Berkshire Hathaway meeting notes PART DEUX
Roughly the first half of the day. I’ll upload as long as battery life holds out.
9:25AM - Buffett and Munger step on stage. Lots of applause. Buffett explains the format. We kick off the meeting by all simultaneously eating the butterscotch lollipops (courtesy of See’s Candy) that were left on our seats. Not bad.
Buffett talks about their Q1 earnings. Talks about accounting changes involving DPAC for the six people in the audience who get all hot and bothered by that thing. The tl;dr of it is: GEICO’s killing it. GenRe is killing it. All the non-housing related businesses, basically, are killing it. Buffett introduces the directors (oh hai Bill Gates) and we kick off the questions.
Carol Loomis (of Fortune mag): Successors got big shoes to fill. CEO has to be the “chief risk officer” of the operation. Does whoever you’ve picked have the qualifications to be the CRO?
WB: Yeah, he’s got the qualifications. We’ve seen people, esp. at financial institutions, try to delegate the CRO function, and they’re just ripe for a catastrophe, despite their ability to talk about six sigma. The person we’ve picked is qualified. The basic risks are BH are excessive leverage, and crappy underwriting risks. Each person at BH subsidiaries definitely monitors risk and lvg, and the CEO has to kinda aggregate that stuff.
CM: Not only has this been delegated at many firms, but the methods used to measure risk (VaR, std. dev) are taught by some of the best schools in the country. These are some of the worst ideas ever put forward.
WB: We’re not gonna have an arts major in charge of this stuff (lots of laugher).
OH NO YOU DI’INT WARREN!
Carol Loomis: If you hadn’t done the deals with GS, GE, and BAC in the sweetheart preferred terms that you got, what would that mean in terms of returns to BH shareholders?
WB: These deals are OK, but they’re not as important as stuff like buying KO or IBM, which took place over months. The values in BH that have accumulated by some “special” transaction like GS and BAC, are really peanuts compared to the rest of the biz.
CM: A lot of our directors are great at risk analysis. The Kiewit construction company, for example. Sandy Gottesman created a great example of risk controls - he fired an employee and the guy said, “How can you fire me, I’m so important?” Gottesman said, “True, but I’m a rich old man, and you make me nervous.”
WB: We don’t have anyone at BH who makes us nervous.
Analyst from KBW: [extremely detailed question on some changes in assumptions regarding mortality rates at GenRe. Basically, one subsidiary was adjusting their reserves up while another was adjusting them down.]
WB: [kicks it up a notch and answers with a pretty detailed answer around how they do the assumptions for their reinsurance contracts with Swiss Re] HOW YOU LIKE ME NOW?
WB : GenRe was under-reserved for years, when we bought it, and now it’s probably adequately reserved, I like the guy who does our reserves there. All these insurance subsidiary managers, they don’t coordinate among each other, so we may have one guy who needs to adjust reserves up one year and another adjusting them down. That’s how it goes.
Audience member: In the past, you’ve done investments in china. Given the growing importance of China in the world, what advice would you give to leaders and CEOs in China to encourage investment there?
CM: We’re not spending a lot of time giving advice to China. They’ve been doing well for a number of years. We ought to seek advice there, not give it.
WB: We’ve found it almost useless to give advice to anyone in investing, anyone in business, over 60 years.
CM: People have this illusion that we have a lot of control at Berkshire. I mean, we own 20% of the stock or whatever, but ultimately, we buy businesses that don’t require a lot of control. That’s the beauty of the system we’ve created.
WB: We’re not in the business of giving these people advice. If we thought the success of our investment depended on them following our advice, we’d move on to something else.
Becky Quick: While pleased that you’re doing buybacks at 110% of BV, I feel like a chump for buying at 200% of BV. Why didn’t you warn us?
[insert Nelson Muntz laugh, by me, in the nosebleed section of the stadium]
WB: If we could have it our way, the stock would trade once a year, and we’d set the price at what we thought was fair. You can’t do that in the public markets. It’d be a little weird for us to try, a half hour before market open, and announce - “Hey, we think our own stock is overpriced”. We’ve never encouraged people to buy our stock, but we have recommended that people not buy the stock. We offered stock in the mid 90’s and on the cover, we said that Charlie and I wouldn’t buy at current prices, and we wouldn’t suggest that our friends and families buy at current prices. That’s probably a collectors item, you won’t see that again on a proxy.
CM: Nothing to add.
