I just got back from the 2009 Berkshire Hathaway Annual Shareholder meeting in Omaha, Nebraska. The meeting was on Saturday, May 2nd. Over 35,000 shareholders packed into the Qwest Center in Downtown Omaha to hear what Berkshire Hathaway Chairman Warren E. Buffett (aka the Oracle of Omaha) and Vice Chairman Charles T. Munger had to say on all matters of business, economics and everything in between.
Most annual shareholder meetings are boring and mundane, with various motions and minutes being taken (unless there is something unusual, like a proxy fight or other activist issue these meeting are super boring). In a contrasting style, for years, Berkshire Hathaway has conducted its annual meetings with a significant portion of time dedicated to a question and answer session - where shareholder post questions to Buffett and Munger about anything that vexes them. The Berkshire Hathaway shareholder meeting has evolved to be a “Woodstock for Capitalists” (Buffett’s term) with a huge exhibit floor containing Berkshire subsidiary companies as vendors and a ‘rock-star’ like atmosphere for Munger and Buffett.
When I got to the venue the morning of the meeting, the line to get inside was already wrapped around the huge Qwest Center by several hundreds of yards. I heard people speaking in different languages and regional dialects - which I found to be very interesting (thought to self: American capitalism must not be dead yet, people from all over the world are here to see the greatest living capitalist).
Once inside the Qwest Center, I mulled the exhibit floor. The exhibits ran as far as the eye could see with products from all over the map: ice cream (Dairy Queen), chocolates (See’s Candies), boots (Justin Brands), jet services (NetJets) and on and on and on. Over at the “Bookworm” section, William H. Gates II (aka Bill Gates’ father) was doing a book signing, with Mr. Buffett himself not far away.
After perusing for a while, I met up with my friend Joe Ponzio of FWallStreet fame. Joe is an investor, writer and investment adviser operating out of the Chicagoland area. I also met Joe’s business partner, Mike, and we headed into the meeting. Lo and behold we were not able to find a seat in the packed area 45 minutes before the meeting started! We ended up standing and watching the jumbo tron for the first half of the meeting. Later, we managed to sneak some good seats for the second half of the meeting.
If you have never been there, you wouldn’t believe how large and diverse the Berkshire Hathaway shareholder group is. You have hedge fund types from Wall Street and farmer types from Wisconsin. John Deere hats to Armani suits. Plain and simple: people from all walks of life travel many miles to hear what Warren Buffett has to say. Here are some snippets (nessesarily abridged) from the Q/A session with Warren and Charlie:
***To Kick off the Q/A, Buffett showed a slide with a picture of a trade ticket for $5,000,000 face value of U.S. treasuries that Berkshire sold on 12/18/08. The sale price for the face value of the $5,000,000 in notes was $5,000,090.00. For those readers not intimate with the way bond markets work, the bottom line is that the buyer of these treasuries from Berkshire was actually paying for the right to lose money. That’s right - they paid $5,000,090.00 in December to receive $5,000,000.00 back from the U.S. treasury in March - a negative yield. Wow! is all I can say***
Q: What type of discounted cash flow analysis do you use in valuing companies?
A: Buffett: investing is all about laying cash out now to get cash back in the future. The timing, certainty and amount of this are what you need to evaluate. A bird in the hand is worth two in the bush - Aesop said this in 400 B.C. and it is true today. If you need a spreadsheet or a calculator to get to an answer, you should probably pass. The number should scream at you from the paper. Munger: high and fancy math can be dangerous and lead you down the wrong roads
Q: What is a worst-case scenario for Berkshire’s insurance business?
A: Buffett: Big Catastrophe would hurt but not kill, we can withstand this based on our underwriting Munger: Public outcry and government nationalization that may result (as it has in other countries) is a worst case.
Q: How well have our government leaders responded to the economic crisis?
A: Buffett: quite well all things considered. Munger: nobody makes perfect decisions in these situations, the good outweighs the bad
Q:Will the U.S. face inflation in the future as a result of government policies?
A: Buffett: Yes, but it had to be done. Munger: yes
Q: Isn’t Berkshire Hathaway’s competitive advantage Buffett and Munger? If so, won’t this disappear when you guys die?
A: Buffett: Berkshire’s competitive advantage lies in an ingrained culture. We get first crack at great deals and businesses, this has been cultivated over many years and makes us strong. Berkshire will continue to be strong after we are gone.
Q: Why have you not named a successor to Buffett and had him/her doing an apprenticeship with Warren?
