This is the second part of the notes from Berkshire Hathaway shareholder meeting. For part I, go to: Berkshire Hathaway 2011 Shareholder Meeting Notes (Part 1)
Q: when you talk in general way, your remarks are always positive, although there are big problems. How can a lousy long term U.S. economy make you so happy?
A: If you look back in 1976, it has been the most extraordinary period in the history of the world. I was born in 1930. Dow was going to 42 from 382. Three thousand banks were going to close. All this happened, but the average living for the average person has increased six for one.
There was always trouble.
When I got out of school, in 1950, both Ben and my dad, the two most respected people of my life, said that don’t start with stocks now. There have been all these problems. But the power of capitalism is incredible. That was what brought us out of the recession.
The game is not over. What happens is that the rest of world has caught up, especially China, tapped into system.
Charlie: I can go back farther than that.
Q: Do you think businesses like See’s candy, or hard assets such as railroads are superior in a inflationary world?
The first group is superior. You have the price power. The worst business is one that has a lot of receivables. Normally we were not enthusiastic with utilities and railroad. The ideal business, See’s candy, was doing $25 million when we bought it. We are doing $300 million now. We only had to plough back $30 million in the business. We don’t have receivables and much fixed assets. See’s Candy is far better.
The ideal asset is the royalty on someone else’s sale. That kind of asset is inflation protected. We deployed in utilities and railroads because we cannot find enough business like See’s.
Q: Dividends? There will be time a time I need dividends. Is it possible that some point in the future Berkshire will pay dividends?
Assume you have a savings account which pays 5%, or you have an account which grows at 12% a year and you can sell a little piece at a time, which way is better?
The question is obvious, but the execution is a problem.
There will come a time, if we believe that we cannot lay out $10-$15 billion a year, we will give shareholders back.
I believe that if we pay dividends, the stock price will go down, and it should go down, because the machine has lost its power of compounding.
Q: Wells Fargo (WFC, Financial) and U.S. Bank (USB, Financial): what are the outlooks for these two banks?
Wells Fargo (WFC) and U.S. Bank (USB) are among the best of the large banks, if not the best. Banking as a whole will be considerably smaller and less profitable than before. The leverage will be reduced. It is a good thing for the society, maybe bad for some banks.
Even of ROA is lower, ROE is lower, we think USB and WFC are still very good.
In terms of the troubles in banking, I think you saw far worse happen before. Banks are always on the asset side. It is a very good business because you get your money so cheap. I like our positions there.
Munger: MT Bank (MTB, Financial) has been a wonderful holding for us.
Buffett: I recommend you to read the shareholder letter by MT Bank’s CEO. I also recommend Jamie Damion (JP Morgan CEO) letter; everyone can learn about banking from those letters.
Q: Commodities like gold went up, but BRK stock was up just a little. Is it possible that gold will continue to go up?
Buffett: There are three major categories of investments. You need to think very hard which category you want to be in before you pick among them.
First is bonds. Which is currency denominated. Any currency-related investment is bad. Almost all currencies will decline in value. As a class, currency related investment must pay extremely well to justify the investment.
Second are commodities; it does not produce anything, but you wish someone to pay more later. Sixty-seven cubic feet of gold will own all the gold of the world. But no matter what you do with it, you can dance on it, you can farm on it, it will not do anything. The only hope is that someone will pay you more later. We did it with silver, but my timing was only 13 years off.
The third is the producing business. If you buy a farm, you calculate how much it will produce, you don’t care about the quote you will get later. I would pick the third.
Rising asset creates excitement. It affects behavior. But over time it won’t make them rich.
Munger: I agree.
Buffett: In addition to the 67 feet cube, more gold is produced. All the gold in the world is now worth $8 trillion, but all farm land in the U.S. is worth just $2 trillion. You can buy all the farm land in the U.S. with the gold, plus 10 Exxon Mobiles (XOM, Financial). You still have another $2 trillion to play with.
Q: How did you get your first investors when you started? How did you approach investors?
A: I had seven members from the family and a friend. It was slow. Then Graham-Newman was liquidating. We stumbled along for almost six years. Then Charlie came along. It was a long time, slowly.
You conducted yourself honestly if others can trust you.
Unfortunately with the current fee structure, it is harder than attracting money.
Q: Berkshire Hathaway resembles a conglomerate. If you disagree, how do you explain?
One advantage with a conglomerate is tax-free money transfers between businesses. One idea with a conglomerate is that you issue shares consistently to buy other companies. Wall Street liked it. Most of those companies have little relationship with Berkshire.
The managers were mainly thinking about how they can pump stocks higher. At Berkshire we are not in that game. We buy business that can generate cash.
