Berkshire Hathaway Shareholder Meeting Notes - Part I
Did you believe the CEO of any financial organization can also be the chief risk officer. Does the future ceo will be chief risk officer?
I do believe CEO of financial organizations should also be chief risk officer. I am the chief risk officer of Berkshire. My successor will have the same responsibility, and we will not select who does not have the ability. It is not an impossible job.
Berkshire can act in speed that is rare among corporations. When we talked with Bank of America CEO, I never talked with him, and I said we will do 5 billion, and we have the ability to act quickly. I don’t believe that the successor cannot do a lot things that I can do. He can do a lot of things better than I can.
2011 annual report, disclosed reinsurance assumptions made, there was a charge. There is difference in mortality rates between different Berkshire businesses.
Warren: Mortality figures coming on quarterly were above expectations and what looked like what should have been the case looking at earlier figures. We are insuring SwissRe and they are reinsuring a lot of American life insurers. How Geico reserves is described in annual report, I would say that the one overriding principle is that our plan is to reserve conservatively. Reserve in reinsurance is a lot different than reserving in the auto business. In auto insurance you find out very quickly how you are doing.
Charlie: There are always going to be some contracts where results are worse than expected. Why would anyone buy insurance if that weren’t the case?
Warren: It’s interesting just how, let’s say 911, very hard to reserve after 911, to what extent, going to collect on insurance, when you close restaurants at airports, is that business interrupted. We turn out to be somewhat over reserved for 911. The same situation in Thailand and Japan, supply chain for many American companies were interrupted by floods in Thailand and tsunami, auto companis can’t get parts. It takes years to work out, generally Berkshire’s reserve developed favorably.
In the past you have made a few investments in China, Petrol China (PTR), BYD, given growing importance, what advice would you give to Chinese leadership?
Charlie: We’re not taking much time giving advice to China. If you stop think about it, China’s doing very well, to some extent we should seek advice there instead of giving.
Warren: We found almost it useless in 60 years in investing to give advice to anyone.
Charlie: It’s amazing how little influence we had when we’ve had 20% of the stock, people have this illusion that the beauty of Berkshire is that we’ve created system that doesn’t require much control.
Warren: If you look at our 4 largest investments, worth $50 billion today, held some for 25 years, the number of times that we have talked to the CEO of those companies doesn’t average more than twice a year, we are not in the business of giving them advice. If we thought that the success of our investment depended on them following our advice, we’d go on to something else.
While I am pleased by your announcement to buy back stock at 110% of book value, sometimes I feel that I have to pay 200%. Did you not feel that Berkshire was trading over intrinsic value over the past decade?
Warren: We have whole different view on that than many managers. If we could have our way, we would want Berkshire stock trade just once a year. We come up with a value and we trade at that price. But this is allowed in public markets. If Charlie and I think that Berkshire is overvalued, interesting proposition to announce half an hour before market opens and say that the stock is overpriced, who knows how the shareholders would react. We would never encourage people to buy our stock at a price we thought was above intrinsic value. At one time we thought the stock was overvalued in mid1990s, we created a page and put in proxy saying that we think the stock was overvalued. We wouldn’t buy stock at that price and didn’t recommend it to our relatives.
We think that if we are going to repurchase shares from people, we should let them know if we are buying it too cheap
What is Berkshires capacity for buybacks, how attractive are the buybacks, what are latest thoughts on instituting dividend.
Warren: 1.1 of book value is a figure we feel comfortable with. We wanted it to be undervalued to do buybacks, we want to make sure shareholders know its undervalued. We have a terrific group of businesses, we think they are going to be worth more in the future. Some businesses worth far more than trading price. From strictly from moneymaking viewpoint, we would love to buy tens of billions worth of stock. I dont think it will happen. It might happen. If we have the chance to do it, we would buy very aggressively, we know we are making significant money for remaining shareholders, very obvious to us we would do it on a big scale, if cash position is not below 20 billion.
Charlie: Some companies buy stock back regardless of price That is not our system.
Warren: It’s for ego. Most of the companies’ CEOs don’t think the way we are thinking at all. They like issuing options at lower prices. We will only buy back shares for one reason, to increase per share value day after, if we have the chance to do it in a big way then we will.
What’s your view on the Euro banks, about US banks.
Warren: We have totally different views on euro banks than US banks. US banks are in far better position than they were in 3-4 years ago. They have taken the losses and buttress their capital in big way. The American banking system is in fine shape. The euro banking system was gasping for a year a few months back. The Mr.xxx opened his wallet, gave a trillion euros in liquidity for those banks. It is a huge act designed to replace funding that was running off from them. Euro banks have more wholesale funding than US banks. Euro banks tended to get most of the funding on a wholesale basis, that money can run pretty fast. ECB gave them $1 trillion for 3 years for 1%. I’d like to have $1 trillion for three years at 1%, but I’m not in trouble so I cant get it. it’s pretty remarkable to look at what’s been accomplished in our banks, when the bankers brought together in Washington and forced to take money. I think that policy was very sound for the US economy. If some banks were forced to raise capital, I wouldn’t like it if I were a shareholder. Fed and treasury have handled things quite sensibly. If they hadn’t done so our world today would be a lot different.
