Warren Buffett Annual Meeting Q&A - First Half
Warren Buffett: Earnings chart – benign in insurance, other businesses did well. We’ve never had higher operating earnings.
Insurance earnings were helped by strong revenue and reduced liabilities in foreign currencies. Hurts in other ways. So many businesses, Coca-Cola, never know if revenue going up or down either hurts or helps.
Had a Swiss Re disagreement for over a year. Settled in the first quarter, and showed a gain of $550 million, but Swiss Re showed a gain of $500 million too. Magnificent what accounting can do.
High point of quarter one was a gain in persistency rate of Geico. Strength of 2012 continued in 2013 and got stronger. Seasonal to policy gains month by month gains increased over 2012 because the closure rate improved this year and a gain in persistency. Pure gold. Closure rate at high levels, meaning people getting a quote can save money and love Geico but buy because they save money. Walk out and get a quote while Charlie Munger is talking.
Finally, railroads this year are doing very well. There was a gain in car loadings of 3.8%, while others gained 0.04% in the first 17 weeks of 2013. The rate was helped by oil found close to the railroad tracks. What better place to find oil? Moving a lot of that. Going to be moving more.
Berkshire Hathaway is now the fifth most valuable company in the world.
We just bought out 20% of a company we didn’t already own for $2 billion. We are happy. They’re happy. The relationship with the family will be continued. The company will be part of Berkshire forever.
Question: You measure corporate performance by growth in book value, but it grew less than S&P for 9 of 11 periods.
Answer: We’re not assured of the future. The last 10 not best because of business in general. If it continues, it will be the first period it falls short of the S&P. We’re not happy with that but no totally discouraged. Likely to better in down markets like 2008, relatively than when things are up. We use book value scale figure as a reasonable proxy in intrinsic value figure. If we gain 1 million at Geico… there’s a significant gap but to be useful tracking device. When bought insurance, marked and book value by $1 billion. So there are distortions. In the end, we have to do better for you than the index fund.
Expect Berkshire to do well over long term. Don’t pay attention to five years of three years. We want to do as well in future in terms of annual gain average gains because in the past we did unbelievably well. At 89 Charlie is not –
Charlie: Old age might come on at any time.
Question: What is your competitive advantage over Sam Vic?
WB: Iscar is better because the company has brains, passion. Go back to 1951 when Seth Warhouser started Iscar. Possibilities facing him, well entrenched competition. He was also 25 years in Israel, getting raw materials from China, selling to Boeing, GM, industrial companies in Germany. He didn’t have a great locational advantage in being in Israel. But the remarkable business comes from that. No other answer will result than talented people never stopped working. Sam Vic was very good on figures and other aspects by Iscar is one of the greatest in the world.
Charlie: Sam Vic is a fabulous company. It is an achievement to do better than Iscar.
WB: Is there a better operation than Iscar in the industrial sector?
CM: You can’t believe how modern they are.
Question: You don’t lose sleep over everything. But what worries you the most?
WB: Good question. Culture is all-important. Business is all important. People will keep calling Geico after I die. The key is the present culture. The successor CEO will have more brains and passion. We’re all in agreement of who it should be. The culture intensified year after year. Charlie and I knew what we were about from the beginning but making sure everyone who bought in understood took time. Any foreign behavior is cast out. People self-select into it. We reject foreign tissue. I think the successor after me, after six months will be sure. Charlie?
Charlie: This is to all the Charlie Mungers in the audience: Don’t be so stupid as to sell your shares.
WB: It’s accurate. I met Georgie in December, and he said he was thinking of going into Heinz. Because I knew them both and thought high of them, I said I’m in. Then they got me a term sheet. Georgie Paolo brought me a term sheet on the deal and it was good. Absolutely fair deal. I didn’t change a word in either. Charlie and I paid more than if we were doing the deal ourselves because Georgie Paolo is a great manager, because he’s so classy, so we stretched a little. I like the business. The design of the deal is if we do good at Heinz we will get a high rate of return. Less leveraged than them. They wanted more leverage. In five years they receive higher rate of return but us with more money will get more.