Q: What will each of you be remembered for?
Old age, the oldest corpse I’ve ever seen.
A fortune wisely used.
Q: The U.S. Dollar is depreciating because of the Fed policy. A few years ago, Berkshire had shorted the U.S. dollar. What is Berkshire doing now?
Last year we had a small position shorting dollars. But we are not that active. It is no question that the dollar will decline, but all currencies will decline. I don’t have strong feelings that the dollar will decline more than others.
We are unlikely to make another big currency bet. I do think the dollar will decline, but I have fears but I don’t have strong feelings about it. Since 1930, the dollar declined from 16 to 1, but we all did well.
Q: what is the difference between investing in Berkshire stock and mutual funds?
I advise people to buy index funds consistently over time; it will be a perfect choice. If I have choice personally I will buy Berkshire.
Munger: I think investors should reduce expectations.
Q: Any significant changes to the policy, fed, or tax wise that will help the U.S.?
We have our foot on the floor in policies. It is hard to push harder. We had a huge stimulus going on. We take 15% of GDP in, but spend 25%. In general, I think the natural power of capitalism will save us.
The economy is coming back. One place we may make a huge mistake is not learning from the collapse. I will have a tax system that discourages trading. I will close the loopholes on taxes. Hedge fund managers of the U.S. get a lower tax rate than my secretary.
Figures about the bet with fund of funds managers: In the past three years, the fund of fund is down 4.24%, S&P500 down 8.18%. So far the fund of funds wins.
After the lunch break:
Q: You were very positive about BYD and its chairman. Does BYD remain attractive as it was?
Munger: BYD’s stock price is still way higher than Berkshire paid for it. Any companies trying to move as fast as BYD will have clutches. I am quite encouraged with what they are doing.
They want to double sales once every year. They succeed in the first five.
Q. Given the status of the world and the price of oil, is this another oil bubble? What is your sentiment on oil?
We did take a position in oil in the 1990s, but we really don’t know. The world needs 88 million barrels a day. One thing I can promise is that oil will sell for much higher some day. We have looked at a lot of places. I have no idea about oil future production. We don’t hedge anything at BRK. There are few commodities that we know the direction of six months later.
Q: What are a couple of the most important things you learned last year?
What I learned last year is I will have Charlie write the next PR.
Q: You resigned from the WPO board. Is this related to the stock? Will you sell the stock?
I will not sell the stock. My enthusiasm to the post is 100%.
Q: As an investor from Asia I am concerned with the Berkshire stock due to dollar declines. Over the long term will Berkshire appreciation offset the dollar decline?
No. the only promise you can get from Charlie and me is to increase the intrinsic value of the company. We think we won’t do nearly as good as we did before. But you will get my best effort.
Q: Will Berkshire split the A shares?
We already split. With B shares available. You should not count on the split of A shares.
Q: Charlie’s view that teaching finance about good business and bad business; could you give an example on each?
Munger: Costco comes to the top of the world. They created custom royalty. Costco will do $400 million this year. It is an example of a successful business. More generally, an average business is like GM, which wiped out shareholders although it was a good business.
Harvard Business School taught that way, but they stopped.
Buffett: Charlie and I were on plane which was hijacked. Before they shot us, they said that each of us can have a request. Charlie said he wants to give a presentation about Costco. When they ask me, I said “shoot me first.”
Q: Compensation of the next CEO?
I think the next CEO will make a lot of money, and it should be this way. I think we may have an option system with the strike at the value. There should be an increase in the base price. With this condition, the CEO can be given a large package.
Q: About investing in China, do you use the same approach considering the culture is so different?
When I invested in PetroChina (PTR, Financial), I considered both PetroChina and Yukus Oil. Both were cheap. I decided that I was more comfortable with China. We do make allowance about our lack of understanding in the culture, but the basic principles apply wherever we invest.
Q: Where do you put Berkshire’s cash? In treasuries?
We don’t play around with our short term money. We keep them in treasuries. We got nothing from it, but the last thing we will do is to take risks for 2% more return. The only thing I feel comfortable about cash is treasuries. We have the need of immediate access to the money a lot of times.
Q: What is your advice to young people? The youth job market is 25% unemployed. Any advice to youth on entrepreneurship?
Do a lot of reading. You never know whether it pays off. Improve communication skills, you will benefit from it all your life.
In my office I have a certificate which I paid $100 for a communication course. That is the best investment I ever made. If I didn’t have that, I would end up very differently.
Q: Johnson & Johnson (JNJ, Financial) is one of our largest holdings. Do you support the recent JNJ acquisition of Synthes?
