2013 Berkshire Hathaway AGM
Question and Answer Draft Notes
As taken by Norman Klippenstein
1. Carol Loomis: Berkshire measures corporate performance based on growth in Book value which has grown at less than 12% in 9 of 11 last five year periods (page 103 of annual report), yet in your last shareholder letter you state that the S&P earns considerably more that 12% on net worth and that that seems reasonable for Berkshire too. How can you say that given your underperformance?
a. Warren Buffet: Such performance is certainly not assured in the future. The last few years have not been the best for business generally. If market continues to rise as much as it has this will be the first five year period where we have not beat the S&P. This won’t totally discourage us, because we expect to underperform in strong up markets. We expect to do better in down years, like 2008. We use book value as a proxy for intrinsic value. If we could provide a number for intrinsic value and back it up, that would be a more accurate measure. There is a significant gap between book value and intrinsic value and that is why we are willing to buy our stock back at 1.2x book value. In the end, we have to do better for you than you would do in an index fund.
b. Munger: I am confident that Berkshire will do well over the long term. We have momentum. Of course, we won’t do as well as we have done in the past. We are slowing down, but it will still be very pleasant.
c. W: At 89, Charlie is not really concerned about this stuff year to year. He is taking the long term view.
d. M: I am trying to take care of my own old age [planning], which might come on at any time.
2. What primary competitive advantage does Iscar have over its primary competitor Sanbeck?
a. W: Sanbeck is a very good company but Iscar is a much better company. The advantage Iscar has is brains and an incredible passion for the business. It was founded in 1951 by a 25 year old fellow from Germany. The raw material – tungsten came from China. They never stopped working, never stopped trying to improve the product, never stopped trying to make customers happy. That continues to this day. By all measures I possess for assessing businesses, its just one of the best ones I have seen.
b. M: Sanbeck is a fabulous company and it is really an achievement for Iscar to have done a little bit better. When I was there I never saw anyone working but robots and computers. You cannot believe how modern a company it is.
3. Shareholder: What are your worries and what can go wrong if you are not longer able to run the company?
a. Warren Buffett: If I die, the culture of this company, lead by the new CEO will take it forward. It took time to build this culture. Its one of a kind and will remain its enduring quality. People are self-selected into this group. We have a board devoted to Berkshire. We have people who brought their companies to Berkshire.
b. Munger: To the many Mungers out there in the audience this weekend: “Don’t be so stupid as to sell these shares.”
4. Betty Quik: Is Heinz deal better for Berkshire then for the other participants in the deal?.
a. W: I have known Jorge Paulo (Brazilian businessman and philanthropist) for many years. Both of us were directors at Gillette. We paid more than we would have paid, because George and his team are exceptional managers. My guess is they will do better over time because they own more stock.
b. M: Report was totally wrong.
5. What is goal of recent hiring in Ajid Jain’s operation?
a. W: There have been hiring moves. Getting 7.5% reinsurance deal with Lloyds gives us more of a cross section of the business we we have had up until now. Regarding hiring, four AIG people have been hired to write commercial insurance. These are people who reached out to Berkshire (or at least one did). I think you will see Berkshire reach into the billions in international insurance worldwide. We have the people and the capital needed to do this.
b. M: Generally speaking, reinsurance is not an easy business. We will be in the primary business (as well as in reinsurance).
6. Shareholder: Why not do what “snapshot” did in testing driver skills/behaviour for GEICO Auto Insurance?
a. W: All auto insurance businesses want to get a picture of how people do drive. We try to estimate likely propensity of people to have accident. We try to identify the key variable that help us determine that. Our system works well right now, we are profitably gaining market share at a fast clip.
7. Now that you are on Twitter, what are you going to do with it? Will you start releasing business news with it?
a. W: No. The key to discloser is accuracy and simultaneity. Business wire, a business we own, does that.
b. M: I avoid twitter like the plague.
8. Doug Kass (bear): Have you not have shifted from buying bargains to making pricier purchases?nnMany of your recent buys will likely not going to give same great returns going forward that you have ad from past purchases ….
b. M: Giant acquisitions like ours should do well because we have a better system.
