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The Complete Notes of Berkshire Hathaway Annual Meeting - Part II

Shadow Stock

Peter Boodell

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This is Part II of the notes taken by Peter Boodell. Part I is here.

Q34 - Andrew Serwer - David Kass asks about the Wal-Mart Mexico scandal.

WB: No, they may have made mistake in how it was handled, and may face a significant fine. I don’t think it changes the fundamental dynamic. It operates on low gross margins, and this results in low prices. That works in retailing. The diversion of management time is costly, but I don’t think earning power of Wal-Mart five years from now will be materially affected.

CM: These are interesting issues. I am not aware of any place where Berkshire is slipping on this. We could have some slippage somewhere. When you are as big as Wal-Mart you will have the occasional glitch. I don’t think there is anything fundamentally dishonorable about Wal-Mart.

WB: There are probably twenty people doing something wrong here at Berkshire. We can talk until we are blue in the face. We are layers removed, and people do crazy things. It is a real worry, if running large business. You worry if it is material and nothing gets done. You need to act fast if you hear about it. If we get twice as large we’ll have more people. We tell managers, we can handle bad news as long as we get it promptly. I am sympathetic to people running hundreds of thousands of people. On the bet with Protégé partners, there are six years to go, and we are neck and neck, both down around 6%. We each bought $1mil zero coupon bond to deliver at maturity. The zero coupon bond has performed magnificently. [laughter]. We have petitioned stakeholder to let us sell the zero coupon, and put money in Berkshire stock. Best thing you could have done is ignored both of us. Come back in hour, then go till 330.

Q35: Gary Ransom: General Re P&C premium down by half over 10 yrs?

WB: GenRe was probably off the track when I bought it. Joe Brandon focused 100% on underwriting profit rather than premium volume. Tad Montrose has followed through on it. But it did mean getting rid of a lot of business. Their life business is very good. They have some long term care in there we wish we didn’t have. It is right sized, smart people, should grow at reasonable pace. We had to get rid of some of the business. It is a terrific asset to us now. I would bet P&C business grows too. We feel enormously better about it now than some years back.

CM: It was a major fix-up but we finally got it done.

WB: We don’t go looking for those.

Q36 – Station 1: Do you worry managers may leave now that working for peers? Will a hedge fund or activist get control?

WB: Manager we have in mind has culture embedded, it is not a question of more lucrative job. They love the environment – many of our managers could retire. They only go to work if it is more fun to work. They have the money to leave it. I’m 81. I’m doing the most enjoyable work in the world. I have a lot of fun working with the people I work. My successor knows that it is important to paint your own painting. Many managers would leave under wrong leadership. Regarding a takeover, our size makes it unlikely. We also have A&B shares. Even ten years from now it would likely that my estate owns 20% of votes. Buffett Family will have 10x the voting power of anyone else for a long time, so it is issue of both size and concentration. My successor? He’ll be better than I am. The Board of Directors reflect that culture. Berkshire stands for something different than most companies.

CM: The first $200bil was hard. The second $200bil will be relatively easy.

WB: The businesses are in place to take it to $400bil.

CM: More businesses will come to us as only acceptable buyer.

Q37 - Carol Loomis. What is it about capital consuming businesses vs. other uses of cash, like new investments or stock repurchases?

WB: Cash intensive businesses are unattractive unless the cash consumed earns an attractive return. Utilities are 12%. Not as good as 20% growth with no capital. Same with railroad, we will spend way more than depreciation. We’ll earn reasonable returns. We would be in terrible situation if we were spending a lot just to stay alive. If you go back to world of 20% ROE, hard…., and we can’t earn 20%, and so we have to like the returns we have.

CM: I think it is going to work pretty well. There are some Mungers here, I hope you don’t listen to the siren songs and you stay with the family heirloom.

WB: My family is just hoping for an heirloom. [laughter]

Q38 – Cliff Galant: Will float shrink?

