berkshire hathaway shareholder meeting notes -- gurufocus

7/28/2019 Berkshire Hathaway Shareholder Meeting Notes -- GuruFocus

1/12

4/10/13 Berkshire Hathaway Shareholder Meeting Notes -- GuruFocus.com

www.gurufocus.com/news_print.php?id=174684

Berkshire Hathaway Shareholder Meeting NotesMay 6, 2012

These are the notes we took at this years Berkshire Hathaway shareholder meeting notes. We published thefirst part last night. This is the complete piece.

Did you believe the CEO of any financial organization can also be the chief risk officer. Does the

future ceo will be chief risk officer?

I do believe CEO of financial organizations should also be chief risk officer. I am the chief risk officer ofBerkshire. My successor will have the same responsibi lity, and we will not select who does not have the ability.It is not an impossible job.

Berkshire can act in speed that is rare among corporations. When we talked with Bank of America CEO, Inever talked with him, and I said we will do 5 billion, and we have the ability to act quickly. I dont believe thatthe successor cannot do a lot things that I can do. He can do a lot of things better than I can.

2011 annual report, disclosed reinsurance assumptions made, there was a charge. There is

difference in mortality rates between different Berkshire businesses.

Warren: Mortality figures coming on quarterly were above expectations and what looked like what should havebeen the case looking at earlier figures. We are insuring SwissRe and they are reinsuring a lot of American lifeinsurers. How Geico reserves is described in annual report, I would say that the one overriding principle is that

our plan is to reserve conservatively. Reserve in reinsurance is a lot different than reserving in the autobusiness. In auto insurance you find out very quickly how you are doing.

Charlie: There are always going to be some contracts where results are worse than expected. Why wouldanyone buy insurance if that werent the case?

Warren: Its interesting just how, lets say 911, very hard to reserve after 911, to what extent, going to collect oninsurance, when you close restaurants at airports, is that business interrupted. We turn out to be somewhatover reserved for 911. The same situation in Thailand and Japan, supply chain for many American companieswere interrupted by floods in Thailand and tsunami, auto companis cant get parts. It takes years to work out,generally Berkshires reserve developed favorably.

In the past you have made a few investments in China, Petrol China (PTR), BYD, given growingimportance, what advice would you give to Chinese leadership?

Charlie: Were not taking much time giving advice to China. If you stop think about it, Chinas doing very well, tosome extent we should seek advice there instead of giving.

Warren: We found almost it useless in 60 years in investing to give advice to anyone.

Charlie: Its amazing how little influence we had when weve had 20% of the stock, people have this illusion thatthe beauty of Berkshire is that weve created system that doesnt require much control.
http://www.gurufocus.com/http://www.gurufocus.com/http://www.gurufocus.com/http://www.gurufocus.com/http://window.print%28%29/


2/12


www.gurufocus.com/news_print.php?id=174684 2

Warren: If you look at our 4 largest investments, worth $50 billion today, held some for 25 years, the number oftimes that we have talked to the CEO of those companies doesnt average more than twice a year, we are notin the business of giving them advice. If we thought that the success of our investment depended on themfollowing our advice, wed go on to something else.

While I am pleased by your announcement to buy back stock at 110% of book value, sometimes I

feel that I have to pay 200% . Did you not feel that Berkshire was trading over intrinsic value over the

past decade?

Warren: We have whole different view on that than many managers. If we could have our way, we would wantBerkshire stock trade just once a year. We come up with a value and we trade at that price. But this is allowedin public markets. If Charlie and I think that Berkshire is overvalued, interesting proposition to announce half anhour before market opens and say that the stock is overpriced, who knows how the shareholders would react.We would never encourage people to buy our stock at a price we thought was above intrinsic value. At onetime we thought the stock was overvalued in mid1990s, we created a page and put in proxy saying that wethink the stock was overvalued. We wouldnt buy stock at that price and didnt recommend it to our relatives.

We think that if we are going to repurchase shares from people, we should let them know if we are buying it toocheap

What is Berkshires capacity for buybacks, how attractive are the buybacks, what are latest thoughtson instituting dividend.

Warren: 1.1 of book value is a figure we feel comfortable with. We wanted it to be undervalued to do buybacks,we want to make sure shareholders know its undervalued. We have a terrific group of businesses, we thinkthey are going to be worth more in the future. Some businesses worth far more than trading price. From strictlyfrom moneymaking viewpoint, we would love to buy tens of billions worth of stock. I dont think it will happen. Itmight happen. If we have the chance to do it, we would buy very aggressively, we know we are makingsignificant money for remaining shareholders, very obvious to us we would do it on a big scale, if cash positionis not below 20 billion.