9. What is the effect on US if the US dollar loses its world reserve currency status?
a. W: It is unlikely that US will not be reserve currency for a long time to come. A change is not likely for decades.
b. M: There are some advantages in being having the reserve currency, but they are not all that significant. The US will be reserve currency in 20 years, but that is not forever…
10. Corporate profits have averaged 6% or revenues, but now corporate profits are 10%. What are your thoughts on this?
a. W: This is why I don’t think our higher corporate tax rates are as much of a problem as some people think they are.
11. Jonathan: You seem to still be buying a lot of smaller companies … how do you balance buying these against building too unwieldy a conglomerate?
a. W: My successor will probably reorganize company somewhat. The Board will want the person to understand the big businesses, but they might not understand the small businesses, the ones that earn some 10 million; However, doing “bolt-on” acquisitions to existing businesses works very well and does not contribute to unwieldiness.
b. C: Of course it would be hard to run all this centrally, but with such a decentralized system, it can work (delegation to the point of abdication is our model).
12. Sharehold: With Fed buying 85 billion in Treasuries per month, how can this initiative be stopped/unravelled?
a. W: I don’t know. It will be difficult. Feds balance sheet is up at 3.5 trillion. Wells Fargo has $175 billion deposited with the Fed that really doesn’t do anything. Banks want to make loans. I have faith in Bernanke… but it has the potential to be very inflationary. The easiest way to run up nominal GDP is to inflate it. When the market gets a signal that inflation is accelerating, people will start revaluating their holdings (hand). Charlie, what do you think odds of 5% inflation after 10 years are?
b. M: Generally speaking… Who would have guessed interest rates could go so low for so long. Or that Japan would be in a static state for 20 years. I suspect profitable investment will be harder in these century than it was in the last.
13. What effect has the Fed’s zero interest rate policy had on Berkshire’s business?
a. W: Interest rates are to asset prices what gravity is to an Apple. 30 year bond is at 2.8%. It is easy, if you are Fed, to buy 85 billion of Treasures every month, but what will be the long term consequences? This is like watching a good movie, you don’t know how it is going to end. We never stretch for yield. We just keep it in (safe) Treasuries.
b. M: I strongly suspect that interest rates will not stay this low all that long. What happened surprised everybody.
14. If business is great in commercial insurance, why not acquire other companies (e.g, commercial underwriter companies)?
a. W: If you look at big ones, s ome of them we would not want to buy. Looks like its cheaper to build them than buy them.
15. SH, What do you think about Bitcoin as a currency?
a. Doubt it will prove lasting. We have not moved any of 40 billion to Bitcoin
16. Isn’t there a fundamental problem with multilevel marketing companies like Pampered Chef?
a. W: I do not know much about the company you mention, but while it is true with pampered chef allows people to makes money on other people’s sales, these sales are being made to end buyers (not other would be sales people in the organization). It is different from those operations that sell product to would be sales people who then hope they can later sell it but typically end up being stuck with a bunch of product they don’t need/want.
b. M: Likely to be more flim-flam in selling magic potions then in selling pots and pans (as Pampered Chef does).
17. Kass: It seems that you have made a shift to doing deals based on your reputation rather than on detailed research
a. W: Successor CEO will have the same capital advantage I have. We are the 800 number of choice if there is panic in markets. Its not our main business, but it is fine. Naked swimmers will call BRK.
b. M: In the early days Warren had success buying small companies where there was little competition instead of the big companies where there was a lot of competition. Now he is providing homes for businesses where, again, there is not a lot of competition. Its his genius that he focuses on those things where the odds of success are greatest.
18. Shareholder. In the past, your key to success was getting people to sell you their shares?
a. W: I disagree. The fellow you mention (Larry Sea?) had died before we ever bought his shares. We did not convince people to sell their shares to us.
19. How do I explain BRK business advantage to my 13 year old daughter?
a. W: People want to avoid selling to a competitor. We look at shareholders as partners.
b. M: We use the golden rule. Treat our subsidiaries the way we would like to be treated [if we were in their shoes]. This makes us a very appealing home for great businesses.
20. Oil, coal, natural gas.
a. 600,000 to 700, 000 tank cars currently … we see a pathway to million soon …
21. What about Harley Davidson bond yielding 15% coming due soon?
a. W: We will try not to answer the phone when they call
22. What do [you allow] your investors Todd and Ted buy?
a. I did not want to have my hands tied when I was managing other people’s money and I think they don’t want this either. I don’t tell them what to buy or how much or how little they can put into one stock. I don’t tell them they can’t put it all into one stock. [They have done twice as well as I did last year]. Todd and Ted get that freedom to buy what they want.
