Final part! Editing to come tomorrow. I missed the final hour when my laptop battery died, but here you go…
Andrew Ross Sorkin: Has your opinion on Wal Mart changed as a result of the Mexican bribing scandal? WB: Nope. Doesn’t change the fundamental dynamic. They offer low pricing and low margins. It’s a huge diversion of management time, and it’s costly, but I don’t think the earning power will be materially impacted. When you have companies as big as BH or WMT, you’re gonna have stuff employees do that you don’t like. You can’t have a city of 270,000 people with zero people behaving poorly…I’m sympathetic to anyone who’s running a business of hundreds of thousands of people. You get a crowd even this size (BH annual meeting), and there are probably some…real strange people here. Audience: Do you ever worry that your managers might leave after you pass away, in order to work for more money? Do you think a takeover someday might be possible, and do you think that that could force a change? WB: No, I think that if they leave, it’ll be because they want to retire. They typically work for the reason I do - they like the culture, they like the environment. They’re certainly not working for the money, in many cases. As far as a takeover, size is a huge factor that makes it really unlikely, as well as the concentration of shares that’ll remain in my hands or my estate’s hands. So no, I don’t think you need to worry about my successor. CM: What I said last night was that the first $200B was hard. 2nd $200B will be pretty easy, with the momentum and systems and people in place. WB: We have the businesses in place to get to $400B. Carol? Carol Loomis: What is it about a capital intensive business like railroads that attracted you, compared to a cash generator like See’s? WB: Cash consuming business are unattractive, unless they earn a good return on the capital they consume. With BNSF, we think that that’s possible, that we might earn 12% or something, which we view as pretty attractive. If that capital was consumed, and we were barely even alive after the capital is consumed…That wouldn’t be attractive. Analyst: With regards to float - you expect the rate of growth in float to slow. How slow? Could it shrink? WB: It could, but unlikely. We think the float of GEICO is gonna grow. Our smaller companies will probably grow over time, but not as fast. Our GenRe operation, it’s tough…it’s a melting ice cube you gotta add more water to, as it runs off. We’re looking for ways to grow the float all the time, the desire is always there. We’ve been imaginative in figuring out ways to do it. We’ve got the smartest guys in the business but…the numbers are huge now, and you do have a runoff from that business. Don’t extrapolate the previous growth. It’s more than possible that it won’t grow at too fast from here on out. I’d bet that five years from now, our float will be a bit higher, but not too much. CM: We have, probably, the best P&C business in the world. Just because it came out of nothing doesn’t mean it’s nothing now. And if you have a wonderful business, but it doesn’t grow and grow, well, that’s still pretty good. Audience: How do you value a declining business? CM: I can answer this. Uhm, they’re not as valuable as growing businesses. [laughter]. They still have worth, based on the cash you can take out of them. Usually, avoid them. WB: Yeah, generally you want to avoid them. You can make money there, but usually, you want to be in a growing business. I would never spend a lot of time trying to value a cigar butt business. The same energy brought towards valuing other businesses is gonna work out a lot better. We started out with lots of declining businesses - department stores in Baltimore, textile businesses, american made shoes… CM: We’re experts! WB: But seriously, if you look at what came out of this, we put in a little money, maybe $6mm, and it’s turned into [mental wheels turning…] $30B? Becky quick [from shareholder]: What strikes you, in today’s world, as crazy, stupid, folly, bubble-ish, etc? WB: We stay away from businesses we can’t understand - not meaning that we don’t know the business, but meaning that we can’t predict how the industry will shake out in 5 years, who will be strong competitors, etc. And beyond that, if the price is crazy, that eliminates stuff too. And then working with like amounts in the tens of billions…the universe gets small quickly. We have never bought a new issue in the last 30 years…the idea that you’ve got stocks going public now, at a 7% commission, with sales people promoting it, when the seller can CHOOSE when they want to come to market…I mean, why would you spend 5 seconds thinking about this stuff? We’re thought of as rude sometimes, Charlie more than me, because stuff immediately doesn’t make it through our filters. We don’t want you to bother finishing the sentence. This business isn’t too hard…just don’t make huge mistakes, and do a smart thing once or twice a year, and hopefully some of them work out OK. CM: If you have to pay a big commission to buy it, don’t buy it. And looking at what smart people are buying is…probably a good idea. You could do much worse. Audience: How long will it take China to build a great company like Coca Cola, and what industry? CM: China has some great companies already. I can’t think of a branded consumer stuff company…but they’ve got ‘em. I can’t pronounce them, but they have ‘em. WB: Yeah. I mean, we tend to export consumer products well. But China’s got some