These notes were taken live as GuruFocus covered the annual
shareholder meeting of Berkshire Hathaway (
) in Omaha on Saturday.
: Earnings chart - benign in insurance, other businesses did
well. We've never had higher operating earnings.
Insurance earnings were helped by strong revenue and reduced
liabilities in foreign currencies. Hurts in other ways. So many
businesses, Coca-Cola, never know if revenue going up or down
either hurts or helps.
Had a Swiss Re disagreement for over a year. Settled in the first
quarter, and showed a gain of $550 million, but Swiss Re showed a
gain of $500 million too. Magnificent what accounting can do.
High point of quarter one was a gain in persistency rate of
Geico. Strength of 2012 continued in 2013 and got stronger.
Seasonal to policy gains month by month gains increased over 2012
because the closure rate improved this year and a gain in
persistency. Pure gold. Closure rate at high levels, meaning
people getting a quote can save money and love Geico but buy
because they save money. Walk out and get a quote while Charlie
Munger is talking.
Finally, railroads this year are doing very well. There was a
gain in car loadings of 3.8%, while others gained 0.04% in the
first 17 weeks of 2013. The rate was helped by oil found close to
the railroad tracks. What better place to find oil? Moving a lot
of that. Going to be moving more.
Berkshire Hathaway is now the fifth most valuable company in the
We just bought out 20% of a company we didn't already own for $2
billion. We are happy. They're happy. The relationship with the
family will be continued. The company will be part of Berkshire
Question: You measure corporate performance by growth in book
value, but it grew less than S&P for 9 of 11 periods.
Answer: We're not assured of the future. The last 10 not best
because of business in general. If it continues, it will be the
first period it falls short of the S&P. We're not happy with
that but no totally discouraged. Likely to better in down markets
like 2008, relatively than when things are up. We use book value
scale figure as a reasonable proxy in intrinsic value figure. If
we gain 1 million at Geico... there's a significant gap but to be
useful tracking device. When bought insurance, marked and book
value by $1 billion. So there are distortions. In the end, we
have to do better for you than the index fund.
Expect Berkshire to do well over long term. Don't pay attention
to five years of three years. We want to do as well in future in
terms of annual gain average gains because in the past we did
unbelievably well. At 89 Charlie is not -
Charlie: Old age might come on at any time.
Question: What is your competitive advantage over Sam Vic?
WB: Iscar is better because the company has brains, passion. Go
back to 1951 when Seth Warhouser started Iscar. Possibilities
facing him, well entrenched competition. He was also 25 years in
Israel, getting raw materials from China, selling to Boeing, GM,
industrial companies in Germany. He didn't have a great
locational advantage in being in Israel. But the remarkable
business comes from that. No other answer will result than
talented people never stopped working. Sam Vic was very good on
figures and other aspects by Iscar is one of the greatest in the
Charlie: Sam Vic is a fabulous company. It is an achievement to
do better than Iscar.
WB: Is there a better operation than Iscar in the industrial
CM: You can't believe how modern they are.
Question: You don't lose sleep over everything. But what worries
you the most?
WB: Good question. Culture is all-important. Business is all
important. People will keep calling Geico after I die. The key is
the present culture. The successor CEO will have more brains and
passion. We're all in agreement of who it should be. The culture
intensified year after year. Charlie and I knew what we were
about from the beginning but making sure everyone who bought in
understood took time. Any foreign behavior is cast out. People
self-select into it. We reject foreign tissue. I think the
successor after me, after six months will be sure. Charlie?
Charlie: This is to all the Charlie Mungers in the audience:
Don't be so stupid as to sell your shares.
WB: It's accurate. I met Georgie in December, and he said he was
thinking of going into Heinz. Because I knew them both and
thought high of them, I said I'm in. Then they got me a term
sheet. Georgie Paolo brought me a term sheet on the deal and it
was good. Absolutely fair deal. I didn't change a word in either.
