Notes from Berkshire Hathaway Shareholder's Meeting

Once again, as became known as "Woodstock for Capitalism", Warren Buffett and his partner Charlie Munger fielded questions from shareholders and journalists from all around the globe. With an audience north of 17,000 people present in the Qwest center in Omaha, Buffett, 80, showed he's still in decent shape and perfect wit by withstanding a grilling session that lasted for about 6 hours.

David Sokol

Buffett started clarifying his mistake at publishing a press release about David Sokol, the Berkshire manager who bought shares of Lubrizol in the days leading Berkshire's offer to purchase the company outright, pocketing an estimated three million dollars. 

Buffett explained why his much criticized press release was too positive on Sokol. Buffett felt like publishing a press release only criticizing David for his "inexcusable" mistake would be diminishing all the great work Mr. Sokol's done for Berkshire. Mr. Sokol did great things and Buffett didn't want them to be lost because of this one mistake. 

Buffett also said he does not believe a man who was paid handsomely over many years (last year his compensation was US$ 14 million) would act in bad faith to earn another 3 million. He believes Mr. Sokol's lack of proper disclosures were an oversight, not an act of bad faith. But that nonetheless, they were inexcusable. 

He then went on to mention Mr. Sokol's altruistic personality.  When Berkshire first bought MidAmerican, Buffett offered a $50 million package to Mr. Sokol and $25 million to Greg Able (another executive at MidAmerican). But Mr. Sokol refused to accept such split and suggested a 50-50 split between the too.

Buffett also clarified that he didn't fire Mr. Sokol on the spot because he wasn't sure of the involvement of Sokol at first, but that when Sokol resigned Buffett decided to accept the resignation which is cheaper than firing an executive and less prone to law suits.

I think deep inside Buffett didn't want to let Mr. Sokol go, but was forced to act this way to keep his image clean and Berkshire's reputation pristine.

Investing in Gold

When asked about investing in gold, Buffett said gold "doesn't do anything". He said people can stare at gold, climb a ladder on top of a pile of gold and sit on it and claim to be the king of the hill. One can even fondle gold and rub it. But it doesn't generate any wealth. 

He then proceeded to tell the same funny story he's told before: suppose Martians were watching the Earth. They would be quite confused by seeing people dig up gold from the ground in South Africa, transport it to New York and then bury it again in vaults.

Buffett simply prefers to invest in things that create economic value and tend to grow over time, such as well-managed companies with competitive advantages that require little re-investment of capital to maintain sales and grow, such as See's Candies.

I very much agree with this. In fact, I wrote about it very recently on my discourse on how to fight inflation.

Investment Vehicles

When answering a question about money, Buffett mentioned that there are three types of investment vehicles: currency-denominated investments, things that only have value because of prices people pay for them and businesses. 

Currency-denominated investments are poor investments over the long run. All fiat currencies tend to go to zero over time. Even shorting currencies is not a great investment because one still needs to know which one will go to zero faster, but in the long run, they all go, because of inflation. So Buffett prefers to stay away from these, which include bonds, loans, IOUs and currencies. He did, however, short the dollar a few years ago for a handsome profit. But he doesn't believe he can consistently predict which currencies will lose value faster.

Things that depend on others to pay up later include gold, oil, and precious metals in general. Even though some metals have utility and oil is a finite resource, he doesn't have any edge on predicting what the demand is for these things. So he doesn't invest in them.

The third category is his favorite: well-managed companies that require little re-investment of capital to function. He cited an example of See's Candies which went from $30 million to $300 million in sales with just a $31 million investment (from $9 million in assets when he purchased it to $40 million now). So, a 10x gain was obtained with less than 10x investment, which is a property of great businesses.

Again, I agree completely with Buffett. I also classified different types of investments recently. Although not exactly like Buffett, my categories are similar.

Investing in Oil

When an investor asked if she should short oil or go long, Buffett answered that instead she should teach us how to do it, because he didn't have any insight. He simply said he has no edge on picking the direction of commodities and as such he doesn't get involved in doing it.

