These are the notes we took at this year’s Berkshire Hathaway shareholder meeting notes. We published the first part last night. This is the complete piece.
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.
Coal?
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.
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.
I am 26. If you were me and had the chance to start over, what areas would you like to get into and do you think that my generation have the same number of opportunities as yours?
Warren: I think you have all types of opportunities. I would very much do what I did, start earlier, and do it a little better. I would try to develop an audited record of performances as early as I could. I would try to get something a lot more interesting, buying companies to keep. I establish relationships with people, I want to be for keeps. That’s been enormously satisfying, but it takes some capital to get into that business. I built it through managing money for myself and others. I would get past that as fast as I could then buy businesses, then spend the rest of my life doing it. And i would do it with Charlie incidentally.
I think that at least 95% of the people here believe that BH is undervalued. Why do you think the stock stays stuck at these levels?
Warren: We’ve run BH now for 47 years. We’ve had 4-5 times where we think it was significantly undervalued. We’ve seen the stock get cut in half in a fairly short period of time. There’s going to be periods where it’s overvalued and times where it’s undervalued. Back in 2000, when we said we were going to repurchase, but we didn’t get any repurchase. The beauty of stocks is that they do sell at silly prices sometimes, and that’s how we’ve gotten rich. Chapter 8 and chapter 20 in the Intelligent Investor by Ben Graham is all you need to get rich. Mr. Market is here to serve you and not to advise you. All the thousands of prices that you have, Mr. Market is making thousands of mistakes every day. It’s built in to the system that stocks have been mispriced. BH generally speaking has been closer to selling at its intrinsic value than most large companies. If you look at our high/low range in the year compared to other big companies, our stock fluctuates at a lower range than others. The stock market is the most obliging money making place in the world because you don’t have to do anything. Thousands of businesses are priced, changes every day, lots of information, you don’t have to do anything. Compare that with any other noninvestment business.
Charlie: What’s interesting about this place is that I’ve had a lot more fun than when we could buy businesses to hold. So as fast as you can work yourself in our position the better off you’ll be.
Warren: It will take you a littel while.
Have macro risks ever set you back in buying a company?
Warren: Charlie and I have never had a conversation about buying/selling a business where we’ve talked about macro affairs. We buy it if it’s well priced and it is a good company. I bought my first stock in June of 1942 and what happened here was a country where all my older friends had disappeared. And we were losing the war. Stocks were cheap. I wrote that article in October of 2008, you’re going to read all kinds of bad news, and stocks are cheap. We look at value and we don’t look at headlines at all. We don’t have any discussions about macro factors. Charlie has this little company Daily Journal (DJCO) and he went out in 2008 and bought a few stocks, that was the time to use the money, not to sit on the money. Charlie, what stocks did you buy?
Charlie: …
Warren: You can never get anything out of him.
When you look at the businesses that BH owns, which business has greatly improved in the past 5 years and why, and name a business that was not so lucky.
Warren: There is no question, the big ones have done well, we actually have owned a significant piece of BNI for the very fundamental reasons. BNSF improved its position dramatically over the past 15-20 years, continues to this day. It is an extremely efficient and eco friendly way of moving a ton of things that have to be moved. It’s an asset that cannot be duplicated for 3-4-5-6 times what its selling for. It has a lot business than what it was 5-10 years ago. Geico was another company similar to that, we’re approaching 10% of the market, we had 2% of the market in 1995. We have Tony Nicely who maximized what there was to be done. Geico is worth billions more than when we bought. BNSF same thing, Mid-American has done a great job. Iscar is doing wonderful since we bought it 6 years ago.
Charlie: 80% of businesses that we own, increase value. The fortune is not going to go away just because Warren will die.
The derivatives that Berkshire owns?
Warren: Some derivative contract is required in our utility. It’s not going to be a huge factor in BH. we’re going to do quite well with the positions that we have, I like the positions but the rules have changed in relation to collateralizing.
Charlie: The derivatives that bother some people. We had better credits than anyone else, we’ve got better terms, we will have made $10 billion, maybe a lot more. We’re lucky if we get those contracts.
When you discuss BH’s intrinsic value, why do value insurance at only cash + investments per share. For noninsurance you use pre-tax earnings?
Warren: Not quite the way you say, I would value Geico and other companies in different ways. Basically, I would say that Geico has an intrinsic value that is significantly greater. 2 reasons. I think that it is quite rational to assume underwriting profit within 1-2 decades, and i think there will have significant growth. In any event, I will let you come up with your own evaluation of that. In operating businesses, different ones have different characteristics. I would like to buy those at 10x pretax earnings.
Since 1999, gold has gone up multiple times. But Berkshire stock lagged far behind. I don’t own your stock for the glamour, i own it to make money. What happened?
