For the past 15 years I have attended the annual meeting of Berkshire Hathaway, which is arguably the best long-term investment ever in the history of investing. Warren Buffett and Charlie Munger spend six hours talking to the shareholders and putting forth their wisdom.
This year’s meeting was no different, although there were clearly more questions about succession and a bit more morbid reality among both of them. Overall, however, the outlook was positive and the plan seems to be in place for a successful transition and a well-run company.
Their outlook for the future is optimistic, as it generally has been and the stock continues to increase in value. Their insights are the big deal here, however. The following quotes and summaries of discussions are the highlights in my mind. I didn’t include any of the intricate discussions involving financial instruments as that is beyond my level of knowledge for the most part.
I hope you enjoy reading this as much as I have enjoyed this incredible meeting each year.
I am including this piece out of place as it was one of the most interesting and telling discussions of the day: Buffett stated that all of his shares will go to five different charities when he dies. He will ask them not to sell for 12 years and has been donating parts each year to charities already. As always, he hopes you won’t sell any Berkshire shares when he dies as they will do well. They asked why he told his wife to invest in S+P: “My wife’s situation is that she has 100% more money than she’ll ever need. I instructed my trustees to not sell Berkshire(BRK) stock until they absolutely have to…”
Munger: After Warren dies, the money will go back to the civilization in which it was earned. I like being associated with him.
There was much discussion of the fact that Buffett compares Berkshire stock book value to the S+P 500 and it has lagged in the past five years. The question was whether this is a fair comparison. Berkshire stock is so much more than the sum of the parts and the actual performance. It is like waiting for a payout at the end of a career. Charlie said it was crazy that Buffett even considered this as a yardstick and feels it is like climbing a mountain rather than just running a fair race. Buffett quote: If this is failure, I want more of it.
Obama performance – there was a question stating that they didn’t believe Obama had performed well. Buffett disagreed and said that his low approval rating isn’t deserved and the proof is that corporate charts are doing well and business is succeeding.
Intrinsic value of stock – Whether to sell or buy their own stock can be a game and intrinsic value is very difficult to measure.
Putting a promise to care for the business and make it prosper is part of the allure of selling to Berkshire – They have only gotten rid of a few businesses and that encourages families to sell to them. Buffett: We made promises to certain businesses based on principle. They may not be doing well, but we will keep running those businesses. Private equity firms won’t be impressed with what is on the back of our annual report, but we have a unique asset at Berkshire and others can’t compete with us. It works well. Munger: We behave the way we do because we like doing it and it works pretty well!
There was a question on the Coca-Cola board compensation issue. Buffett disagreed with the resolution, but ended up abstaining from it despite that. His son, Howard, voted for it. There was much discussion on what that meant and how to behave on boards. Buffett stated that shouting and attempting to change the behavior of others is dangerous and doesn’t always have the intended effect. “Charlie, I offend you more than most people and I’m quite pleased at your level of disapproval [on this issue].” Buffett: “If you keep belching at the dinner table, you’ll be eating in the kitchen,” essentially saying that if he were to kick up a fuss he wouldn’t be on the board and this is about as active as he would get on this issue. Your social brain needs to be at the board table, not just your intellectual brain. Munger: Pick your spots of disapproval. Don’t shout disapprovals all day. Pick certain ones.
Cost of capital discussion – Nebraska Furniture Mart was purchased for $60 million in 1983 while it had $4 million in ebidta. It now has $400 million for the main location and I believe he mentioned $600 million (perhaps for all of the units as he has one in Kansas City). Buying Nebraska Furniture Mart wasn’t done at a bargain price, but if you want a bargain price, shop at Nebraska Furniture Mart!
Nebraska Furniture Mart is building a huge site in Dallas. He predicts the Dallas site will be biggest home furnishings in the world by factor of two when it is finished.
Weather-related issues led to railroad problems this winter, which he says was the worst winter ever for the railroads. It is interesting that they simply can’t function well at 0 degrees or lower and that was what it was for much of the winter in the Bakken Oil Fields and north. Buffett will spend $5 billion on railroad this year and there will be a comeback.
There were some questions about their age and who would replace Charlie if he were to die. He said that with Charlie now entering middle age (he is now 90!), he can be like a canary in the gold mine . . . Warren said it was great working with Charlie and wouldn’t have done it any other way. Sadly, Charlie said: The world won’t have to worry . . . most 90-year-old men are gone soon enough. He is not worried about a succession plan, however.