A: Buffett: Successor candidates are running businesses and allocating capital. Pulling them from their daily activities to watch me read or have a meeting an hour with me in the office would be counter productive. Munger: the candidate for successor is properly prepared by what they are doing now
Q: What was the compelling reason for the BYD investment?
A: Munger: this is an amazing company, run by an amazing guy, adding lots of value to society. Capitalizes on growing Chinese market. Buffett: $4b per year business and profitable - good fit for Berkshire long term
Q: What should China do about it’s mounting U.S. dollar reserves?
A: Buffett: they will continue to build up as long as the U.S. buys more from the Chinese than we sell to them. China consciously makes this decision to sell to us. They can buy U.S. assets like stocks, bonds, real estate. Munger: China has done a fantastic job moving their economy from third world up. They have a great success story.
Q: What is the main problem with CEO pay and bonus compensation that helped facilitate the current credit crisis?
A: Buffett: bad incentives. CEO’s can push around boards and comp. committees much easier than you would think. The CEO’s want Cocker Spaniels not Pitbulls on their boards. Rubber stamp mentality. Munger: public officials and board members should not have to rely on salaries from serving to put food in their mouths - problem of not wanting to upset the applecart. Buffett: CEOs hire consultants to come in and everyone serves the same master from H.R. on through.
Q: Why take on more derivative contracts? Aren’t they ‘financial weapons of mass destruction’?
A: Buffett: Berkshire has no collateral posting requirements for our contracts and we think they are mis-priced and can make money with them. Berkshire receives money now and only has to pay out if certain situations happen with regard to equity indexes and bond indexes many year from now. Our estimation is that these will play out well for us.
Q: What would Ben Graham have thought about derivatives?
A: Buffett: he wouldn’t have liked them. But, he may have taken advantage of a mis-priced situation. Munger: the accountants should be ashamed of themselves for the standards and enforcement of the accounting for derivatives.
Q: What led to the financial meltdown?
A: Buffett: unlimited belief in ever-rising property values
Q: What will happen in the housing market?
A: Buffett: huge oversupply. 3 million new households created every year, as long as supply stays stagnant, demand should build up supply by its natural course and things should return to normal levels. Already some pickup in activity, but not pricing, in California markets. Munger: places that did not go up into the stratosphere should be ok (like Omaha), but places like Florida and others have a very long way to go.
Q: When is Berkshire going to pay a dividend based on its policy of $1 increase in market value for stock for every $1 in retained earnings?
A: Buffett: even though 12/31/08 stock close has not kept up with the 5 year rolling metric we use, the book value of Berkshire, which we use as a proxy for intrinsic value, has kept pace - our intrinsic value has grown at a faster rate than retained earnings - which means no need to pay dividend. Munger: we could suck dividend out of subsidiary but that may cut off their growth and long term profits.
Q: What about problems with rating agencies and Moodys holding? Should Berkshire have done something with its large stake in Moodys to prevent it from partaking in the shenanigans of the subprime fiasco?
A: Buffett: conflict of interest problem with rating agencies was overblown, real issue was false beliefs in property values. Munger: fancy mathematical and ivory tower formulas played neat tricks on the rating agencies - they drank their own Kool-aid. Buffett: I didn’t write to Moody’s to tell them how to do their business because we don’t tell Burlington Northern how to handle safety issues or American Express what interest rate to charge its customers.
Q: How well did the investment management successor candidates do with their portfolios last year?
A: Buffett: down, about in line with the S&P. Munger: we would not want somebody that went timely into cash last year - not our kind of person.
Q: What effect will national health care have on businesses?
A: Munger: the U.S. will have a system like that of Western Europe in the future. Buffett: all businesses will need to stay in tune and adjust to this.
Q: Was Berkshire stock selling below intrinsic value recently? If so, would Buffett consider buying back stock?
A: Buffett: at 12/31/08, I felt that the market price was below intrinsic value. We did not buy back, mostly b/c other opportunities were there for us and we were committed to them and the stock was not selling for substantially below intrinsic value. If we announced share buyback, market would bid up the price and we would not be buying back at a discount.
Q: What makes a good business leader?
A: Buffett: emotional intelligence. You don’t need a 150 IQ to invest well or run a business well. Munger: it is VERY dangerous to have an IQ of 140 and think you have a 150 IQ. If you have a 150 IQ, sell 30 points to someone else!
Q: What is the impact of government bail out money in banks on Berkshire’s businesses?
A: Buffett: harder for us to compete, like Clayton, will have higher funding costs than banks with TARP money, etc. Going up against government backing and guarantees is tough. Munger: we have more flexibility than those companies who have taken government money.
Q: What advice did you give the college students that you spent time with last year?