Warren: When I bought Berkshire, gold was at $6 and BH was at $15, now gold is $1600 and BH is 100,000. Common stocks as a group will do better than gold, if you own an ounce of gold now, in 100 years from now you’ll still have 1 ounce of gold. It’s very hard for unproductive investments to be productive investments over any long period of time. If I say bonds are no good, Bernanke still smiles at me. But if you say anything negative about gold, it arouses passions in people. This is kind of fascinating. Usually you thought through something intellectually, it shouldn’t matter what people say. If your facts are right and your reasoning is right, then you’re good. My father loved gold, he could take a discussion of it but many people don’t tolerate that.
You said in an interview in CNBC that you have bought shared of JPM for your personal account, can you share some stocks you bought for your own account? and difference between buying for your personal account compared to for BH?
Warren: I actually bought WFC more than JPM, my best ideas are all in BH, I can promise you. Charlie’ bought real estate too.
Charlie: Diversification is something i have no interest in unless it happens automatically like it did with BH. I like this buy and hold investing to live life and deal with a better class of people.
Warren: If you have 98.5% of your money in BH, and you’re thinking about the rest 1.5% then you have a problem. We have 400 million shares of WFC in BH and I like JPM too, but WFC is easier to understand, we bought WFC in the first quarter, we bought it last year and a lot of years before. If I wasn’t managing BH, and I was sitting on my own money, I would put a lot of money in WFC and some in JPM too.
Money in life insurance companies vs. in property casualty insurance companies?
Warren: Money in our life insurance companies has less use to use. I’d rather have 100 million in property casual than life. Money in life insurance cannot be used as effective than money in property casualty insurance. It’s a disadvantage. The number 1 place that we’d like that money is in the holding company, 10 billion of that in there. Most of our operating companies keep more cash than they need. As long as I have 20 billion in some place, i feel comfortable. It’s probably more than we need but it makes us feel that we can do other things comfortably, as long as the downside is protected. Fair amount of logic to where things are placed, if we were to make a big acquisition would have to shift some funds from one place to another, but we will always leave every where properly funded.
Since BH will likely need to offer a stock component for large acquisitions, wouldn’t it have effect of lowering of cash? Dividends?
Warren: We would prefer to have our stock sold at intrinsic value, use cash for the balance. BH without dividend will probably be sold at or above intrinsic value above as much as it as below. I don think a dividend would be a plus to sell at intrinsic value most of the item. We’re willing to pay 1.10 for a dollar on book, we think that it’s worth at least that much. Unless we find we can’t do things in the future that make sense. Our goal is to have our stock sell as close to intrinsic value as possible. Cash is our favorite medium of purchase, we hate giving out shares. We do not like trading out a part of company because of any acquisition.
Charlie: What you suggested is a very conventional approach, shareholders should do it the way we’re going it.
Warren: I should point out, I’m in the position of giving away all of my stock between now and 10 years after my death. For philanthropic purposes I’m disposing of the stock. Our interest is in having it sell at the fair value. Over time it will average at the fair value. It has happened in the past, but it doesn’t happen every year.
You have described the newspaper business negatively. With all new options today in social media, demise of newspaper, why buy Omaha new herald. Was there some self-indulgence in this?
Warren: Everything she said is true, it’s even worse than that. The newspaper have 3 problems, two of which are very difficult to overcome, the 3rd if they don’t overcome it is worse problem. News is what you want to know but you don’t know. The newspapers 50 years ago contained dozens of areas of interest to people. They are the primary source for news. Now, all of those things of interest have found other means where that information is available on more timely, cost free basis. Newspapers have to be primary about something of interest to a significant percentage of people that live in their distribution area.
The World Herald tells me every day a lot of things that I want to know that I can’t find some places else. They don’t tell me as many things as 30 years ago, but still some. The most of those items are local, but I want to know what I don’t know. I’m going to look at those through other mediums. They tell me local sports, about my city, about my neighbors, a lot of things i want to know. As long as they stay primary in that area, they have an interest to me. They are expensive to distribute.
And another problem, there are 1400 daily newspapers. In a great many cases they are going up on the web and giving free the same thing they’re charging for in delivery. Will any business plan that’s sustained itself for a long time can charge significantly in one version and offers the same version free to people that have a business model that will work over time? In the last year even many newspaper have succeeded in those experiments in getting paid for what they were giving away for free. I think there is a future for newspapers that exist in an area where there a senses of community, where people care about what’s going on, about their schools in their geographic area. it’s not as bulletproof as it used to be, but I think if you live where most people have a sense of community, cover the local area with news people are concerned of, doing that better than other people. So we have bought, we own a paper in buffalo, and we make a internet presence there, the economics based on the prices we’ve paid and made, I think the economics will work out okay, but it’s nothing like the old days but it still fulfills important purpose. It will tell you a whole lot about what’s going on locally if you’re interested.
Charlie: We had a similar situation at World Book. The encyclopedia businesses was ruined, given away for free by Bill Gates, not much profit in newspapers as it used to. it’s not going to be our best businesses.
Warren: We will be going where there a strong sense of community. If you live in grand island at Nebraska, and your children live there and your church is there, you will be interested in the state of Nebraska on TV or the internet, and you’ll be willing to pay something for it, and advertisers will find a good way to talk to you, but it won’t be like the old days.