Question: Berkshire’s Ajit Jain is bringing in high profile AIG executives. What is the goal of the managers? Will they get average results?
WB: The goal is to increase the share of the market. The second was Ajit. One, a 7.5% in business at Loyds and London market. Insured have a right to pick insurance. Not totally auto, we get 7.5%. We had an arrangement with Marsh on Marine but not across the board. He will give executives of business than they’re used to having. Two, four well-known AIG people joined to write commercial insurance down and zero internet rate world. Other people reached out. A number of executives have in the past. Will see Berkshire add all insurance business because it’s a significant factor worldwide, into billion and we hope could be more greater number of billions. We have people, capital, and ability to sign on to coverage others spread out.
CM: General speaking, reinsurance spread is very good for most people. Berkshire is different from other businesses. If reinsurance business is peculiar, it’s because people think it’s easy, and find out it isn’t.
Question: Regarding Geico, no policies are usage-based like Progressive. Is that still the case?
WB: It’s still the case. Snapshot is getting attention because you get a picture of how people really drive. Insurance rates go down as they attempt to figure out the possibility of an accident. Possibility of 100 like to die than 70. An insurance assessment measures variables. Different companies do it differently. A 16 year old male is more likely to get in an accident than I am. I’m not a better driver. We ask a number of questions and find the possibility of accident and charge policy fees on this, and see how they do. The process is working well. We have a huge number of policy holders. Everyone is trying to figure out how to figure out who will have an accident. It’s interesting by our works well.
Q: You’re on Twitter and the SEC recently allowed business results to be posted on social media. Is this important for Businesswire and do you agree? Would you sell Businesswire? And what in the world are you doing on Twitter?
WB: It’s a mistake. The key to disclosure is accuracy and simultaneity. If we want to be sure its accurage and received at the same time as other people, Businesswire does that. I do not want to keep going to a web page and be 10 minutes before others. I don’t think anything does as well as Businesswire. Management couldn’t be happier. I wish I could clone Kathy. Berkshire puts out info after the market close because there’s so much to digest. Anything important on Berkshire goes to Businesswire.
CM: I’m avoiding it like the plague.
Question from short-seller Doug Kass: I’m in a lions den of 45,000 of your closest friends. In a follow-up to Loomis’ question: size matters.
WB: It does.
Kass: Berkshire used to buy things cheap or wholesale. Now you’re buying pricier and mature businesses at higher sals and earnings. The businesses might be great to add to Berkshire, but could result in lower rates of return. Are you look more after your legacy? Is Berkshire becoming more of an index fund, better for widows and orphans?
WB: We can’t do as well as in the past. It depends on the nature of markets. Bad markets can be an advantage. I take exception that I paid fancier prices. GE was 20x earnings. I paid a far bit more than I would. It gets tougher as we get bigger. The price would diminish and we could still be satisfied. There are companies we should have bought 30 – 40 years ago. Now we realize that paying up for companies is good.
CM: I could make a short-seller’s question even better. When we say we won’t do as well in the future, we still think better than others have done in the past.
WB: We’re buying good businesses. We own eight businesses that would be on the Fortune 500. In a few months we’ll own half of another.
Question: In China the dollar’s status as reserve currency could be changing?
WB: I don’t know the answer. The U.S. and China will be the super-powers in decades to come.
CM: There is an advantage to the country that has the reserve currency. Europe had a better hand when it had the reserve currency. If it happened it would not be all that significant in nature of things. Every great leader is not one any longer. We’re all dead.
WB: That’s the cheery part!
CM: I still think it will be 20 years from now. Not forever.
Question: If the Fed is buying 10-year treasuries, what are the long-run risks and how do they stop without implications:
CM: I don’t know.