huge, successful manufacturers. Andrew Ross Sorkin: Now that you’re in IBM, any other entrenched companies that are ‘inevitable’? Is GOOG ‘inevitable’? What about AAPL? WB: Well, those are all great companies, they look tough to dislodge where they have their “strengths”. I don’t have the level of conviction that I’d need to buy them, but I sure as hell wouldn’t short ‘em. CM: Yeah. I think the odds are good someone else will always understand GOOG or AAPL better than us…that gives us the reverse of ‘an edge’. We don’t want that. Analyst: Political risks that apply to BNSF? WB: BNSF runs their own business. I talk to Matt like, once every three months. But yeah, utilities and railroads are all impacted by the political process. But I mean, we can move a ton of product 3 miles on 1 gallon of diesel. That’s probably 3x as efficient as say, trucking. I don’t think politics are going to change that fundamental advantage. In terms of congestions, emissions, we have these advantages. There will always be struggles with customers and competitors - that’s the nature of the game - but I like our position. Customers and competitors will try to change things through lobbying, and so on, but I like our position. It would be very dumb to discourage the railroads through legislation. Country has a strong interest in the industry being solid and growing. The industry also pays its own way. CM: It’s the nature of things that there are good and bad breaks. BNSF was helped when you could double stack containers, and when we discovered gas in ND with no pipelines. Those were good breaks, and there’ll be bad ones, too. But it’s a wonderful business. WB: It’s a great way to move stuff long-distance. You have air, pipelines, roads - I mean, trains are pretty good. Carol Loomis (quoting a shareholder): The table in page one of the annual is misleading. You should compare book value of S&P with dividends reinvested to BV of BH. WB: Yeah, we’ve thought about that, but it’d make the comparison look even better for us, because we started at a discount to book and ended up at a premium. Analyst: In terms of enterprise risk management at BH, how do you share information between business units at Berkshire to make sure that one section isn’t doing the reverse of another (AIG mentioned as terrible example)? WB: Yeah, I mean, we don’t. If there’s any sharing going on, it’s not through us. But no, we don’t make any attempt to do that. We have no system that coordinates our different units. We want our business units to run autonomously. We don’t tell people who buy from Clayton homes to get their carpet from Shaw, or their paint from Benjamin Moore. We could, but they don’t. We think the incremental gain would be totally offset by the horrible attitude that comes when you tell someone how to run their business. Anything else Charlie? CM: Yeah. We’re trying to fail, at what you’re telling us to try to succeed at. Audience: It seems that a well-run forest products company would fit with your portfolio. Any thought to that? WB: Well, what we just said - We don’t evaluate a company based on how it’ll fit in with our other companies. We’ve looked at a few, but the economics have never been compelling enough. CM: And our structure totally nullifies the tax gains that come out of the legal structure of a lot of forest products firms. Analyst: You have a big Gen Re contract rolling off - are you going to replace it with something? WB: Yeah, we’d love to, if we can find profitable business, but we’re not gonna do one thing different because we’re losing a few billion in premium volume. We’re not gonna write dumb business. If money comes in, we’re not just gonna write dumb business. CM: I don’t think there’s another large insurance company in the world that’s as cheerful about losing volume. We’re not going to write dumb business just to write business. Becky Quick (reading a shareholder question): Can you please elaborate your view on risk? You clearly aren’t a fan of stat models, and you like $20B in cash. Why $20B? WB: Yeah, I don’t know, it’s not exactly $20B. We’ve seen plenty of firms get serious, serious problems despite calculating value-at-risk to three decimals. CM: And they were smarter than we were! WB: Yeah. I mean, we figure out what we think we need and then tack on a big margin of safety. We’re not gonna try a bet where we have a 99.5% chance of doubling our money and a 0.5% chance of losing it all. We won’t do it - the downside’s too great. It’s our job to figure out what can go wrong with this place - We’ve seen sept 11th 01, Sept ‘08, and we’ll see stuff in the future. If you’re calibrating it in some mathematical way…you’re probably going about it wrong. (I think that Buffett is saying if you’re evaluating risk using math, you’re probably already taking on risks you shouldn’t. If the risk needs to be measured so precisely that you need three decimal places, you’re already playing too close to the railroad tracks). CM: How do these super smart people end up doing these dumb things? I think it’s explainable by saying - “to a man with a hammer, every problem looks like a nail.” They learn these techniques, and they wanna use ‘em. WB: Life in financial markets does not operate by sigmas. If we’d all never heard of sigma, we’d be better off. Right, Charlie? CM: [long pause] Well…sure. WB: Ok. Have some fudge. At this point, my laptop battery died. And I’ll be honest: I really wanted a beer and to just kinda chill out. Pics and editing to come tomorrow, AF folks.