Technology has affected many of the businesses. What businesses will be affected in the future by companies such as Amazon (AMZN, Financial)?
Warren: AMZN is a powerhouse. I don’t think it will affect furniture, but it will affect other things. The first four days of this week, our business at the furnishing market are up about 11% since last year. on Tuesday we got over 6 million in business, huge volumes. And we’re going to Dallas, a 433 acre plot down there. Going back to Amazon (AMZN), Geico is affected by the internet. Geico was selling through mail, originally. It was very successful. Then it moved to TV, then internet came along. I thought only young people would look for quotes on the internet, I would be calling on a rotary dial phone. The business just changed dramatically to the internet. Things do change a lot and the consumer finds something that they’re like to buy. For Amazon, it is very hard to find unhappy customers. A business that has millions and millions of happy customers can introduce them to new items, it will be a powerhouse and could affect a lot of businesses.
Charlie: Anything that can easily be bought using a home computer will be affected. I won’t be buying the stuff. I almost never buy anything. I think it will hugely affect a lot of people, and is really terrible for a lot of retailers.
If other companies want to copy Berkshire’s Model, care to comment?
Charlie: We have a very peculiar model, it’s very hard to people to copy this.
Warren: It takes a great amount of consistency. It is possible at Berkshire because of we are controlling shareholders. We’ve had a culture where we can write out 13-14 principles 30 years ago, and still stick with them. That’s very hard to do, it takes a very unusual structure in order to do that. It took a long time. We bought the Dutch company yesterday, big private acquisitions will come to BH because they want to, and that’s a significant competitive advantage.
BH has several investments in other publicly traded companies. BH must cast votes on matters, could you tell us how you vote our shares in these companies?
Warren: We’ve almost never voted against management, but there have been a couple of times we’ve thought, stock option expensing, there may have been a bad option grant. Our general feeling is when we’re a large shareholder, we generally like the business, we like the management, they’re not going to subscribe to our views. It is not that they are bad people, they just judge differently, think differently. That doesn’t rule out owning a big piece of the business. We are not trying to change people. We know we don’t want anyone to change us. We accept people the way they come, We don’t expect everyone to be clones of us, if we were to see a particularly dumb merger, stock option plan, etc, but we might vote against it. It would pass anyways but we wouldn’t conduct a campaign against it. We have seen some of our companies engage in what we thought were really dumb deals, i think we voted against maybe one or two of them
Wal-Mart is a large position of Berkshire. How does Mexican scandal affect it?
Warren: I do not think the earning power of WMT 5 years of now will be affected that much by the situation.
Charlie: These are interesting issues. I’m unaware of any place where BH is slipping; it’s not inconceivable we could have some slipping somewhere. In a company as big as WMT there’s going to be a small glitch.
Warren: We have 270,000 people today. At least 20 people are doing something wrong. We can have a bull in the face about people do and not do, a lot of people will just do crazy things. It is a real worry if you’re running a big company. You act fast if you hear about something and we’ve got communications, but that does not stop the fact that right now someone is doing something wrong at BH, and we try to convey to the managers that when they find out about something, act on it, we can handle bad news as long as we get it promptly. I am very sympathetic of managers of large companies; you’ll have some very peculiar people.
Thank you for being open about your heath situation. As I have traveled a long way, I’m hoping for a good answer from you and Charlie as well. My question is, how do you value declining businesses? Encyclopedia and retailing businesses, how do value declining businesses?
Charlie: They’re not worth as much as growing businesses.
Warren: We are in several declining businesses, such as newspaper business. We will pay a price in a declining business, but that is not where we’re going to make money at BH. The real money is going to be made through growing businesses, and that’s where the focus should be. I would never spend a lot of time trying to value a declining business and thinking I am getting one free. The same amount of energy and intelligence brought to better types of businesses is just going to come out better. We started with declining businesses, textiles in New England. We have one business that had $120 million in sales in 1970s, but only $20,000 in sales last year. We thought of brining the sales chart down here and turning it upside down. In 1966, we put $6 million in a company, we called it diversified retailing even though there was one company, in our defense there were 4 department stores, but that $6 million has turned into about $30 billion starting with that failed business.
Media: Many of us are interested in what you’re buying, but you won’t tell us. What in the investment world strikes you as folly, crazy, or dumb?
Warren: I think we should start with companies that I don’t understand. I don’t have a reasonable idea about how the industry will develop within 5 to 10 years, and that eliminates a whole bunch of things. If the price is crazy even If I do understand it then that’s out as well. So we’re down to a small group of companies. The idea that someone is bringing something to the market, and that is going to be the single cheapest thing to buy, it’s nonsense. You know it can’t be the most attractive thing, but people get excited about what’s coming and all. I will guarantee you that you will have thousands of opportunities and most of them are not special. It just doesn’t make any sense to spend 5 seconds thinking about them, but we don’t think about them. There’s also industries that we think could potentially do very well but we have no idea who the clear winners could be in the next few years, so we don’t think about those as well. You can’t have a big disaster in this business. We don’t want to lose a significant percentage of BH net worth and so far we haven’t.