The deal would be a lot better if it were all for cash. By using a lot of stocks, it is saying the JNJ is not valuing its own business that valuable.
Q: when you talk in general way, your remarks are always positive, although there are big problems. How can a lousy long term U.S. economy make you so happy?
A: If you look back in 1976, it has been the most extraordinary period in the history of the world. I was born in 1930. Dow was going to 42 from 382. Three thousand banks were going to close. All this happened, but the average living for the average person has increased six for one.
There was always trouble.
When I got out of school, in 1950, both Ben and my dad, the two most respected people of my life, said that don’t start with stocks now. There have been all these problems. But the power of capitalism is incredible. That was what brought us out of the recession.
The game is not over. What happens is that the rest of world has caught up, especially China, tapped into system.
Charlie: I can go back farther than that.
Q: Do you think businesses like See’s candy, or hard assets such as railroads are superior in a inflationary world?
The first group is superior. You have the price power. The worst business is one that has a lot of receivables. Normally we were not enthusiastic with utilities and railroad. The ideal business, See’s candy, was doing $25 million when we bought it. We are doing $300 million now. We only had to plough back $30 million in the business. We don’t have receivables and much fixed assets. See’s Candy is far better.
The ideal asset is the royalty on someone else’s sale. That kind of asset is inflation protected. We deployed in utilities and railroads because we cannot find enough business like See’s.
Q: Dividends? There will be time a time I need dividends. Is it possible that some point in the future Berkshire will pay dividends?
Assume you have a savings account which pays 5%, or you have an account which grows at 12% a year and you can sell a little piece at a time, which way is better?
The question is obvious, but the execution is a problem.
There will come a time, if we believe that we cannot lay out $10-$15 billion a year, we will give shareholders back.
I believe that if we pay dividends, the stock price will go down, and it should go down, because the machine has lost its power of compounding.
Q: Wells Fargo (WFC, Financial) and U.S. Bank (USB, Financial): what are the outlooks for these two banks?
Wells Fargo (WFC) and U.S. Bank (USB) are among the best of the large banks, if not the best. Banking as a whole will be considerably smaller and less profitable than before. The leverage will be reduced. It is a good thing for the society, maybe bad for some banks.
Even of ROA is lower, ROE is lower, we think USB and WFC are still very good.
In terms of the troubles in banking, I think you saw far worse happen before. Banks are always on the asset side. It is a very good business because you get your money so cheap. I like our positions there.
Munger: MT Bank (MTB, Financial) has been a wonderful holding for us.
Buffett: I recommend you to read the shareholder letter by MT Bank’s CEO. I also recommend Jamie Damion (JP Morgan CEO) letter; everyone can learn about banking from those letters.
Q: Commodities like gold went up, but BRK stock was up just a little. Is it possible that gold will continue to go up?
Buffett: There are three major categories of investments. You need to think very hard which category you want to be in before you pick among them.
First is bonds. Which is currency denominated. Any currency-related investment is bad. Almost all currencies will decline in value. As a class, currency related investment must pay extremely well to justify the investment.
Second are commodities; it does not produce anything, but you wish someone to pay more later. Sixty-seven cubic feet of gold will own all the gold of the world. But no matter what you do with it, you can dance on it, you can farm on it, it will not do anything. The only hope is that someone will pay you more later. We did it with silver, but my timing was only 13 years off.
The third is the producing business. If you buy a farm, you calculate how much it will produce, you don’t care about the quote you will get later. I would pick the third.
Rising asset creates excitement. It affects behavior. But over time it won’t make them rich.
Munger: I agree.
Buffett: In addition to the 67 feet cube, more gold is produced. All the gold in the world is now worth $8 trillion, but all farm land in the U.S. is worth just $2 trillion. You can buy all the farm land in the U.S. with the gold, plus 10 Exxon Mobiles (XOM, Financial). You still have another $2 trillion to play with.
Q: How did you get your first investors when you started? How did you approach investors?
A: I had seven members from the family and a friend. It was slow. Then Graham-Newman was liquidating. We stumbled along for almost six years. Then Charlie came along. It was a long time, slowly.
You conducted yourself honestly if others can trust you.
Unfortunately with the current fee structure, it is harder than attracting money.
Q: Berkshire Hathaway resembles a conglomerate. If you disagree, how do you explain?
One advantage with a conglomerate is tax-free money transfers between businesses. One idea with a conglomerate is that you issue shares consistently to buy other companies. Wall Street liked it. Most of those companies have little relationship with Berkshire.
The managers were mainly thinking about how they can pump stocks higher. At Berkshire we are not in that game. We buy business that can generate cash.
Q: What will each of you be remembered for?