Charlie: Some companies buy stock back regardless of price That is not our system.

Warren: Its for ego. Most of the companies CEOs dont think the way we are thinking at all. They like issuingoptions at lower prices. We will only buy back shares for one reason, to increase per share value day after, ifwe have the chance to do it in a big way then we will.

Whats your view on the Euro banks, about US banks.

Warren: We have totally different views on euro banks than US banks. US banks are in far better position thanthey were in 3-4 years ago. They have taken the losses and buttress their capital in big way. The Americanbanking system is in fine shape. The euro banking system was gasping for a year a few months back. TheMr.xxx opened his wallet, gave a trillion euros in liquidity for those banks. It is a huge act designed to replace

funding that was running off from them. Euro banks have more wholesale funding than US banks. Euro bankstended to get most of the funding on a wholesale basis, that money can run pretty fast. ECB gave them $1trillion for 3 years for 1%. Id like to have $1 trillion for three years at 1%, but Im not in trouble so I cant get it. itspretty remarkable to look at whats been accomplished in our banks, when the bankers brought together inWashington and forced to take money. I think that policy was very sound for the US economy. If some bankswere forced to raise capital, I wouldnt like it i f I were a shareholder. Fed and treasury have handled things quitesensibly. If they hadnt done so our world today would be a lot different.

Charlie: Europe has its own debt and so on. But they dont have their own federal union. It is very difficult tohandle stresses. We are more comfortable with US banks.

Warren: Back in 2008 Fed and treasury said we will do whatever it takes. You know they had the power and the


3/12



will to do whatever it took. But when you have 17 countries that have surrendered their sovereignty in currency,you cant do that. Kissinger said if you want to call number to Europe, what number would you dial. For exampleif 17 states governors have to meet in Washington, we would have to have a different outcome. Europe and USare very different.

Coal?

Warren: Mid-American is never going to be affected by coal. It is a regulated public utility. We have two Mid-Americans, utilities on the west coast. They are pass through organizations, if they are operated efficiently.

While coal price goes up or down, it doesnt affect them, it affects customers. Coal traffic is down this year thismay interest you, the first quarter kilowatt hours used in the United States went down 4.7%. This is aremarkable decrease in electricity usage. Another thing is natural gas under $2 at the same time oil was $100.If you told Charlie or me 5 years ago that you had 50 to 1 ratio between oil and natural gas, I wouldnt believeyou.

Charlie: We are using up precious resources we need to create fertilizer. Sparing resources that is not asprecious. We should use up all of thermal coal before using a bit of natural gas. I think natural gas reserves arethe most precious things we can leave our descendents. Gas is worth more than coal.

Warren: Ratio of prices to natural gas compared to prices of oil, cant really change the percentages too much.

It will be interesting to see how gas/oil ratio plays out. It has changed everyones thinking in a very short periodof time. 3 years ago people wouldnt have said this is possible.

What Geico doing to keep the competitive advantage in the technology change?

Warren: Progressive is leader with technology change. If i t becomes something that gives you better predictedvalue, then we will take it on. We are always looking for more things to tell us if we look around in the people inthis room, what tells us the likelihood that them having an accident next year. Age is one thing. 16-year old maleis totally different than someone like me. Some things are very good predictors, credit scores tell you a lotabout driving habits. I dont see anything that threatens Geico in any way. In the first quarter, it not our bestquarter, we had a very significant number, 300,000 new policies. Feb. was best month. Marketing is workingvery well. Risk selection is working extremely well. Retention is working extremely well. Geico is carried over a

billion dollars over its book value. It is worth a whole lot more than that, based on the price we paid, the figurewe paid is worth 15 billions more, we wouldnt sell it at all, that would not tempt us in the least.

In recent years business schools taken lot of blame to effect on economy, what would you expect to

change.

Warren: I wouldnt blame business schools, i dont think that theyve taught us bad, what do you think?

Charlie: It was a considerable sin; I think business school is improving.

Warren: In investing, I would say that probably the stuff weve seen taught at major business schools, maybe

because in the investment area, it is astounding to me how schools have focused on one fan after another,finance theory, usually very mathematically based, when its become very popular almost impossible to resist.Investing is not that complicated. I would have one course on how to value a business, then one on how to thinkabout market. If people grasp these principles, they would be a lot better off. Who needs option pricing in aninvestment business? Its totally drifted way the teaching of investments. I look at books that are usedsometimes and found that theres nothing in there about value in businesses. If you buy businesses under whattheyre worth, youre going to make money. Theyve tried to make it a lot more difficult.