For a company, available cash is like oxygen – you don’t know you need it until it is gone. Shortly after the downturn, they lent money to Harley Davidson at a 15% rate! They never expected to need it and no one else would loan it. They would have liked to have purchased Harley Davidson, but that wasn’t an option. Berkshire will always keep $20 billion on hand so they can sleep at night! Buffett: “In the next 100 years, we will need it at some point.”
He referred to Charlie as “the abominable no man.”
CEO compensation issue and greed among CEOs – He feels that if they publish the salaries of all folks at the company, it will only push up compensation. “I’ve never seen a CEO see a salary of another CEO on a proxy and say, ‘I should make less’. . .” Charlie: “Envy is destroying America. We seek to be envy dampeners.”
Munger: “You need to know how to scramble out of your mistakes. Like when the original textile business of Berkshire Hathaway failed. Imagine what we could have been if we had a better start!”
Every company has more cash than other companies in general at Berkshire and they could do a sweep account for the companies, but they don’t. Perhaps that is a shortcoming on their part, but they feel it is unnecessary because they are not big disciplinarians of companies and don’t want to keep too much control over cash. They likened it to a ‘blood draw’ and felt it could squeeze the life out of the companies. They also said they were somewhat slow to make personnel changes, even when warranted.
By the standards of the world we over trust and some see that as a weakness. That could make us look bad in the future, but it is one of the things they just do. Overtrusting is something that is a cultural issue. My comment: They were burned by it when David Sokol invested in a company they were in talks with and it reflected poorly on them.
Buffett was asked about the candy business in general. He replied that it is stagnant at this time, but has always been a big business, but doesn’t transport well and doesn’t work in some areas of the country. It has lost market share to salted snacks and other items and there is little he can do to increase the size of the market. He said that Pepsi was at one time owned by a candy company. He sees growth stalled now, but not sure what the future will hold. Here is the info on who owned Pepsi from Wikipedia:
Pepsi was first introduced as “Brad’s Drink” in New Bern, North Carolina, United States, in 1893 by Caleb Bradham, who made it at his drugstore where the drink was sold. It was later labeled Pepsi Cola, named after the digestive enzyme pepsin and kola nuts used in the recipe. Bradham sought to create a fountain drink that was appealing and would aid in digestion and boost energy.
1919 newspaper ad for Pepsi-Cola
Plaque at 256 Middle Street, New Bern, NC
In 1903, Bradham moved the bottling of Pepsi-Cola from his drugstore to a rented warehouse. That year, Bradham sold 7,968 gallons of syrup. The next year, Pepsi was sold in six-ounce bottles, and sales increased to 19,848 gallons. In 1909, automobile race pioneer Barney Oldfield was the first celebrity to endorse Pepsi-Cola, describing it as “A bully drink…refreshing, invigorating, a fine bracer before a race.” The advertising theme “Delicious and Healthful” was then used over the next two decades. In 1926, Pepsi received its first logo redesign since the original design of 1905. In 1929, the logo was changed again.
In 1931, at the depth of the Great Depression, the Pepsi-Cola Company entered bankruptcy – in large part due to financial losses incurred by speculating on wildly fluctuating sugar prices as a result of World War I. Assets were sold and Roy C. Megargel bought the Pepsi trademark. Megargel was unsuccessful, and soon Pepsi’s assets were purchased by Charles Guth, the President of Loft, Inc. Loft was a candy manufacturer with retail stores that contained soda fountains. He sought to replace Coca-Cola at his stores’ fountains after Coke refused to give him a discount on syrup. Guth then had Loft’s chemists reformulate the Pepsi-Cola syrup formula.
On three separate occasions between 1922 and 1933, The Coca-Cola Company was offered the opportunity to purchase the Pepsi-Cola company, and it declined on each occasion.
Pepsi’s success under Guth came while the Loft Candy business was faltering. Since he had initially used Loft’s finances and facilities to establish the new Pepsi success, the near-bankrupt Loft Company sued Guth for possession of the Pepsi-Cola company. A long legal battle, Guth v. Loft, then ensued, with the case reaching the Delaware Supreme Court and ultimately ending in a loss for Guth.
When they purchased See’s Candies in 1983, it opened their eyes to the power of brands. Its main contribution was “ignorance removal.” Munger: “We are pretty good at ignorance removal and good news is that there is a lot left. We want to purchase good businesses that are run well with good management in place and a big potential earning power.”
