Berkshire Hathaway's 2014 annual meeting has come and gone. While many of you have undoubtedly already read synopses of the event, here's a set of detailed notes for a further glimpse into the minds of Warren Buffett and Charlie Munger.
Berkshire Hathaway Annual Meeting 2014 Notes
The meeting started out with Warren Buffett (WB) discussing the results from the first quarter. $77B in float. Insurance business is great. Insurance earnings dragged down operating income, but a lot of that was foreign exchange.
Resolutions for dividend. 97% of the 'A' share voted against with 1% voting for. Almost the exact percentages of the 'B' shares as well, 97% to 2%. Almost as many people voted for WB as they voted not to put a dividend in place.
Q&A Session
Carol Loomis (CL) - Coke vote on compensation. Why did he handle it the way he did?
WB - Thought he handled in the most effective way. Does not like the plan, but also does not want to fight with Coke. Also, doesn't know David Winters, disagrees with some of the calcs from Winters.
Charlie Munger (CM) - Warren handled it well.
WB - CM still Vice Chairman. If 50M shares at $40 are granted, and then exercised at $60 per share, then that is $10B in comp. The proceeds plus the tax benefits are used to buy shares back.
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Jonahthan Brandt (JB) - Is there a way to use 3G (given that they are so good as an operator) to manage subsidiaries or hire 3G alumni?
WB - Doesn't think the two fit too well. Likes to partner with 3G. Great partners. Never had rules for subsidiaries regarding headcount. Leads by example.
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Shareholder Question (SH) - The shareholder asked a long question about Obama and WB trying to change policy.
WB - Disagrees with a lot of that question. Business is doing well. Corporate taxes as a percentage of GDP are down a lot over the past 50 years. Return on tangible assets very high in the US. Corporate taxes are much lower than they've historically been.
CM - I'll avoid this one.
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Becky Quick (BQ) - Returns relative to 5 year S&P500, WB had said that when Berkshire fell behind those, then things would need to change. Well, Berkshire underperformed the S&P500 over the last 5 years. Thoughts?
WB - They will underperform in strong years, match in normal years, and beat in weak years. Overall, thinks they will beat over the cycle.
CM - Berkshire's returns are after tax, S&P 500 are pre-tax.
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Jay Gelb (JG) - Question about Berkshire and its discount to Intrinsic Value.
WB - Willing to buy at 120% of Book Value. If Munger and Buffett both guessed Intrinsic Value, they'd probably be within 5% of eachother, but not 1%. Lots of businesses are carried at very low book value.
CM - Never want to get stock above IV. People that want stock high want egg in their beer. Over long term, system works well.
WB - Using overvalued stock to buy other companies is a strategy that has worked well for others.
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Shareholder Question (SH) - Berkshire Hathaway known as buy and hold. Also M&A usually very good. What is the trick?
WB - Try to keep the promises and be comfortable about the promises they make. They take very different approach to the other Private Equity companies.
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Andrew Ross Sorkin (AS) - Role in Coke vote vs. steward of culture for Howard Buffett.
WB - Has voted in favor of numerous compensations plans he wasn't crazy about. Can't remember ever a time a compensation committee has recommended a dissenting vote. Independent members where you get $300K a year. They don't look for dobermans, but cockerspaniels. Non-Exec Chairman is there as a safety valve. Howard Buffett right for the job.
CM - Gotta pick battles for public disapproval.
WB - If you are in any social organization, if you keep belching at the table, eventually you'll be in the kitchen.
CM - Pleased with how WB has handled things.
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Greggory Warren (GW) - Question about BH's cost of capital and ability to exceed it.
WB - Size is an anchor to performance. Lots of nonsensical cost of capital concepts.
CM - Never heard a sensical one.
WB - Just like CFOs like about cost of capital. Real question is if retained earnings will exceed "market returns". Just bought Canadian company for $3B.
