This is the notes we took during the shareholder meeting on May 3 in Omaha. Hope you enjoy it.
Warren Buffett (Trades, Portfolio): Earnings were down in the first quarter, due to the impact from sells of securities. Insurance has a float 77 billions, ours to invest. The insurance underwriting was very remarkable, thought down in the first quarter. Pay no attention on the impact to earnings due to quarterly sell of securities.
No dividends, votes without buffett’s shares, 96.8% B shareholders voted against dividends. More than 98% of A shares voted against dividends. 97.05% voted for Buffett as director.
Q&A Session starts.
Question: Regarding to Berkshire’s holdings in KO, KO made large payment to their executives. You did not vote’s shares against the plan. I like to know why you engaged this un-Buffett like behavior?
WB: The KO proposal was dilutive. I did not talk to Muhtar Kent (Coca-cola CEO). I admire the company and the management. The compensation plan is excessive. We abstained. In term of having an effect on KO compensation, that is the most effective way of behavior for Berkshire. I made clear of the excessiveness of the plan. We did not endorse some calculations that were wildly inaccurate. I don’t think it is a good idea to joint forces with someone I don’t know.
CM: I think you had the position very well.
WB: I told Charlie of the plan and we agreed. For those of thinking of dilution, KO has purchased shares. They have a plan to buy 500 million shares. They expect issue those stock options in 4 years. That is a lot of shares. Let’s assume KO is around 40, options are issued at $40. When they exercised at $60, it is a transfer of value of $10 billion. When that is done, the company gets a tax deduction of $3.5 billion. Overall it will be a 2.5% dilution.
Question: Berkshire buys a company and then stays hand off and let company run the same way as before. Can Berkshire do it in a similar way as 3G? Actively involves in the operations of the company?
WB: I don’t think the two blend well. 3G did a great job doing that. I think we will see more opportunities to join 3G for the deals. They are very capable and good at that. I don’t think blending the two work very well for us. The way we do works very well. We welcome more opportunities to join 3G
Question: The president approval is less 40%. Obama is the biggest obstacle for the economy, can you conduct Obama to change the train’s direction?
I don’t agree a number of things you are saying, I will let you communicate him directly. If you think tax rate is too high, look at a chart of tax against GDP.
Question: Over the last 5 years Berkshire did not beat S&P 500. If you are unable to beat the S&P, are you changing the yardstick or what’s next?
WB: I said before if market do well in another 5 years, our streak will end. Last year the market went up 30%, there were just two years in history that were better than the last year. We will do better in average or down years. We will outperform in a cycle.
CM: WB talked about the net worth after tax. S&P 500 Index does not pay tax. Last years the net worth of Berkshire after tax went up by $60 billion.
Question: Intrinsic of Berkshire. You signaled the brk stocks are undervalued. What will you do to narrow the difference between the intrinsic value and the stock price, do you consider IPO of Berkshire companies?
The answer to the last part is no. I said that I am eager to buy stocks at 1.2 of book value. book value is now at 120 billion. But we cannot put an exact numbers on intrinsic value.
KO said they will buy shares to cover option dilutions, they shouldn’t do it if the stocks are overvalued.
CM: We never want to do anything to narrow the difference. In think one day the stock price will be close to intrinsic value. But we don’t want to gain advantages over other people through buybacks.
Question: Berkshire is known for buying companies. Typically acquisition is disruptive. What do you to gain the trust of owners when you buy companies?
WB. We can promise we won’t sell the companies unless they keep losing money or have labor problems. We don’t promise there won’t be layoffs. We cannot make promises we won’t change employment. We can keep our promise that they will continue run the business. We put ourselves in a class for others to compete.
Question: Coporation governing, your son Howard sits on KO board. Your son voted for KO’s stock option compensation. How can count on Howard to defend the culture of Berkshire after you pass away?
The nature of corporate boards is such that they are part work organizations and part social organizations. I sat in 55 years on business board of 19 companies. That is the way it works. Bear in mind the so called the independent board members are paid 200k or 300k a year, they are not really independent. Don’t condemn too much. Howard will have dedication to Berkshire, he is there to facilitate the change that the board decide to change. Howard is the perfect guy for this.
If you in any social organization, you are always against them, people won’t lesson to you. You won’t stay there for long when you intent to change the behavior of others.
Question: Measurement of management: what do you believe the cost of capital at Berkshire is?
Size is the anchor of performance. We cannot earn the return on capital with the market cap of $300 billion as we could before. Our cost of capital will be produced by our second best idea. The real test of return on capital is whether a dollar we put in can create more than a dollar in market cap.
CM. Cost of capital means different things to different people.
Question: Original acquisition of Nebraska Furniture Mart, based on the report, you could buy it for two time of earnings and less than .8 of book?
We paid 11 to 12 after tax earnings. We bought 80% of the company for $60 million. It was more than book. It was about 7 times of pretax. It was not a bargain, but it was a great business.
Question: Regarding to your wife’s portfolio after you pass away, you said that it should be 10% of in cash, 90% in S&P 500 index fund? Why not in Berkshire shares instead?
I wonder if the question is not from Vanguard by any chance. When I die all the shares will be distributed in about 12 years. They won’t sell any shares. In my wife’s situation, it is just that it cannot get a bad position. On the part that I care about maximizing, I told them not to sell any Berkshire shares until they have to.