WB: Yes, retroactive contracts are where float runs off. Geico will grow. Smaller companies likely will net grow. With Ajit is where we have the retroactive stuff, and they are always a melting ice cube. When we had $40bil we didn’t think it would grow. Now it is $70bil. We have been looking for intelligent ways to grow float since 1967, and still have float cost us nothing, but numbers are huge now.

You shouldn’t expect growth. If we get lucky, we could add more. It is possible that it dwindles down a little bit. It is possible that it won’t grow as much. Ajit told me that it became a challenge to him when I wrote it in the annual report, he wants me to look like an idiot. I may have to stick a few more things into the Annual Report. Five year from now I’d probably bet a slight bit higher. Every day we are working on ways to increase it.

CM: The casualty insurance by its nature is not a good business, you have to be in top 10 to do well. We probably have the best in world. It won’t grow wildly. If you have something very good but doesn’t grow wildly that is not end of world.

CM: Tony and Ajit have grown billions of dollars for shareholders.

Q39 – Station 2: Norman from Bonn Germany. Warren you are in my thoughts and prayers. Since I can no longer ask questions in Pasadena, how do you value your declining businesses? Encyclopedia, retailing – how do you value them?

CM: They aren’t worth nearly as much as growing businesses. But can still be quite valuable if cash coming out.

WB: Most of time we avoid declining businesses. Newspapers are declining. We understand it, we’ll pay a price to be there. Real money is in growing businesses. I would never spend a lot of time on valuing declining business and think I’m getting something free. Same energy and intelligence brought to growing business will work out better. We are playing out some declining businesses by their nature. We started with declining businesses, trading stamps, Baltimore department stores, and textile business.

WB: We have a business which had revenues of 120m in 1968, and $20k last year. Charlie is still in charge of that business.

CM: All businesses can fail. We aren’t looking for an opportunity to do it again.

WB: We put $6m in 1967 into Diversified Retailing. We bought a department store at Howard and Lexington in Baltimore. That $6mil has turned into $30bil. Blue chip stamps is another example. And Berkshire, the textile company. We were sort of masochistic in our early days.

CM: Ignorant too. [laughter]

WB: That was word that came to mind, but I didn’t want to use it!

Q40 - Becky Quick: Iowa. Invert – what current trend do you see which is folly, a fad, unsustainable, crazy or dumb?

CM: A lot.

WB: We try to stay away from the things that we don’t understand. It means I have to have a reasonable fix on competitive position and earnings power. Some notion of how it will stand in a few years. It is a small universe if working with lots of money. I can’t recall a time in 30 years where we bought a new issue. The idea that a seller who has choice of when to come to market, and carries 7% commission -- it can’t be the most attractive thing. But I will guarantee you, there are thousands of opportunities, and some other security coming to market – and it doesn’t make any sense. We don’t think about them. There are industries we know which have a wonderful future but we have no idea who will win. We have a number of filters, and often we are thought of as rude. It doesn’t make it over the hurdle. We say quickly that ‘we have no interest.’ We do that. We don’t have to do very many things that work. You don’t have to spell 500 words. You just have to do one or two things. But you can’t have a big disaster. We don’t want to lose a significant amount.

CM: There are rules of thumb. If there is a large commission in it – don’t read it. Paying a commission to give you an advantage? Low chances. In reverse, as a place to look – looking at what other smart people are buying, not a crazy sorting method.

WB: I’d always grab the Graham Newman report.

Q41: Jay Gelb: Many ask me what are the implications if Berkshire is subject to Investment Company Act of 1940?

CM: Too remote, it is not going to happen.

WB: I read it in 1940 probably 20 times. We used to worry about personal home & company and Investment Company status. We are a million miles away from it.

CM: We need our heft to make our businesses work.

WB: We own eight companies that qualify for Fortune 500. People thought of us as investment company for a long time, longer than appropriate.

Q42 – Station 3: Young, from Canada. How long will it take China to appear with a great company, like Coca-cola?

CM: China has some great companies already. I can’t pronounce them. Not sure about branded company.

WB: Not yet exporting Chinese fast food companies to the US. We have 500 Dairy Queens in China. We export certain products well. China has some huge companies. They may eclipse in market value some like Coca-cola some day.

