This year’s Berkshire Hathaway annual shareholders’ meeting provided lots of little bits of wisdom, just like all the others. I’ve only been attending these meetings since 2001, and in these past seven years, attendance has tripled to where this year there were 27,000. Omaha may need to build a bigger convention center again to hold next year’s attendees!
For your reference, I’ve taken these notes this year, from all of the questions asked of Warren Buffet and Charlie Munger:
Insurance
Hope over time to break even in underwriting because earn lots of dollars on the float and have lots of float.
Private Equity Activity
What could slow it down…..yields on junk bonds going up
BH owns forever and doesn’t sell so won’t really compete with private equity activity.
International/Global growth of BH?
BH is not on the radar screen overseas; no bias against buying outside US in marketable securities or the entire business; can be criticized validly for not doing so (investing globally); also have to inform the public in UK & Germany what BH is buying and when if greater than 300 million; all that public disclosures screws up making any purchases (price can rise with the announcement that going to buy and then not affordable to buy).
Executive compensation unfair to investors?
Poor management is worse than a poor compensation system. Envy is more the problem. No upside to envy; need to compensate for what is under the executives’ control.
Air travel
NetJets has been valuable to accomplishing business deals; corp jets have been a real asset to BH. Trappings of power when abused are disappointing to investors, but not when used for efficiency and effectiveness as with NetJets .
Explain credit contraction on BH?
BH benefits when others suffer.
The Fed Reserve was established to prevent the effects seen historically: bank failures, stock market crash, etc
Corporate profits now jumped up to 8% from 4-6% and as a result, there are higher corp taxes; so the labor component of GDP has fallen; a lot of the profits are now in the financial sector (banks, investment management groups).
(Need to be smart enough to have experienced troubles before)
Retirement accounts, etc., and cash on selling short:
Delays in delivery of stocks bought or sold is slop in brokerage firms
Lots of slop in derivatives
Clearance systems are failing
Gambling companies have a great future?
“Tax on ignorance”, like dreaming about having an ATV versus having one
BH won’t be buying gambling companies
Read all you can; fill your mind with various competing thoughts and then invest. Without all this learning and doing, it is like reading a romance novel and doing something else.
What do you own and why do you own it?
Get into the habit of thinking that way….buy a great business.
Health care mess – can BH help it?
In order to do very well in health insurance, you need low distribution costs; as it is now, benefits are paid out from premiums received but no one out there doing a good job with low distribution costs.
Intrinsic value:
BH retains all of its earnings and what will it do with them over time –
“Skill at which retained earnings would be used effectively”;
Each dollar has a greater value
Hard to judge at BH: future is not the same as the past; hard to think;
By being a “learning machine”, always reading, etc., = owner oriented
Derivatives = Financial Weapons of Mass Destruction
Derivative itself okay, but the usage of them on expanding basis introduces more and more leverage into the system.
We may not know exactly where danger begins or ends, but it will go on to increase and unpleasant things will happen (i.e., forced sales – stop orders, which are “portfolio insurance” or “doomsday machine”
For example, with GEN RE – mark to market per FASB but market is psychological and can vary instantly with any type of market hype.
Short term investing – participants are playing a different game
Human behavior is involved and irrational when en masse
Six sigma theory all out the window!
On replacing Warren: Not looking for someone to teach but rather who knows how to do it; someone who understands conditions we haven’t even seen yet and won’t blow it. (see intrinsic value above where he said that the future is not the same as the past)
Early investing: trade less attractive stocks for more attractive stocks (limited $)
Later investing: with more $ than investments to choose from – can buy 20% of a stock and not cause too much imbalance.
Railroads competitive now
Better on the labor front
Trucking industry fuel costs are 4 X Rail
No new capacity in rail business
What used to be highly regulated
It is highly capitalized and doesn’t get extraordinary returns but it can be a good business over time.
Best way a 10 year old can earn $?
Deliver newspapers
Business success correlations found best with the age at of the 1st business venture
Make yourself reliable
BH has a good group of businesses – DON’T WANT:
High labor content
Or goods shipped in from abroad
Or a competitive position that can erode over time
The $ is declining over other major currency.
Boards of Directors
Past members are “potted plants”
Recent rules require more “process” for transparency
The Right CEO is one who seeks counsel with the Board, not overreacting
Boards bring independent judgment
A real owner’s board is on in which there is no board compensation or de minimis and own stock in the company.
On business “partners”
Normally don’t do deals with partners for dollars or in relying on the brains of others
Want 100% of any deal, upside or downside.
Commodities
Have no opinion on commodities; but have opinions on the companies
Need business with little capital investment so can good return on the capital
Newspapers and the NY Times
The newspaper is like looking in the rearview mirror versus what you want to do is look through the window.
For more information, download the annual report from BerkshireHathaway.com
http://www.berkshirehathaway.com/2006ar/2006ar.pdf