Barclays analyst: In last years annual, you mentioned you had done no dividends or repurchases ever. Now you’ve said that you’ll do buybacks. What’s your capacity for buybacks, how does it compare to acquisitions, and what’s your thinking on a dividend?
WB: 1.1x BV is a figure we feel comfortable with, that’s pretty darn undervalued, we think. We want people to know that we think that 1.1x BV is undervalued, if shareholders want to sell to us. From a money point of view, we’d love to buy billions or tens of billions at 110% of book. We know we’re making significant money for remaining shareholders by doing that.
CM: Some people buyback regardless of price. That’s not our system.
WB: I mean, yeah, that’s idiotic. I’ve seen a lot of boardrooms where that happens, and these people like buying stock at high prices and issuing options at low prices. Just the opposite of what they should be doing. We’ll only do it if it increases the value for the remaining shareholders on the day after we do it.
AUSTRIAN SHAREHOLDER WITH HEAVY ACCENT: WHAZ YOUR VIEW ON ZE BANKS, ZE EURO BANKS, UND ZE US BANKS?
WB: The us banks are in a way better position than the Euro banks. They’ve taken losses and buttressed their capital, they have liquidity out their ears. The Euro banks…were gasping for air a few months back. This is why Draghi opened his wallet at the ECB a few months back…a trillion Euros, roughly 1.3 trillion USD. That’s a sixth of the US deposit base, just a huge amount of money. The Euro banks need to raise capital, but haven’t done it, probably because they don’t like the prices they’d have to do it at. [drily] I’d like to have a lot of money for 3 years at 1%, but I can’t get it, probably because I’m not in trouble…
Overall, forcing US banks to take money during the credit crunch was a good idea.
CM: Europe has problems we don’t. They don’t have a full federal union, and that makes it really tough to handle the stresses. We’re more comfortable with the risk profile in the US.
WB: It’s night and day. In Fall ‘08, Bernanke and Paulsen said, “We’ll do whatever it takes”, and people knew that they could. 17 countries that have surrendered their power to print money…it’s tough to coordinate them. Henry Kissinger said, “When I want to dial Europe, what number do I dial?” It’s like that.
Andrew Ross Sorkin: Can you describe your view on coal and nat gas? How the current prices effect BNSF and Mid-American?
WB: If coal is cheap or expensive, cost or benefits will be passed on to customers. The utilities are pass-through organizations…if they’re operated efficiently, that’s what we care about. That’ll make value for the shareholders.
CM: What’s happening now is idiotic. We’re using up a precious resource (nat gas) and not using something that is decidedly not precious (coal). We should be leaving the nat gas untouched as long as possible for our children…it’s a very valuable thing. It’s crazy to use natural gas at these prices.
Analyst: Telematics is the latest device in the auto insurance business. You put a thingy in your car, and it’ll help adjust your rates based on your driving patterns. What’re you doing to keep up at GEICO?
WB: Yeah, progressive is probably the leader in that. If there’s a better way to evaluate the propensity of a driver to take risk, yeah, we’ll take it on. We’ve got 50, maybe 51 questions on the GEICO website, and they do a pretty good job, but if there’s other stuff out there, yeah, we’ll adopt it. I don’t see this new experiment as threatening GEICO, though, no. GEICO added huge policies in Q1, maybe close to 300,000 policies, and so far what we’re doing is working. GEICO is a machine…we carry it at like a billion above it’s book value. It’s worth way, way, way more than that…probably more like 15 billion above book would be right.
Audience member: In recent years, b-schools have taken blame for state of economy. How would you suggest that business leaders are trained in this country?
WB: I think they’ve taught students a lot of nonsense about investing, but I don’t think they’re responsible for the state of the economy, do you Charlie?
CM: Oh no, but it was still a considerable sin.
WB: Silliest stuff taught is probably stuff in the investment area. It’s astounding to me that schools have focused on sort of…one fad after another in finance theory. Usually very mathematically based, and once it’s become popular, how can you resist this? Going against the ‘revealed wisdom’ of your elders is dangerous to your career at b-school. Investing isn’t that complicated. Have a course on how to value a business. Have a course on how to think about the market. You grasp those two things, you’re gonna do OK. MPT, option pricing theories…who needs option pricing theory? When Ray Kroc started McDonalds, he wasn’t pricing MCD options…he was thinking about how to differentiate it and run it efficiently.