Q43 – Andrew Serwer: Larry Pikowski asks: Now you own IBM, are there other entrenched leaders in technology that are ‘inevitables.’ Is Google reminiscent of advertising companies in 1970s? Google risks? Apple?

WB: They are extraordinary companies obviously. They are huge, make lots of money, have fantastic returns on capital -- they look tough to dislodge. I would not be surprised to see them worth more in 10 years, but I can’t buy can’t get to level of conviction to buy, but I sure as hell wouldn’t short them.

CM: We have the reverse of an edge. We can be sure others know more.

WB: Isn’t it same in IBM?

CM: IBM is easier to understand.

WB: Less chance to be way wrong in IBM, less so in Google and Apple. We can’t predict next ten years. I don’t know how to evaluate which big companies or garages and who will change the world the way they have.

CM: What do we know about computer science. [silence]

WB: There is no reply. [laughter]

Q44 – Gary Ransom: Coal plant closings and BNSF revenues? Impact of politics or other things?

WB: BNSF runs their own business, I talk to Matt about once every three months. Railroads, utilities, insurance companies are all affected by political process. Economics usually win out. We can move one ton of product 500 miles on gallon of diesel, 3x as efficient as trucking. As a percentage it won’t change, heavy traffic long distance over steel rail is too compelling. We have a wonderful product. There will always be competition. Overall I like our position. The railroads – all will be involved in political process. Things will get decided in politics, so they will use lobbyists. It will be dumb of country to discourage industry from spending the type of money we want to spend in the future. Money is spent on highways, the country has a strong interest in the railroad industry having strong incentive to invest. We’ll spend $3.9bil this year and a lot will go to improve present system, and some towards expansion. Federal government will not write a check.

CM: There are waves of good breaks and bad breaks. You can make the tunnels higher, you find oil in North Dakota. Bad breaks too – they take away the freight. I don’t think our main problems are political. We’re headed by prominent Democratic. [laughter]

WB: Railroads had 1.7m employees in US in 1940. Now there are 200k, they are so much more efficient today. Fundamentally rail is a very good way to move heavy stuff a long way. Only a few rivers can do real volume in barging. Trains are pretty darn good.

Q45 - Carol Loomis: Relative performance vs. SPX book value. Unfair apples to oranges. Investor can return SPX, but not book value. We earn returns on price. Fairer comparison is SPX book value. Better information.

WB: Market value of SPX vs. market value with dividend. It would show up better. We started at discount and ended at premium. Our gain would be 35% higher in aggregate. That is a lot of dollars. Can also show book of spx vs Berkshire – that would be a wash. Spx ratio about same. I don’t think the calculation is misleading.

CM: Over the long term the stock has tracked book value.

Q46 – Cliff Galant: Collapse of AIG. Parts of company were lowering risk, while others were raising it?

WB: We are uncoordinated. There are some at Berkshire that have contact with others. There isn’t an organized way of doing it. We don’t make any attempt to make quotes the same. We want autonomy, and want managers to have autonomy – very important. We don’t make people do certain things. Gains of incremental units offset by manager not having control. We want manager to feel same way as day before when we had the money and they had the stock certificates.

CM: We’re trying to fail at what you want us to succeed at.

WB: I’ll have to think about that a little. [laughter]

Q47 – Station 5: Richard Cooper –Michigan. Professional forester. Berkshire has different parts to support a well-run forest products business – transportation system, construction firms, homebuilders, insurance companies. Are you thinking about forest products?

WB: We would not consider the other activities in considering our joint businesses. We don’t think about synergies. We have looked at several. They didn’t meet our tests against returns against purchase price. Math has always escaped us.

CM: A lot of forest product companies convert to flow through entities. We’d be at disadvantage in bidding for forests. REITS – they have eliminated a tax in their structure which we would bear. We don’t have structures like that.

Q48 – Becky Quick: Scott Bonderrant – Chicago. Can you please explain why $20bil?