How long do you think it will take China to have a company like CocaCola?
Warren: China’s got some huge companies and they may have clips in market value, some of the ones is as big as Coca Cola.
Given that you’re now in IBM, are there any companies? Is Google inevitable? What are the one or two things about Google and Apple that you feel?
Warren: Well both are extraordinary companies, they look very tough to dislodge where they have their strengths, I would not be at all surprised to see them worth a lot more money 10 years from now, but I would not want to own either one of them. But I would not short them either.
Charlie: I think we can fairly say that other people will always understand those two companies better than we do.
Warren: The chances of being way wrong in IBM are probably less than being way wrong for Google or Apple, but that doesn’t mean that the latter two aren’t going to do as well as IBM. We wouldn’t have predicted what would happen with Apple 10 years ago, and it’s very hard for me to predict them 10 years from now.
Recently we’ve seen some coal plant closings and other things. Will thos affect BNSF?
Warren: There is no question that railroads, utilities, insurance companies, are all very much affected by political process. Economics are on our side in the railroad industry, we can move a ton of products 500 miles on a gallon of diesel. Railroads move 42% of inner city stuff. In terms of congestion and emissions, railroads are all advantage. We got a wonderful product, overall I like our position. They do have to be involved in politics because people who would like to change some of the rules are going to be in politics too, and things will be decided in state capitals and more importantly in Washington. I think it would be very dumb for the country to do anything that discourages the railroad industry from spending the kind of capital that needs to be spent in the future. The country has a strong interest in the railroad industry, having ever incentive to invest, and the railroad industry paves its own way. $3.9 billion will be spent this year to expand and improve, and the country will be better off.
Charlie: It’s the nature of things there are good breaks and bad breaks. BNSF helped double the container carriage tunnels higher and ridges wider, found oil, bad breaks too, but averaged out it’s a terrific business and terrific management.
Warren: After WWII the railroad industry have 1.7 million employees in the US. Now there are only 200,000 employees and have become a lot more efficient. It’s a fundamentally very good way to move heavy stuff a long distance. It’s hard to conceive of anything. Trains are pretty darn good.
In AIG, some people were decreasing exposure to risk, while others increased. How do you share information across units among Berkshire companies?
Warren: There are certainly some people in Berkshire who have contact with other people in Berkshire, but we don’t make any attempt. We want our businesses to feel like they are their own business. We don’t tell the people how to run their business. The moment we start telling them how to change the way they operate that just erodes that advantage which we feel very substantial about how they feel that the company is actual theirs.
Trees are one of America’s greatest resources. We have a well run forester, they can use their product to subsidiaries of Berkshire. Will you consider buying a forest company?
Warren: When we buy a business, we never think much about this company’s product can be used in other companies. To date, we’ve looked at several forestry companies, the business that’s reasonably easy to understand, but the math has escaped us in terms of being compelling.
Charlie: We’d be at a disadvantage for any kind of activity to compete. They have eliminated one tax in their structure that we have to bear, limited federal income tax, we have a structural disadvantage that is really quite significant.
You mentioned 20 billion is the cash you need. Has it changed over time, and why?
Warren: I would get very worried if someone told us exactly how much cash we needed, Charlie and I saw a lot of problems developed in an organization, how to calculate their risk, they were a lot smarter than we were. We both have the same state of mind where we think about worst cases all the time. Then we add on a big margin of safety, I enjoy tossing those papers in the other room but I don’t want to do it for a living, so I undoubtedly built in layers of safety. It’s our job to think what can really go wrong with this place. If you’re calibrating it in some mathematical way, you got to be worried.
Charlie: They twist the problem to fit the solution.
Warren: Life in financial markets has got no relations to Sigmas.
You wrote that you expected the housing market to be improved by now. But now. Fannie Mae and Freddie Mac are getting worse?
How are Tom Combs and Ted Weschler ’s performances? How much are they paid?
We are more concerned about how they achieved their record than the record itself. We also check their integrity. These two are perfect.
We pay $1 million a year for each of them. We also give me them 10% of the part that they outperform the S&P500. The same structure we paid Lou Simpson. If they hire people, that come out their performance. They operate their own brokers. We told them if they get into a new name, I told them to tell me the name. I just want to make sure they did not buy from the insider information I have.
They will do a great job. Todd did substantially better than S&P500 last year. Ted just joined this year.
Charlie: 90% of the investment business started off our formula. I think these people will be do very well. I hope that one day they will join the 400 people I mentioned.
(This note should include most of the Q&A sessions in this year’s Berkshire meeting. We did miss some at the end as the computer run out of battery. Enjoy)
This was the question that GuruFocus sent to Carol Lomis. She acknowledged that she received the message. But the question was not asked. Here is the question:
Currently US corporations are enjoying historical high profit margins. In your opinion, why can US corporations have high margins now? Is the high profit margin sustainable? If not, what factors will bring the margins down?