23. Back to Snapshot and driver testing?
a. W: Every company has a different approach. One of our competitors, came out of a mutual company. I will charge people different rates. Before Snapshot this company had a different approach. We didn’t use that either. We are getting — We will get — 2/3rd of all the growth in auto insurance sales, do it profitably while saving people money.
b. M: We are obtaining a hugely disproportionate market share increase, compared to our competitors.
24. How do you make decisions (You used to list 25 items and pick the top 5)?
a. W: Charlie likes to design buildings. I don’t recall ever making lists like the one you mention.
b. M: Warren’s operating style … We are habituals on routine. We keep to our life cycles. We eat lots of sugar. I can’t remember an important decision Warren made when he is tired. He is always happy and full of energy. His style turned out to be absolutely ideal to get great cognition.
25. Will you make profit on your newspaper acquisitions? It looks like an exceptional sideline because these purchases are so small and their profits almost immaterial to Berkshire.
a. W: We get to write off the intangibles of what we are acquiring. We expect at least a 10% aftertax return (or higher) on the papers we buy. We get favourable tax treatment because of how it was bought. Running these newspapers does not require extra effort from us. We are happy to give you annual reports of how profitable they are.
b. M: I think what Warren is saying is, “yes, it is an exception but I like doing it.”
26. Doug Kass, Seabreeze: Berkshire is such a large conglomerate with four major different business lines, why not split the business along those different lines…
a. W: Henry Singleton, played the public markets very well. We are not interested in doing that.
b. M: Singleton, was a genius. Started a conglomerate but (unlike ourselves) managed those companies on a very centralized basis. In the end, he wanted to sell them to us but at top dollar. We were not interested. He was enormously talented. (But) we are more avuncular.
27. Shareholder, New york. What are the top 2 or 3 things for keeping US competitiveness?
a. W: Health care cost is a major problem for the us. Most countries allocate maybe 9 or 10% of GDP to health care. We are giving up 5 to 7% more there. Since crisis of 2008, we have done very well, [but this is still a long term problem that needs to be addressed].
b. M: Does not do us any good to have these huge derivative/options books (Norman: Say what?!?).
28. Carol Loomis: Are your employee’s receiving health benefits. How will affordable care impact Berkshire?
a. W: Don’t know of any units who don’t have health care. We do few things centrally, but with health care we may need to [thing more company wide]
29. M: We want these kind of decisions to be made “near the firing line.”
30. Jonathan Brandt: On off grid Solar energy vs. using “the grid”
b. M: Expect more solar in sunny climates than in cloudy ones. We have our installations in deserts. The utility is doing fine. We will see some rooftop solar[, but less than people expect and not much in cloudy climates. ]
31. Shareholder: To what degree was timing key to your personal success?
a. Being born in USA was the first huge advantage. Being born Male was another huge advantage. I was conceived during November after crash of 29. I envy the child being born today. They will have opportunities to do very well in the investment field. The person who has a passion for investment and coming of age in 20 years should do very well.
32. Shareholder: I am 30 years old. What advice would you give me?
a. M: Warren had so much fun, his is nowatoning for his sins by giving all his money back…. We are old fashioned. All the old virtues still work. Do what you like. We found things we liked to do and then pushed very hard doing those things. We had so much fun it is almost sinful.
33. How did you stay rational about the markets so long?
a. W: We have remained controlling shareholders. Therefore, no external factors are impacting on us. We were major writers of P&C some years ago. We are doing very little today. We did not leave the business, the business left us when prices for coverage fell too much. It is very hard to shrink an insurance business by 80% when your people don’t have enough to do. It’s hard to do, but it is essential in an industry where people go as crazy as they do.
b. M: There is a reason why you shouldn’t covet your neighbour’s Ass. Envy is the one sin it is no pleasure to commit. It just leaves you miserable from the start.
34. What do you make of lower reinsurance pricing in the market? How do you respond?
a. W/M?: : Hedge funds have been moving into the business. Anything Wall Street can sell, it will sell! It may have stupid side effects. The industry has done this before. If we can’t do it [with an underwriting profit], we will sit on the sidelines for a while. The standby costs in this business are not huge. Our managers like Berkshire because they don’t get pushed into doing stupid things.