Charlie: Europe has its own debt and so on. But they don’t have their own federal union. It is very difficult to handle stresses. We are more comfortable with US banks.
Warren: Back in 2008 Fed and treasury said we will do whatever it takes. You know they had the power and the will to do whatever it took. But when you have 17 countries that have surrendered their sovereignty in currency, you can’t do that. Kissinger said if you want to call number to Europe, what number would you dial. For example if 17 states governors have to meet in Washington, we would have to have a different outcome. Europe and US are very different.
Warren: Mid-American is never going to be affected by coal. It is a regulated public utility. We have two Mid-Americans, utilities on the west coast. They are pass through organizations, if they are operated efficiently. While coal price goes up or down, it doesn’t affect them, it affects customers. Coal traffic is down this year this may interest you, the first quarter kilowatt hours used in the United States went down 4.7%. This is a remarkable decrease in electricity usage. Another thing is natural gas under $2 at the same time oil was $100. If you told Charlie or me 5 years ago that you had 50 to 1 ratio between oil and natural gas, I wouldn’t believe you.
Charlie: We are using up precious resources we need to create fertilizer. Sparing resources that is not as precious. We should use up all of thermal coal before using a bit of natural gas. I think natural gas reserves are the most precious things we can leave our descendents. Gas is worth more than coal.
Warren: Ratio of prices to natural gas compared to prices of oil, can’t really change the percentages too much. It will be interesting to see how gas/oil ratio plays out. It has changed everyone’s thinking in a very short period of time. 3 years ago people wouldn’t have said this is possible.
What Geico doing to keep the competitive advantage in the technology change?
Warren: Progressive is leader with technology change. If it becomes something that gives you better predicted value, then we will take it on. We are always looking for more things to tell us if we look around in the people in this room, what tells us the likelihood that them having an accident next year. Age is one thing. 16-year old male is totally different than someone like me. Some things are very good predictors, credit scores tell you a lot about driving habits. I don’t see anything that threatens Geico in any way. In the first quarter, it not our best quarter, we had a very significant number, 300,000 new policies. Feb. was best month. Marketing is working very well. Risk selection is working extremely well. Retention is working extremely well. Geico is carried over a billion dollars over its book value. It is worth a whole lot more than that, based on the price we paid, the figure we paid is worth 15 billions more, we wouldn’t sell it at all, that would not tempt us in the least.
In recent years business schools taken lot of blame to effect on economy, what would you expect to change.
Warren: I wouldn’t blame business schools, i don’t think that they’ve taught us bad, what do you think?
Charlie: It was a considerable sin; I think business school is improving.
Warren: In investing, I would say that probably the stuff we’ve seen taught at major business schools, maybe because in the investment area, it is astounding to me how schools have focused on one fan after another, finance theory, usually very mathematically based, when it’s become very popular almost impossible to resist. Investing is not that complicated. I would have one course on how to value a business, then one on how to think about market. If people grasp these principles, they would be a lot better off. Who needs option pricing in an investment business? It’s totally drifted way the teaching of investments. I look at books that are used sometimes and found that there’s nothing in there about value in businesses. If you buy businesses under what they’re worth, you’re going to make money. They’ve tried to make it a lot more difficult.
Charlie: They want some kind go standardized solution that requires them not to think too hard, and they have one.
Warren: Is there anyone we’ve forgotten to offend?
The Buffett rule
Warren: It was more fun to attack something that I hadn’t said than it was to attack something that I had said. The proposal was that people who make very high incomes pay a rate that is below 15%. When people look at the takes rate, making 40 million a year, they should pay taxes in the 30% area, many people are. If you look at the most recent year, if you aggregate payroll and income taxes, if you take the 400 largest incomes in the United States, the average is $270 million each. 131 of those 400 pay tax rates that were below 15%. They are paying at less than what the standard payroll tax was. So under the Buffett rule we would have a minimum tax, restore their rate. Back in 1992, average income of the top 400 people was 50 million, only 31 (?) was paying a lower rate. What we’re asking for is to share sacrifice from the American public, we’re telling them we have to cut back, make sure that the people with these huge incomes get taxed at a rate is the way that they used to be taxed, 2/3 of the people in that area get taxed at higher rates. You can raise a lot of money, very few people would actually be effected.
You can give 30% to charity instead of government?
Warren: The bill was sent to the white house and didn’t not get passed. I think that people like me that have huge incomes should pay higher rate. I have no tax planning, no gimmicks, no Swiss banks account, when i get all through, my tax rate is lower than my cleaning lady. I made a calculation 3 different times, 2004, 2006 nd 2010. My incomes in those years were 25-65 million. I came in with the lowest tax rate in our office. They were all in the 30s, and I was in the area of 17%. That’s because the tax law favored those who make huge amounts of money. Among those making $270 million a year, the tax rate of 31 out of 400 were below 10%. The cleaning lady at the office has been paying 12.5% on social security taxes, people making hundreds of million pay less than 10%. That is wrong.