CM - Cost of capital means different things to different people. Likes WB's definition. We're right and most other people are wrong.
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SH - Question about Nebraska Furniture Mart?
WB - Paid 11 or 12 times after tax earnings. $7M Pretax and $100M in sales. $4.5M After Tax. Never asked for an audit. Asked if she owned the building. Tuesday sales were larger than monthly sales of RC Wiley in Sacramento. Texas store 1.8 million square feet and 40 acres will do more sales than any store in the world.
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CL - Question about WB's comment about 10% bonds and 90% in index fund. Why wife's trustee vs. BH given he believes BRK will outperform SPY?
WB - Very bullish on BRK. Allocation is for peace of mind.
CM - WB is peculiar in how he chooses to distribute money. He can do what he damn well chooses.
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JB - Difference between BNSF and Union Pacific?
WB - BNSF has had a lot of service problems. They spend more than Union Pacific (which also spends a lot).
Matt Rose - Weather had a big impact. Did 206,000 units in a week. No rail had ever handled 205,000 in a week.
WB - Thinks BNSF's results will get better.
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SH - Question about Natural Gas for utilities.
WB - Largest generator using alternative energy.
Greg Abel - Systems challenged due to weather. There was enough gas for energy generation and heating homes. 39% of energy in Iowa was renewable / wind.
WB - Gas in Omaha. Berkshire Hathaway Energy - Named for Mid American.
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BQ - Successor for CM? Charlie is now 90.
WB - Berkshire is better off because of CM with WB. Big applause. Not sure anyone could succeed CM.
CM - People don't have anything to worry about.
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??? - Question about Matt Rose and WB's succession.
CM - Not worried about successor of WB.
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SH - If all net worth had to be invested in one thing, what would it be.
WB - Won't answer that question, CM?
CM - WB gave right answer.
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AS - Question about disclosure of compensation for other top paid managers are Berkshire.
WB - Current disclosure of officer compensation is based on SEC rules. Disclosure of key people sometimes is bad if it is for top TV anchors as an example. Most at Solomon Brothers not happy because of compensation they compared to others. Lots of time compensation disclosure is bad for shareholders.
CM - Better of not adding to culture of envy.
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GW - Question about cash and acquisitions.
WB - Will always keep at least $20B in cash on hand. Cash and credit are like oxygen. You don't notice it until it is gone.
CM - They are better off having outlets for capital investment.
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SH - Question about allocation of capital. Do WB or CM ever fight?
WB - They met at 29 and 35. Have had lots of disagreements, but not arguments.
CM - Disagreements are good. WB once called CM the abominable "No" man.
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CL - What are BRK's weak points?
WB - Sweep accounts. Probably lead to better capital allocation. WB slow to make personnel changes. Lack of supervision also a weakness, but has benefits.
CM - Doesn't like the sweep idea. Compares it to giving blood.
WB - No position of General Counsel. Lots of trust of manager.
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JB - See's since 1999 See's growth has stalled. Grow a lot from '70s to '99.
WB - Boxed chocolates sales are down. Sees has done a lot other than boxed chocolates. If they hadn't bought See's they never would have bought Coke.
CM - Ignorance Removal is important. They still have a lot of ignorance.
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SH - Question about Bank of America and the change from cumulative preferred to non-cumulative preferred...was requested by Brian Moynihan...willing to make it non-callable.
WB - Non-call of 6% preferred a good deal. Non bothered by recent error at BAC.
CM - I agree with you.
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BQ - Question on Net Jets.
WB - Small market. They are biggest. Have greater than 60% of the market. Expanding to China.
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JG - Potential for using KO or other stock for acquisition.
WB - Unlikely, but possible.
CM - Rail and Utility at BRK is good for investment of extra capital.
WB - Have Todd and Ted, but really want to buy businesses.
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SH - Person asking question is an Italian from Genoa. Question about borrowing money at low rate and investing now while they are able to invest.
