Tuesday, May 05, 2009

The Meeting

How to describe the Berkshire Hathaway meeting....well the name "Woodstock for Capitalists" has been tossed around before and it seems about right (ignoring the obvious issue that there were probably no capitalists at woodstock).

Picture 35,000 people packed into the Qwest center for 7 hrs of questions and answers.

The two at the front, Warren Buffett and Charlie Munger, already well into retirement, are seemingly the most successful pair in the world at allocating capital.

To help them along they have little more then a few cokes and some "dilly bars".

The crowd consists of everyone from 10 yr old's in business suits to Grandmothers in jogging suits.

The questions ranged from the absolutely ludicrous to the almost brilliant (along with the people it would seem)

Never have so many people been in 1 place while it was so quiet.

Nor have so many people been in the same room and remained so civilized!

The meeting started with 1 slide (which is 1 slide more than usual) that was a sale ticket for treasury bonds that Berkshire sold in Dec. The sale price left the buyer with a negative yield. The profundity of that was (hopefully) clear to all in the room and was a great way to kickoff a meeting like this during such incredible economic times. Never again in my life do i think i will see treasury's sold with a negative yield (Guaranteed loss!). Hopefully

Moving to the questions and answers the format was changed slightly from years past with a panel of 3 journalists asking questions while rotating with Audience members. The panel questions were all sent in by the public but, given the opportunity for some pre-screening, the quality was much better. Buffett and Munger had no knowledge of any questions before hand. None of the meeting is transcribed or broadcast so this is by memory (either mine or found online). Here were some of my favorite questions (some because they were good questions, others because they were so stupid as to be funny, especially considering Buffett and Munger's answers).

A shareholder asks about the federal stimulus bill, saying only 8 percent is aimed at infrastructure. He asks should not more of that bill go to real assets and put numerous people to work? Munger says "Let me answer that one. Yes!" Buffett says that should be the goal. Buffett says anytime government or anything else throws a lot of resources into something, there is a lot of slop. Buffett says the intent though, is to get a lot of money into action and used smartly. Buffett says when the consumer pulls back the way they have, government needs to step in. Buffett also says there will be consequences. "I think we should be doing it, but we shouldn't think its a free ride."

I never pictured Buffett as much of a Keynsian. Guess i was wrong!

A shareholder asks if starting a smaller investment fund today what do about high returns on some stocks? Reinvest earnings somewhere else or sit on the high returns in the name of value investing? Buffett says he would buy good companies and keep them. And not worry about the stock price. Munger more bluntly tells the shareholder that he must "Realign your thinking". The room chuckled.

A shareholder says Berkshire's competitive advantage is Buffett and Munger. Buffett says that is not true. He says Berkshire's competitive advantage is a business model that is hard to copy. Buffett says for example shareholders hold onto Berkshire stock, with little turnover. He says there is no other company in the country that has the ability to do that now, or the ability to adopt that model in any big way. Buffett says any new CEO will be dedicated to that model in the future. Buffett says managers and shareholders joining the company are immersed in that culture. Munger says a lot of corporations in America are run stupidly with profits each quarter guiding decisions. Munger says that is not the case with Berkshire.

Buffett is asked why people shouldn't just invest in companies that Berkshire invests in, and not in Berkshire itself? And why is the meeting not Webcast? Buffett says the meeting could be Webcast, but there is a lot to be gained with face-to-face contact. He says people come to see each other and Berkshire products. Buffett says in terms of buying securities Berkshire buys, a lot of peple do that. He says, though, that they don't have free float. If they had $58 billion then they would be at the same level as Berkshire. Munger says generally they would be smart to copy Berkshire's investment moves. Munger says "I think you have a very good idea." Buffett says he used to look at Graham's moves and he got ideas from them.

