Buffett's Berkshire Hathaway Annual Meeting: Q&A Session [NOTES] P-1VW Staff
Below is the Part-1 of Questions and Answers session that was held today in Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) Annual Shareholders meeting. Questions include: Next CEO of the company, Investment in China, Stock Buybacks, Acquisitions, Warren Buffett’s health etc.
Carol Loomis – first question to shareholders talked about the heavy responsibilities that will fall on shoulders – at Berkshire does the leading CEO candidate posess the necessary stuff to be risk manager as well?
Could the Goldman Sachs Inc. (NYSE:GS) deals have been done without the involvement?
Managing risk ranks rig up there with allocating capital
Excessive leverage is a basic risk and other is insurance risk
Charlie – risk decision delegated to people using a silly at that analyze risk based on some way they are taught in business schools.. some risk models are the dumbest thing ever put forward
“We’re not going to have an arts major in charge” – Warren
Berkshire can at with speed and finality and get a chance to make large transactions but that makes
No connection with Bryan Moynihan in life and approached him to get warrants and approached him.. ability to commit and know the commitment is good and is a big plus
I don’t think every deal he has made is possible by successor
Successor however can do some things better than Warren
GE and Goldman not as important as Coca Cola deal and being accumulated.. these are peanuts vs. buying businesses like Geico, BNSF and is not key to future.. ingredients to continue to do this are still there.. people believe it can get done
Directors are excellent risk managers
Second question – assumptions on mortality risk. Swiss Re was higher than expected other segment lower than expected
Swiss Re has a contract that required the charge and has been assumed to be the supposed worst case (Swiss re has a stop loss contract on this)
There will always be some contract that is worse than expected – Charlie
Over reserved for 9-11 for business interruption insurance
What advice would there be to make investment in China?
We’re not spending a lot of time giving advice on china
To some extent US should seek advice rather than give it
Useless to give advice to others
Look at the four largest investments worth around $50bn today the number of times they have talked to the CEO of this companies doesn’t average more than 2 times a year
It’s as bad to be overvalued vs undervalued. Why didn’t you warn us?
Warren prefers not to have shares sell at the highest possible price. Tsovk would trade once a year and warren and Charlie would come up with an intrinsic value…if they think it is overvalued it would be an interesting proposition to say that Berkshire is overpriced
Look at mid 1990s prospectus of when Berkshire sold stock…said something that has not really been said before
We know it is significantly above $110 – will never announce
Share repurchase obligation – what is the capacity for share buy backs…how attractive is acquisitions vs. buy backs and how attractive is dividends?
The 1.1x is what they feel VERY comfortable with…
They would buy back on a big scale if given the chance to do so
Some buy back stock regardless of price but thats not brk’s system – Charlie
Will only do buy back if increases per share value
What’s the view on European and US banks?
American banks are in a far far better position than they were a few years ago.
Have taken most abnormal losses that existed
Coal and natural gas?
Mid American will not benefit or be penalized from price of coal
It’s a regulated public utility – pass through organizations that really only affects customers
Coal traffic is down this year, in the first quarter KwH used went down 4.7% which affected demand for coal and natural gas under $2…50 to 1 ratio would have been unbelievable and it is idiotic…we are using up precious resource…Charlie would run thermal coal before touching the natural gas…natural gas is one of the best things we can leave for the future.
Will be interesting to see how the gas to oil ratio play out…this was not possible years ago…it is crazy to use up natural gas at these prices
Competitive advantages at Geico?
Progressive has been leader of telepricing and Geico has not followed that
Geico worth a whole lot more something like $15bn more than carrying value versus what is at on the books at $1bn above
What to suggest to change ways people are trained in business school?