Charlie and I paid more than if we were doing the deal ourselves
because Georgie Paolo is a great manager, because he's so classy,
so we stretched a little. I like the business. The design of the
deal is if we do good at Heinz we will get a high rate of return.
Less leveraged than them. They wanted more leverage. In five
years they receive higher rate of return but us with more money
will get more.
Question: Berkshire's Ajit Jain is bringing in high profile AIG
executives. What is the goal of the managers? Will they get
WB: The goal is to increase the share of the market. The second
was Ajit. One, a 7.5% in business at Loyds and London market.
Insured have a right to pick insurance. Not totally auto, we get
7.5%. We had an arrangement with Marsh on Marine but not across
the board. He will give executives of business than they're used
to having. Two, four well-known AIG people joined to write
commercial insurance down and zero internet rate world. Other
people reached out. A number of executives have in the past. Will
see Berkshire add all insurance business because it's a
significant factor worldwide, into billion and we hope could be
more greater number of billions. We have people, capital, and
ability to sign on to coverage others spread out.
CM: General speaking, reinsurance spread is very good for most
people. Berkshire is different from other businesses. If
reinsurance business is peculiar, it's because people think it's
easy, and find out it isn't.
Question: Regarding Geico, no policies are usage-based like
Progressive. Is that still the case?
WB: It's still the case. Snapshot is getting attention because
you get a picture of how people really drive. Insurance rates go
down as they attempt to figure out the possibility of an
accident. Possibility of 100 like to die than 70. An insurance
assessment measures variables. Different companies do it
differently. A 16 year old male is more likely to get in an
accident than I am. I'm not a better driver. We ask a number of
questions and find the possibility of accident and charge policy
fees on this, and see how they do. The process is working well.
We have a huge number of policy holders. Everyone is trying to
figure out how to figure out who will have an accident. It's
interesting by our works well.
Q: You're on Twitter and the SEC recently allowed business
results to be posted on social media. Is this important for
Businesswire and do you agree? Would you sell Businesswire? And
what in the world are you doing on Twitter?
WB: It's a mistake. The key to disclosure is accuracy and
simultaneity. If we want to be sure its accurage and received at
the same time as other people, Businesswire does that. I do not
want to keep going to a web page and be 10 minutes before others.
I don't think anything does as well as Businesswire. Management
couldn't be happier. I wish I could clone Kathy. Berkshire puts
out info after the market close because there's so much to
digest. Anything important on Berkshire goes to Businesswire.
CM: I'm avoiding it like the plague.
Question from short-seller Doug Kass: I'm in a lions den of
45,000 of your closest friends. In a follow-up to Loomis'
question: size matters.
WB: It does.
Kass: Berkshire used to buy things cheap or wholesale. Now you're
buying pricier and mature businesses at higher sals and earnings.
The businesses might be great to add to Berkshire, but could
result in lower rates of return. Are you look more after your
legacy? Is Berkshire becoming more of an index fund, better for
widows and orphans?
WB: We can't do as well as in the past. It depends on the nature
of markets. Bad markets can be an advantage. I take exception
that I paid fancier prices. GE was 20x earnings. I paid a far bit
more than I would. It gets tougher as we get bigger. The price
would diminish and we could still be satisfied. There are
companies we should have bought 30 - 40 years ago. Now we realize
that paying up for companies is good.
CM: I could make a short-seller's question even better. When we
say we won't do as well in the future, we still think better than
others have done in the past.
WB: We're buying good businesses. We own eight businesses that
would be on the Fortune 500. In a few months we'll own half of
Question: In China the dollar's status as reserve currency could
WB: I don't know the answer. The U.S. and China will be the
super-powers in decades to come.
CM: There is an advantage to the country that has the reserve
currency. Europe had a better hand when it had the reserve
currency. If it happened it would not be all that significant in
nature of things. Every great leader is not one any longer. We're
WB: That's the cheery part!
CM: I still think it will be 20 years from now. Not forever.