WB: Not a magic number, there is no magic number. I’d worry about someone telling me every morning we were secure to 3rd sigma on our cash balances. We argued about risk. They were smarter than we were. We both have the same bent of mind. We think about worst cases all the time and add on margin of safety. We don’t want to go back to go. I enjoy tossing papers but don’t want to do it again. We build in safety. We have 600k shareholders, we have members of my family with 80% of net worth. Not 1/100th of a chance. We are never going to risk what we have and need in order to stretch for what we don’t need. Charlie thinks the same way. It is our job to figure out what can really go wrong with this place. We’ve seen 9/11. We will want to know what we can do with the excess money we have around. We don’t calibrate mathematically. There are some really great organizations with advanced math who don’t really get at the problem. It is at top of our mind. In 99yrs out of 100 your return will be lower, but 1 in a 100 we’ll survive when others don’t.

CM: To a man with a hammer every problem looks like a nail. They will twist the problem until it looks like a nail.

WB: In 1962 I put seven items on the office wall. I made photocopies of pages from financial history. In the Northern Pacific Corner, they both bought more than 50% of the stock, each, and both really wanted it. Interesting things happened.

CM: To the shorts.

WB: 170 to 1000 per share trading for cash because the shorts needed it. A brewer in Troy NY committed suicide by diving in hot beer because of margin call. How impossible for $170 stock to go to $1000? Those seven days I put up on wall, life in financial markets has no relation to Sigma’s. If everyone who operated in financial markets operated without standard [error], they’d be better off CM: Well sure, it has created a lot of false confidence. Fat tails. In Solomon meetings we’d roll our eyes when risk control people were talking.

Q49 – Jay Gelb: Swiss Re – ends in 2012. Will you replace?

WB: What we do has no relationship to expiry of that contract, which is billions of dollars. It does not cause us to do one thing differently. We don’t try to increase float. It is a non-event in regard to future strategy. Every decision is independent. If money comes in we don’t operate differently.

CM: I don’t think there is another insurance company in the world more cheerful about losing volume. Only look at growth in value over time.

Q50 – Station 6: Best wishes on recovery. Fannie Mae. Housing hasn’t improved, Fannie Mae/Freddie.$1.6tril, each a Lehman Brothers. And $4tril of balance sheets, conservatorships. Financed by blank check. Most bankrupt companies shed assets, these have not. Securities law didn’t need rewrite. Fannie Mae does not work. What is solution? How many years can they stay in conservatorship? What roll will WFC? MBS?

WB: I got through college answering fewer questions than that. Overall tone indicates that you think Fannie and Freddie a mess, and this is probably justified. What is best structure to have in this country to generally finance mortgages? No question that a government program brings down cost over time. We’ve had several – but it went wild when we introduced profit motive into two institutions that were really a housing mission and profit mission hybrid, and the profit mission one. Congress hasn’t sorted it out yet. There are roughly 50mil residential mortgages, they total $10tril or so. It is important to have market to minimize costs for borrowers with adequate down-payments, etc. How long in conservatorship? They will be there long time. Until resolution which both parties can go along with. CM: Canada has almost no trouble, and they have a more realistic lending system. We departed from sound lending, and government participated in the folly. It was wrong not to step on the boom so full of fraud and folly. Alan Greenspan overdosed on Ayn Rand when young, and believed if an axe murder occurs in free market it is probably for the best. People allowed craziness to go unchecked. Greenspan was wrong. It is the duty of government to step on booms. You put your finger on a disgraceful episode. But once into it, had to nationalize Fannie and Freddie and that is what happened. By the way we didn’t participate.

WB: Charlie was asked about lending standards by regulators during savings & loan crisis and he said that ‘we don’t lend money to people like you.’ And for some reason we had regulatory problems for a few years after that.

CM: I told them that we are underwriting them so they are using government credit. He was an alcoholic.

WB: We have more problems when charlie wins an argument.

Q51 – Andrew Serwer: Todd Combs well compensated – too short a term horizon for compensation?

