Berkshire Hathaway Meeting: 2000 Afternoon Session

In 2018, CNBC launched the Warren Buffett (Trades, Portfolio) Archive, "the digital home to the world's largest video collection of Warren Buffett (Trades, Portfolio)." The website includes complete video footage from every Berkshire Hathaway BRK.A BRK.B shareholder meeting since 1994, in addition to video clips from Buffett's appearances on CNBC dating back to 2005.

My goal in this series is to share key takeaways from each meeting session. I will select a handful of quotes from each section that I think are most insightful for investors. With that, let's take a look at the 2000 afternoon session.

Spotting change

Early in the session, Buffett and Munger were asked about their interest in energy and transportation companies. For context, the questioner likely asked about this because Buffett had described in the 1999 shareholder letter how Berkshire had recently made an investment of roughly $2 billion in MidAmerican Energy. Here was Buffett's response:

"I would say that energy and transportation, in the very broad sense, are both things we've at least got a chance of understanding. Those are the kind of areas we would think about making investments. We would probably think about it less in connection with new technology. We expect the people who run MidAmerican Energy to be thinking about that all the time. But Charlie would be better at it than I am, because he has a different background and thinks better in terms of evaluating newer technologies. I wouldn't be very good at it at all. But those fields are big, in terms of capital investment, for one thing. They're very big fields. And secondly, we would probably think we were capable of evaluating the potential, some years down the road, of many companies in energy and transportation. So those would be fields we would consider. And we made an investment in MidAmerican Energy. I doubt if the technology changes dramatically in any near term as to the product that they're delivering. But if there were changes on the horizon, I think we've got the management there that would be very good at spotting that ahead of time and capitalizing on it in a proper way. I wouldn't take that function on myself."

This answer interests me because it gets to an important point about investing. While Buffett prefers businesses that are seemingly less exposed to the risk of change, the reality is that it is not 100% avoidable. Given that fact, it's important to determine whether you're partnered with people who are good at "spotting that ahead of time and capitalizing on it in a proper way." As part of that consideration, you also need to determine whether the people running the business are incentivized to focus on the risks and opportunities presented by long-term changes, as opposed to managers who are paid on next quarter's earnings per share (and will leave tomorrow's problems to the next guy). Personally, I place significant emphasis in my investment process on finding great businesses with sustainable competitive advantages in addition to best-in-class leadership that will be able to intelligently react to change in their business (as Buffett notes, I don't want to take on the function of doing that myself). Without both of those characteristics, I'm not sure how you can honestly go into an investment with the intention of being an owner for decades.

Scrambling out of wrong decisions

Later in the session, Buffett and Charlie Munger (Trades, Portfolio) were asked about their history with Berkshire, including their decision to invest in – and ultimately take control of - the textile business. Buffett said:

"The original purchase of Berkshire was a terrible mistake… Berkshire was selling below working capital and had a history of repurchasing shares periodically on tender offers… And then, actually, I met Seabury Stanton one time, who was running Berkshire… he said he was thinking of having a tender. And he wondered what price we'd tender at. And as I remember, I may be wrong on this, but I think I said, 11 and 3/8ths." And he said again to me, "Well, if we have a tender at 11 and 3/8ths, will you tender?" And I said, "Yes, I will." And then I was frozen out, obviously, of doing anything in the stock for a little while. But then he came along with the tender offer. And as I remember, I opened the envelope, and it was $11.25. I may be wrong. But it was an eight below what he had said to me and what I had agreed to. So I found that kind of irritating. And I didn't tender. And then I bought a lot of stock… And before long, we controlled the company. So, at an eighth of a point difference, we wouldn't have bought the company if they'd actually tendered at that price… We would've been much better off if we hadn't bought it. Because then things like National Indemnity and all of that, instead of buying it into a public company with a great many other shareholders, we would've bought it privately in the partnership. And our partners would've had a greater interest. So Berkshire was exactly the wrong vehicle to use for buying a bunch of wonderful companies over time. But I sort of stumbled into it and we kept moving along. And when I disbanded the partnership, I distributed out the Berkshire because it seemed like the easiest and best thing to do. And I enjoyed it enormously. I'm glad it all worked out this way. It did not work out the best way, economically, in all probability. It was the wrong base to use to build an enterprise around. But maybe, in a way, that's made it more fun."