WB: He has nothing to add. We’re in uncharted territory. Many find out is easier to buy than sell. 3.4 trillion on the Fed’s balance sheet. That’s a lot of securities. Bank reserve is incredible. It’s uncharted territory. Fed is in permanent if risks, he knows risk. Don’t know if he hands baton to another guy. Mr. Bernanke is smart. But we haven’t see this. There’s a potential for inflation. Not so far. The Fed wishes there had been inflation. Up till now GDP is inflation. They’d never admit it. When market learns significant buying ends – it should be the shot heard round the world. Not the end of the world. But start revolting hard and fast.
CM: Generally, what happened surprised people who thought they knew that interest rates were so low and would stay that way. Everyone has to be more cautious when they print money in massive amounts.
WB: It’s a huge experiment.
Question: How is a zero interest rate policy affecting Berkshire’s subsidiaries?
WB: It helped. Interest rates are to asset prices as gravity is to an apple. Decreased interest rates pull on asset prices. People make different decisions when they can’t get something for practically nothing. Interest rates power everything in the economic universe. We paid less on Heinze than 10 years ago. It’s a huge factor in what people borrow. Houses are more attractive. It’s easy for Fed to borrow $85 billion per month. Don’t know what would happen if they tried to sell. It’s like watching a good movie because we don’t know the end.
CM: Interest rates have not stayed this low for an extended period.
WB: We have at the first quarter 48 or 49 billion in short term securities. Earning nada. Our money doesn’t count on anyone else. We have benefited and the country has by what the Fed has done in the last few years. If we can successfully end without support we’re better off.
Question: What not make an acquitiion in your commercial insurance business?
WB: We have a terrific manager in Ajit. There are some operations if we could buy at the right price we would have done it. We predict we will have good insurance business.
Question: What significance is there to bitcoin and what does it mean for the future?
CM: We have no confidence whatsoever in bitcoin becoming world currency.
Question: Ackman questions the legitimacy of Herbalife (HLF). Berkshire Hathaway (BRK.A)(BRK.B) owns Pampered Chef. Has there been any impact on Pampered Chef? It’s a multi-level marketing company.
WB: I’ve never looked at the 10K of Herbalife. The key is whether it’s based on selling profits. Pampered Chef is miles away from selling to level A and level B. People get paid based on who they recruit. But people are based on selling to end user. There are thousands of parties a week selling to people who want to use the products. And that should be the distinguishing characteristic.
Charlie: And there’s likely more flim flam in selling magic potions than pots and pans.
Question: Berkshire’s returns in the last 10 years are based on repeating and extensive deals than in the past when you were a value investor doing extensive analysis. How will your successor achieve the same returns?
Warren: My successor will have more capital and when markets are in distressed fewer people have capital and willingness to commit. My successor will have unusual capital and ability to say yes. Berkshire is the 800-number when there is really panic in markets and people need capital. It’s not our main business, but fine. It will happen again. When the Dow Jones drops 1,000 points you find out who’s been swimming naked. They will call Berkshire. And Berkshire’s reputation does not rest on any single individual.
Charlie: Buffett had success in value investing because competition was less intense. It’s ridiculous to think the way he did things in the past he should have stayed in.
Warren: Goldman Sachs, GE, Bank of America are trying.
Charlie: Other people were not getting calls.
Warren: They don’t have money and speed.
Question: What are the three keys to influencing people to sell who didn’t want to sell?
Warren: There was a death at See’s and the rest of the family didn’t want to run the business, so they put it up for sale. I didn’t hear about it until after one person had already fallen through. I didn’t persuade them to sell. It traded actively, I bought key pieces and stock. Sanborn was not the most attractive business. I bought stock in the market from Stanton and Case. They were happy to sell. I never met Stanton. I did not convince them to sell their stock. I talked to Betty Peters about avoiding a transaction I thought was dumb.
Question: Over the years you have built Berkshire to be sustainable. I have difficulty explaining to people the long term sustainable advantage of Berkshire. Can you give it in a Peter Lynch two-minute speech?