WB - Both Rail and Utility could do more with debt. If they were younger, they'd probably do it. Good idea. They'd do it if a deal came along. Should not have used BRK stock in BNSF.
CM - Good idea. Probably a good idea.
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GW - Question about Todd and Ted. How much are each running and where will it be in 5 years?
WB - At $7B now. They know a lot about business and management. They are doing lots of other things. Only grow over time.
CM - Nothing to add.
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SH - Question about 0% interest rates.
SH - Question about 0% interest rates.
WB - Very surprised by how well things have gone. Would like to believe he would have done the same thing given how well they've gone. Ben Bernanke is a hero. Surprised by how other members of the fed didn't understand situation.
CM - In Japan no one would have expected low rates in 20 years. Very confusing to economics professors. If not confused, then didn't understand.
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WB - Collection of businesses has worked well for America. Thinks business plan is good. System for allocating capital. As if conglomerate is buying using cash or stock.
CM - They have more investment options than others. Can buy companies, insurance companies, marketable securities, etc.
JB - Forest River vs. Thor for recreational vehicles?
WB - Bought Forest River about 10 years ago. Pete sold it to PE firm in 90s. PE firm created hell for him. He quit, it went BK. Pete bought it out of BK and sold it to BRK 10 years ago. WB doesn't know the RV business and no one else at BRK does. Talks to Pete once every couple years. His company. Six IT people.
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SH - Question about Oil sands and impact on BRK.
WB - Business in Marmon does business with Oil Sands. Owns some XOM with business in oil sands. Also has BNSF moving oil. Rail moves oil 2x faster than pipelines. Oil sands are important for mankind over centuries to come.
CM - Economic if NatGas is cheap and oil expensive.
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WB - Business in Marmon does business with Oil Sands. Owns some XOM with business in oil sands. Also has BNSF moving oil. Rail moves oil 2x faster than pipelines. Oil sands are important for mankind over centuries to come.
CM - Economic if NatGas is cheap and oil expensive.
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Before breaking for lunch, Buffett provided an update on the bet he made regarding the performance of the S&P500 relative to a fund of hedge funds. Buffett is way ahead on bet.
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2ND HALF
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WB - Sent out 11,000 more tickets this year compared to prior year.
BQ - Question about Energy Future Holdings. Also, other companies in umbrella of similar risk.
WB - He gets credit on Energy Future Holdings. Business models can be at risk. Geico - Mail - Phone - Internet. When change from government employees at one point they almost went broke.
CM - Remove your ignorance, scramble out of mistakes.
WB - Sent out 11,000 more tickets this year compared to prior year.
BQ - Question about Energy Future Holdings. Also, other companies in umbrella of similar risk.
WB - He gets credit on Energy Future Holdings. Business models can be at risk. Geico - Mail - Phone - Internet. When change from government employees at one point they almost went broke.
CM - Remove your ignorance, scramble out of mistakes.
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JG - Heinz - Normalized Earnings Power and his estimated future earnings.
WB - He will be filing public statements. Has historically had 15% margins and expects those to go up over time.
WB - He will be filing public statements. Has historically had 15% margins and expects those to go up over time.
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SH - Expand on thoughts of investment opportunity. Why buy some companies vs others? Example, ones he bought vs. KO or Moody's.
WB - Bought a bit early in Fall of 2008 vs. early 2009. Did reasonably well overall. Plus they did get BNSF in Fall of 2009. Want to buy good businesses for reasonable prices over time.
CM - Private businesses more ideal target than stocks, and guesses that will continue, right Warren?
SH - Expand on thoughts of investment opportunity. Why buy some companies vs others? Example, ones he bought vs. KO or Moody's.
WB - Bought a bit early in Fall of 2008 vs. early 2009. Did reasonably well overall. Plus they did get BNSF in Fall of 2009. Want to buy good businesses for reasonable prices over time.
CM - Private businesses more ideal target than stocks, and guesses that will continue, right Warren?