CM: It creeps into the accounting, too. A very long-term option on a business…should not be priced with Black-Scholes. Yet the acct’g profession does this. They want a standardized solution that doesn’t require thinking hard. [laughter]. And they’ve found one [more laughter].
WB: Anyone we haven’t offended?
(I missed a long question here on the Buffett rule. Apologies, AF folks).
KBW Analyst: Near term, what do you expect the impact of all these recent major catastrophes is gonna be on Reinsurance rates?
WB: Anything that moves as slowly as the things effecting our globe…separating out the random from the actual new trends is hard. We tend to expect the worst. We don’t take the last 5 years as indicative of the new rates, but we don’t take the last 100, either. We’ve done a ton of reinsurance biz in Australia, NZ, Japan in the last few months…they were previously using rates that were too low. We think we’re getting a rate that, with a fairly negative hypothesis, fairly compensates us, then we’ll write the business. Last year, there were two or three earthquakes in Christchurch. The second one caused like $12B in damage, in a country of like 4-5mm people. Compare that to the damage in the US…that’s like ten Katrinas. Rates went up, and we wrote business. We’ve got lines of business as high as maybe $10B. The market for cat business in the world is better, significantly better, than it was a year or two ago.
Audience member: MidAmerican has large investments in solar and wind power. Can you talkabout how subsidies effect these businesses? What’s the most appropriate use for the nat gas you mentioned?
WB: I think the subsidy for wind is like 2.2 cents per KwH, and there’s no question that makes wind projects “work” where they wouldn’t work without them. So the gov’t is has encouraged wind development. If there had been none, there’d probably be no wind projects. In the case of solar, the projects we have, have got a commitment from Pacific Gas & electric to a very long term purchase arrangement. I don’t know the specifics, but I think neither the solar or wind would be working without subsidy. You can’t count on wind power for your base load - it’s gotta be a supplementary part of your power gen.
CM: Eventually we’re going to have to take a lot of power from renewables, and we’re helping that along with subsidies. It’s wise that the gov’t is doing this.
Greg Abel (mid american): Yeah, what WB said. The subsidy has allowed us to do 10 mW of power that we couldn’t do without that subsidy. With the solar, you get help with the construction, we recovered like 30% of the construction costs.
WB: BH has a competitive advantage (not unique) in that we pay lots of tax. When there are programs that give tax credits, we can really use them. Perhaps 80% of the utilities in the US, don’t pay federal income taxes, through things like bonus depreciation, so they have no appetite for tax credit projects like wind, because they have no tax to pay. For BH, we can definitely put those tax credits to good use.
Becky Quick: [from shareholder] Should the political dialogue be muted for the sake of the share price? My dad won’t buy your stock because of the Buffett rule and probably would otherwise.
WB: I don’t think that any employee of BH or the CEOs should have their citizenship restricted…when Charlie and I took the jobs, we did not decide to put our citizenship in a blind trust. It’s fine if people disagree with us, I mean…I don’t know what the politics of Ken Chenault (AXP) or whoever are. I don’t think that some 84 year old man should be making investment decisions based on my politics…if that’s the case, he should go buy Fox [laughter]
OHHHHHHHHHHHHHHHH, SICK BURN!
Analyst; Would you consider an acquisition in excess of $20B? How would you fund it?
WB: Yeah. We considered one a month or two ago, about $22B. At that point, it’s tough. We wouldn’t use stock for 30% or 40% of a deal, probably…
CM: We could.
WB: Yeah, it could, but I don’t think so. We would have done this $22B deal, but it would have stretched us. We like to have a $20B cash balance, and I could have done it, but it would have meant selling stocks I didn’t want to sell. If it had been $40B, gosh…I don’t think we would do it. You’ve kind of hit the point, I think, where you can start to see us squirm.
Audience member: I notice some companies are bringing jobs back to the US. Is BH looking at doing that for any jobs they previously shipped overseas?
WB: We’ve got like 270,858 employees at year end 2011. We probably…I don’t think we have more than 15,000 out of the US. As I said in the annual, we invest in plant and equipment over $8B in 2011, and 95% of that was in the US. We don’t have lots and lots around the world. ISCAR is in Israel, they’re in Japan and Korea and India. What they make is gonna be sold around the world - the US is a portion of their market, but it’s not a majority. So they majority of their 11,000 people are abroad. We just bought a business through Marmon in Australia…another business based in the Netherlands. 10 yrs from now, I’m sure we’ll have many employees, and some of those will be outside the US. There’s no shortage of opportunity in the US. We liked putting that $8.2B to work.