Charlie: They want some kind go standardized solution that requires them not to think too hard, and they haveone.

Warren: Is there anyone weve forgotten to offend?


4/12



The Buffett rule

Warren: It was more fun to attack something that I hadnt said than it was to attack something that I had said.The proposal was that people who make very high incomes pay a rate that is below 15%. When people look atthe takes rate, making 40 million a year, they should pay taxes in the 30% area, many people are. If you look atthe most recent year, if you aggregate payroll and income taxes, if you take the 400 largest incomes in theUnited States, the average is $270 million each. 131 of those 400 pay tax rates that were below 15%. They arepaying at less than what the standard payroll tax was. So under the Buffett rule we would have a minimum tax,

restore their rate. Back in 1992, average income of the top 400 people was 50 million, only 31 (?) was payinga lower rate. What were asking for is to share sacrifice from the American public, were telling them we have tocut back, make sure that the people with these huge incomes get taxed at a rate is the way that they used to betaxed, 2/3 of the people in that area get taxed at higher rates. You can raise a lot of money, very few peoplewould actually be effected.

You can give 30% to charity instead of government?

Warren: The bill was sent to the white house and didnt not get passed. I think that people like me that havehuge incomes should pay higher rate. I have no tax planning, no gimmicks, no Swiss banks account, when i getall through, my tax rate is lower than my cleaning lady. I made a calculation 3 different times, 2004, 2006 nd

2010. My incomes in those years were 25-65 million. I came in with the lowest tax rate in our office. They wereall in the 30s, and I was in the area of 17%. Thats because the tax law favored those who make huge amountsof money. Among those making $270 million a year, the tax rate of 31 out of 400 were below 10%. Thecleaning lady at the office has been paying 12.5% on social security taxes, people making hundreds of millionpay less than 10%. That is wrong.

Mid-American has large investment in wind and solar power. What is the most appropriate use of

natural gas?

Warren: I believe on wind were a lot bigger stake in wind than solar, subsidy is 2.2 cents for 10 years perkilowatt hour, federal subsidy, makes wind projects work whereas they wouldnt work without the subsidy. Sothe government by putting in that 2.2 cents has encouraged a lot of wind development. I think if there had been

none, there would have been no wind development. Without subsidy the projects wouldnt make sense. solarprojects there may be some subsidy involved in. I dont know the specifics. If Greg was here, he can correct meon this. I don think any solar or wind would be working without subsidy.

Charlie: I think its very wise thats what the government are doing.

Warren: The future is subsidizing oil and natural gas in a sense.

Greg: Warren was right, the subsidy with the wind allowed us to build 3000 megawatts over our two utilities.We wouldnt have moved forward without it. In solar a few other incentives, large inventive in constructing 30%covered cost, significant advantage as Berkshire is a full tax payer. Competitors dont have the tax advantage

for those. Berkshire benefits from the tax credit.

Warren: BH has a distinct competitive advantage in that BH pays lots of federal income tax, we can use them,dollar for dollar benefit. I would guess that 80% of utilities in US cannot reap full tax benefits, or any tax benefitsbecause they dont pay any federal income taxes. They use depreciation to wipe out taxable income. Theycannot have any appetite for wind projects because of tax credit. By being part of BH which is a huge taxpayer,Mid-American has extra abilities to do a lot of project without worrying about exhausting their tax capacity. Thatis a big advantage we have.

You are clearly entitled to speak your mind as an individual. The recent publicity around Buffett tax

is limiting on principle on Berkshire stock for some people. While being a public company, should

some political dialogue be muted? My father is 84, he does not buy Berkshire stock because of this.


5/12



Warren: I dont think that the CEOs of any of companies in should in any way have their citizenship restricted.when Charlie and I took this. We did not decide to put our citizenship in blind trust. I really think that 84 year oldman making investment decisions on political decisions not wise.

Charlie: Warrens position on taxing for the rich has decreased my popularity in my country club.

Warren: Weve never had a disagreement in 53 years. In November roughly half the country is going to feel oneway, other half going to feel a different way, selecting lifestyle on having people to agree with you, going to life a

pretty peculiar way.

Position on purchasing acquisitions, 20 billion cash deal?

Warren: We recent considered a 22 billion deal. With BNI we used stock to pay, I dont like to do it. Wewouldnt use stock to pay for deal. Although it could happen, I dont think it will happen. So we looked at thedeal, and we would have done it, but it would have stretched. We want to have a 20 billion dollar cash balanceat all times. If that had been 40 billion, as much as I liked it, I dont want to be in limbo not really knowing wherethe money was going to be come from. If we make it a 20 billion deal, then well do it.