Charlie: The competitive advantage is it’s getting bigger. The golden rule – we treat people like we want to be treated. The long term competitive advantage is we are a good partner to people who need money.
Warren: Years ago a person in 60s said one year to think about selling his business. We had experience buying business years earlier, this person died and he wanted to put to bed what had happened. That one year and that if he sold to a competitor, which is a logical buyer, it would put its people in charge and it would mean it would fire his people, and come in like Atila the Hun. He could sell to a private equity firm and lose control. To me, we’re not the most attractive, but we were the only guy left standing. We promised him he could keep doing what he loved, and not worry. The competitive advantage was we had no competitor. And the shareholder base we’ve developed – we look at them as partners.
Question: I heard Warren’s way to conserve energy is to write 20 things he wanted to do, choose five and forget 15. How does that work?
Warren: Not the case. That is more disciplined than I am. Charlie and I live simple lives. We know what we enjoy and we do it pretty much now. Charlie is a real architect now. I never made lists in my life. Maybe I should start!
Charlie: I can see here, I don’t know when it started that marketing psychology that you shouldn’t make decisions when you’re tired, and if that’s true, we live on auto pilot, it’s habitual. We don’t waste decision-making energy. We use caffeine and sugar.
Warren: When we write our book on nutrition it will be a hit.
Charlie: Warren’s style is idea for human cognition.
Question: Buying newspapers doesn’t seem to make sense economically to get a higher rate of return on a business that is smaller, and you like big elephants.
Warren: We will get a decent rate of return. Compared to Heinz we have a structural advantage because write offs and after tax return declined to 10% after tax, maybe higher. To date, we meet or beat 10%. Never move the needle. $100 million in pretax earnings would not move the needle but give a decent return. We wouldn’t have done it in another business. We promise to give figures annually of investments, but at low price to earnings.
Charlie: It’s an exception and you like doing it. That’s what I heard you say.
Warren: I wish I had no asked.
Question (Doug Kass): You suggested for the first time when you go, you would move to a more centralized approach to management. In past respect of Henry Singleton, he was 100% rational. Prior to his death Berkshire should you move Berkshire to three companies? Teradyne was harder to manage given its size. Compared to Berkshire, should you split it along business lines?
Buffett: A tiny bit more in terms of small companies. No change of significance Henry Singleton can give views on what he did right and wrong. Breaking up would not give the present result now and in the future.
Charlie: Henry Singleton’s geniun was he managed his companies more centralized than us. In the end he wanted to sell tous. He loved you and the business, but we didn’t want to issue Berkshire stock.
Warren: He issued stock like crazy. GM worked wonderfully if diluted created how ended up.
Charlie: We’re more avuncular than Henry Singleton was. I like us better.
Question: Taxes and deficit. What are two things policymakers can focus on to stay competitive.
Warren: Health care costs are 12% of GDP. Rivals 9.5 to 11.5%. There are only 100 cents in a dollar. Give up 8 cents just like raw material. It will be a major problem in US competitiveness. Overall since the crisis it works, but number one is health care costs.
Charlie: Grossly swollen alternatives markets. You can graduate from MIT in derivatives markets. They are crazy markets. I agree on health care but find the other more revolting.
Warren: Charlie is very Old Testament.
Question: Will the health care act affect Berkshire Hathaway (BRK.A)(BRK.B)?
Warren: We’re not sure. We don’t know of any units that don’t have health care. Health care was a huge cost for us. Do few things on a centralized basis but we have not assessed figures of the quarter. We saw a few units’ costs rising 10% to 12%. We’re not trying to centralized headquarters.
Question: What are your capital spending plans? And do you owe your success to timing?