Too Big To Fail

An investor and small business owner asked whether there should exist a business that is "too big to fail", which was the case of many US banks in 2008 and 2009 and also AIG, Freddie and Fanny as well as General Motors.

Buffett said that these businesses do exist and in fact, there are now countries that are too big to fail. This is simply unavoidable, in his view. However, he doesn't believe in free bailouts either. He suggested a policy where shareholders should get wiped and the CEOs and their families should lose all their money, certainly all their money earned when at the helm of such big institutions. Such treatment would protect investors and the population by discouraging CEOs from taking huge risks.

In the case of GM, Buffett said he was on the fance on whether it should have been bailed out, but he said that in hindsight it was a good move by the government. I disagree. GM was not too big to fail and it sucked up resources and market share that could have gone to more efficient players. 

In the case of banks, I'm sympathetic to Buffett's view, since a run on banks and massive unemployment could have destabilized the country and generated massive domino effects elsewhere. However, it's clear more responsibility is necessary on the part of executives. The trick is to achieve this without too much regulation and without stifling innovation and competitiveness -- if other countries can do it, then the US will lose out by not allowing their banks to do it too. Balance is the key.

Expanding the Circle of Competence

A shareholder asked: "if given another 50 years to live, which new circle of competence would you like to develop?" Buffett first answered with "I really like the preamble", and the crowd laughed. He then proceeded to say that he would learn about tech, because it's a very large field and there will certainly be a few big winners in it.

Charlie agreed and also said that energy would be a good area, because with enough energy all problems of civilization are resolved, such as clean water. Charlie mentioned having read "In the Plex", a book about Google, which he certainly enjoyed reading and learned a lot from it.

Best Businesses To Invest

A shareholder asked Buffett whether an asset-heavy business would perform well during periods of inflation versus a business with fewer assets. His theory was that tangible assets such as factories, machinery, power plants, etc would work as a store of value.

Buffett was unequivocal about this: no, the best business is the one that doesn't depend on too much capital invested in it and can generate profits with minimal capital reinvestment. He again  cited the example of See's Candies and compared it with Lubrizol and utilities, which can be lucrative, but are not as good as businesses with moats and low capital requirements.

On Inflation

Buffett dislikes inflation like everyone else. He said that the dollar from when he was born is only worth six cents today. But despite that, he and Charlie did well over time. So inflation is bad, but not as bad as it sounds. 

I suppose he was trying to say that controlled inflation is not a very big deal. But that somehow goes a little against his disdain for cash-denominated investments. I guess what he meant by this all is that inflation is only a problem if one is not invested in great businesses and instead holds cash or cash-denominated investments.

Jamie Dimon

Like two years ago, this year again Buffett praised the CEO of JP Morgan, Jamie Dimon, and said it's worthwhile reading his shareholder's letter. Maybe again this year, like two years ago, yours truly will read it and summarize it here. Stay tuned.

On BRK Dividends

This year again, as is common for several years now, people ask when Berkshire will pay dividends. Buffett thinks it's best not to, as long as a dollar retained produces more than one dollar of economic value for the stock. So far this requirement has been met. 

The day Berkshire pays a dividend, says Buffett, is the day they admit defeat and can no longer invest money profitably. On this day, the stock price should go down, according to him.

Buffett joked that he wishes his friends live until BRK pays a dividend.


Many other topics were debated, including a charitable giving program that was discontinued several years ago; Charlie's love for Costco; Ajit Jain's workaholic habit of flying to London on Thanksgiving to continue on working; and the one diploma Buffett has on his wall: "Dale Carnegie's Course on how to communicate effectively".

Buffett also commented that the government not raising the debt ceiling would be the biggest asinine thing it could do. That the debt capacity of the US is larger than it was when the ceiling was instated and that, in his opinion, there should be no limit.

All told, it was worthwhile flying to Omaha to see the Sage. (Even better, on a private jet with a couple friends of mine). I expect to repeat this again in the years to come. Long live Buffett.

Disclosures: I own BRK at the time of writing. I do not own an airplane.

You can follow me on Twitter @pinhe1ro.

No comments:

Post a Comment