Question: Use natural to generate electricity? How to guarantee if we have enough natural at good prices to for generating electricity at MidAmerican Energy (now Berkshire Energy)?
Wb. By 2015, we will capital to produce in Iowa 40% of electricity with wind. Greg will answer the specifics:
We had cold in Midwest. But the resources, the available of natural gas, there are sufficient natural gas. Clearly we need in the unique situation more natural gas. We meet the needs of the customers in a cost effective way. We got clear path to our customers. We are well positioned to meet the needs of customers.
Charlie turns 90 and I find how well he handles it. I think likely whoever replaces me will develop someone like Charlie. Berkshire works well with two of us.
We won’t get another A Jain. Fortunately we don’t need to for a long time. I have letters from my managers what to do if something happens to them. So that shouldn’t be a worry.
Question: Compensation table. Should include two of the highest two positions of subsidiaries? Will you do it? How much the next CEO will be paid?
The question to the last question is how much he will accept. He will be paid a lot. We follow SEC rules on reporting the compensation of the next CEOs. I am not sure it is in the interest of shareholders, because it may have negative effect on the negotiation of compensations to other people. I think it is a good reason for us not to publish it.
At Saloman everybody was not satisfied how much he was paid. It is not because he wasn’t paid a lot, it is because someone else made more money. It made compensation a terrible problem.
Question: What is Berkshire’s weak point?
I am slow to make personnel changes.
CM: by the standard of the rest of world, we over-trust. We created a culture of trust. We select a group of people who deserve the trust.
Question: See’s Candy, since 1999 the profit growth seems to stall? Did something change? How to restore the growth?
If you are back 100 years, each city’s candy consumption does not grow. We cannot increase the size of the market. We tried to move the market geographically multiple times. But it doesn’t travel that well. We have done well with See’s. I see what the greatness is and also the limit. But if we did not buy See’s, we wouldn’t probably buy KO as we learn by owning See’s.
Question: Bank of America (BAC) investment? Benefit to Berkshire shareholders with the trade of Bank of America tier 1 capital?
Brian Moynihan (CEO of BAC) called and ask if we are willing to exchange cumulative preferred to non-cumulative preferred. If we do that, BAC will make the preferred to non-callable for 5 years. I think it is good idea. That was done before BAC had a miscalculation with Merrill Lynch.
Question: Net jets
A satisfactory business, I wouldn’t say it is a great business
Question: Acquisition: how large Berkshire can comfortably do.
Wb. Our goal is buy great business, good business. We always more $20-30 billion of cash that we can comfortably deploy.
Question: Increase leverage of Berkshire? Why not issue bond and make good use of the fund for investments?
We do have a good way of generating funds. We do that through insurance float. We don’t like the idea of leveraging. We have no problem leveraging up utilities and railroad. At parent level, we borrowed some money when we bought BNSF, and issued equity. Issuing equity was not a good idea. We are reluctant to leveraging up since we have this other source of fund. We have insurance float of $70 billion.
CM. Even though it is a good suggestion, we will not do it.
Question: Transfer of investment responsibilities to Ted and Todd. Update on how much they are running, and how much they will management in five years.
They manage about $7 billion now. They will be handling more money in the future than they are now. They are saying it does get more different as their funds get bigger. They are both terrific additions to Berkshire besides investment. They are very helpful in doing things that are beyond their investment responsibilities. They don’t ask for more compensation. They have been a big big plus to Berkshire
Question: General financial market: 0 interest rate usually lead to financial bubble. If you run the fed, what will you do?
I don’t think I will do things very differently as it worked so well. But as I said before it we did not see it before, and we don’t know how it ends. Bernake was a hero as he handled it very well.
CM. nobody anticipated the interest will stay down for so long.
Wb. In 2008 people said cash is king. But it is not king if you don’t use it. It is not a bubble as we are living now, but it is an unusual situation. Cash is the dumbest thing if you don’t use it.
Questions: Heinz transaction, how much can earn in 10 years?
Heinz files 10q itself. I think margin of Heinz will be significantly improved. The brands are as strong as ever. The cost structure will be improved.
Question: Comparing investment opportunities. In past you can make big positions in portfolio. Can Berkshire achieve high returns by buying stocks during the market crash?
I spent the money too early in the market crash. But we did fine. We didn’t do as remotely as well if we investment as the bottom. But in the fall 2009 we could buy BNSF. Overall we did reasonably well. Looking back, we could have done better but we never learned how to buy at market bottom. But overall we prefer to buy good business as a whole and build them over time.
When we buy stocks, it reflects in book and you can see it. If you buy businesses, you increase the earnings power in the future. You cannot see it immediately.
We bought fair amount of Wells Fargo (WFC). We feels 100% comfortable for WFC.
Question: The future of Geico: usage based pricing, how will this affect Geico?
Usage based pricing: automatic driving car: good for society, bad for insurance. I don’t know when it will happen.
Question: Acquisition outside US
We never turn down companies because they are outside US. But we are not lucky enough to get a lot of foreign companies approach us. In 2006 we were approached by Iscar and it has been doing extremely well. Iscar has been a wonderful business and people are sensational. I wish I can find more of those. We keep trying.
Question: why should you compare Berkshire book value with S&P 500?
CM. You are right. It is insane. But warren does it so that it will make him look good.