Jobs that were shipped outside are coming back to the US, a number of companies started bringing

back here, is BH looking at doing that?

Warren: I would say that the number of jobs we have is listed, about 270,858, we probably, I dont think we havemore than 15000 outside the US. We invested in plant equipment over 8 bi llion last year, 95% or so of that wasin the US. We dont have a lot of that around the world. Im not opposed to it, our Iscar operation operatesaround the world, product they sell is going to be sold around the world. US is an important market, but not amajority. that company has 11000 employees or so, but few are in US. But wed like to do more business inKorea, Japan, India, etc. we have utility operations in the UK, we just bought a business in Australia, just in thelast day or two we bought an operation based in the Netherlands. It is extremely likely that 10 years in the future,we have maybe hundreds of thousands more. There are a lots of opportunity in the US, this is a real land ofopportunity, but we find lots of things we do that we think make a lot of sense in this country.

Charlie: You cant bring a lot back if it never left.

How are you feeling?

Warren: I feel terrific. I always feel terrific. I love what I do, I work with people I love. Its more fun every day,basically I think I have a good immune system, my diet is such as any fool can plainly say, Im eating properly.

All i can say is that it works. and I have 4 doctors, least a few of them own BH. My wife and my daughter and Ilisten to 4 of them, they describe various alternatives. The ones that they recommend do not involve a day ofhospitalization, they dont require me to take a day off from work, the survival numbers are way up, 99 and ahalf percent for 10 years. Maybe Ill get shot by a jealous husband, this is a really minor event.

Charlie: I rather resent all this attention and sympathy that warren has, I probably have more prostate cancerthan he does. I dont know because I dont let them test for it. Anyways, i want the sympathy.

Warren: My secretary was getting too much attention, so i had to throw the spotlight back to myself. The medcenter is about 2 minutes away, I may have a little less energy but I do fewer dumb things.

I am 26. If you were me and had the chance to start over, what areas would you like to get into and

do you think that my generation have the same number of opportunities as yours?

Warren: I think you have all types of opportunities. I would very much do what I did, start earlier, and do it a littlebetter. I would try to develop an audited record of performances as early as I could. I would try to get somethinga lot more interesting, buying companies to keep. I establish relationships with people, I want to be for keeps.


6/12



Thats been enormously satisfying, but it takes some capital to get into that business. I built it through managingmoney for myself and others. I would get past that as fast as I could then buy businesses, then spend the rest ofmy life doing it. And i would do it with Charlie incidentally.

I think that at least 95% of the people here believe that BH is undervalued. Why do you think the

stock stays stuck at these levels?

Warren: Weve run BH now for 47 years. Weve had 4-5 times where we think it was significantly undervalued.Weve seen the stock get cut in half in a fairly short period of time. Theres going to be periods where its

overvalued and times where its undervalued. Back in 2000, when we said we were going to repurchase, butwe didnt get any repurchase. The beauty of stocks is that they do sell at silly prices sometimes, and thats howweve gotten rich. Chapter 8 and chapter 20 in the Intelligent Investor by Ben Graham is all you need to get rich.Mr. Market is here to serve you and not to advise you. All the thousands of prices that you have, Mr. Market ismaking thousands of mistakes every day. Its built in to the system that stocks have been mispriced. BHgenerally speaking has been closer to selling at its intrinsic value than most large companies. If you look at ourhigh/low range in the year compared to other big companies, our stock fluctuates at a lower range than others.The stock market is the most obliging money making place in the world because you dont have to do anything.Thousands of businesses are priced, changes every day, lots of information, you dont have to do anything.Compare that with any other noninvestment business.

Charlie: Whats interesting about this place is that Ive had a lot more fun than when we could buy businesses tohold. So as fast as you can work yourself in our position the better off youll be.

Warren: It will take you a littel while.

Have macro risks ever set you back in buying a company?

Warren: Charlie and I have never had a conversation about buying/selling a business where weve talked aboutmacro affairs. We buy it if its well priced and it is a good company. I bought my first stock in June of 1942 andwhat happened here was a country where all my older friends had disappeared. And we were losing the war.Stocks were cheap. I wrote that article in October of 2008, youre going to read all kinds of bad news, andstocks are cheap. We look at value and we dont look at headlines at all. We dont have any discussions about

macro factors. Charlie has this little company Daily Journal (DJCO) and he went out in 2008 and bought a fewstocks, that was the time to use the money, not to sit on the money. Charlie, what stocks did you buy?

Charlie:

Warren: You can never get anything out of him.

When you look at the businesses that BH owns, which business has greatly improved in the past 5

years and why, and name a business that was not so lucky.