WB: We’ve always been concerned with how record was achieved than record. Both have quality of character, and real commitment to Berkshire. We’ve seen hundreds of good records, but these two are perfect. We pay them each a salary of $1m per year, and 10% of amount by which they beat the SPX, on three year rolling basis. It is 80% on own efforts, 20% on other person’s efforts – they collaborate. I Same formula as Lou Simpson. If they employ others, that comes out of performance record. It has worked far better than we hoped.

Each had 1.75bil at year end. And we added another $1bil to each at end of March, so $2.75bil each. They use their own brokers. I want to know the name in case I have inside information and can’t trade it. There is something 13-d. They operate in different stocks, in a much bigger universe. They are working with $2.75b vs. 175bil. They have pitched in for other duties. They will do a great job for Berkshire. Ted only joined us this year. Todd racked up a big year in first year. He could lose that back. CM: At least 90% of investment management business in US would starve to death on our formula. And these people will do pretty well. They are the kind of manager we like.

CM: Each of them could earn more money in different format, but with a less desirable lifestyle. WB: We have a free coke machine. [laughter]

Q52 - Gary Ransom: Geico combined ratio over 100 in 4Q, tell us more?

WB: This was related to Florida and pip coverage. They were new reserves, looked appropriate. In Q12012, we wrote at 91. Cost us significant money. Geico – every metric that I have seen this year in terms of retention, combined ratio on seasoned, all consistent to our record. It is worth a lot of money now and will be worth a whole lot more in future.

Q53 – Station 7: Connecticut. What financial statement do you use to gauge whether company environmentally responsible and a good investment?

WB: In terms of good investment, we look at everything we can to figure industry and world and company. Coca-cola – we are confident about next 5-10 yrs. For retail, we don’t have same conviction for instance. Environmentally, for containers moving by rail – this is more friendly. There is no magazine we go to for environmental concerns.

CM: Warren, even though an unseasoned young man, can see that if you use less fuel per ton of freight, you put fewer particles into the air.

Q54 - Station 8: John Norwood, Iowa. A lot of time talking about allocating capital, and risk. One on compensation and motivation. Financial vs. nonfinancial incentives?

WB: Why do we do what we do? We don’t need the money. Why is that the case? We get to paint own painting every day, it will never be finished. If someone is telling us to use more red than blue, we might tell them what to do with the paint brush. We like applause. We let them keep the paintbrush, we applause, and we pay fairly. Over 40 years, the times when compensation were important part of conversation were practically nil.

Ted and Todd will make below hedge fund manager money and pay more tax. It is a different way to live your life. We want to have our managers enjoy their lives. We get rid of what they don’t like. I can’t put passion into someone. But I can create a structure that takes the passion away. We focus on not messing up something that is already good. We have a bunch of managers that no one else can hire. How many others can say that? I think we will retain that advantage. It is self-reinforcing.

CM: We don’t have standard formulas. X on x, and Y on something else. Big human resources, every inventive arrangement is specific. It would be crazy.

WB: Some busisnesses don’t use capital. Base on operating margin? We could hire consultants…

CM: We never have.

WB: We never will. WB: I like to describe these as Ratchet Ratchet bingo systems for compensation consultants. We have numbers in 8 figures here at Berkshire. A page or so of 1mil and over. It relates to logical measures of performance. I am compensation committee for 60 or 70 people, and I’m not overworked. CM: In past years, I have said that for compensation consultants, prostitution would be a step up. WB: Charlie also is in charge of diplomacy.

Q55 – Station 9: How to grow America at 4% again?

WB: Too complicated, Charlie?

CM: A lot [complicated].

WB: Population grows 1%, and GDP 2.5% per year - that would be remarkable over a very large time. It is [quadrupling] of real GDP every century. Remember rate of growth that has a very high standard of living. And is adding 1% per capita. 6:1 real GDP increase since I was born, this is no where near 4%. We are unbelievably rich. Many not feeling that way. We have tremendous country to work with. Huge abundance, if my parents, if you told them when I was 81 that I would be living in country with 6x the output of their day, they would have thought utopia. Our country is not a mess. Politics a mess, but output is terrific. Charlie, if you had to guess at growth rate per capita over next 20 yrs?