What do you expect insurance pricing to be on cotastrophes, more catastrophes affect reinsurance compnaies
Mid-American has large investment in wind and solar power. What is the most appropriate use of natural gas?
Warren: I believe on wind we’re a lot bigger stake in wind than solar, subsidy is 2.2 cents for 10 years per kilowatt hour, federal subsidy, makes wind projects work whereas they wouldn’t work without the subsidy. So the government by putting in that 2.2 cents has encouraged a lot of wind development. I think if there had been none, there would have been no wind development. Without subsidy the projects wouldn’t make sense. solar projects there may be some subsidy involved in. I don’t know the specifics. If Greg was here, he can correct me on this. I don think any solar or wind would be working without subsidy.
Charlie: I think it’s very wise that’s what the government are doing.
Warren: The future is subsidizing oil and natural gas in a sense.
Greg: Warren was right, the subsidy with the wind allowed us to build 3000 megawatts over our two utilities. We wouldn’t have moved forward without it. In solar a few other incentives, large inventive in constructing 30% covered cost, significant advantage as Berkshire is a full tax payer. Competitors don’t have the tax advantage for those. Berkshire benefits from the tax credit.
Warren: BH has a distinct competitive advantage in that BH pays lots of federal income tax, we can use them, dollar for dollar benefit. I would guess that 80% of utilities in US cannot reap full tax benefits, or any tax benefits because they don’t pay any federal income taxes. They use depreciation to wipe out taxable income. They cannot have any appetite for wind projects because of tax credit. By being part of BH which is a huge taxpayer, Mid-American has extra abilities to do a lot of project without worrying about exhausting their tax capacity. That is a big advantage we have.
You are clearly entitled to speak your mind as an individual. The recent publicity around Buffett tax is limiting on principle on Berkshire stock for some people. While being a public company, should some political dialogue be muted? My father is 84, he does not buy Berkshire stock because of this.
Warren: I don’t think that the CEOs of any of companies in should in any way have their citizenship restricted. when Charlie and I took this. We did not decide to put our citizenship in blind trust. I really think that 84 year old man making investment decisions on political decisions not wise.
Charlie: Warren’s position on taxing for the rich has decreased my popularity in my country club.
Warren: We’ve never had a disagreement in 53 years. In November roughly half the country is going to feel one way, other half going to feel a different way, selecting lifestyle on having people to agree with you, going to life a pretty peculiar way.
Position on purchasing acquisitions, 20 billion cash deal?
Warren: We recent considered a 22 billion deal. With BNI we used stock to pay, I don’t like to do it. We wouldn’t use stock to pay for deal. Although it could happen, I don’t think it will happen. So we looked at the deal, and we would have done it, but it would have stretched. We want to have a 20 billion dollar cash balance at all times. If that had been 40 billion, as much as I liked it, I don’t want to be in limbo not really knowing where the money was going to be come from. If we make it a 20 billion deal, then we’ll do it.
Jobs that were shipped outside are coming back to the US, a number of companies started bringing back here, is BH looking at doing that?
Warren: I would say that the number of jobs we have is listed, about 270,858, we probably, I don’t think we have more than 15000 outside the US. We invested in plant equipment over 8 billion last year, 95% or so of that was in the US. We don’t have a lot of that around the world. I’m not opposed to it, our Iscar operation operates around the world, product they sell is going to be sold around the world. US is an important market, but not a majority. that company has 11000 employees or so, but few are in US. But we’d like to do more business in Korea, Japan, India, etc. we have utility operations in the UK, we just bought a business in Australia, just in the last day or two we bought an operation based in the Netherlands. It is extremely likely that 10 years in the future, we have maybe hundreds of thousands more. There are a lots of opportunity in the US, this is a real land of opportunity, but we find lots of things we do that we think make a lot of sense in this country.
Charlie: You can’t bring a lot back if it never left.
How are you feeling?
Warren: I feel terrific. I always feel terrific. I love what I do, I work with people I love. It’s more fun every day, basically I think I have a good immune system, my diet is such as any fool can plainly say, I’m eating properly. All i can say is that it works. and I have 4 doctors, least a few of them own BH. My wife and my daughter and I listen to 4 of them, they describe various alternatives. The ones that they recommend do not involve a day of hospitalization, they don’t require me to take a day off from work, the survival numbers are way up, 99 and a half percent for 10 years. Maybe I’ll get shot by a jealous husband, this is a really minor event.
Charlie: I rather resent all this attention and sympathy that warren has, I probably have more prostate cancer than he does. I don’t know because I don’t let them test for it. Anyways, i want the sympathy.
Warren: My secretary was getting too much attention, so i had to throw the spotlight back to myself. The med center is about 2 minutes away, I may have a little less energy but I do fewer dumb things.
(To be continued)