Warren: There is no question, the big ones have done well, we actually have owned a significant piece of BNI

for the very fundamental reasons. BNSF improved its position dramatically over the past 15-20 years,continues to this day. It is an extremely efficient and eco friendly way of moving a ton of things that have to bemoved. Its an asset that cannot be duplicated for 3-4-5-6 times what its selling for. It has a lot business thanwhat it was 5-10 years ago. Geico was another company similar to that, were approaching 10% of the market,we had 2% of the market in 1995. We have Tony Nicely who maximized what there was to be done. Geico isworth billions more than when we bought. BNSF same thing, Mid-American has done a great job. Iscar is doingwonderful since we bought it 6 years ago.

Charlie: 80% of businesses that we own, increase value. The fortune is not going to go away just becauseWarren will die.

The derivatives that Berkshire owns?


7/12



Warren: Some derivative contract is required in our utility. Its not going to be a huge factor in BH. were goingto do quite well with the positions that we have, I like the positions but the rules have changed in relation tocollateralizing.

Charlie: The derivatives that bother some people. We had better credits than anyone else, weve got betterterms, we will have made $10 billion, maybe a lot more. Were lucky if we get those contracts.

When you discuss BHs intrinsic value, why do value insurance at only cash + investments per

share. For noninsurance you use pre-tax earnings?

Warren: Not quite the way you say, I would value Geico and other companies in different ways. Basically, Iwould say that Geico has an intrinsic value that is significantly greater. 2 reasons. I think that it is quite rationalto assume underwriting profit within 1-2 decades, and i think there will have significant growth. In any event, Iwill let you come up with your own evaluation of that. In operating businesses, different ones have differentcharacteristics. I would like to buy those at 10x pretax earnings.

Since 1999, gold has gone up multiple times. But Berkshire stock lagged far behind. I dont own your

stock for the glamour, i own it to make money. What happened?

Warren: When I bought Berkshire, gold was at $6 and BH was at $15, now gold is $1600 and BH is 100,000.Common stocks as a group will do better than gold, if you own an ounce of gold now, in 100 years from nowyoull still have 1 ounce of gold. Its very hard for unproductive investments to be productive investments overany long period of time. If I say bonds are no good, Bernanke still smiles at me. But if you say anything negativeabout gold, it arouses passions in people. This is kind of fascinating. Usually you thought through somethingintellectually, it shouldnt matter what people say. If your facts are right and your reasoning is right, then youregood. My father loved gold, he could take a discussion of it but many people dont tolerate that.

You said in an interview in CNBC that you have bought shared of JPM for your personal account,

can you share some stocks you bought for your own account? and difference between buying for

your personal account compared to for BH?

Warren: I actually bought WFC more than JPM, my best ideas are all in BH, I can promise you. Charlie boughtreal estate too.

Charlie: Diversification is something i have no interest in unless it happens automatically like it did with BH. Ilike this buy and hold investing to live life and deal with a better class of people.

Warren: If you have 98.5% of your money in BH, and youre thinking about the rest 1.5% then you have aproblem. We have 400 million shares of WFC in BH and I like JPM too, but WFC is easier to understand, webought WFC in the first quarter, we bought it last year and a lot of years before. If I wasnt managing BH, and Iwas sitting on my own money, I would put a lot of money in WFC and some in JPM too.

Money in life insurance companies vs. in property casualty insurance companies?

Warren: Money in our life insurance companies has less use to use. Id rather have 100 million in propertycasual than life. Money in life insurance cannot be used as effective than money in property casualty insurance.Its a disadvantage. The number 1 place that wed like that money is in the holding company, 10 billion of that inthere. Most of our operating companies keep more cash than they need. As long as I have 20 billion in someplace, i feel comfortable. Its probably more than we need but it makes us feel that we can do other thingscomfortably, as long as the downside is protected. Fair amount of logic to where things are placed, if we wereto make a big acquisition would have to shift some funds from one place to another, but we will always leaveevery where properly funded.


8/12



Since BH will likely need to offer a stock component for large acquisitions, wouldnt it have effect of

lowering of cash? Dividends?

Warren: We would prefer to have our stock sold at intrinsic value, use cash for the balance. BH withoutdividend will probably be sold at or above intrinsic value above as much as it as below. I don think a dividendwould be a plus to sell at intrinsic value most of the item. Were willing to pay 1.10 for a dollar on book, we thinkthat its worth at least that much. Unless we find we cant do things in the future that make sense. Our goal is tohave our stock sell as close to intrinsic value as possible. Cash is our favorite medium of purchase, we hate

giving out shares. We do not like trading out a part of company because of any acquisition.