We welcome your comment on this question.
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.
Coal?
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.
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.
I am 26. If you were me and had the chance to start over, what areas would you like to get into and do you think that my generation have the same number of opportunities as yours?
Warren: I think you have all types of opportunities. I would very much do what I did, start earlier, and do it a little better. I would try to develop an audited record of performances as early as I could. I would try to get something a lot more interesting, buying companies to keep. I establish relationships with people, I want to be for keeps. That’s been enormously satisfying, but it takes some capital to get into that business. I built it through managing money for myself and others. I would get past that as fast as I could then buy businesses, then spend the rest of my life doing it. And i would do it with Charlie incidentally.
I think that at least 95% of the people here believe that BH is undervalued. Why do you think the stock stays stuck at these levels?
Warren: We’ve run BH now for 47 years. We’ve had 4-5 times where we think it was significantly undervalued. We’ve seen the stock get cut in half in a fairly short period of time. There’s going to be periods where it’s overvalued and times where it’s undervalued. Back in 2000, when we said we were going to repurchase, but we didn’t get any repurchase. The beauty of stocks is that they do sell at silly prices sometimes, and that’s how we’ve gotten rich. Chapter 8 and chapter 20 in the Intelligent Investor by Ben Graham is all you need to get rich. Mr. Market is here to serve you and not to advise you. All the thousands of prices that you have, Mr. Market is making thousands of mistakes every day. It’s built in to the system that stocks have been mispriced. BH generally speaking has been closer to selling at its intrinsic value than most large companies. If you look at our high/low range in the year compared to other big companies, our stock fluctuates at a lower range than others. The stock market is the most obliging money making place in the world because you don’t have to do anything. Thousands of businesses are priced, changes every day, lots of information, you don’t have to do anything. Compare that with any other noninvestment business.
Charlie: What’s interesting about this place is that I’ve had a lot more fun than when we could buy businesses to hold. So as fast as you can work yourself in our position the better off you’ll be.
Warren: It will take you a littel while.
Have macro risks ever set you back in buying a company?
Warren: Charlie and I have never had a conversation about buying/selling a business where we’ve talked about macro affairs. We buy it if it’s well priced and it is a good company. I bought my first stock in June of 1942 and what happened here was a country where all my older friends had disappeared. And we were losing the war. Stocks were cheap. I wrote that article in October of 2008, you’re going to read all kinds of bad news, and stocks are cheap. We look at value and we don’t look at headlines at all. We don’t have any discussions about macro factors. Charlie has this little company Daily Journal (DJCO) and he went out in 2008 and bought a few stocks, that was the time to use the money, not to sit on the money. Charlie, what stocks did you buy?
Charlie: …
Warren: You can never get anything out of him.
When you look at the businesses that BH owns, which business has greatly improved in the past 5 years and why, and name a business that was not so lucky.
Warren: There is no question, the big ones have done well, we actually have owned a significant piece of BNI for the very fundamental reasons. BNSF improved its position dramatically over the past 15-20 years, continues to this day. It is an extremely efficient and eco friendly way of moving a ton of things that have to be moved. It’s an asset that cannot be duplicated for 3-4-5-6 times what its selling for. It has a lot business than what it was 5-10 years ago. Geico was another company similar to that, we’re approaching 10% of the market, we had 2% of the market in 1995. We have Tony Nicely who maximized what there was to be done. Geico is worth billions more than when we bought. BNSF same thing, Mid-American has done a great job. Iscar is doing wonderful since we bought it 6 years ago.
Charlie: 80% of businesses that we own, increase value. The fortune is not going to go away just because Warren will die.
The derivatives that Berkshire owns?
Warren: Some derivative contract is required in our utility. It’s not going to be a huge factor in BH. we’re going to do quite well with the positions that we have, I like the positions but the rules have changed in relation to collateralizing.
Charlie: The derivatives that bother some people. We had better credits than anyone else, we’ve got better terms, we will have made $10 billion, maybe a lot more. We’re lucky if we get those contracts.
When you discuss BH’s intrinsic value, why do value insurance at only cash + investments per share. For noninsurance you use pre-tax earnings?
Warren: Not quite the way you say, I would value Geico and other companies in different ways. Basically, I would say that Geico has an intrinsic value that is significantly greater. 2 reasons. I think that it is quite rational to assume underwriting profit within 1-2 decades, and i think there will have significant growth. In any event, I will let you come up with your own evaluation of that. In operating businesses, different ones have different characteristics. I would like to buy those at 10x pretax earnings.
Since 1999, gold has gone up multiple times. But Berkshire stock lagged far behind. I don’t own your stock for the glamour, i own it to make money. What happened?