35. Shareholder: [what is] The state of women in workforce?
a. W: Women have not had the same opportunities. All my teachers, were female because all this talent was compressed into a few career areas. See Forbes article on Women … after being limited, women then begin to believe their “station” was this or that limited area. Despite Katharine Grahams intelligence and huge ability as a CEO, to her dying day there was this voice in her head that said she should not be running corporations but be in garden. Get rid of the “fun house” mirrors and get regular mirrors…
36. Is Berkshire “too big to fail”?
a. W: We have not been impinged on by a “to big to fail” status. Capital ratios are being set higher for large banks then for smaller banks. Banks are stronger in US than 20 years ago. We will have bubbles again. I don’t think the next one will be a housing bubble. But it will be something else.
b. M: I am less optimistic long term. Do not see that massive derivative books should be mixed up with government insured loans and deposits..
c. W: Look at longbets.org. Some of the odds placed on various outcomes re interesting there.
37. Have you moved from the more intense, detailed research like you did when you first bought American Express to now more general research?
a. W: Not sure that is true. I didn’t know anything about American Express business in 1963. They were known as travel and entertainment cards. A key insight came when golfing with Frank Olsen? … when he was complaining how he just couldn’t break into AMEX’s business.
b. M: The first time you bought it you didn’t know that much about American Express. The second time you bought it you already knew a lot.
38. What are your top 5 quantitative metrics?
a. W: We don’t really use screens. I had no precise book value, PE or other metric in mind when I decided to make an investment in Bank of America. I first learned about Bank of American when I read Biography of a Bank. Bank of America was subject to a lot of rumours and I got his phone number and I gave the CEO a call. We are looking at businesses exactly the way we would look at them if we where buying the whole thing. We watched the auto business for 50 years, but we don’t know which auto company will do great in 10 years and which will be hanging on by its finger nails [so we don’t invest in them, except BYD;-)]
b. M: We don’t know how to make decisions about a company by looking at ratios.
39. What do you think about Bill Gross’ thoughts on the “New Normal”[for the economy/stock market]? Should I be concerned?
a. W: We don’t pay any attention to macro forecasts. If we don’t know … (conceit says) no one else does. It doesn’t make any difference to me what any economist thinks about the future. What we do know is that BNSF will be carrying more loads than it has now. To ignore what you know because of predictions about the new, old or medium normal that you don’t know (and no one else does) is silly. Charlie and I are reading the Joe Kennedy biography. We read for the enjoyment.
40. What do you do to make Fruit of Loom succeed over time?
a. W: You keep your costs down. It is a branded product. Before I was 11, I read every book on investment in the Omaha library. Many of them I read twice. I enjoyed this. I have owned about 400 stocks, but made most of my money in perhaps 10.
b. M: We will average out okay, but not win every squirmish. I could not name 10 best books to read.
41. Betty Quik: Now that air carriers are profitable again … giving double digit returns, have their overall investment prospects improved?
a. W: The industry has consolidated down to 4 major carriers. In some markets, even two competitors end up fighting for market share. In other markets both do well. Coke and Pepsi, for example co-exist profitably. Some 50% of pop sold are Cola`s. We like things we have stronger feelings about.
b. M: Railways consolidated some years ago and we missed it. So, if this where a permanent change, we would not want to miss it. But someone really couldn`t create another railroad, but someone could create another airline. Airline ideas are generally easy to sell to investors [despite the fact that they tend not to be profitable over time].
42. How hard should we think about book value as a floor price of your stock.
a. W: 120% of book value is the point were we want to buy it. Book value has been what we track for Berkshire, but the intrinsic value is much bigger.
b. M: Nothing to add
43. Charlie, have you ever considered moving back to Omaha?
a. W: Charlie has fond thoughts about Omaha
b. M: No. Omaha has changed a lot in last five years. Many of the buildings I used to use as landmarks are gone.
44. If asked, what are the emerging risks due to climate change. What are your thoughts on carbon units?
a. W: Charlie knows a whole lot more about the Science than I do. There is a reasonable chance that scientists are right about global worming. I don’t know much about it. But I don’t discount it all. This question calls for Charlies answer.
b. M: I think carbon trading is problematic. But Europe (with its socialist bend and hunger for more tax revenue) has stumbled into the right strategy by taking fuel usage. Taxes are better that trading carbon.
