the most damage you could do. Even 50 years ago, you couldn't do much damage. Of the people that wish us ill, very few of them will translate that feeling into any sort of attempted action. But knowledge of the techniques and materials needed to seriously hurt someone you hate has increased almost exponentially in the last 20-30 years. And that includes knowledge of nuclear, chemical, and biological weapons.

Q: Because of your stature, because of the perceived information flow that you get, people immediately worried that you knew something.

A: I don't know anything. But I do know basic probability. I am in the insurance business; so I understand how things that seems very unlikely to happen, happen anyway if enough time passes. I know there are certain nations and certain terrorist groups that would like to cause us a lot of trouble. And I know they work on biological weapons. There are people trying to design viruses, there are people who would like to get plutonium, there are people who would like to get a dirty bomb. Most of them would be ineffectual. We won't even hear about it. We'll block a lot of those attempts. I don't think the probability has gone up from what it was a year ago. It does go up a little bit because of the knowledge and material spread. But I don't think there has been any acceleration in that. I don't think that there is any dramatic acceleration in who hates us. It's just that there are plenty of people out there who do.

Q: Did you take any heat from Washington for having said that? You got a phone call or anything?

A: Not at all. There will probably be some people who welcomed it. Because you need support for funding, for vigilance. The government is the one who has to protect us against terrorists. And you want a government that is very vigilant about it.

Q: What do you make of the post September 11 response? In terms of increased government spending and the way that Washington has responded in such a variety of actions at least as far as the economy is concerned. What do you think the net effect of September 11 ultimately will be?

A: It redirects resources to a significant extent. Take an extreme example. If we have 100 million people in the workforce and all of sudden, we asked everybody to watch everybody else, we would get only half the output. Now the GDP wouldn't change. Everybody would be working, so unemployment wouldn't go up. But you'd get less output.

So the more people you have inspecting people at airports or whatever it may be, that diverts from other output. It's like in war. In war, GDP does wonderful things. Because you're building planes and ships to go into the ocean. But you aren't getting much in the way of consumer goods. So anytime you have a war, and this is a very limited sort of a war, you redirect resources. And that has some impact. But I don't think it's that dramatic.

Q: I know you don't talk much about the stock market per se. And yet the market seems to be going through a period of trouble that is somewhat inexplicable right now as it relates to the economy. The economic numbers that we are getting looked actually fairly decent in some cases, and the stock market is laboring under something?

A: If you look at the 20th century. In those 100 years, DOW went from 66 to 11,000. That was a fabulous period. The American standard living went up 7 for 1, GDP on a real basis. During that period, there were three long periods covering 56 years where net, the market was down. And yet every decade the American economy advanced. So stock market is going to out of sync with the economy for very long periods. It is going to get ahead of the economy and it is going to get behind. We had a 17 year period from 1964 to 1981, when the market went no place. The DOW went up less than a point in a 17 year period. The economy grew a lot. Then we had another period to follow that for 17 years, where the economy chugged along not much better than it had in the earlier period and stocks not only caught up with their previous underperformance but they overshot in a big way. The market will not perform in sync with the economy. Anybody who thinks that if the economy picks up, the stock market has to go up does not follow history.

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