Warren: When I bought Berkshire, gold was at $6 and BH was at $15, now gold is $1600 and BH is 100,000. Common stocks as a group will do better than gold, if you own an ounce of gold now, in 100 years from now you’ll still have 1 ounce of gold. It’s very hard for unproductive investments to be productive investments over any long period of time. If I say bonds are no good, Bernanke still smiles at me. But if you say anything negative about gold, it arouses passions in people. This is kind of fascinating. Usually you thought through something intellectually, it shouldn’t matter what people say. If your facts are right and your reasoning is right, then you’re good. My father loved gold, he could take a discussion of it but many people don’t tolerate that.
You said in an interview in CNBC that you have bought shared of JPM for your personal account, can you share some stocks you bought for your own account? and difference between buying for your personal account compared to for BH?
Warren: I actually bought WFC more than JPM, my best ideas are all in BH, I can promise you. Charlie’ bought real estate too.
Charlie: Diversification is something i have no interest in unless it happens automatically like it did with BH. I like this buy and hold investing to live life and deal with a better class of people.
Warren: If you have 98.5% of your money in BH, and you’re thinking about the rest 1.5% then you have a problem. We have 400 million shares of WFC in BH and I like JPM too, but WFC is easier to understand, we bought WFC in the first quarter, we bought it last year and a lot of years before. If I wasn’t managing BH, and I was sitting on my own money, I would put a lot of money in WFC and some in JPM too.
Money in life insurance companies vs. in property casualty insurance companies?
Warren: Money in our life insurance companies has less use to use. I’d rather have 100 million in property casual than life. Money in life insurance cannot be used as effective than money in property casualty insurance. It’s a disadvantage. The number 1 place that we’d like that money is in the holding company, 10 billion of that in there. Most of our operating companies keep more cash than they need. As long as I have 20 billion in some place, i feel comfortable. It’s probably more than we need but it makes us feel that we can do other things comfortably, as long as the downside is protected. Fair amount of logic to where things are placed, if we were to make a big acquisition would have to shift some funds from one place to another, but we will always leave every where properly funded.
Since BH will likely need to offer a stock component for large acquisitions, wouldn’t it have effect of lowering of cash? Dividends?
Warren: We would prefer to have our stock sold at intrinsic value, use cash for the balance. BH without dividend will probably be sold at or above intrinsic value above as much as it as below. I don think a dividend would be a plus to sell at intrinsic value most of the item. We’re willing to pay 1.10 for a dollar on book, we think that it’s worth at least that much. Unless we find we can’t do things in the future that make sense. Our goal is to have our stock sell as close to intrinsic value as possible. Cash is our favorite medium of purchase, we hate giving out shares. We do not like trading out a part of company because of any acquisition.
Charlie: What you suggested is a very conventional approach, shareholders should do it the way we’re going it.
Warren: I should point out, I’m in the position of giving away all of my stock between now and 10 years after my death. For philanthropic purposes I’m disposing of the stock. Our interest is in having it sell at the fair value. Over time it will average at the fair value. It has happened in the past, but it doesn’t happen every year.
You have described the newspaper business negatively. With all new options today in social media, demise of newspaper, why buy Omaha new herald. Was there some self-indulgence in this?
Warren: Everything she said is true, it’s even worse than that. The newspaper have 3 problems, two of which are very difficult to overcome, the 3rd if they don’t overcome it is worse problem. News is what you want to know but you don’t know. The newspapers 50 years ago contained dozens of areas of interest to people. They are the primary source for news. Now, all of those things of interest have found other means where that information is available on more timely, cost free basis. Newspapers have to be primary about something of interest to a significant percentage of people that live in their distribution area.
The World Herald tells me every day a lot of things that I want to know that I can’t find some places else. They don’t tell me as many things as 30 years ago, but still some. The most of those items are local, but I want to know what I don’t know. I’m going to look at those through other mediums. They tell me local sports, about my city, about my neighbors, a lot of things i want to know. As long as they stay primary in that area, they have an interest to me. They are expensive to distribute.
And another problem, there are 1400 daily newspapers. In a great many cases they are going up on the web and giving free the same thing they’re charging for in delivery. Will any business plan that’s sustained itself for a long time can charge significantly in one version and offers the same version free to people that have a business model that will work over time? In the last year even many newspaper have succeeded in those experiments in getting paid for what they were giving away for free. I think there is a future for newspapers that exist in an area where there a senses of community, where people care about what’s going on, about their schools in their geographic area. it’s not as bulletproof as it used to be, but I think if you live where most people have a sense of community, cover the local area with news people are concerned of, doing that better than other people. So we have bought, we own a paper in buffalo, and we make a internet presence there, the economics based on the prices we’ve paid and made, I think the economics will work out okay, but it’s nothing like the old days but it still fulfills important purpose. It will tell you a whole lot about what’s going on locally if you’re interested.
Charlie: We had a similar situation at World Book. The encyclopedia businesses was ruined, given away for free by Bill Gates, not much profit in newspapers as it used to. it’s not going to be our best businesses.
Warren: We will be going where there a strong sense of community. If you live in grand island at Nebraska, and your children live there and your church is there, you will be interested in the state of Nebraska on TV or the internet, and you’ll be willing to pay something for it, and advertisers will find a good way to talk to you, but it won’t be like the old days.