45. Kass: Would you give me some money to short sell for you.
a. W:We have done some short selling. I might even offer you a wager some time in the future.
b. M: Answer to your question is NO. We don’t like trading agony for money.
46. [not sure what this question was] Investment stock selection versus buying industries?
a. W: We usually feel we pay too much. Looking back at wonderful businesses we bought that turned out to be wonderful, we could have paid more. If you have a business that has high returns on capital and can invest new monies . You will see price opportunities in the stock market that you will never see in the direct business purchase market.
b. M: Change almost always happens. No, we are sort of in a different mode now focussed on buying businesses outright. The game of life is the game of ever lasting learning. … at least if you want to win.
47. Loomis: Over the years you have alluded to thrift, how can you support an Obama administration that has gotten us into 16 trillion of debt…
a. W: Well Bush can be given some credit for the problem we are in. It happened under his watch. Stimulus spending has been quite appropriate. In the midst of the crisis, Berkshire got a phone call for help from GE (as the last stop effort). If GE was in trouble, most everyone was in trouble. Fanny and Freddie failed. The really important question now is how to get off of this stimulus. That is a problem, but it is a lesser problem then we would have had If money had not loosened up. As G W. Bush put it, “If money is not loosened up this sucker is going down.” This was not easy to do. I am disturbed about a national debt that rises relative to GDP, but we came out of WW II with even higher levels and the country did great.
b. M: I like these non-partisan solutions. Current problems are quite confusing. In fact, in if you are not confused you probably don’t understand the problem very well. And we have bigger problems: All the present value of future promises. But all of our problems fade into insignificance if we can keep real GDP growing at 2%.
48. Tell us more about the management change at Benjamin Moore paints. Bear, Sherwood, Benjamin Moore.
a. W: Benjamin Moore has a dealer system, but it would have represented a total change in the distribution system if we had changed it the way management was suggestiong. It will never get the kind of market share of Bear selling through Home Depot gets. The company was investigating some strategy that would have dismantled this dealer network , so we made some management changes there — because I had made a pledge to keep the dealer network when we bought it..
b. M: Agree totally, would like to by five more businesses structured like it.
49. Shareholder: Thank you Warren. How about a strategy for becoming a great investor?
a. W: The real question is whether you are going to become an expert investor or trying to be a professional but not giving it the time and energy to the game to be a professional.
b. M: Knowing the edge of you own competency is critical (especially in marriage).
50. Question about charity
51. Are you going to expand internationally?
a. W: We are willing to go into anything that we understand and also do it internationally (bolt on acquisitions are the easiest). Ever since fall of 2009, we have seen a slow economic progress over time. The economy has not come roaring back (over past four years), but it’s never faltered. We are now seeing recovery in home prices and we are seeing housing starts improving. Next year I think we will still be moving forward, seeing improvements. You need mental fortitude to jump in when everyone is jumping out (and visa versa).
b. M: It’s not a field were I have been good. We can’t even make a lot of money thinking we know what is going on now. [Making more money by fortelling the future is harder].
52. How to get people’s money if you don’t have a track record?
a. W: You have to be careful with whom you place money, even if people have a track record. It was very slow and it should have been very slow. To attract money for management you should deserve money and you should be able to explain to people why it is you are getting the results you are getting.
b. M: Most people start with friends and family, people who have already started to trust you for other reasons. The arithmetic attracts many of the wrong sort of money management people.
53. Is Ajid your successor?
a. W: [no comment].
b. M: If Ajid ever is not with us, we will not look as good.
54. Kass: Some day Howard will become you chairman, but he does not have experience to be a Chairman.
a. W: Howard is taking on the role of being a nonexecutive chairman, not an executive chairman. It his not his job to run the business, but as a non-executive chairman he could step in if a wrong CEO was chosen. I have seen times on broads when a likable but not appropriate CEO needs to be removed and the board, whose members live far way, just don’t manage to muster what is needed oust him. Howard would be very motivated to step in should something like that occur.
b. M: The Mungers are a lot safer with Howard there. When it comes to problematic CEOs that are hard to get rid of, I am reminded on this certain fellow of whom it was said “He was the only man who could strut sitting down.”