Coal v. green energy – I think there are a lot of folks who like a calamity and want to talk about it, (but it isn’t relevant to their work/investments now). We do see climate change and invest in both coal and other green energy. Because of their investments in green energy in wind and solar in Iowa, they got the contract for a 1 million square foot Google Data Center in Iowa. This allows Google to gain energy tax credits.
He thinks Ben Bernanke was a hero during the crash. Interest rates being this low is something we’ve never seen and don’t know how it will end but it will be an interesting story. He likes Janet Yellen as well.
Munger: If you’re not confused you probably don’t understand it very well. This is not a bubble situation with interest rates being so low but it is unusual and they are unsure when it will end.
There was a question about conglomerates and performance and the fact that Berkshire is one of a very few conglomerates that actually has worked. The question was why they worked, but no others have so far. They feel that moving capital between businesses with business principles is what should be done rather than stock indications and most conglomerates do it the wrong way (do it for stock reasons). They referred to it as a chain letter idea – it works well initially and then it blows up. They are like the Mellon brothers v. Gulf and Western, which he didn’t think succeeded.
They talked about when they invested huge amounts of capital, which they did in 2008, much to shore up the economy and create faith in America when it wasn’t there. They did reflect that investing in 2008 was too early and had they timed it (which is clearly impossible to know), they should have invested in 2009.
While initially, they invested in stocks more than companies, now it is the opposite, but it is more enduring to invest in purchasing entire companies. Buffett: I love it when we buy transmission lines in Alberta. They won’t ever be ‘gone,’ but if they do ‘go away’ we won’t know it (i.e., the world will be over)!
There was a question regarding investing in banks. They said they could have made more money buying marginal banks back in 2009 as they had more room to recover than Wells Fargo, which was a wonderful bank and did well throughout the downturn. Basically, they stated it is best to invest in something that is not the greatest if you want to see a significant return . . .
On Progressive’s Snapshot and insurance rates – they say there are all sorts of ideas for insurance and they stand by Geico not having Snapshot. They did say that if self-driving cars come around, it will be very good for society and very bad for automobile insurers. But they wouldn’t sell Geico yet as they think self-driving cars will not be here five years from now or 10 years from now as well and “30 years from now, I’ll go away peacefully without knowing how it all turns out.”
A person asked how they know their circle of competence – Buffett: “I know of a number of CEOs who don’t know their circle of competence. Mrs. B (the owner of Nebraska Furniture Mart) knew it when she took cash for Nebraska Furniture Mart and invested it in real estate and apartments rather than the offer of Berkshire stock.” Apparently, she didn’t even read the contract but her son did (she couldn’t read English). Competency is a relative concept according to Munger. “What I needed was to compete with idiots and luckily there is a large supply of them.”
When Buffett was young, he went to various CEOs unannounced and asked to talk with them. When he did, he asked them, “If you had to invest in any other company in your space other than your own, which would it be?” He then picked the company that most of them referred to. “You can learn a lot by asking. You will find your spot over time . . .”
Munger: “If you’re outclassed and in a highly competitive field, you should realize it and get out of it.” Buffett: “I had a similar experience in athletics!”
There were several hotels in Omaha that had very expensive rates for the convention and Buffett said that he invited Air BnB to open up in Omaha to alleviate the situation.
Will Geico ever overtake State Farm? Geico passed Allstate this year. Buffett: “When I turn 100, it will be number one. I’ll do my part” Charlie: “Geico is like Costco. Good product at a low price.” Warren: “People don’t come and go at Geico and stay with the product.” Charlie: “Costco is unbelievable. Most companies talk the game but don’t live the game like Costco does.”
Talking about spending money and how to live frugally – Warren lives in the same house in Omaha that he has been in since 1958. He called Charlie less frugal as he actually built his house in California and paid an architect. Charlie said he built it in 1960 and paid the architect $1,900 for the house plans!
Buffett: “I have everything I wanted. I don’t think standard of living equals money. I don’t think my life would be better if I had six or eight houses. It just doesn’t correlate. X or 100x doesn’t equate with standard of living or happiness.” That is part of the allure of Berkshire to investors. Munger: “We collect frugal people [at Berkshire].” Buffett: “But forget being frugal this weekend. The more you buy, the more you save at these prices at the Nebraska Furniture Mart and Borsheims!”