Technology has affected many of the businesses. What businesses will be affected in the future by companies such as Amazon (AMZN, Financial)?
Warren: AMZN is a powerhouse. I don’t think it will affect furniture, but it will affect other things. The first four days of this week, our business at the furnishing market are up about 11% since last year. on Tuesday we got over 6 million in business, huge volumes. And we’re going to Dallas, a 433 acre plot down there. Going back to Amazon (AMZN), Geico is affected by the internet. Geico was selling through mail, originally. It was very successful. Then it moved to TV, then internet came along. I thought only young people would look for quotes on the internet, I would be calling on a rotary dial phone. The business just changed dramatically to the internet. Things do change a lot and the consumer finds something that they’re like to buy. For Amazon, it is very hard to find unhappy customers. A business that has millions and millions of happy customers can introduce them to new items, it will be a powerhouse and could affect a lot of businesses.
Charlie: Anything that can easily be bought using a home computer will be affected. I won’t be buying the stuff. I almost never buy anything. I think it will hugely affect a lot of people, and is really terrible for a lot of retailers.
If other companies want to copy Berkshire’s Model, care to comment?
Charlie: We have a very peculiar model, it’s very hard to people to copy this.
Warren: It takes a great amount of consistency. It is possible at Berkshire because of we are controlling shareholders. We’ve had a culture where we can write out 13-14 principles 30 years ago, and still stick with them. That’s very hard to do, it takes a very unusual structure in order to do that. It took a long time. We bought the Dutch company yesterday, big private acquisitions will come to BH because they want to, and that’s a significant competitive advantage.
BH has several investments in other publicly traded companies. BH must cast votes on matters, could you tell us how you vote our shares in these companies?
Warren: We’ve almost never voted against management, but there have been a couple of times we’ve thought, stock option expensing, there may have been a bad option grant. Our general feeling is when we’re a large shareholder, we generally like the business, we like the management, they’re not going to subscribe to our views. It is not that they are bad people, they just judge differently, think differently. That doesn’t rule out owning a big piece of the business. We are not trying to change people. We know we don’t want anyone to change us. We accept people the way they come, We don’t expect everyone to be clones of us, if we were to see a particularly dumb merger, stock option plan, etc, but we might vote against it. It would pass anyways but we wouldn’t conduct a campaign against it. We have seen some of our companies engage in what we thought were really dumb deals, i think we voted against maybe one or two of them
Wal-Mart is a large position of Berkshire. How does Mexican scandal affect it?
Warren: I do not think the earning power of WMT 5 years of now will be affected that much by the situation.
Charlie: These are interesting issues. I’m unaware of any place where BH is slipping; it’s not inconceivable we could have some slipping somewhere. In a company as big as WMT there’s going to be a small glitch.
Warren: We have 270,000 people today. At least 20 people are doing something wrong. We can have a bull in the face about people do and not do, a lot of people will just do crazy things. It is a real worry if you’re running a big company. You act fast if you hear about something and we’ve got communications, but that does not stop the fact that right now someone is doing something wrong at BH, and we try to convey to the managers that when they find out about something, act on it, we can handle bad news as long as we get it promptly. I am very sympathetic of managers of large companies; you’ll have some very peculiar people.
Thank you for being open about your heath situation. As I have traveled a long way, I’m hoping for a good answer from you and Charlie as well. My question is, how do you value declining businesses? Encyclopedia and retailing businesses, how do value declining businesses?
Charlie: They’re not worth as much as growing businesses.
Warren: We are in several declining businesses, such as newspaper business. We will pay a price in a declining business, but that is not where we’re going to make money at BH. The real money is going to be made through growing businesses, and that’s where the focus should be. I would never spend a lot of time trying to value a declining business and thinking I am getting one free. The same amount of energy and intelligence brought to better types of businesses is just going to come out better. We started with declining businesses, textiles in New England. We have one business that had $120 million in sales in 1970s, but only $20,000 in sales last year. We thought of brining the sales chart down here and turning it upside down. In 1966, we put $6 million in a company, we called it diversified retailing even though there was one company, in our defense there were 4 department stores, but that $6 million has turned into about $30 billion starting with that failed business.
Media: Many of us are interested in what you’re buying, but you won’t tell us. What in the investment world strikes you as folly, crazy, or dumb?
Warren: I think we should start with companies that I don’t understand. I don’t have a reasonable idea about how the industry will develop within 5 to 10 years, and that eliminates a whole bunch of things. If the price is crazy even If I do understand it then that’s out as well. So we’re down to a small group of companies. The idea that someone is bringing something to the market, and that is going to be the single cheapest thing to buy, it’s nonsense. You know it can’t be the most attractive thing, but people get excited about what’s coming and all. I will guarantee you that you will have thousands of opportunities and most of them are not special. It just doesn’t make any sense to spend 5 seconds thinking about them, but we don’t think about them. There’s also industries that we think could potentially do very well but we have no idea who the clear winners could be in the next few years, so we don’t think about those as well. You can’t have a big disaster in this business. We don’t want to lose a significant percentage of BH net worth and so far we haven’t.