55. How great is the challenge of this low interest rate environment for insurance companies?
a. W: Cash and cash equivalents have been brutal on people. I feel sorry for people who have clung to fixed income accounts. Owning businesses has made more sense than owning fixed $ investments. The fall out of low interest rates has hit millions of people and hurt them.
b. M: They had to hurt someone and savers were convenient. Would I have done it? Yes, I would have done the same thing but felt very bad about it.
56. Tell us more about your early investment style, which you have said is 85% Benjamin Graham, 15% Fisher?
a. W: Actually Charlie’s was more interesting.
b. M: We would be looking in small things with discrepancies. But we forget about what we had to do when we were very young, because those strategies don’t work for us at our current scale. But opportunities were many at that time Often, between getting my income tax bill and needing to pay it, I would often make enough money investing to pay it.
57. What are you looking at in China?
a. We never have these kinds of conversations. We don’t name an area and then look for opportunities in that area. Rather, we look for opportunities and follow them to whatever country/place they lead. We have done investments in China and other places, but if you told us not to invest outside of USA … it would not disturb us.
58. Shareholder, Brant Hooker: Wasn’t the US government was complicit even responsible for creating the housing bubble?
a. W: The whole country went crazy in terms of housing. Legislators were encouraging Fanny and Freddie to loosen terms and loan more. People are making easy money and they succumbed. We have the ability to not get caught up with what other people are doing. When we see falling prices we think it is an opportunity to buy. Leverage was a given those days. Everybody was making money You were seen as stupid not to do it [Social proof].
b. M: As things got crazier and crazier the government should have pulled back the bunch bowl, but instead they increased the proof. After the bubble burst, panic set in. $175 billion flowed out of money markets in a few days (during financial crisis).
59. Question about investments in Europe.
60. How has social media made an impact on your businesses.
a. W: The world has changed. Thought internet would effect younger people’s use of GEICO, but it has changed the way people of all ages transact with us. It would be a terrible mistake to put me in charge of social media
b. M: Regarding social media generally, I doubt kids immortalizing for all time the 3 dumbst things they have said done by the time they were 13, is not a good idea. If you multitask like the young people today, problem may be that none of the tasks is done particularly well.
61. How do you recognize stuff on financial statements that suggests fraud?
a. W: We are primarily assessing people. We have to be right about the ones where we made affirmative decisions [to invest]. In looking at financials statements: In insurance, you would see companies lowering reserves before a stock issue or they would be building reserves when they were buying stock back (increasing and decreasing reported earnings respectively). You can usually spot people who, for one reason or another are trying to cook the books. Financial institutions are particular vulnerable. With Arthur Anderson there was a case where they put in a large “plug number” for 10 years just to make their book balance. Sometimes its very complicated.
b. M: Somebody wanted to sell us an insurance company … from Eastern Europe. At some point we heard them say that “We only write fire insurance on concrete structures … that are under water.” People are not fraudulent necessarily, they are deluded. The financial statements of big banks are much harder to understand today than they should be. When we bought Gen Re [we discovered a huge derivative book that cost us years and cost us a few 100 million to run down … in benign markets] . It’s new kind of asset class “Good until reached for.” When people get into a competitive frenzy, things get out of control. We used a plug number with a thrift because we could not figure out any other way to deal with it … wrote it down over time. In Italy workers just throw boxes of mail in the garbage if it has piled up too long.
62. Would you Invest in sub-Saharan Africa?
a. W: …
b. M: Knew of someone who bought up all the banks in the region once and then made money by selling them.
63. We love you in Fort Worth where you have four of your companies! How do you keep from ruining your kids?
a. W: More kids are ruined by the behaviour of their parents, then by their inheritance. I don’t think the amount of money parents leave for them is important. Every time I rewrite my will my kids are happy, because I end up leaving them more money. It is crazy to have them read the will for the first time after you are dead. I rewrite the will every 5 or 6 years. They should know how to carry out the obligations of the will. When they get into the mid-thirties they should be participants.
b. M: You don’t want to discuss your will with your children, if you are going to treat them unequally.
64. Would you do stock splits in the future
a. W: I think we have both now that we have the lower priced B shares. If there is some corporate situation, the A and B people would be treated similarly.