Question: If the Fed is buying 10-year treasuries, what are the
long-run risks and how do they stop without implications:
CM: I don't know.
WB: He has nothing to add. We're in uncharted territory. Many
find out is easier to buy than sell. 3.4 trillion on the Fed's
balance sheet. That's a lot of securities. Bank reserve is
incredible. It's uncharted territory. Fed is in permanent if
risks, he knows risk. Don't know if he hands baton to another
guy. Mr. Bernanke is smart. But we haven't see this. There's a
potential for inflation. Not so far. The Fed wishes there had
been inflation. Up till now GDP is inflation. They'd never admit
it. When market learns significant buying ends - it should be the
shot heard round the world. Not the end of the world. But start
revolting hard and fast.
CM: Generally, what happened surprised people who thought they
knew that interest rates were so low and would stay that way.
Everyone has to be more cautious when they print money in massive
WB: It's a huge experiment.
Question: How is a zero interest rate policy affecting
WB: It helped. Interest rates are to asset prices as gravity is
to an apple. Decreased interest rates pull on asset prices.
People make different decisions when they can't get something for
practically nothing. Interest rates power everything in the
economic universe. We paid less on Heinze than 10 years ago. It's
a huge factor in what people borrow. Houses are more attractive.
It's easy for Fed to borrow $85 billion per month. Don't know
what would happen if they tried to sell. It's like watching a
good movie because we don't know the end.
CM: Interest rates have not stayed this low for an extended
WB: We have at the first quarter 48 or 49 billion in short term
securities. Earning nada. Our money doesn't count on anyone else.
We have benefited and the country has by what the Fed has done in
the last few years. If we can successfully end without support
we're better off.
Question: What not make an acquitiion in your commercial
WB: We have a terrific manager in Ajit. There are some operations
if we could buy at the right price we would have done it. We
predict we will have good insurance business.
Question: What significance is there to bitcoin and what does it
mean for the future?
CM: We have no confidence whatsoever in bitcoin becoming world
Question: Ackman questions the legitimacy of Herbalife (
). Berkshire Hathaway (
) owns Pampered Chef. Has there been any impact on Pampered Chef?
It's a multi-level marketing company.
WB: I've never looked at the 10K of Herbalife. The key is whether
it's based on selling profits. Pampered Chef is miles away from
selling to level A and level B. People get paid based on who they
recruit. But people are based on selling to end user. There are
thousands of parties a week selling to people who want to use the
products. And that should be the distinguishing characteristic.
Charlie: And there's likely more flim flam in selling magic
potions than pots and pans.
Question: Berkshire's returns in the last 10 years are based on
repeating and extensive deals than in the past when you were a
value investor doing extensive analysis. How will your successor
achieve the same returns?
Warren: My successor will have more capital and when markets are
in distressed fewer people have capital and willingness to
commit. My successor will have unusual capital and ability to say
yes. Berkshire is the 800-number when there is really panic in
markets and people need capital. It's not our main business, but
fine. It will happen again. When the Dow Jones drops 1,000 points
you find out who's been swimming naked. They will call Berkshire.
And Berkshire's reputation does not rest on any single
Charlie: Buffett had success in value investing because
competition was less intense. It's ridiculous to think the way he
did things in the past he should have stayed in.
Warren: Goldman Sachs, GE, Bank of America are trying.
Charlie: Other people were not getting calls.
Warren: They don't have money and speed.
Question: What are the three keys to influencing people to sell
who didn't want to sell?
Warren: There was a death at See's and the rest of the family
didn't want to run the business, so they put it up for sale. I
didn't hear about it until after one person had already fallen
through. I didn't persuade them to sell. It traded actively, I
bought key pieces and stock. Sanborn was not the most attractive
business. I bought stock in the market from Stanton and Case.
They were happy to sell. I never met Stanton. I did not convince
them to sell their stock. I talked to Betty Peters about avoiding
a transaction I thought was dumb.