CM: If God would make a guarantee, I would settle for very low figure. This is for a mature economy with a lot of safety net and with competition from nations rising. 1% per capita, 25% better in 20yrs, in one generation. That is setting expectations so high. From this base it is a sensational result. WB: This system still works. It was an incredible crash in 2008. There is a lot of resilience. CM: Resilience is better for business, and business profits right at the height. WB: Strains on political system.

Q56 – Station 10: Arthur Lewis, CO. Donation to super-pac’s?

WB: I won’t. It is tempting. We don’t believe, but are you going to tie your hands behind your back over principle? I think whole idea of Super-pacs is wrong. I think huge money influencing government is bad. Sheldon Adelson – put in $12m. He thinks system wrong but wants to play. You need to take a stand somewhere. By design, a Super-pac will spend money misleading about the opponent’s record. I don’t want to see democracy going in that direction.

CM: I am negative about politics, gerrymandering, and requiring unified thought so that crazies get the power. That said, I think we are lucky to have such good candidates. There are certain subjects for Super-pac’s that I would support. If I could reduce legalized gambling, I would spend it. It does us no good. And that we allow our securities markets to be like gambling.

Q57 – Station 11: Glenn Tongue – T2 Partners. Investment portfolio, and book. Controlled businesses are worth more than book. So intrinsic should be increasing vs. book. $20bil.Is Mr. Market in manic mood?

WB: Charlie? CM: No, but it is nature of things Mr. Market will do what it wants when it wants, not when you want it. You aren’t welcome in this room if the short term orientation turns you on.

WB: Berkshire is somewhat cheaper than it was a year ago.

CM: Yes, if that is your test, your margin of safety is better.

Q58 – Station 1: Dividends?

WB: We can create more than a dollar of present value by investing. Sometimes we can repurchase shares. Every dollar we retain turns into more than $1 of value. If want to create own income stream, more money working per share, better than paying out 2% dividend. I paid out 10c per share in 1960s, that was a bad idea. If we paid out dividends our shareholders would be worth less net than leaving it in.

CM: The dividends will come in due course, as we will find it difficult to multiply the rabbits.

WB: Events of last few years have been encouraging, regarding creating a dollar of present value. Mid- American may have some unusual opportunities in next 10 yrs, perhaps $100bil. That doesn’t make us too excited about dividends.

CM: We’ll think it about it when we’re older.

Q58 – Station 2: $1mil to invest, achieve 50%. What would you do differently, knowing what you know now?

CM: There are a lot of things I can’t do now that I used to do better.

WB: Have we learned things? We could do better now with $1m.

CM: Endless time and small money, you could find ways to do well.

WB: We have learned more or been exposed to more.

CM: What is interesting about Berkshire. Berkshire’s record would have been terrible if Warren didn’t keep learning. Had to learn to do things at beginning of every decade. He’s getting old, I worry about him a lot.

Q59 – Station 3: Mistake minimization. Most effective way to minimize mistakes?

WB: We make mistakes, we think about avoiding mistakes which will hurt our ability to play tomorrow. We like to do things big, so we have to think about consequences. I don’t worry about my mistakes. I’ve learned something about people over the years. I make mistakes with people. But I think I’ll make more good judgments about people, I’ll recognize the extraordinary ones better than 40-50 years ago. CM: I would argue, that what you’ve done, you’ve learned a lot from other people’s mistakes. That is a much more pleasant way to learn. There is great variety in other people’s mistakes.

WB: Reading financial history. I’ve always been absorbed at reading about disasters. This gave us advantage over others with a lot of math. They didn’t understand other humans. We have been a student of other’s folly, and it has served us well.

Q60 – Station 4: Massachusetts – how to build barriers of entry?

WB: Pretty tough.

CM: We sort of buy barriers, we don’t build them.