Teaches students a lot of nonsense about investments. Business school education is improving from a low base, Warren agrees with that. In investing, probably the silliest stuff taught has been in the investment area, astounding how the schools have focused on one fad after the other in finance theory and it has been very mathematically based and when it becomes popular it is tough to resist if you hope to make progress in faculty advancement, going against wisdom of elders at business schools can be tough
Wuld have a course on how to value a business and course on how t think about markets and knowing the basic course is way better than knowing option pricing and portfolio management
Nothing in there about valuing businesses and that’s what investing is all about…if you know differences between those you can and can’t value then youll make money
Black scholes – Wrong and community wants an easy way to value everything
Is there anyone we forgot to offend? – Warren
Buffet rule question:
Minimum tax for the high earners
When we are asking for shared sacrifice and given promises and we will have to cut back would make sure people with these huge incomes are taxed at a rate that they were taxed long ago. Exception in Obama proposal about charitable deductions.
Near term, what is the impact on catastrophe pricing? Do these affect view?
Hard to know…tend to assume the worst…does not take the last few has or the last 100 years to underwrite
Has written far more business in Japan, Thailand, etc. and have found the rates they had been using we’re really inadequate and are looking for large amounts of capacity and Berkshire is there to do that
Subsidies in wind and solar? Thoughts on sustainable energy? Appropriate use of natural gas?
Berkshire has entered a little into solar in the last 6 months or so.
Subsidies essential to development in the past and projects would not be profitable without them
Wise of governments to have subsidies – future is subsidizing oil and natural gas
DiffereNt set up incentives per type of investment
Berkshire has a distinct competitive advantage in that Berkshire pay a lot of income tax so when there are tax credits they can use them because there are a lot of taxes that Berkshire can pay…perhaps 80% of utilities can reap the full tax benefits because they don’t pay taxes, they use.
Should political dialogue be muted because this is a public company?
Audience clapped at this question
Does not think that the CEOs should have citizenship restricted
*Louder applause after this*
The 84 year old man who doesn’t agree with warren and his political views and therefore won’t invest in brk should probably invest in Fox
Question on acquisitions – acquisition in excess of $20bn…
Considered a $22 billion acquisition…used stock in Burlington northern and felt it was a mistake for 30% of deal that mix was okay but would not use stock now
About $20bn is a little squirmish…and need to find the right deal
Question about jobs coming back to the united states
Of the number of jobs about 270,858 at year end Berkshire would probably not have more than 15,000 outside of the united states….
Not opposed to outside of the US but there are plenty of opportunities in the US that make a lot of sense in this country
You can’t bring a lot back if it never left – Charlie
Question on how Warren is feeling?
I feel terrific. I like what I do and work with people I love. It seems to have a good immune system and
Prostate cancer is a really minor event I really resent all the attention warren is getting. I probably have more prostate cancer than he does but I don’t let them test for it – Charlie.
My secretary was getting too much attention so I decided I had to put the spotlight back on me – Warren
Annuity business has a lot of runoff. When would you consider taking on those liabilities?
We would take on annuity books but will not assume much better than the risk free rate when making a bid
Don’t like taking on long term liabilities and paying 150 bps above treasury to do this
We want to get money on the liability side on attractive rates.
Question: what opportunity would you get into?
All kinds of opportunities
Warren would try to develop an audited record of performance as early as could and build up a fair amount of money investing which would be buying businesses to keep
Private equity is buying businesses to sell
Buying businesses to keep
That has been enormously satisfy I and capital needed for business so has built capital and would get through process and get through game to buy businesses and would send rest of life doing it
Question on man things 951% believes it is undervalued…why is stock stuck at these levels?
Several times when thought it was significantly undervalued
Saw the price cut in half around 4 times…if you run any business there will be times when it’s over and under valued…Tom Murphy rank successful but in 1970s was selling for a third of what you could have sold the properties for
Question on systemic risk fear to buy equities?
Charlie and I do not think there is a discussion about buying stock or business that has been talked about macro affairs
Doesn’t make a difference what the headlines are or what is going on…always going to be good and bad news there…
No discussions about macro factors…kept liquid reserves
Which business has improved over the last few years and which has underperformed?
No question that Burlington northern has done well for fundamental reasons and has improved position dramatically over 15 to 29 years and continues to today
Iscar has been remarkable
Mid American was bought at $34 a share but now apprised at around $250 a share….