As for Munger, he said:

"It is interesting that a wrong decision has been made to work out so well. We've done a lot of that, scrambled out of wrong decisions. I'd argue that's a big part of having a reasonable record in life. You can't avoid the wrong decisions. But if you recognize them promptly and do something about them, you can frequently turn the lemon into lemonade, which is what happened here. Warren twisted a lot of capital out of the textile business and invested it wisely. And that's why we're all here."

Munger's answer speaks to the pragmatism of Berkshire. Under the two gurus, the company has completed dozens of meaningful investments or acquisitions. And, invariably, some of them have worked better than others. What they've done better than others, in my opinion, is to quickly recognize when an investment or acquisition has not worked as expected and to stop throwing money down the drain out of a need to remain prideful or to convince themselves they still believed in the thesis. For decades, they've started each day with fresh eyes with a hope of putting new capital to its highest and best use. And, in the end, despite a few mistakes along the way, that approach has worked tremendously for Berkshire shareholders.

"Living in a totally different world from ours"

Near the end of the session, Buffett and Munger were asked about Berkshire's structure (as compared to funds operated by other well-known investors like George Soros (Trades, Portfolio) and Stan Druckenmiller), and whether it impacted their ability to act intelligently and think long term. Buffett started off by saying:

"We don't consider ourselves in remotely the same business as Tiger. They are managing a securities operation. And we aren't doing anything like what they do… We're not a fund. We are an operating business that generates a lot of capital and uses that to buy other businesses in whole or part. And we prefer in whole but we sometimes do it in part… We could easily have 90% of the value of Berkshire, 10 years from now, be represented by businesses that we own and 10% by securities. Or we could easily have 60% or 70% represented by securities, depending on how markets develop. I hope it develops in the former way. But I'm perfectly willing to go the other way, too…"

Munger followed up by saying:

"Well, I do think that the people in the relative performance game, who are trying to attract so-called hot money, are living in a totally different world from ours. I mean, Soros, in the end, was not willing to have a lot of people make a lot of money in high-tech stocks and not be part of that game. And they got killed. We're perfectly willing to let something we don't understand very well rage on while a lot of other people make a lot of money we don't."

This answer speaks to another pillar that has been fundamental to the long-term success attained at Berkshire. Simply put, Buffett and Munger are comfortable planning their own game, and will do their best at all times to play it to the best of their ability – but they have no interest in trying to replicate the success of others by doing stuff they don't understand. As Munger alluded to, that was not the case for Druckenmiller in the late 1990s and early 2000s. Here's what he said about his experience during the tech bubble in an interview in 2013 (which I wrote about here):

"I bought the top of the tech market in March of 2000 [after quickly making money in the same space in mid-late 1999] in an emotional fit I had because I couldn't stand the fact that it was going up so much and it violated every rule I learned in 25 years. … I bought the tech market very well in mid-1999 and sold everything out in January and was sitting pretty; and I had two internal managers who were making about 5% a day and I just couldn't stand it. And I put billions of dollars in within hours of the top. And, boy, did I get killed the next couple months."

It's worth noting that Druckenmiller has had a very successful investment career. But he has done so by playing his game – which isn't the same as the game the Berkshire duo have chosen to play. The important takeaway here is to always focus on playing your game and to accept that it may not always be in favor. The minute you start chasing others out of greed, you have entered a dangerous place.

Disclosure: Long Berkshire Hathaway Class B stock.

Read more here:

• Nike: The Digital Moat Widens​
• What the Future Holds
• Berkshire Hathaway Meeting: 2000 Morning Session

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