Charlie: What you suggested is a very conventional approach, shareholders should do it the way were going it.

Warren: I should point out, Im in the position of giving away all of my stock between now and 10 years after mydeath. For philanthropic purposes Im disposing of the stock. Our interest is in having it sell at the fair value.Over time it will average at the fair value. It has happened in the past, but it doesnt happen every year.

You have described the newspaper business negatively. With all new options today in social media,

demise of newspaper, why buy Omaha new herald. Was there some self-indulgence in this?

Warren: Everything she said is true, its even worse than that. The newspaper have 3 problems, two of whichare very difficult to overcome, the 3rd if they dont overcome it is worse problem. News is what you want toknow but you dont know. The newspapers 50 years ago contained dozens of areas of interest to people. Theyare the primary source for news. Now, all of those things of interest have found other means where thatinformation is available on more timely, cost free basis. Newspapers have to be primary about something ofinterest to a significant percentage of people that live in their distribution area.

The World Herald tells me every day a lot of things that I want to know that I cant find some places else. Theydont tell me as many things as 30 years ago, but still some. The most of those items are local, but I want toknow what I dont know. Im going to look at those through other mediums. They tell me local sports, about mycity, about my neighbors, a lot of things i want to know. As long as they stay primary in that area, they have aninterest to me. They are expensive to distribute.

And another problem, there are 1400 daily newspapers. In a great many cases they are going up on the weband giving free the same thing theyre charging for in delivery. Will any business plan thats sustained itself for along time can charge significantly in one version and offers the same version free to people that have abusiness model that will work over time? In the last year even many newspaper have succeeded in thoseexperiments in getting paid for what they were giving away for free. I think there is a future for newspapers thatexist in an area where there a senses of community, where people care about whats going on, about theirschools in their geographic area. its not as bulletproof as it used to be, but I think if you live where most peoplehave a sense of community, cover the local area with news people are concerned of, doing that better thanother people. So we have bought, we own a paper in buffalo, and we make a internet presence there, theeconomics based on the prices weve paid and made, I think the economics will work out okay, but its nothing

like the old days but it still fulfills important purpose. It will tell you a whole lot about whats going on locally ifyoure interested.

Charlie: We had a similar situation at World Book. The encyclopedia businesses was ruined, given away forfree by Bill Gates, not much profit in newspapers as it used to. its not going to be our best businesses.

Warren: We will be going where there a strong sense of community. If you live in grand island at Nebraska, andyour children live there and your church is there, you will be interested in the state of Nebraska on TV or theinternet, and youll be willing to pay something for it, and advertisers will find a good way to talk to you, but itwont be like the old days.

Technology has affected many of the businesses. What businesses will be affected in the future by
http://www.gurufocus.com/StockBuy.php?GuruName=Bill+Gates


9/12



companies such as Amazon (AMZN)?

Warren: AMZN is a powerhouse. I dont think it will affect furniture, but it will affect other things. The first fourdays of this week, our business at the furnishing market are up about 11% since last year. on Tuesday we gotover 6 million in business, huge volumes. And were going to Dallas, a 433 acre plot down there. Going back to

Amazon (AMZN), Geico is affected by the internet. Geico was selling through mail, originally. It was verysuccessful. Then it moved to TV, then internet came along. I thought only young people would look for quotes onthe internet, I would be calling on a rotary dial phone. The business just changed dramatically to the internet.Things do change a lot and the consumer finds something that theyre like to buy. For Amazon, it is very hard to

find unhappy customers. A business that has millions and millions of happy customers can introduce them tonew items, it will be a powerhouse and could affect a lot of businesses.

Charlie: Anything that can easily be bought using a home computer will be affected. I wont be buying the stuff. Ialmost never buy anything. I think it will hugely affect a lot of people, and is really terrible for a lot of retailers.

If other companies want to copy Berkshires Model, care to comment?

Charlie: We have a very peculiar model, its very hard to people to copy this.

Warren: It takes a great amount of consistency. It is possible at Berkshire because of we are controlling

shareholders. Weve had a culture where we can write out 13-14 principles 30 years ago, and still stick withthem. Thats very hard to do, it takes a very unusual structure in order to do that. It took a long time. We boughtthe Dutch company yesterday, big private acquisitions will come to BH because they want to, and thats asignificant competitive advantage.

BH has several investments in other publicly traded companies. BH must cast votes on matters,

could you tell us how you vote our shares in these companies?