WB: Think about that, because it is true. Some industries don’t have barriers. You had better be running very fast. If you gave me $30bil, and told me to try to knock off Coca-cola, I wouldn’t have the faintest idea how to do it. The great brands we bought we didn’t create them. Richard Branson – Virgin Cola. Brand is a promise, not sure what promise Virgin is. [laughter] Haven’t heard anything about it since. Hundreds have tried, those are real barriers. It is hard to do. As Pfizer finds out with Lipitor, was a gold mine, but still is a good mine. Nobody is going to build another railroad. We’ll have competitors, but when very low cost vs. replacement cost, it is a good business.

CM: One competitor is frequently enough to ruin a business.

WB: We had a Philips station across the street, and whatever he charged for gas was my price.

Q61 – Station 5: BYD – when will they have new cars in US?

WB: Charlie is our expert.

CM: Huge market, they are in China. Fleets in CA may be first market for electric cars. Subsidies. My relatives in Seattle – can only use express lane if they have hybrid. BYD: One of 8 children of a peasant, famous professor, before age 50 China’s noble prize, land holding the size of Macau, 100mil sqf of buildings, 180k employees.

WB: What percentage of cars electric in 10 years?

CM: Not many. We should subsidize electric cars in various ways in order to ween ourselves from oil. But I’m not expecting a sudden revolution. I was driven around the block in a BYD car this week. I was flabbergasted how improved that car was. It is amazing how fast they have improved, the world is getting very much more competitive.

Q62 – Station 6: Jay: Philosophy of life? Insurance business? Float and underwriting. PV of investments. Economic goodwill in Geico. Different ways to value insurance?

WB: Economic value comes from ability to utilize float if obtained at bargain rate. At Geico can expect underwriting profit and growth for as far as eye can see. Well that is attractive combination because Geico is a low cost producer. Scale and method of operation, it is hard for others to duplicate their cost structure. Ajit’s business is not the same at all. Geico has 10mil policies. That is a statistical business. 100,000 drivers in NY, trends. Statistical business plus low cost. Ajit has to be smart on each deal. Event coverage on 10bil of loss in Japan? He can’t look to history. Economic goodwill is Ajit’s skill to price each transaction and find demand. Geico is more of a machine. More important on how machine is run. In years since he took over, Tony has quintupled our share coupled with underwriting profits - growing a large low cost float. People are paying us to hold $70bil of their money, and that is a lot of fun. That chance of that continuing is high, but growing $70bil is more difficult. But less than zero cost is good chance, and if relative funding rates go back to 4-5% - it will be a huge asset.

CM: We are currently in lower turn environment. Ajit would generate a lot of float and Warren would do 20-30% on it before we gave it back. Our earning power today is being affected by current fed policies. That won’t be the normal rate, so our normal earning power is being depressed by Mr. Bernanke but likely for good reason.

Q63 – Station 7: US Independent in energy market? Trade deficit?

WB: A huge boon if energy production increases and what we import costs us less. We are doing a lot in oil, but I don’t see us self-sufficient. Gas – the picture is different. It would have been better if we hadn’t been an oil exporter for years, and used Saudi’s oil instead. Treat reserves in Texas as strategic reserves? Current account changed for the better. We still have a ways to go. But it looks better.

CM: Well I think that is a very complex interaction. Our single most precious resource are our hydrogen reserves. I am a Puritan, I want to suffer now to make future better. I think energy independence is a stupid idea. We wouldn’t have anything left. We want to conserve this stuff, and thank God everyone else has some to sell. I have exact absolute reverse idea than others, and I think I’m right.

WB: Charlie’s version of saving sex for old age.

CM: At least we’re going to use the oil! [laughter]

Q64 – Station 8: Liberty Mutual - $50m per year in compensation and perks. Concentration of profits goes to management and not to policy holders.

WB: We agree. But if we start out with $48k per person, 20% increase per generation. You would hope doesn’t all bubble to the top. Tax code has encouraged it. We have a tax code that is pro rich. Was 27% now 17%. We’ve gone wrong direction and a long way. Trickle down not being achieved.

CM: Most of great mutual insurance companies don’t have that compensation example. That is egregious but Boston has led in egregious examples.