Question: Over the years you have built Berkshire to be
sustainable. I have difficulty explaining to people the long term
sustainable advantage of Berkshire. Can you give it in a Peter
Lynch two-minute speech?
Charlie: The competitive advantage is it's getting bigger. The
golden rule - we treat people like we want to be treated. The
long term competitive advantage is we are a good partner to
people who need money.
Warren: Years ago a person in 60s said one year to think about
selling his business. We had experience buying business years
earlier, this person died and he wanted to put to bed what had
happened. That one year and that if he sold to a competitor,
which is a logical buyer, it would put its people in charge and
it would mean it would fire his people, and come in like Atila
the Hun. He could sell to a private equity firm and lose control.
To me, we're not the most attractive, but we were the only guy
left standing. We promised him he could keep doing what he loved,
and not worry. The competitive advantage was we had no
competitor. And the shareholder base we've developed - we look at
them as partners.
Question: I heard Warren's way to conserve energy is to write 20
things he wanted to do, choose five and forget 15. How does that
Warren: Not the case. That is more disciplined than I am. Charlie
and I live simple lives. We know what we enjoy and we do it
pretty much now. Charlie is a real architect now. I never made
lists in my life. Maybe I should start!
Charlie: I can see here, I don't know when it started that
marketing psychology that you shouldn't make decisions when
you're tired, and if that's true, we live on auto pilot, it's
habitual. We don't waste decision-making energy. We use caffeine
Warren: When we write our book on nutrition it will be a hit.
Charlie: Warren's style is idea for human cognition.
Question: Buying newspapers doesn't seem to make sense
economically to get a higher rate of return on a business that is
smaller, and you like big elephants.
Warren: We will get a decent rate of return. Compared to Heinz we
have a structural advantage because write offs and after tax
return declined to 10% after tax, maybe higher. To date, we meet
or beat 10%. Never move the needle. $100 million in pretax
earnings would not move the needle but give a decent return. We
wouldn't have done it in another business. We promise to give
figures annually of investments, but at low price to earnings.
Charlie: It's an exception and you like doing it. That's what I
heard you say.
Warren: I wish I had no asked.
Question (Doug Kass): You suggested for the first time when you
go, you would move to a more centralized approach to management.
In past respect of Henry Singleton, he was 100% rational. Prior
to his death Berkshire should you move Berkshire to three
companies? Teradyne was harder to manage given its size. Compared
to Berkshire, should you split it along business lines?
Buffett: A tiny bit more in terms of small companies. No change
of significance Henry Singleton can give views on what he did
right and wrong. Breaking up would not give the present result
now and in the future.
Charlie: Henry Singleton's geniun was he managed his companies
more centralized than us. In the end he wanted to sell tous. He
loved you and the business, but we didn't want to issue Berkshire
Warren: He issued stock like crazy. GM worked wonderfully if
diluted created how ended up.
Charlie: We're more avuncular than Henry Singleton was. I like us
Question: Taxes and deficit. What are two things policymakers can
focus on to stay competitive.
Warren: Health care costs are 12% of GDP. Rivals 9.5 to 11.5%.
There are only 100 cents in a dollar. Give up 8 cents just like
raw material. It will be a major problem in US competitiveness.
Overall since the crisis it works, but number one is health care
Charlie: Grossly swollen alternatives markets. You can graduate
from MIT in derivatives markets. They are crazy markets. I agree
on health care but find the other more revolting.
Warren: Charlie is very Old Testament.
Question: Will the health care act affect Berkshire Hathaway (
Warren: We're not sure. We don't know of any units that don't
have health care. Health care was a huge cost for us. Do few
things on a centralized basis but we have not assessed figures of
the quarter. We saw a few units' costs rising 10% to 12%. We're
not trying to centralized headquarters.
Question: What are your capital spending plans? And do you owe
your success to timing?