CM: You can’t bring a lot back if it never left.
Andrew Ross Sorkin: Lots of shareholders want me to ask - How you feeling?
WB: I feel great! I love what I do, I like the folks I work with. As anyone can see, I’m eating properly [holds up fudge]. I have 4 doctors, I think a few of them own BH [laughter]. My wife and my daughter and I listened to the four of them for about 1.5 hrs a few weeks ago…none of their suggestions required hospitalization or time off. Maybe I’ll get shot by a jealous husband. [laughter] Charlie’ll tell you.
CM: I’m jealous of Warren. I probably have more prostate cancer than Warren. [laughter]. I don’t know, because I won’t let them test for it. [laughter].
Analyst: Is there a time you’d consider taking on annuity runoff business?
WB: Yeah, but we’re not gonna assume anything better than the risk free rate for that business. We don’t like taking on long-term liabilities and paying 150 bps above treasuries to do so. There are people who will do that…but we won’t.
[Missed a huge question on “life advice” for a 26 year old at a P.E firm. I was waiting for this opportunity to upload my notes. THIS IS THE TYPE OF QUESTION I AM SPARING YOU , AF READERS. GO READ HIS PREVIOUS MEETING NOTES, HE’S COVERED THIS. The TL;DR is that yes, you can still make money in equities over a lifetime. Also, go read Chapters 2 and 8 of The Intelligent Investor].
Audience member: When you look at the businesses that BH owns, which business has greatly improved its competitive position over the last 5 years? And any that have maybe worsened?
WB: Fortunately, the big ones have done well. The railroad business, for fundamental reasons, has improved dramatically over the last 15-20 years. There’s a lotta stuff that has to be moved. It’s an asset that can’t be duplicated for 3,4,5,6 times what it cost. GEICO’s a better business, but you could’ve predicted that. They’re approaching 10% of the market, and they were like 2% in 1995. We had the ingredients for success, and we had Tony Nicely, so it worked out well. Mid-American has done great, ISCAR…we bought ISCAR 6 years ago, and they just don’t stop. I would NOT want to compete with them.
CM: More than 80% of our business by value, have increased their market strength. We’ll never get it to 100%.
WB: The mistakes have been made in the purchasing, not in the management. Either we assessed the future wrong or in a way that was inappropriate, and we’ve done some of that. The big ones, though, have worked out. I mean, Ajit has created something worth tens of billions of dollars from nothing.
Becky Quick: From a shareholder: You run the derivatives book. Who’s gonna run it these ‘WMD’s’ after you’re gone?
WB: Yeah, I don’t think there will even BE much of a derivative book after I’m gone, heck, even while I’m still around. Some of our activities warrant derivatives, like the railroad business hedging fuel, but most - no. There’ll be at least two guys doing investments - Todd and Ted. They’re better than we deserve, but Charlie and I like that. We’ll probably do OK with our derivatives, we’ve done so far, and I like the positions we still have. But the rules have changed re: collateralizing, and I don’t like exposing us to anything that would expose us to undue risk if something crazy happened with the Fed or with Europe. We think about the “worst case” scenario lots, lots of the time at BH.
CM: The derivatives that bother people, we never would have signed if we didn’t get the terms that we did. We’re probably gonna make $10B on them, maybe a lot more.
Analyst: Why do you value the insurance business at only cash + investments per share? What’s a reasonable multiple to assign to those earnings?
WB: We don’t do it quite that way. I would value them all differently. I would value GEICO at higher than its net worth plus its float, but I wouldn’t do that for ALL of them. I think GEICO is still going to have great growth and profitable growth, but I can’t say that about ALL of them. Under todays market, I’d love to buy some great business at, I don’t know, maybe 9x pre-tax earnings. What would you say, Charlie?
CM: I don’t even like hearing the word EBITDA. It’s just…“earnings before what really counts.”
WB: I mean, yeah, people really like EBIDTA for some reason.
Audience member: Since 99, BH appreciated significantly, but gold has gone up way more. I don’t own your stock for the warm feeling - what happened?
OHHHHHHHHHHH SICK BURN DIRECTED AT THE ORACLE!
WB: Well, if you bought BH in the 60’s, we were at $15, and gold was at $20…now gold’s at $16,000 and BH is at like, $120,000, so I mean, pick your time period. (OHHHHHHHH, SICK COUNTER-BURN!) I think gold will do OK, but honestly I think stocks as a group will do better. Charlie?