Old age, the oldest corpse I’ve ever seen.
A fortune wisely used.
Q: The U.S. Dollar is depreciating because of the Fed policy. A few years ago, Berkshire had shorted the U.S. dollar. What is Berkshire doing now?
Last year we had a small position shorting dollars. But we are not that active. It is no question that the dollar will decline, but all currencies will decline. I don’t have strong feelings that the dollar will decline more than others.
We are unlikely to make another big currency bet. I do think the dollar will decline, but I have fears but I don’t have strong feelings about it. Since 1930, the dollar declined from 16 to 1, but we all did well.
Q: what is the difference between investing in Berkshire stock and mutual funds?
I advise people to buy index funds consistently over time; it will be a perfect choice. If I have choice personally I will buy Berkshire.
Munger: I think investors should reduce expectations.
Q: Any significant changes to the policy, fed, or tax wise that will help the U.S.?
We have our foot on the floor in policies. It is hard to push harder. We had a huge stimulus going on. We take 15% of GDP in, but spend 25%. In general, I think the natural power of capitalism will save us.
The economy is coming back. One place we may make a huge mistake is not learning from the collapse. I will have a tax system that discourages trading. I will close the loopholes on taxes. Hedge fund managers of the U.S. get a lower tax rate than my secretary.
Figures about the bet with fund of funds managers: In the past three years, the fund of fund is down 4.24%, S&P500 down 8.18%. So far the fund of funds wins.
After the lunch break:
Q: You were very positive about BYD and its chairman. Does BYD remain attractive as it was?
Munger: BYD’s stock price is still way higher than Berkshire paid for it. Any companies trying to move as fast as BYD will have clutches. I am quite encouraged with what they are doing.
They want to double sales once every year. They succeed in the first five.
Q. Given the status of the world and the price of oil, is this another oil bubble? What is your sentiment on oil?
We did take a position in oil in the 1990s, but we really don’t know. The world needs 88 million barrels a day. One thing I can promise is that oil will sell for much higher some day. We have looked at a lot of places. I have no idea about oil future production. We don’t hedge anything at BRK. There are few commodities that we know the direction of six months later.
Q: What are a couple of the most important things you learned last year?
What I learned last year is I will have Charlie write the next PR.
Q: You resigned from the WPO board. Is this related to the stock? Will you sell the stock?
I will not sell the stock. My enthusiasm to the post is 100%.
Q: As an investor from Asia I am concerned with the Berkshire stock due to dollar declines. Over the long term will Berkshire appreciation offset the dollar decline?
No. the only promise you can get from Charlie and me is to increase the intrinsic value of the company. We think we won’t do nearly as good as we did before. But you will get my best effort.
Q: Will Berkshire split the A shares?
We already split. With B shares available. You should not count on the split of A shares.
Q: Charlie’s view that teaching finance about good business and bad business; could you give an example on each?
Munger: Costco comes to the top of the world. They created custom royalty. Costco will do $400 million this year. It is an example of a successful business. More generally, an average business is like GM, which wiped out shareholders although it was a good business.
Harvard Business School taught that way, but they stopped.
Buffett: Charlie and I were on plane which was hijacked. Before they shot us, they said that each of us can have a request. Charlie said he wants to give a presentation about Costco. When they ask me, I said “shoot me first.”
Q: Compensation of the next CEO?
I think the next CEO will make a lot of money, and it should be this way. I think we may have an option system with the strike at the value. There should be an increase in the base price. With this condition, the CEO can be given a large package.
Q: About investing in China, do you use the same approach considering the culture is so different?
When I invested in PetroChina (PTR, Financial), I considered both PetroChina and Yukus Oil. Both were cheap. I decided that I was more comfortable with China. We do make allowance about our lack of understanding in the culture, but the basic principles apply wherever we invest.
Q: Where do you put Berkshire’s cash? In treasuries?
We don’t play around with our short term money. We keep them in treasuries. We got nothing from it, but the last thing we will do is to take risks for 2% more return. The only thing I feel comfortable about cash is treasuries. We have the need of immediate access to the money a lot of times.
Q: What is your advice to young people? The youth job market is 25% unemployed. Any advice to youth on entrepreneurship?
Do a lot of reading. You never know whether it pays off. Improve communication skills, you will benefit from it all your life.
In my office I have a certificate which I paid $100 for a communication course. That is the best investment I ever made. If I didn’t have that, I would end up very differently.
Q: Johnson & Johnson (JNJ, Financial) is one of our largest holdings. Do you support the recent JNJ acquisition of Synthes?
The deal would be a lot better if it were all for cash. By using a lot of stocks, it is saying the JNJ is not valuing its own business that valuable.