WB: Corporate world more egregious than mutual world. Rich like it that way. Tax code is where we decide who bears the costs of government. Rich bear less as they move farther from middle class. There may be underlying trends that push democracy towards plutocracy.

CM: When I first went to Boston, the Mayor was running the city from the federal penitentiary, and no one saw anything wrong.

Q65 - Station 9: Brian Chilton. Boston. Risk? One of biggest risks is sovereign debt levels. ECB injections, and how do debts get balanced, and do they concern you?

WB: The nice thing about sovereign debt is they can not pay you and you can’t do anything about it. They have defaulted many times over history. Then you get a big reallocation of wealth. You don’t lose the wealth, but I don’t know how it plays out in Europe. We have seen ECB here recently give the trillion to banks loaded with sovereign debt, like giving money to a guy with a margin account to load up more. Had a bad ending at MF Global, might have bad ending over there. I would prefer a world getting fiscal

house in order. But counter-argument is that recessions can be destructive when they feed on themselves. Stimulus bill a few years ago, was it adequate? When government is operating at 9% of GDP deficit, that is consistent with a huge fiscal stimulus. We will have to ween ourselves off it. 19% rev to GDP and expenses at 21%, but both sides feel they will show weakness by going first. Leaders of one party can’t speak for their party so can’t have negotiations in private. At this price I would avoid medium term government bonds, our own or those of other countries.

CM: He’s asking the really intelligent question of the day, and we are having trouble answering it. It is hard to know if Keynesian stuff will work if you have lost your fiscal virtue. Don’t know precise point, Krugman is a genius but I think he’s more optimistic about operations when low on fiscal virtue. It is important we not go too far. In Great Recession, we avoided calamity because tricks could work. Is it inconceivable that we get a mediocre result because of our fiscal problems?

WB: If I came with budget with 19% revenue and 21% expenditures, would you want to adopt that now?

CM: I think the reason intelligent disagree is because it is so difficult. Everyone wants fiscal virtue but not quite yet. St. Augustine, willing to give up sex but not quite yet.

WB: He’s a hero to many of us. [laughter]

CM: There is one thing I am sure of. It is safer to use money to build things you are sure you need, than throw it off end of train or to crooked lawyers. We all have interest to use the money and protect fiscal virtue. I would spend it on infrastructure we would use, and whole country should spend more like Punic Wars, when Romans paid off 2/3rds of debt before war was over. We need more patriotism, more civilized politics, and more sensible spending of money. But still a hard a question, and I think we go on to an easier one. Warren’s not strained, but I’m at my limit.

Q66 – Station 10: Candy from Denver. Taxes – what do you feel is ideal corporate tax rate to jumpstart economy?

WB: Actual taxes paid last year were 13% of profits. Corporate rate is 35%. Corporates got to write off 100% of most fixed asset purchases. Corporates are not the problem in the economy. Huge money is available. There is money to spend on opportunity. We spent in railroad and energy businesses. It is not lack of capital. Nor is it tax rates that are holding back investments, when corporate rate was at 52% they paid it. It is not holding us back. Corporate taxes were 1.2% of GDP, and 17% were medical. We have 7% spread over rest of world on medical. The tapeworm is medical costs versus rest of world. That is where the money is, and you can fiddle with it, but it wouldn’t move much. More fairness perhaps? Lower overall tax rate but apply it more equally. Getting from here to there is very difficult. But once you put out specific proposals – everyone will fight an intensity that outstrips the intensity that the other side fights with.

CM: I used to say I expected to see a value added tax. It equalizes the import export effect of tax, to tax consumption. We give money, then try to take it back. Human nature resists that. Better to take it off the top. Don’t vary it. In CA go up and down and it is crazy way to have tax system. 52% tax rate we got by when we led world. If rest of world 15% it might have perverse effects. It is really hard to save on medical.

WB: We’ll end with a hard one and we’ll reconvene in 15min to conduct the business of the meeting.

Rating: 4.0/5 (10 votes)

Comments

jonmonsea
Jonmonsea premium member - 1 year ago
Fantastic. Thanks a lot!

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