Question: Ackman questions the legitimacy of Herbalife (NYSE:HLF). Berkshire Hathaway (NYSE:BRK.A)(NYSE: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.
Continue reading part 3 here.