How long do you think it will take China to have a company like CocaCola?
Warren: China’s got some huge companies and they may have clips in market value, some of the ones is as big as Coca Cola.
Given that you’re now in IBM, are there any companies? Is Google inevitable? What are the one or two things about Google and Apple that you feel?
Warren: Well both are extraordinary companies, they look very tough to dislodge where they have their strengths, I would not be at all surprised to see them worth a lot more money 10 years from now, but I would not want to own either one of them. But I would not short them either.
Charlie: I think we can fairly say that other people will always understand those two companies better than we do.
Warren: The chances of being way wrong in IBM are probably less than being way wrong for Google or Apple, but that doesn’t mean that the latter two aren’t going to do as well as IBM. We wouldn’t have predicted what would happen with Apple 10 years ago, and it’s very hard for me to predict them 10 years from now.
Recently we’ve seen some coal plant closings and other things. Will thos affect BNSF?
Warren: There is no question that railroads, utilities, insurance companies, are all very much affected by political process. Economics are on our side in the railroad industry, we can move a ton of products 500 miles on a gallon of diesel. Railroads move 42% of inner city stuff. In terms of congestion and emissions, railroads are all advantage. We got a wonderful product, overall I like our position. They do have to be involved in politics because people who would like to change some of the rules are going to be in politics too, and things will be decided in state capitals and more importantly in Washington. I think it would be very dumb for the country to do anything that discourages the railroad industry from spending the kind of capital that needs to be spent in the future. The country has a strong interest in the railroad industry, having ever incentive to invest, and the railroad industry paves its own way. $3.9 billion will be spent this year to expand and improve, and the country will be better off.
Charlie: It’s the nature of things there are good breaks and bad breaks. BNSF helped double the container carriage tunnels higher and ridges wider, found oil, bad breaks too, but averaged out it’s a terrific business and terrific management.
Warren: After WWII the railroad industry have 1.7 million employees in the US. Now there are only 200,000 employees and have become a lot more efficient. It’s a fundamentally very good way to move heavy stuff a long distance. It’s hard to conceive of anything. Trains are pretty darn good.
In AIG, some people were decreasing exposure to risk, while others increased. How do you share information across units among Berkshire companies?
Warren: There are certainly some people in Berkshire who have contact with other people in Berkshire, but we don’t make any attempt. We want our businesses to feel like they are their own business. We don’t tell the people how to run their business. The moment we start telling them how to change the way they operate that just erodes that advantage which we feel very substantial about how they feel that the company is actual theirs.
Trees are one of America’s greatest resources. We have a well run forester, they can use their product to subsidiaries of Berkshire. Will you consider buying a forest company?
Warren: When we buy a business, we never think much about this company’s product can be used in other companies. To date, we’ve looked at several forestry companies, the business that’s reasonably easy to understand, but the math has escaped us in terms of being compelling.
Charlie: We’d be at a disadvantage for any kind of activity to compete. They have eliminated one tax in their structure that we have to bear, limited federal income tax, we have a structural disadvantage that is really quite significant.
You mentioned 20 billion is the cash you need. Has it changed over time, and why?
Warren: I would get very worried if someone told us exactly how much cash we needed, Charlie and I saw a lot of problems developed in an organization, how to calculate their risk, they were a lot smarter than we were. We both have the same state of mind where we think about worst cases all the time. Then we add on a big margin of safety, I enjoy tossing those papers in the other room but I don’t want to do it for a living, so I undoubtedly built in layers of safety. It’s our job to think what can really go wrong with this place. If you’re calibrating it in some mathematical way, you got to be worried.
Charlie: They twist the problem to fit the solution.
Warren: Life in financial markets has got no relations to Sigmas.
You wrote that you expected the housing market to be improved by now. But now. Fannie Mae and Freddie Mac are getting worse?
How are Tom Combs and Ted Weschler ’s performances? How much are they paid?
We are more concerned about how they achieved their record than the record itself. We also check their integrity. These two are perfect.
We pay $1 million a year for each of them. We also give me them 10% of the part that they outperform the S&P500. The same structure we paid Lou Simpson. If they hire people, that come out their performance. They operate their own brokers. We told them if they get into a new name, I told them to tell me the name. I just want to make sure they did not buy from the insider information I have.
They will do a great job. Todd did substantially better than S&P500 last year. Ted just joined this year.
Charlie: 90% of the investment business started off our formula. I think these people will be do very well. I hope that one day they will join the 400 people I mentioned.
(This note should include most of the Q&A sessions in this year’s Berkshire meeting. We did miss some at the end as the computer run out of battery. Enjoy)
This was the question that GuruFocus sent to Carol Lomis. She acknowledged that she received the message. But the question was not asked. Here is the question:
Currently US corporations are enjoying historical high profit margins. In your opinion, why can US corporations have high margins now? Is the high profit margin sustainable? If not, what factors will bring the margins down?
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