The Berkshire Hathaway shareholder meeting was fabulous. A great experience to sit at the feet of Warren Buffett and Charlie Munger. (Thanks Darren, for making this trip possible!)
I love my blackberry. I was able to take a lot of notes during the Q&A session which lasted about five hours. I am not a trained reporter, and my notes may contain a few mistakes (I’ve caught and corrected a few already), so please don’t accept this as an accurate transcript. Like my post says, these are notes to myself, and in places they are rather cryptic.
WB. Catastrophe insurance is seasonal: 50% of hurricane’s are in September. Later this year P&G may buy Gillette giving them billions in capital gains, but that’s just for reporting, it means nothing to them, since they will hold P&G for a long time. They will announce an acquisition soon in insurance, just under a billion. We’d love to buy something for $5-10 billion, our check would clear. We’ve got more money than brains.
Q. What are three most important criteria for selecting managers.?WB. 1. Passion for their business. We buy companies from people who are already rich, don’t want to sell or leave their business, but they need some liquidity. We hope they love their business, we try not to dampen that. Intelligence, energy, integrity. Do they love the money or love their business. We don’t have anyone to run their businesses.
CM. How well this has worked and how few people have copied it.
Q. How to decide abt Anheiser Busch, what was its intrinsic value?WB. Decision takes about 2 seconds. I bought 100 shares abt 25 years ago, of AB and lots of stocks, so I could get reports. I’ve been reading reports for 25 years. Beer sales are flat. Wine and spirits are gaining. Miller was rejuvenated.
CM. At our scale, if we’re going to buy well regarded companies we almost need a patch of poor performance.
WB. Ave person drinks 64 oz. Per day. 11 oz will be coco-cola, beer is about 10%. Coffee is going down.
CM. Some of you may remember Mets. National brands are replacing all the local ones. That is permanent.
Q. How you see Berkshire vs others, esp rise of private equity firms. Last year you said there were enough owners wanting to sell to BH. Rise of hedge funds, investing in everything. Are returns going down because of the increased competition.
WB. Far more money looking at deals now than five years ago, higher prices for mundane businesses. Private equity funds are bigger. Bidders line up for things. Many businesses being flipped. We are positioned poorly for acquisitions. Its amazing how fast things change. Three times he thought there was so much money that it would be hard to do intelligent things. 69 got out of partnership. 3-4 years later I saw the biggest opportunities.
We bought abt $7 b in junk bonds abt 3 years ago. We are positioned very badly, your stock won’t do as well. I don’t have any magic solutions.
CM. A lot of buying is fee motivated. I had a friend who tried to buy warehouses but he was always topped by professional managers who want fees. A few years ago he had a call from someone who was trying to spend clients money before he had to return it. We don’t get paid for spending money, but for making it.
CM. None of the companies sold to us over the years would have wanted to deal with a hedge fund.
Q. What sparked your interest in investing? What advice?WB. Got interested at 7. Wasted time before that. His Dad was in business. Read all the books on investing in Omaha. Bought 3 shares at 11. Read Graham’s book at 19. Advice: read every book in sight. Start young. If you start young and read a lot you are going to do well. There is no priesthood with scrolls that are available only in temples. You don’t need IQ, but temperament. I developed a simple framework by reading, didn’t come up with it myself. You can learn everyday but not act every day. If you enjoy the game, like bridge or baseball.
CM. My attitude is like Keynes that money managing is a low calling. Not like a surgeon. I don’t like percentage of GDP going to money management fees. Not good for the country. Managers would do better if they understood investments.
WB. I’ll have some CEO friends who don’t manage their own money. But they take advice on huge acquisitions with shareholder money.
CM. Present Era has no comp. Higher percentage of intelligent classes in buying pieces of paper trying to get rich. No past era had a similar concentration.
CM. A lot of what I see reminds me of Sodom and Gomorrah.
WB. We weren’t there by the way.
CM. But there is a published account. Bad things happened after greed and envy.
Q. Poem from 11 year old. Petro China?WB. We bought Petro China a few years ago after reading the annual report. At $400 m. It produces 3% of worlds oil. Last year it earned $12 b. So it’s a major company. Total market value was $35 b. In the report they say they will pay out 45% percent of what they earn. Chinese govt owns 90% of the company, we own 1.8%. If we vote together we control it. We had to reveal our stake. We would have bought more but the price jumped. Employs almost 500,000 people. Anyone can read the report. We bought. We didn’t go there and meet anyone. We just sit and read. At the time Yukos was far better known. I compared them at the time. PetroChina was far cheaper and China had better prospects.
Q. Rising costs on fuels, metals, wood. Unable to pass on costs. Will profits be compromised in the future?WB. Carpet business we’ve been hit over and over. Lagged on passing costs along. Corp profits as percentage of GDP are at an all-time high, will probably go down over 5 years. Corp taxes as percentage of total taxes are near all-time low.
Likes untapped pricing power, like Sees Candy. If you raise prices $0.10 would sales go down.? You can almost measure the strength of a business by how much agony they go through when they contemplate a price increase. Years ago newspapers did annual price and ad rate increases. It worked. Fat margins. But now publishes agonize over rate increases because they are worried about losing circulation or advertisers. You can learn a lot about the durability of an industry by getting in the mind of a manager relative to pricing.
Q. You are our heroes.WB. We have lowest turnover, most knowledgeable shareholders.Q. What about a dividend? With 15% rate.WB. If there were no tax on dividends, we would have done the same things. We retain earnings when we can increase the present value. So far our retained dollars have produced more than a dollar in present value. We’ll discuss this at next week’s directors mtg.
Q. How could current account deficit come down?WB. $618 b current account deficit, can’t last, something will happen. Most observers think a soft landing is likely.April 10 oped piece by Paul Volker about soft landing. With so much of worlds assets on hair trigger, some event could happen overnight that could cause them to want to change their position in a day–electronic herd is at an all-time high. Some exogenous event could cause a stampede by the electronic herd. People can’t get rid of dollars quickly…
In economics you can know what is going to happen, but not timing. You can see bubbles for example.
CM. I’m more repelled by the lack of virtue in consumer credit and public finances. Eventually a lack of virtue will hurt us.WB. What do you think the end will be? CM. Bad.WB. We consume a little more every day than we produce. We mortgage our farm or sell off pieces every day. More and more the rest of the world is owning part of us. The world will eventually own a good bit of us. Our children will pay for the fact that we overconsumed. World has demonstrated a diminishing enthusiasm for dollars. We are flooding with them.CM. Counter argument is: what does it matter if foreigners own 10% of the country if our real wealth is 30% higher than now. Some say if we manufactured nothing but just ran hedge funds we could have a great lifestyle. WB. The idea of us paying tribute to the rest of the world because of overconsumption of previous generations.
Q. Decline in housing, how would affect carpet?WB. We’d make up for it in other areas. Well being is tied up in housing. If there is a bubble that was pricked, we’d feel it, but the net effect could be good for us. We’re not into macro economics. We had people fleeing from cash (because of inflation) into farm land. In 1980 a farm here sold for $2,000 an acre. I bought it later for $600. People go crazy. Resolution Trust was formed. Many banks failed. Because people live in houses, the behavior might be different than other markets. CM. In Omaha, there’s not a bubble. You have a real asset price bubble in CA, Virginia suburbs. WB. I sold house in CA for $3.5 m, first day, probably sold it to cheap. 2000 sq ft. About $60 m per acre. CM. Friend sold a modest oceanfront house in CA for $27 m.WB. I