Warren: Weve almost never voted against management, but there have been a couple of times weve thought,stock option expensing, there may have been a bad option grant. Our general feeling is when were a largeshareholder, we generally like the business, we like the management, theyre not going to subscribe to ourviews. It is not that they are bad people, they just judge differently, think differently. That doesnt rule out owning

a big piece of the business. We are not trying to change people. We know we dont want anyone to change us.We accept people the way they come, We dont expect everyone to be clones of us, if we were to see aparticularly dumb merger, stock option plan, etc, but we might vote against it. It would pass anyways but wewouldnt conduct a campaign against it. We have seen some of our companies engage in what we thoughtwere really dumb deals, i think we voted against maybe one or two of them

Wal-Mart is a large position of Berkshire. How does Mexican scandal affect it?

Warren: I do not think the earning power of WMT 5 years of now will be affected that much by the situation.

Charlie: These are interesting issues. Im unaware of any place where BH is slipping; its not inconceivable we

could have some slipping somewhere. In a company as big as WMT theres going to be a small glitch.

Warren: We have 270,000 people today. At least 20 people are doing something wrong. We can have a bull inthe face about people do and not do, a lot of people will just do crazy things. It is a real worry if youre running abig company. You act fast if you hear about something and weve got communications, but that does not stopthe fact that right now someone is doing something wrong at BH, and we try to convey to the managers thatwhen they find out about something, act on it, we can handle bad news as long as we get it promptly. I am verysympathetic of managers of large companies; youll have some very peculiar people.

Thank you for being open about your heath situation. As I have traveled a long way, Im hoping for a

good answer from you and Charlie as well. My question is, how do you value declining businesses?

Encyclopedia and retailing businesses, how do value declining businesses?
http://www.gurufocus.com/StockBuy.php?symbol=AMZNhttp://www.gurufocus.com/StockBuy.php?symbol=AMZN


10/12



Charlie: Theyre not worth as much as growing businesses.

Warren: We are in several declining businesses, such as newspaper business. We will pay a price in adeclining business, but that is not where were going to make money at BH. The real money is going to bemade through growing businesses, and thats where the focus should be. I would never spend a lot of timetrying to value a declining business and thinking I am getting one free. The same amount of energy andintelligence brought to better types of businesses is just going to come out better. We started with decliningbusinesses, textiles in New England. We have one business that had $120 million in sales in 1970s, but only

$20,000 in sales last year. We thought of brining the sales chart down here and turning it upside down. In 1966,we put $6 million in a company, we called it diversified retailing even though there was one company, in ourdefense there were 4 department stores, but that $6 million has turned into about $30 billion starting with thatfailed business.

Media: Many of us are interested in what youre buying, but you wont tell us. What in the investment

world strikes you as folly, crazy, or dumb?

Warren: I think we should start with companies that I dont understand. I dont have a reasonable idea abouthow the industry will develop within 5 to 10 years, and that eliminates a whole bunch of things. If the price iscrazy even If I do understand it then thats out as well. So were down to a small group of companies. The idea

that someone is bringing something to the market, and that is going to be the single cheapest thing to buy, itsnonsense. You know it cant be the most attractive thing, but people get excited about whats coming and all. Iwill guarantee you that you will have thousands of opportunities and most of them are not special. It just doesntmake any sense to spend 5 seconds thinking about them, but we dont think about them. Theres alsoindustries that we think could potentially do very well but we have no idea who the clear winners could be in thenext few years, so we dont think about those as well. You cant have a big disaster in this business. We dontwant to lose a significant percentage of BH net worth and so far we havent.

How long do you think it will take China to have a company like CocaCola?

Warren: Chinas got some huge companies and they may have clips in market value, some of the ones is asbig as Coca Cola.

Given that youre now in IBM, are there any companies? Is Google inevitable? What are the one or

two things about Google and Apple that you feel?

Warren: Well both are extraordinary companies, they look very tough to dislodge where they have theirstrengths, I would not be at all surprised to see them worth a lot more money 10 years from now, but I would notwant to own either one of them. But I would not short them either.

Charlie: I think we can fairly say that other people will always understand those two companies better than wedo.

Warren: The chances of being way wrong in IBM are probably less than being way wrong for Google or Apple,but that doesnt mean that the latter two arent going to do as well as IBM. We wouldnt have predicted whatwould happen with Apple 10 years ago, and its very hard for me to predict them 10 years from now.

Recently weve seen some coal plant closings and other things. Will thos affect BNSF?

