Return on Capital

AUDIENCE MEMBER: Joe Tellinghas (PH), Boston, Massachusetts. What’s the proper way to think about goodwill and return on capital? Berkshire’s manufacturing, service, and retail businesses earn pretax returns on tangible capital over 20 percent, which suggests either skilled managers or fantastic businesses. But the return on allocated equity is in the single digits, which looks drab. Accountants treat intangibles similarly because they have different economics. (Inaudible) For an indestructible brand like See’s or Coca-Cola, I can see why the intangibles should not be amortized because it’s worth more every year, and your comments on GEICO policyholders were one way to think about that. But all the tobacco companies have billions of dollars of goodwill in unit sales of cigarettes to claim every year in developed countries, so perhaps they should be amortized. And for Time Warner- AOL, goodwill definitely needed to be amortized. WARREN BUFFETT: Yeah, it’s terrific, but wind power is terrific, but only when the wind blows. And the wind blows about — as I remember— about 35 percent of the time in Iowa. So you never can count on wind power, obviously, for your base load. And, you know, that is a real limitation. On the other hand, wind power, you know, is basically, I guess, the cleanest energy you can come up with, except for the fact that it can’t be relied on. It — the economics only make sense with an incentive credit — tax credit — provided by the federal government, which they’ve been doing for a considerable period of time. It does not — standing on their own, the investment will not return anything like an adequate return on capital. So there is a tax credit that your government has made a decision that it wants to subsidize, in effect, wind power. And Iowa has been — Iowa is a good wind state.