They talked about companies going overseas for lower tax rates – “Moving overseas to save money would be crazy. To be as prosperous as we are at Berkshire and try to move to pay less taxes if stupid. We don’t mind paying our taxes, but we don’t give a tip on our taxes either! We follow the rules and don’t begrudge our taxes.”
They talked about the intrinsic value (qualitative) v. financial factors and a stock’s valuation. Charlie’s thoughts are quality, while Warren looks at the financial aspects more.
They talked about why someone hasn’t copied them. They said that Berkshire is too difficult to copy and paid respect to Dr. Edwin Davis, a famous urologist from Omaha who introduced Charlie to Warren and explained that he did his surgeries unlike anyone else and therefore ended up with mortality rates that were unheard of through a complicated, but excellent method that no one else could imitate. Berkshire is slow to do things but does them the right way, to which Munger said, “Berkshire is so slow that you’ll be dead before it is finished.”
On inflation – it will hurt everyone. Can’t keep printing money and it’d be a shame if a bunch of politicians messed it all up.
On companies that acquire multiple companies – The sum total of acquisitions will be dumb and industry isn’t like Berkshire when they invest and therefore doesn’t have the same results.
They talked about some companies that they didn’t get. “When we see that a company we don’t own is going to have an acquisition, we cry but we do well.” Warren on mergers/acquisitions: “Most of these ideas are dumb.” Charlie: “Some are just mediocre.” On the whole, there were all sorts of gains that could have happened if these companies hadn’t made those acquisitions.
Warren: “They try hard not to just do a deal but to do a deal that makes sense.”
On talking about acquisitions – After Buffett expressed his strong disapproval of the current culture of acquisitions, Charlie said, “You know how how much more tactful Warren is.” Warren answered: “The comparison isn’t tough compared to Charlie.”
Prosecuting individuals v. corporations – They favor prosecuting individuals as that is the only way to make sure folks don’t go over the line. “We know there will be individuals who do things wrong in our 300,000 people corporate city but hope [they don’t].” The way to change behavior is to make it hit home with the individual punishments as they did with Salomon Brothers.
They talked about insuring railroads and the risks of another accident like the one in Pennsylvania. They said that transportation of HAZMAT materials is something they have to do and can’t decline and insurance will cover it even if another bad accident occurs. Compared to the Gulf/BP disaster – Charlie: “I would have less enthusiasm of drilling in Gulf of Mexico if I were BP after the spill there. Who would have thought that just one leak could lead to the huge issue and loss? We have to carry chlorine and other materials, but these won’t cause the issues like BP.”
They are now in commercial insurance is a forever play and we plan to play hard in it.
Someone asked if they intended to purchase the Clippers. Buffett: “Sports equipment isn’t a great business and we own some of it, but if we try to buy a sports team you need to look at successors to us!”
Activism looks to get prices up for stocks but not necessarily changes in companies. They said you wouldn’t want an activist to marry into the family, which was funny as Bill Ackman, the activist investor behind the Valeant/Allergan deal was in the audience. They called to mind the quote by Oscar Wilde about fox hunting when asked about activists and their activities: “The English country gentleman galloping after a fox – the unspeakable in full pursuit of the uneatable” from the play, A Woman of No Importance.
Munger: “I think America made a mistake when they let the public schools to go to hell in answer to education crisis. The Asians aren’t making the same mistakes.”
Buffett: “Fannie and Freddie are doing a pretty decent job now and when the private sector was running things it was a race to the bottom. I think that particular experiment in privatization was a total failure and we even made a billion dollars together off of it . . .”
Brazilian partners that bought Heinz with them (3G) – Smart, hard-working, determined, never satisfied and never overpromise. They have a book about him called Dream Big, which is now in English.
How to get folks to partner with them – “The way to get a good spouse is to deserve one.” The same thing goes with corporate partners.
Talking about the fact that they haven’t done as well lately and eventually companies don’t have huge growth – Munger: “It’s not a tragedy to succeed so much that future returns go down.”
Talking about how to teach children financial literacy – Many parents are committing financial lunacy, but they have a board game that teaches it called the Secret Millionaires Club. The best is to learn at the dinner table. Adult financial literacy is important too! Charlie: “Most of the fault is with the parents. It is hard to fix people who have the wrong parents and teach the wrong things.”
Buffett and Munger on business schools and business education – Buffet: “I’m good at raising the top higher in my field, but a lot of asinine stuff being taught in colleges for finance. The net utility was negative.” Munger: “It was asinine.” Extraordinary universities were teaching dumb things. But they think that they are doing a little better now.