A: Buffett: I told them that if I was teaching business school, there would only be two classes: how to value a business and how to think about markets - this is why I am not a teacher. I don’t know how you would kill an hour class if you were teaching efficient markets - first minute “everything is priced correctly all the time. Ok, 59 more minutes and a whole semester to go.” I would have put my entire net worth into Wells Fargo at $9 per share.
Q: Are stocks as cheap as they were in 1973-1974?
A: Buffett: No. Great companies were selling for 4 times earnings. Munger: No. Don’t wait for another 1974. Prices were just silly then.
Q: Are newspapers a good thing to invest in right now since they are so beaten down?
A: Buffett: their competitive advantages are shrinking rapidly, likely will never return to the profit levels even remotely close to what they had before.
Q: Is Berkshire managing the economic downturn with layoffs?
A: Buffett: Yes. Some places, like Acme Brick, nobody is buying any bricks, so they are shut down. Other companies have shared sacrifice - but that doesn’t work for all types of businesses. Munger: shared sacrifice is good for some businesses, but others simply need to make cuts - you can’t pay people for idle plants.
Q: Will GEICO continue spending huge sums on advertising?
A: Buffett: Yes! We love spending money on advertising at GEICO because it results in more people knowing about our brand - a brand is a promise - and results in more policies. When we bought GEICO it had 2% of the domestic auto insurance market, now it has over 8% and climbing and we are the 3rd largest auto insurer in the country. Our advertising dollars are well spent.
Q: Why do you prefer non-capital intensive businesses to capital intensive businesses?
A: Buffett: non capital intensive businesses tend to achieve higher returns than capital intensive businesses, we much prefer a company like BusinessWire to an auto company.
Q: How should non U.S. investors feel about investing in Berkshire amid a falling dollar?
A: Munger: dollar fall relative to what? Other countries are having massive stimulus and government spending as well. Buffett: Berkshire’s businesses have great earning power and derive a good deal from overseas businesses. A cautious investor might hedge
Q: How has the financial meltdown affected Berkshire Hathaway’s businesses?
A: Buffett: our operating businesses have been hurt. GEICO has gotten a boost because of the people looking to save money.
Q: Who will take over making the big Reinsurance decisions once you/Ajit Jain are gone?
A: Buffett: Ajit is irreplaceable. We would not give the same ‘power of the pen’ to anyone new. Not even close. I don’t make decision for Ajit, I talk to him because I am extremely interested in what he does. Like writing life insurance policies for Mike Tyson.
Q: What are some problems with leverage in this whole financial mess?
A: Buffett: You don’t want to be in a position where someone can pull the rug out from under you. You can get confused emotionally and pull it out from yourself as well.
——————-
I suppose I could go on for a few more, but these were the main points that I took away. The whole meeting was quite an experience and I look forward to going next year.
The challenge is to take Warren Buffett’s wisdom to heart and start making wise investment decisions. The framework is there - what are you waiting for?
Hi, nice post. I have been pondering this topic,so thanks for writing. I’ll certainly be subscribing to your posts. Keep up the good work
Adam,
Glad to see you back. Sounds like you had some fun. Thanks for the summation.
As you can probably imagine, I’m not a big fan of Warren’s politics or his belief that the bailouts were a net positive thing. Then again, the nature of capitalism is you can be one of the best capitalists in the world and not appreciate or even really understand the theory of it.
Obviously, Buffett is a business genius, no disputing that.
I really enjoyed the Q and A of their preference of non-capital intensive businesses. I couldn’t agree with that more. In fact, when I look back at my business history, it’s always been the things that cost the least that made the most.
And, it’s always been those things that required the biggest capital outlay that produced the least (or worse, lost money).
Regards,
Dan
Dan,
Thanks a lot for commenting. I always look forward to your take.
I have a conspiracy theory with regard to Buffett’s politics. I suspect that some of his views are geared toward continuing to build the Berkshire Empire.
What I mean is, if he were to come out and take more conservative stances on things (e.g. less government involvement in private enterprise, lower taxes, etc.) he would look like a huge bully. He would look like the rich man who “just doesn’t have enough.” Popular opinion would abhor his stances and he would lose chances at buying the $1 Billion+ family owned gem businesses (a la Clayton, Iscar, Flight Safety, etc.) By joining the ‘party of the little man’, he has a softer side to the brutal swashbuckling capitalist that many might otherwise view him as.
Again, just a thought.
As far as capital intensive businesses go, I am afraid I must also concur with you and Buffett.