CM: I have never owned gold. I would much rather work with owning businesses. And I can’t think of a worse crowd to deal with than gold bugs.
Andrew Ross Sorkin: You recently said you bought JPM for your personal account. How do you differentiate [between buying for BH and buying for your personal account]? Other names you like?
WB: My best ideas are for BH, I can’t buy what we’re buying. I buy my second choices in my personal account, and sometimes maybe like tiny little holdings like I did in Korea. I like JPM fine, but remember that 98.5% of my net worth is in Berkshire, so to spend too much time on the remaining 1.5% is…it’s kinda crazy.
Analyst: Are there any parts of BH that have any hindrance towards capital allocation, that make it hard to move? Maybe BNSF?
WB: Yeah, we’re more restricted with the life insurance companies, and that money can’t be used as effectively (regulations on life insurance companies are more onerous). Most of our operating businesses keep more cash around than they need…as long as I have $20B somewhere, I feel comfortable. We’ll never have anything come up that I could lose sleep over, as long as I have $20B in cash. If we were going to make a big acquisition, we might have to move stuff around, but we’ll always leave everything adequately capitalized. But yeah, the P&C businesses, it’s a bit easier to move cash around.
Audience: Berkshire has to probably do stock as part of the large deals. Would offering a small dividend boost the stock price to near fair value so that you could use less of it in acquisitions?
WB: I don’t think a dividend would be a plus, honestly…we’re willing to pay 110 cents on the dollar on what’s in the company currently, and we’ll pay a dividend if we think that that’s a good use of cash, but we don’t at present. We’d prefer to have the stock sell at a range that we think is closer to intrinsic value, but we won’t do silly things to try and get the stock price there. We hate giving out shares if we don’t have to. We don’t like the idea of leaving you with a lower percentage holdings in See’s, and Coke, and so on, which is effectively what we do if we issue shares.
CM: What [audience member] suggested is a very conventional approach. We’d rather do it our way.
Carol loomis (reading a shareholder question): Why buy the Omaha World Herald when you talk about how much worse the newspaper business is now vs. 20 years ago? Was this self-indulgence?
WB: Oh, it’s worse than all that. Newspapers have 2 or 3 problems. News is what you don’t know, that you wanna know. If you go back 50 years, the newspaper contained dozens and dozens of areas of interest, where the newspaper was the primary source. Apartment rentals, jobs, where bananas were selling cheapest, sports, your stock prices, etc. All of those things have now found other venues where you can get that info more timely, probably free. So newspapers have to be a primary source for a significant percentage of people in their distribution area. Now, newspapers have lost primacy in so many areas that were important. They STILL are primary in areas that are important, however. The OWH tells me a lot of things that I can’t find elsewhere. Most of those items are local. They’re not gonna tell me about Afghanistan, or some other stuff, but they tell me a lot about local sports, my city, my neighbors. As long as they stay primary in that arena, they’ve got something I want. In a great many number of cases, newspapers are going up on the web and putting up on the web their content for free. I don’t know of a business that charges significantly for one version of a product, and offers the same product for free on a more timely basis, and they can do that business model for a long time. I think there’s a market for what a lot of papers have tried, which is putting their content up on the web, for a cost. In communities that care about local news, papers still have primacy for stuff like weddings, funerals, divorces, local sports. Papers aren’t as good as they once were, but the economics of some papers in communities like the one the OWH operates in, the economics are still pretty good.
CM: We had a similar situation where Bill Gates nearly destroyed World Book [laughter - reference to Encarta]. We still make a reasonable profit, but not what it once was. These aren’t gonna be our lollapolloozas anymore.
Analyst: You’ve mentioned how tech has affected some of your businesses. Do you think that it might really hurt some of the things you own?
WB: Well, yeah, but it’s not gonna affect a lot of stuff. Nebraska Furniture Mart is up hugely this year, so you guys are doing your part. But going back to Amazon, for example - GEICO is effected by the internet, and we missed that at first. GEICO was successful by mail first, and then partially moved to television, and now the internet came along, and I thought originally only young people would get quotes online. I would have been using a rotary phone. But yeah, if the consumer likes what they’re offered - I mean, it’s hard to find people who are unhappy doing business with Amazon.
CM: It’ll hurt anything that can easily bought using a home computer or an iPad. I think it’ll hugely effect a lot of people - it’s terrible for most retailers. Not slightly terrible, but REALLY terrible.
Lunch soon. More to come, at least till my laptop dies.