Warren: I was born in the U.S. so I had a huge advantage, and I was born male so I had a big advantage. I’m not sure in the business world if I was born in 1930 the time could have been better. I was conceived in November 1929 when my parents had nobody to call on and no TV, so here I am, luck the crash of 29 came along. It caused a lot of people to be turned off on stocks like the last crash. Business was a terrible environment. Every baby born in the U.S., on a probably basis, will do better in all kinds of ways than I do. In the investment field, it is not as good as it was in 1950. But a person with a passion for investing coming of age likely will do better and live better.
Charlie: Competition was weak in the early days. Competition is not as weak now. There is surely an advantage from exiting between not mean more to do ahead.
Question: If you can imaging yourself at 30, how have you changed, and what advice would you give yourself, and how would you give the advice in a way that you would actually take it?
Charlie: It’s so old fashioned and boringly trite. Keep plugging along. All old virtues still work. And work where you’re turned on.
Warren: We met in the grocery business. I’m not in the grocery business now.
Charlie: You were not promoted either. Even though you had the family name.
Question: How concerned are you about
Warren: I hate dumb competition. And a lot of hedge funds have entered into the hedge fund business aggressively in the last few years. It gives them an opportunity to operate in Bermuda and avoid taxes. It’s respectable and sold to investors. Anything Wall Street can sell it will sell. It’s very sellable now. Money is flowing in and bringing down prices. In the end we know what we’re willing to do and do what we think will get us underwriting profit. If a hedge fund guy is willing to sell gas and buy first, he has a problem. In the 1980s we had expense ratios up and volume down. Standby costs were real, but not backbreaking. We look forward to better days and they came. Never anticipated it would happen. We’ve been luck to get people – Jain and Nicely. We hit the jackpot of people and like not having pressure to do…
Question: I noticed your boardroom reflects the fact that women are not hired for top jobs in corporate America.
Warren: I wrote an article for Fortune and you can see my views on that. There’s no question that throughout my lifetime women have not had the same shot as we have. My sisters were as smart, grades were good, and more personable than me. My parents loved them. All my teachers were female and because they only had a few occupations available to them. Improvements have been made, but there is a long way to go. When people are placed in that position they start believing it themselves, so they don’t envision more. Katherine Graham was an intelligent woman and told woman couldn’t run a business as well as a man. She knew it wasn’t true, but couldn’t get rid of it and secretly told herself that. The stock went up 40% under her and she wrote a Pulitzer Prize-winning biography. I hope it keeps moving and moving faster. I hope females hearing this will not see themselves in funhouse mirrors.
Question: Is Berkshire too big to fail? How about DF and how does it impact insurance and Wells Fargo (WF) and Goldman Sachs (GS).
Warren: It won’t affect it to my knowledge. Capital ratios for long banks at high levels and affects return on equity. Cap ratios increase and return on equity will increase. Banking in the U.S. is stronger than in the past 20 years. Compared to the EU or 20 years ago, it’s dramatically stronger. Don’t worry about banking being the cause of the next bubble. Usually we don’t get to a bubble the same way we got to the last one. I feel good about our investments at MNT and WFC. We won’t earn as much return on equity because the rules change.
Charlie: I’m less optimistic in the long term. I see something more extreme. I don’t see why massive derivatives books should be mixed with deposits of people. The more banks act like investment banks, the less I like it.
Warren: Five years ago I wrote about investors getting sold predictions. I offered to beat bet a group of hedge funds that they could not beat a no-load index fund over five years. Each put $350,000 into a zero-coupon treasury at $1 million. Interests rates have gone down, so from an investment of $950,000 sold zero-coupon and bought Berkshire Hathaway, now worth 1.2 million. Hedge funds have returned 0.13% and the S&P returned 8.96%, at the half-way part. If it does well we’ll have more than $1 million to give to charity. You can see it on Longbets.com, where there is a bet a large hadron collider will destroy the earth in 10 years. And one that says one human in 2000 will be alive in 2150 – Charlie?
(The notes of the meeting have been consolidated into the first half of the meeting, here, and the last half which you can read here.)