WB - Yes.
CM - Love buying transmission lines in Alberta. Have to adapt to BRK.
WB - Have bought a fair amount of Wells Fargo last couple years. Weak banks have bounced back the most.
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AS - Geico and usage based pricing and impact on auto industry and Geico. Also, self-driving cars. Would you sell Geico if need for auto insurance went away?
WB - Won't sell. Underwriting in auto a bit different than life. Different variables. Feels very good about Geico, the management, and ability to manage risk. Self-Driving cars will be good for society and bad for auto insurers.
CM - Things can take long time. Example is movies on demand. Thinks self-driving cars will take a while.
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GW - Why not many foreign acquisitions?
WB - No preference for US businesses, but that seems to be where the deals are coming from. More recognition in the US. Some awareness. Lots of great things to say about Iscar. April had record sales.
WB - No preference for US businesses, but that seems to be where the deals are coming from. More recognition in the US. Some awareness. Lots of great things to say about Iscar. April had record sales.
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SH - Circle of competency. How does one know what their circle of competency is?
WB - Good question. Need to be self-realistic. Was out of his circle of competency when he bought Berkshire Hathaway. Has also stretched in the area of retail. Ms. B (of Nebraska Furniture Mart) didn't take BRK stock because it wasn't in her circle of competency. Her areas were cash, retail, and real estate.
CM - Not that different. Someone that's 5'2" probably isn't going to be great at basketball and someone that's 350 pounds probably not going to be great at ballet. 95 year old probably not going to get the leading role in a romantic movie. Circle of competence can be a relative concept. I need to compete against idiots and there's a large supply.
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CL - Question about the logic of comparing the annual change in Berkshire's Book Value vs. S&P 500.
CM - (Charlie interrupted Buffett from answering) - Doesn't make any sense. It's insane and doesn't make sense, but WB likes impossible challenges.
WB - Given that wishy washy answer, Buffett won't add to it.
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JB - Question about Prices on Marmon and Iscar.
WB - Iscar was 80% then put the rest. Marmon was an installment sale with 64% was first, then 36% was 2nd and 3rd installment.
CM - Price went up as value went up.
JB - Question about Prices on Marmon and Iscar.
WB - Iscar was 80% then put the rest. Marmon was an installment sale with 64% was first, then 36% was 2nd and 3rd installment.
CM - Price went up as value went up.
WB - With both transactions, all feelings are good.
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SH - What non-tech thing would you do if you were 23?
WB - I'd probably do what I did, go into investment business. One question he'd ask if they had to put all money in one business (not their own) for 10 years, what would it be?
CM - Larry Bird trick - asked every agent, if I don't go with you, who's the 2nd best I'd go with?
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BQ - Capitalism vs. Rooms given his comments about people using AirBnB.
WB - Omaha can't size itself to the event. Doesn't like 3-day minimum rule.
CM - Nothing to add.
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JG - Question about Geico. Allstate's share = 10%, State Farm's = 19%.
WB - Passing Allstate this year. State Farm is a great company. Recommends "The Farmer from Merna". Says he thinks Geico will be number one by time he's 100. Tells Geico he'll do his part.
CM - Geico is like Costco in that cost is part of its soul. Easy to talk the game, but they can back it up.
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SH - Question about frugality.
CM - WB is frugal. Doesn't like to spend money.
WB - Bought house in 1958. CM bought his in 1960. Life would be worse with more. At certain point there is inverse correlation.
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AR - Berkshire paid $8.9B in taxes last year. Pfizer is looking at offshoring for taxes. Thoughts?
WB - Wouldn't do it.
CM - It'd be crazy.
WB - Tries to minimize taxes, low cost housing, tax breaks on energy.
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GW - Union Pacific moving freight to Mexico, thoughts relative to BNSF?
WB - UP has edge in Mexico. KSU has good presence in Mexico, but also good prospects elsewhere.