Warren: There is no question that railroads, utilities, insurance companies, are all very much affected bypolitical process. Economics are on our side in the railroad industry, we can move a ton of products 500 mileson a gallon of diesel. Railroads move 42% of inner city stuff. In terms of congestion and emissions, railroadsare all advantage. We got a wonderful product, overall I like our position. They do have to be involved in politicsbecause people who would like to change some of the rules are going to be in politics too, and things will bedecided in state capitals and more importantly in Washington. I think it would be very dumb for the country to do


11/12



anything that discourages the railroad industry from spending the kind of capital that needs to be spent in thefuture. The country has a strong interest in the railroad industry, having ever incentive to invest, and the railroadindustry paves its own way. $3.9 billion will be spent this year to expand and improve, and the country will bebetter off.

Charlie: Its the nature of things there are good breaks and bad breaks. BNSF helped double the containercarriage tunnels higher and ridges wider, found oil, bad breaks too, but averaged out its a terrific business andterrific management.

Warren: After WWII the railroad industry have 1.7 million employees in the US. Now there are only 200,000employees and have become a lot more efficient. Its a fundamentally very good way to move heavy stuff a longdistance. Its hard to conceive of anything. Trains are pretty darn good.

In AIG, some people were decreasing exposure to risk, while others increased. How do you share

information across units among Berkshire companies?

Warren: There are certainly some people in Berkshire who have contact with other people in Berkshire, but wedont make any attempt. We want our businesses to feel like they are their own business. We dont tell thepeople how to run their business. The moment we start telling them how to change the way they operate that

just erodes that advantage which we feel very substantial about how they feel that the company is actual theirs.

Trees are one of Americas greatest resources. We have a well run forester, they can use their

product to subsidiaries of Berkshire. Will you consider buying a forest company?

Warren: When we buy a business, we never think much about this companys product can be used in othercompanies. To date, weve looked at several forestry companies, the business thats reasonably easy tounderstand, but the math has escaped us in terms of being compelling.

Charlie: Wed be at a disadvantage for any kind of activity to compete. They have eliminated one tax in theirstructure that we have to bear, limited federal income tax, we have a structural disadvantage that is really quitesignificant.

You mentioned 20 billion is the cash you need. Has it changed over time, and why?

Warren: I would get very worried if someone told us exactly how much cash we needed, Charlie and I saw a lotof problems developed in an organization, how to calculate their risk, they were a lot smarter than we were. Weboth have the same state of mind where we think about worst cases all the time. Then we add on a big marginof safety, I enjoy tossing those papers in the other room but I dont want to do it for a living, so I undoubtedly builtin layers of safety. Its our job to think what can really go wrong with this place. If youre calibrating it in somemathematical way, you got to be worried.

Charlie: They twist the problem to fit the solution.

Warren: Life in financial markets has got no relations to Sigmas.

You wrote that you expected the housing market to be improved by now. But now. Fannie Mae and FreddieMac are getting worse?

How are Tom Combs and Ted Weschlers performances? How much are they paid?

We are more concerned about how they achieved their record than the record itself. We also check theirintegrity. These two are perfect.

We pay $1 million a year for each of them. We also give me them 10% of the part that they outperform theS&P500. The same structure we paid Lou Simpson. If they hire people, that come out their performance. They
http://www.gurufocus.com/StockBuy.php?GuruName=Ted+Weschler


12/12


operate their own brokers. We told them if they get into a new name, I told them to tell me the name. I just wantto make sure they did not buy from the insider information I have.

They will do a great job. Todd did substantially better than S&P500 last year. Ted just joined this year.

Charlie: 90% of the investment business started off our formula. I think these people will be do very well. I hopethat one day they will join the 400 people I mentioned.

(This note should include most of the Q&A sessions in this years Berkshire meeting. We did miss some at the

end as the computer run out of battery. Enjoy)

This was the question that GuruFocus sent to Carol Lomis. She acknowledged that she received the message.But the question was not asked. Here is the question:

Currently US corporations are enjoying historical high profit margins. In your opinion, why can US corporationshave high margins now? Is the high profit margin sustainable? If not, what factors will bring the margins down?

We welcome your comment on this question.

Discuss this story

Home Advertise Site Map Term of Use Privacy Policy Subscribe FAQ Contact Us Links

2004-2013 GuruFocus.com, LLC. All Rights Reserved.
http://www.gurufocus.com/link_mesh.phphttp://www.gurufocus.com/contact.phphttp://www.gurufocus.com/faq.phphttp://www.gurufocus.com/subscribe.phphttp://www.gurufocus.com/Privacy_policy.htmhttp://www.gurufocus.com/Terms_of_use.htmhttp://www.gurufocus.com/sitemap.phphttp://www.gurufocus.com/sponsor.phphttp://www.gurufocus.com/http://window.print%28%29/http://www.gurufocus.com/forum/read.php?1,174684

berkshire hathaway shareholder meeting notes -- gurufocus

Documents