Good fortune will not go away simply because warren does – Charlie
Question about who will manage derivative book after warren’s tenure
A few operations will have minor positions
Unlikely whoever follows
At least too investors that follow – Todd and Ted – got better than they deserved…unlikely they do anything in derivatives though they would not be prohibited buit will not be a huge factor…have done fine with theirs that expired this far
Rules have changed in relation to collateralizing and does not like exposure to anything to worry about financial condition if it’s hit by nuclear bonb or something
They think about worst cases more than anything and think about it all the time…requirement to collateralize things means that they will not do this on a significant scale
Valuing insurers question?
Would value geico different than general re and other insurers
Geico wortht significantly more thank sum of net worth and float due to growth and underwrite profit going forward
Warren would love t buy a new bunch of operating businesses that have siilar competitive
When you use EBITDA he doesn’t even like hearing the word (earnings before what really counts in costs) – Charlie
EBITDA is nonsense need to consider other costs especially capital
Stock versus gold?
When took over Berkshire gold was 20 and brk was 15 and now look at prices
Over 50 year period Berkshire will do better than gold, probably farmland will do better than gold
Hard for unproductive investment to be a productive investment over time
Warrens dad loved gold
Charlie never had slightest interest in owning gold…
Bought shares of JP Morgan Chase & Co. (NYSE:JPM) for personal account?
Like WFC Better than JPM and are buying
Cant be buying what Berkshire is buying
Buying Korea companies
Best ideas are all in Berkshire
Charlie has bought real estate too
Basically the munger family in 2 or 3 things
Diversification is something Charlie does not have interest in
Warren has 98.5% of wealth in Berkshire and JPM was part of his 1.5%
Shouldnt Berkshire make shares increase to use stock for larger acquisitions? By using dividends, etc.
Can’t control stock value…
Charlie thinks its better for shareholders to do what they are doing
Question on newspapers – why?
Newspapers have here problems, two of which are very difficult and one which can be overcome but even worse problem
News is what you don’t know that you want to know
Newspaper stil is primary in a few areas – not s many things as in past, but those items are local…local sport, neighbors, city, and as long as they stay primary there is an item of interest
Problem is newspapers – expensive to distribute
1,400 newspapers in the US and news giving free the same thing they are charging for in delivery…no business plan that charge significantly in one version and other version is free…
In last year many newspapers have experimented and somewhat succeeded at getting paid for what they were giving away.
There is a future for getting newspapers that exist in an area where there is a sense of community
Owning papers where there is a strong sense of community
Question on businesses like Amazon.com, Inc. (NASDAQ:AMZN)
Won’t affect Nebraska furniture mart but will affect others
In first few days this week business at furniture mart up 11% over last year
Tuesday over $6mm of business – huge huge volumes…going to Dallas in a few years and will have a store that will make records look like nothing
Back to Amazon, Geico is very affected by the Internet
Geico was mail originally and then it moved to television big time and then Internet came along
Warren tought only young people would look on Internet
Tings do change very significantly and if consumer finds something they like to do better then well.
Internet is terrible for most stuff
Question on reinsurance, book value or something.
*Broken English…neither got the question*
Interesting business model where people think of Berkshire first…
The Dutch company was bought at auction
Big acquisitions will come because they want to come t Berkshire
Others aren’t really challengers on that aspect
Question on voting with management
There have been a couple of times where they didn’t vote with management i.e. stock option grants
When Berkshire is a large shareholder management may have different views and they dont think about things the way Berkshire does
Berkshire is not in the business of trying to change people
Question on commercial insurance operations
If Berkshire tought they could expand internally which would be tough or buy a great company (more likely) they would
It’s hard to think that many commercial insurance companies
Whitney Tilson question on buybacks…
People don’t have a lot to lose slightly above the price Berkshire paid
If they would buy a whole lot more stock at a slightly higher price then
If you get into chaotic market Berkshire might buy a lot of stock
Questions about investment in Wal-Mart Stores, Inc. (NYSE:WMT)
Earning power of Walmart in 5 years won’t be materially affected by the outcome of the situation
Charlie is not aware where Berkshire is slipping on this
Nooning fundamentally wrong wit Walmart
We can handle bad news as long as they get it promptly
Warren made bet with protege partners about S&P.
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Update: Part 2 of Q&A Session – HERE