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SH - Intrinsic value difference and what are competitors to Berkshire?
WB - Intrinsic value is present value of all future cash. Aesop bird in the hand is equal to two birds in a bush. Sees no competition to Berkshire.
CM - Too tough to replicate and no one teaches it.
SH - Intrinsic value difference and what are competitors to Berkshire?
WB - Intrinsic value is present value of all future cash. Aesop bird in the hand is equal to two birds in a bush. Sees no competition to Berkshire.
CM - Too tough to replicate and no one teaches it.
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CL - Question about inflation from Goodhaven.
WB - Berkshire would be worse off. EPS would go up. Intrinsic value would go up in dollar terms.
CL - Question about inflation from Goodhaven.
WB - Berkshire would be worse off. EPS would go up. Intrinsic value would go up in dollar terms.
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JG - Question about acquisitions.
CM - Sum return of all deals is bad. We are peculiar, but most don't want to be like us.
WB - Having a corporate acquisition team is bad because they always want to do acquisitions.
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SH - Question about too big to fail.
CM - Thinks the crisis has improved things dramatically, but there will always be problems. Criminal prosecution of individuals does change behavior.
WB - Like prosecutions of individuals more than prosecutions of corporations. Corporation is just going to write a check. There will be problems from time to time. At BRK, there are 300,000 employees. He's sure there is someone doing something they shouldn't be.
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BQ - Question about serious rail accident and insurance for major accident.
WB - Ajit has offered to provide insurance, Matt Rose has proposed it.
CM - BP was the big surprise. No one imagined that could happen.
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JG - Question about insurance (P&C, Specialty Lines).
WB - BRK has competitive advantages (people, capital, ratings, underwriting).
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SH - Any plans to buy sports team or manufacturers?
WB - Owns 1/4 of minor league team. If you ever hear they are looking to buy another team, it is time to consider a successor). Guard companies at airports should be owned by people without deep pockets.
CM - Whatever WB thinks of sports teams, CM thinks less.
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AS - Question about Ackman on recent transaction where he partnered with acquirer.
WB - Scares corps. Can be good when managements need to be changed.
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GW - Question about cash and acquisitions.
WB - Love to buy company for 2 or 3 billion. Prefers one 30 billion dollar deal over smaller deals.
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SH - What was the best question?
CM - Best was about Berkshire Book Value compared to S&P Performance.
WB - No answer.
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SH - Question about Mid American and Ebit + Depreciation - CapEx...resulting in negative return?
WB - Doing great with tangible assets. Investment is available for more capital as long as regulators allow for rates. Plus their rates are generally more competitive.
CM - I agree.
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SH - Thoughts on education market in US and China in the future.
CM - We are getting the easy questions now.
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SH - Question about housing reform and GSEs
WB - 30 Year mortgage is good for homeowners. Private industry can't do it alone. Issue is how do you keep government in without it getting to be political.
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SH - Comment by Whitney Tilson about the Brazilian Partners. Question was will Berkshire be able to get special deals once Buffett is gone (i.e. will the stamp of approval go away when Buffett is gone).
WB - Buffett name will be the Berkshire name.
CM - Good partners get good partners. Success of Jorge Paulo. Good at cost cutting. Thinks cost cutting is good.
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SH - From Taiwan, named son after Warren Buffett. If BRK doubles and then doubles market cap will be $1.2T.
WB - Depending on price, buybacks might make sense. Will have excess cash issue.
CM - Not a tragedy to have that problem.
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SH - Question about AirBnB and Uber.
WB - Things are changing, stays away for investment purposes.
CM - Very disruptive.
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SH - Question about whether financial education should be taught in schools.
WB - Earlier the better, very important for good financial habits.
CM - Fault goes to parents. Very hard to fix people with bad parents. Lots of problems with college business schools and economics departments.
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SH - Question about dividend and breaking company into four parts.
WB - The company is much better and stronger as a whole than broken up.
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THE END
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