Buffett is asked about inflation. He says the country will have inflation, and people holding government debt in the form of bonds will pay for that. Buffett says a good deal of that debt is being held by the Chinese. Buffett says the best protection against inflation is your own earning power. He says if you are the best teacher or whatever, you will command earning power and get your share of the national economic pie, regardless of the value of the currency. The second best investment, Buffett says, is in a good company. He says people will give up their own earnings to enjoy whatever product your company is making. Munger suggest becoming a brain surgeon and investing in Coca Cola instead of government bonds.

BYD Chinese company is not early stage venture capital company, Munger says. It is a big maker of batteries, for example. Then finally, not satisfied with a couple of miracles it is now in automobile business. With zero start point and very little capital he built best selling model in China. That was against joint ventures in China. Munger says it is a damned miracle, not a speculative activity. Munger says engineering graduates are being hired at BYD who were at top of their classes. He says it is a remarkable compilation of talent. Munger says lithium batteries are needed in every utility company in America and using power of the sun will need batteries. Berkshire has invested in BYD and Munger says it is not a crazy venture. Munger says that car to be seen in the Qwest Center Omaha, the company makes almost every part in that car. Munger says it is a privilege to have Berkshire associated with a company that is trying to do so much. Munger says it is a small company but its ambitions are big. Munger says he will be amazed if great things don't happen.

A shareholder through journalist Becky Quick asks about lack of disclosurre issues around Bank of America's buying of Merril Lynch. Buffett says he wonders if he would behave any differently than Bernanke or Paulson in this matter. Buffett says it is a tough question. Munger says the decision by Bank of America to buy Merril Lynch could be second guessed. But Munger says sonce the deal was signed, the government and Bank of America behaved honorably.

Berkshire is asked about Chinese companies. Buffett says he didn't know he'd be invested in BYD some years back, nor did he know he would have invested in Petro China. Buffett says in some ways Berkshire will be restricted by ownership limitations, such as in insurance. But Buffett says it is hard to imagine not doing more in China in coming years because it is a huge market. Buffett says a Chinese officially recently was upset with the Treasury bonds they hold because the value is dropping. Buffett says he believes the Chinese official is right. Buffett says it is a problem, though not the biggest problem in the world. Munger says he would exactly what China is doing. Munger says China has one of the best financial managing systems in the world. He says China will be very hard to compete with all over the world, and that is exactly the right policy for China. Munger says that is exactly the right policy and he greatly admires the Chinese.

A shareholder asks about student loan industry. Buffett says he doesn't know a lot about the business. Munger says he doesn't know a lot either. Buffett says it has been a long time since he and Charlie sought a student loan.

There were a lot of other good questions that i don't remember, but i'll keep my eye open on the web for a better transcript. Here were the two i submitted

Given the size of Berkshires cash position, where and in what investment vehicles (if any) is that money kept? Is it with any TARP banks?

Given the tax disadvantages of preferred shares (over bonds) along with the bankruptcy disadvantage, why did Berkshire choose preferred shares for some of it's recent investments? What risk do you see of a dividend cut?

What was my feeling after leaving the meeting? I left with renewed confidence in our system and the markets (along with my Berkshire purchase). I'm already nearly 100% back into equities so my path is set (for now). But at the end of the day the true "magic" to their strategy of investing is how un-magical it truly is. Knowing that most people do not act rationally when it comes to investing, you simply be patient and never over pay for something. Over the long term, you will always come out ahead.

Mel came along as well and dare i say, had a lot of fun. I think she found the blunt common sense of Buffett and Munger (Munger in particular) was quite refreshing. Although we spent the vast majority of our time at the Qwest center we were able to hit some of the Berkshire company's in the vendor area and picked up a few little things. After the meeting we went to a show at the Omaha Playhouse. Originally i had tickets for "Twelve Angry Men" but switched it to "Rock Legends" at the last minute on the advice of the lady working the door. And it was good advice! A little Japanese food, a cab ride to the airport in the morning and we were home! Paris was thrilled to see us, well, Mel at least.

Book your flights for 2010!