Berkshire Hathaway 2011 Shareholder Meeting Notes (Part 1)

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May 02, 2011
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“I am Warren, he is Charlie. He can hear and I can see, that is why we work together.” This is how Warren Buffett started his shareholder meeting on April 30, at Quest Center, Omaha, NE. It was a sunny day, and more than 40,000 shareholders from all over the world came to Omaha and joined the annual Woodstock of Capitalists. The arena was completely full, and it was hard to find a seat. As usual, a movie was played for shareholders. A lot of jokes were embedded in the movie. It ended with a The Office piece where Charlie Munger hold Dwight Schrute’s tie and told him that “I have 18 ways of killing you” because Dwight Schrute wants to be Warren Buffett’s No. 2 in The Office.

It seemed that a lot of people came just to watch the movie. After the movie was finished, many people left and seats became available.

These are some of the notes:

First underwriting loss in 9 years

Presentations start with the first quarter results. All businesses, with the exception of those related to housing, are getting better.

We had the second worst quarter for the insurance industry in the first quarter of 2011. Normally it was the third quarter of a year that is worse. In the first quarter we had major catastrophes that hit the insurance market hard. That may cost the reinsurance in the order of $50 billion. We participate 3-4% of that.

It is unlikely that we would have an underwriting profit in 2011. It is conceivable that we may make a small profit or breakeven. But this is the first time in 9 years we may not have an underwriting profit.

Three major catastrophes will have a loss of $1.67 billion. Among them: flood - $195 million, New Zealand earth quake - $412 million, and $1.066 billion from the Japan earthquake and tsunami.

Another record year for Geico

Geico got 318,676 new policy holders in the first quarter of 2011, compared with 218,422 in Q1 2010. He estimates that each policy had a goodwill value of $1,500; this translate into a value of $500 million.

On David Sokol incident

“You saw in the movie about Soloman that happened about 20 years ago. Charlie was there on a Sunday and I was elected the Chairman. In the Q&A, somewhere asked what happened, I was new and I said that what happened was inexplicable and inexcusable.

Here it is the same, inexplicable and inexcusable. Dave violated the principles in the letter I wrote every two years.

The second fact that is puzzling, David has a net worth of very high numbers. He made $24 million just last year in Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). In 1999 when we bought mid-American, Sokol, the senior executive, had a major piece in options.

After we bought mid-American, Walter Scott (a director of Berkshire) told me that we should have special compensation to Sokol, in options. He saw me turn white.

Instead we created something in very large cash amount based on five-year average performance. If that figure is achieved we will give $50 million to Sokol, and $25 million to Sokol’s junior partner. I had Sokol in my office. He said this is more than generous. We should split it equally between him and his partner. We witnessed Dave transfer $12.5 million to his junior partner. I thought it was rather extraordinary. What was even extraordinary is that some 12 years later $3 million caused a man who voluntarily turned away $12.5 million to lose (his sight).

I did not ask him if he owns the stock when I looked at Lubrizol (LZ, Financial).”

Q&A Session

Q: When you find out Dave Sokol bought LZ stock before the deal announcement; I don’t understand your reaction. I found that your press release was not direct, you said that you didn’t think it was illegal. Why did not you insist?

I learned that David Sokol bought LZ on March 14. Between Jan. 14 and Mar 14 Dave gave no indication he had contacted Citi. On March 14, when deal was announced, I got a call from John Coyle from Citi. He said congratulations. He said the Citi team was working with Dave on the deal. This was news and set some yellow light. CFO Marc Hamburg called Dave about this. It turned out to be Dave had an understatement.

On March 14 Lubrizol was to prepare the proxy. I wanted to know what Lubrizol had to say about the Citi involvement. Then I took off for Asia. In the afternoon of March 19, we got the materials about Dave’s involvement. Our lawyers interviewed Dave and sent over information. We decided that when we got back we needed to have the board meeting about this.

March 26 we got back; on March 28 we had a board meeting. A letter came out of blue from David Sokol saying that he was resigning, at a high point.

I drafted the PR. I laid the good things he has done, and the actions based on what I knew then seemed not to be unlawful. Lubrizol’s proxy said that Dave did know the transaction before the announcement. On Wednesday we had a board meeting. We also delivered the information and facts to SEC.

I think we acted in this case very properly. We informed the SEC about facts we knew at the time.

Q: What do you think the end of Permanent Open Market Operations effect on the stock market?

We are discussing this. I don’t think any effect of it hasn’t been discounted at this time. I see no reason why the program’s end will cause significant change to the market. Obviously the big force will end, it will be a different market, but it has been anticipated.

Q: We are not far away from now to have a new CEO. How do you make sure that someone in line will not act like Sokol?

That is one of the reasons why my son Howard will act as a nonexecutive Chairman. I don’t think the candidate in line will act that way. If some mistakes were made, it will be easier to change CEO with Chairman independent.

It is easier to change a CEO that way. It is not as easy to change a CEO if he is also the chairman.

Q: If you were going to live 50 years, which sector were you going to invest in?

That is a good question, I particularly like the preamble. You will pick a sector that is very large. I will say if you can become an expert in the tech field, with the ability to pick winners, you want to invest in tech. In energy sector your skill won’t make much a different. The great disparity in tech with great skill will make a huge difference

Munger: Either tech or energy.

Q: What was Dave’s role in convincing you in the Lubrizol purchase?

I don’t have chemistry understanding. I suggested that Charlie is a lot smarter on this. Charlie said that he didn’t understand either. Dave asked along to me. I feel that I got a good business understanding. Oil companies are big customers. I found that it is not possible for others to enter the business of Lubrizol. It is not a huge market; Lubrizol has a lot of patents. I thought that I understand the economics of the business. I decided that this is going to have a durable competitive advantage. I concluded that Lubrizol’s position in the business is sustainable. It is a very good business. Lubricants will be always around. That was my conclusion. Dave relayed it on to me. I think Lubrizol will be a good addition to Berskhire.

Q: On the valuation of Berkshire Hathaway. Each A share was $95k of investment plus $90k of operation value, total $185k. Is that correct?

Those figures are pre-tax figures. I would expect that the operating earnings be almost certainly going to increase. The investments may be about the same, may go up or down. Our goal is to build operating earnings.

Charlie and I have different ranges of the valuations of Berkshire. We don’t regard Berkshire is overpriced. We had recently a very large international company wanting to do something with Berkshire. But we couldn’t handle without using stock. We did not do this because we think that our stock is not fully valued.

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