Warren: I was born in the U.S. so I had a huge advantage, and I
was born male so I had a big advantage. I'm not sure in the
business world if I was born in 1930 the time could have been
better. I was conceived in November 1929 when my parents had
nobody to call on and no TV, so here I am, luck the crash of 29
came along. It caused a lot of people to be turned off on stocks
like the last crash. Business was a terrible environment. Every
baby born in the U.S., on a probably basis, will do better in all
kinds of ways than I do. In the investment field, it is not as
good as it was in 1950. But a person with a passion for investing
coming of age likely will do better and live better.
Charlie: Competition was weak in the early days. Competition is
not as weak now. There is surely an advantage from exiting
between not mean more to do ahead.
Question: If you can imaging yourself at 30, how have you
changed, and what advice would you give yourself, and how would
you give the advice in a way that you would actually take it?
Charlie: It's so old fashioned and boringly trite. Keep plugging
along. All old virtues still work. And work where you're turned
Warren: We met in the grocery business. I'm not in the grocery
Charlie: You were not promoted either. Even though you had the
Question: How concerned are you about
Warren: I hate dumb competition. And a lot of hedge funds have
entered into the hedge fund business aggressively in the last few
years. It gives them an opportunity to operate in Bermuda and
avoid taxes. It's respectable and sold to investors. Anything
Wall Street can sell it will sell. It's very sellable now. Money
is flowing in and bringing down prices. In the end we know what
we're willing to do and do what we think will get us underwriting
profit. If a hedge fund guy is willing to sell gas and buy first,
he has a problem. In the 1980s we had expense ratios up and
volume down. Standby costs were real, but not backbreaking. We
look forward to better days and they came. Never anticipated it
would happen. We've been luck to get people - Jain and Nicely. We
hit the jackpot of people and like not having pressure to do...
Question: I noticed your boardroom reflects the fact that women
are not hired for top jobs in corporate America.
Warren: I wrote an article for Fortune and you can see my views
on that. There's no question that throughout my lifetime women
have not had the same shot as we have. My sisters were as smart,
grades were good, and more personable than me. My parents loved
them. All my teachers were female and because they only had a few
occupations available to them. Improvements have been made, but
there is a long way to go. When people are placed in that
position they start believing it themselves, so they don't
envision more. Katherine Graham was an intelligent woman and told
woman couldn't run a business as well as a man. She knew it
wasn't true, but couldn't get rid of it and secretly told herself
that. The stock went up 40% under her and she wrote a Pulitzer
Prize-winning biography. I hope it keeps moving and moving
faster. I hope females hearing this will not see themselves in
Question: Is Berkshire too big to fail? How about DF and how does
it impact insurance and Wells Fargo (
) and Goldman Sachs (
Warren: It won't affect it to my knowledge. Capital ratios for
long banks at high levels and affects return on equity. Cap
ratios increase and return on equity will increase. Banking in
the U.S. is stronger than in the past 20 years. Compared to the
EU or 20 years ago, it's dramatically stronger. Don't worry about
banking being the cause of the next bubble. Usually we don't get
to a bubble the same way we got to the last one. I feel good
about our investments at MNT and WFC. We won't earn as much
return on equity because the rules change.
Charlie: I'm less optimistic in the long term. I see something
more extreme. I don't see why massive derivatives books should be
mixed with deposits of people. The more banks act like investment
banks, the less I like it.
Warren: Five years ago I wrote about investors getting sold
predictions. I offered to beat bet a group of hedge funds that
they could not beat a no-load index fund over five years. Each
put $350,000 into a zero-coupon treasury at $1 million. Interests
rates have gone down, so from an investment of $950,000 sold
zero-coupon and bought Berkshire Hathaway, now worth 1.2 million.
Hedge funds have returned 0.13% and the S&P returned 8.96%,
at the half-way part. If it does well we'll have more than $1
million to give to charity. You can see it on Longbets.com, where
there is a bet a large hadron collider will destroy the earth in
10 years. And one that says one human in 2000 will be alive in
2150 - Charlie?
(The notes of the meeting have been consolidated into the first
half of the meeting, here, and
the last half which you can read here
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