I don’t think capital intensive businesses start out achieving low returns on capital. Think of the auto industry in its first 30-40 years, the airline industry in its first 20-30 years (Howard Hughes vs. Juan Tripp) and many others. As industries mature, returns on capital employed tend to decline as increases in productivity are forced through the companies to the end customer, resulting in lower prices for goods like textiles amid huge Capex and lower profits for the manufacturer. Increasing competition also drives returns in these industries down, as patents expire and sophisticated manufacturing processes are learned and adopted by competitors.
Anyway, more than you probably were looking for in response - but this is fun stuff!
Adam,
Actually, it’s not more response than I was looking for. I, too, often consider thoughts just like that which you proposed.
Admittedly, I haven’t followed Buffett’s career too closely. I have a couple of books about him and his investing strategies and will listen to what he says when he gets media coverage, but that’s about the extent of it.
I would be curious to know what his politics were before he was rich and famous. Was he still the big government advocate?
In any event, I judge people by their actions, not their words. If I can’t see their actions, then I will default to what they say.
If Buffett thinks taxing the rich is a good thing because the government needs the revenue, then he should sell his stocks at the end of each year he has gains on them so he can incur as high of a tax penalty as possible and help out good ‘ole Uncle Sam.
But we know his strategy is to actually buy good businesses and perferably own them forever. So, obviously his actions belie what he advocates verbally.
I should hope that if I were ever in a position where going against what I believed inwardly enriched me financially, I would stay true to my convictions. I believe money is important and a very good thing, but, of course, it certainly isn’t everything.
And certainly not worth compromising one’s integrity to attain.
That’s interesting what you say about returns on capital intensive businesses. I didn’t realize they were higher in the beginning. But, it does actually make sense.
Out of all of the business endeavors that you’ve personally been involved in, what were your favorites?
Dan
Dan,
Believe it or not, even General Motors used to earn good returns on capital. Check it out here:
http://books.google.com/books?id=uj6te3wYm_0C&pg=PA234&lpg=PA234&dq=General+motors+annual+report,+1950&source=bl&ots=BOOEtJmk_k&sig=1OIZULl2vzx1ESLCTtcuLx8v-Us&hl=en&ei=IiUISpr3L5PoMKjsxZcG&sa=X&oi=book_result&ct=result&resnum=2#PPA238,M1
(Sorry for the long link, but my blog editor has some limitations)
As far as businesses that I’ve been involved with I am most happy with where I’m at right now - in terms of being positioned to invest in distressed assets (like real estate) and heavily discounted stocks.
I enjoyed the vending machine business a lot as well. That company didn’t scale as nicely as I thought it would, but margins were great and I enjoyed having a cash business - not having to worry about collections. Also, week after week the machines were like a little army of cash generators - not a lot of up and down cash flow. Although employee problems were tough, decentralized autonomy was beneficial in great customer service.
How about you?
Adam,
Interesting link. Thanks for sharing that.
My favorite businesses?
So far, Internet Marketing. Partly because it fits my current lifestyle (I have 3 young kids) and it allows me to work at home.
That part is priceless.
Also, because Internet marketing has such low start up costs, it’s insanely profitable if you do it right.
But this is not to say what types of businesses I would get the most enjoyment from.
Down the line, I’d like to possibly open a nightclub or a restaurant. I worked in a nightclub for several years when I was in my early 20’s and loved the experience.
Now, I know that nightclubs and restaurants are notoriously tough businesses to run, and have large start up costs.
Both of those, in addition to the fact that I care for kids most of the day at the current stage of my life, prohibits me from pursuing these ventures at the current time.
I am also in a radical expansion of my Internet marketing training service to a level that I never dreamed of. Whether it’s successful or not remains to be seen. But I have the right partners now that’s for sure.
If it becomes extremely successful and I am flush with cash, then I may pursue the nightclub and/or restaurant idea (and probably lose it all right back!) :)
Regards,
Dan
Some bonds are more prone to default than others. Warren Buffet says ” when the tide goes out, you get to see who is swimming naked”. Our local government’s cant afford to continue to dole out platinum healthcare & pension benefits to police, fire and teachers. In good times, fat pensions stress cities’ finances and increase our taxes. But In bad times , these debts can break the camels back especially if city finances are unhealthy to begin with .
I do the job with these dogs and as far as animal behavior goes, I’m a solid believer in nurture and education. I’ve met Jack Russell Terriers that I would not go near again, but have never had a bad encounter with an American Staffordshire Terrier. If you are talking about their owners- nicely, which is a different story. Human beings are animals as well, and we tend to each have our individual ideas about “moral concepts”.
I always enjoy reading intelligent articles by an individual who is definately knowledgeable on their chosen subject. I’ll be following this post with great interest. Keep up the good work, till next time
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