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The meeting ended a couple of hours ago and I wanted all of you to have my notes, sentence fragments and all ASAP.
About 1500 people were there, 50% more than last year with the last 500 in a spill over room across the hallway watching Charlie on closed circuit tv.
Charlie started signing the second edition of Poor Charlie's Almanack around 130, started the Wesco business meeting at 2, finished the meeting at 205 and then expounded contemporaneously for 40 minutes before the Q&A session that lasted until 5 p.m.
He was grateful to all those who attended from far away and repeatedly returned to the theme of morality in business.
The notes are rough with lots of sentence fragments when you see "I" it means Charlie. I apologize to anybody whose name who was misspelled. Feel free to have me attempt to clarify anything that is not clear.
It was great meeting some of you like "ish" live, and now having a face to associate with the name.

Mungerian

Welcome to the groupies meeting.

Somewhat extended comments by me.
Reason for making extended comments is that so many of you have come from afar and so many are devotees of the same aspect of life.
I like people who think the way that I do.
I regard it as a national scandal the number of people going into money management.
If you know enough about money management you know a lot about life.
I see prospectuses for places with 40-50 PhDs, all they want is $100B sent in.
What is the central theme that most people in the room represent? Rationality is not just something to make more money, but it is a high moral duty. It is a really good idea.
Avoid a lot of conventional nonsense. Requires developing systems of thought.

When I first got into investing stocks paid dividends twice as much as bonds. You were profiting from the demoralization of the previous generation of stocks and bonds.
In the past 10-15 years there has been a bid up in the price of stocks due to large institutional investors (university, pension fund).
Philosophy of “I need it I want it therefore I should have it.”
System morphed into a series of consultants.
Analogy of farmers raising different crops and animals- having a beauty contest.
People who went to alternative systems did a lot better e.g. leveraged position in junk bonds.
Example of man leveraging 6:1 with his own bonds collecting 2% spread + 2/20.
Taking 1st lien position bonds can be called but not pre-paid.
Sort of like writing earthquake insurance. Most years you make a profit and you look intelligent.
The rest of us were asleep when Harvard was making a lot of money when interest rates were going down. Long 2-year treasuries and short 1-year treasuries highly leveraged.
Look at history of venture capital a few firms made most of the money in some brief periods.
Mankiew in his best selling economics textbook writes that all intelligent people make investment decisions based upon their own opportunity costs.
Why is it that what he says is inconsistent with what the experts are doing?
Crazy waves of social conformities. Difficult for me to believe that so many smart people can be so irrational. They worship at the temple of diversification.
Frictional costs can be 3% per annum can be half of your return. Add inflation and you have a lot of disappointment in America.

John Arriaga (Stanford grad) built buildings (15M sq. ft.) around Stanford paid off all his debt. Took the risk out of his life by getting out of highly leveraged business.
How crazy are things?

1. Saudi Arabia – South Sea Bubble
2. Kuwait
3. Qatar - $9 Billion for a medical school

Wealth from being in the right place at the right time was best described by an old Texas saying, “Charlie was out in the field playing the tuba the day it was raining gold.”

All asset classes are overpriced now. Real estate is paying 5% (3% in Europe).
Junk bonds right now are pretty junky.
If the thing (potential investment- he was referring to sub-Saharan Africa) is despised enough and ignored enough you might be able to run a Geiger counter over it and make it click.

The Macro scene

Consumer credit has expended like it has never before.
Lenders are looking for borrowers best described as: “He's crazy to overspend but not so crazy as to go bankrupt”.
It's like serfdom all over again.

Mortgage credit – it is a new world.
Accountants let people write mortgages where interest is accrued not collected.
A lot that I see is not the way that I do accounting.

It is quite rational that as interest rates went down housing prices would go up.
The rest of us were being dumb.
But it is not smart to continue for example the consumer credit collapse in England 10-15 years ago.

Commercial Lending to Real Estate developers

Development $140M $8M put up by developer.

We were all a little brain blocked in not doing more in recent years. We should have scanned a little more intelligently and been a little more ambitious.

Questions & Answers


The world of derivatives has gone absolutely bonkers. e.g. Fannie Mae
Both sides of trade make money? The accounting profession has sold out.
You think that they would have learned by now. Likens to doctor pulling the tube on a moribund patient. Asked accountant for opinion “I have nothing to add.”

Tilson – Corporate governance

Munger – Hollinger was a total kleptocracy. If you think that Carl Icahn thinks about the rest of the Time Warner shareholders…

Foxhunting (Oscar Wilde) “The pursuit of the uneatable by the unspeakable.

Accounting for stock options is a problem. A lot left to be fixed.

SOX has been a bonanza for accountants.

Quoted the Episcopalian Bishop of Los Angeles who said regarding the Catholic Church, “I have my own scandals too they just happen to be heterosexual”.

Schramm (LA) Iscar-
We were glad to buy it at the price that we offered. We want Iscar to be run as it has in the past.

Wertheimer – one of the smartest men whom I have met and I can't imagine him learning anything from me.

Will the rate of growth of float accelerate – no, it will go down.

Views on Home Depot and management compensation – management should not be blamed if the market goes crazy, if the business is performing well. Lou Simpson bough the stock and he is here.

Ken Shubenstein (NYC) – shareholder activism.
Nothing to be gained in capitalism by unions entering the contested corporate management field. The world has worked better since the days of the Predators' Ball waned. A group whom you would not admire does shareholders activism.
CEO compensation creates too much envy. CEOs should act as exemplars.

Tom Urbanchik (TJ Partners)
What book do you recommend to read– Fortune's Formula (Kelly); computer algorithms for trading sometimes is successful

Grady Smith

$35T in derivatives yearly, could there be a blowup?
No, we could survive it. Some of our key brilliant economists “It lays off risk so it's good.”

Ralph Kischmeyer

What is the BRK compensation for CEO's especially for reinsurance?
Nobody uses a specific formula. Ajit and Warren are like father and son, like bridge players. There is no formula there

Jay Jan

Do you need a confidence level, what is it?
Lot's of experience, Warren and I do it in our heads. Distrust the other system.


Reinsurance industry for the future

It is a very difficult business. A lot of dumb things can be done. A lot of bad calamities. It takes exceptional skill. Most people won't do very well over a long time.


Mike Meisler (AZ)

Government reports 3-4% inflation. Low interest rates. Why?

Complex relation between interest and inflation.

Chris Davis' “Temple of Shame”, his review errors of omission should be “Temple of Shame squared”

D&O Exposure

BRK not big in that area.

Alex Rubo Cava (LA)

Is there a solution to Public Pension funds unfunded liabilities?

Plan A be lucky, Plan B taxation.

John Horton (Santa Barbara)

Counterparty risk, how might it all clear.

Risk is extreme. $400M derivatives at GenRe were “good until reached for” then there was the loss.

Credit Problems

Korea was bad. But he can't predict the future as to when. Only that there is considerable danger.

Last year he said, “American society was near the apex”.

Can't tell if in front of or behind, Warren is more optimistic.

Sophie Maris (H.S. student in Orange County)

Petrochina and Darfur – he knows nothing. All oil companies in the 3rd world deal with governments that do things that the companies would not do.

Sanjay Sang (Toronto)

Newspapers, oil, China

Newspapers- future is worse than the past
Oil- price will continue to go up
China- guess that it will continue to grow

Ernie Petrosine

Resolution of USG

Great success story, management has done a hell of a job.


Jay Parker (airline pilot)

Patrick Byrne and his naked short selling “jihad”.
Charlie has no opinion. “My jihad calendar is full enough.”

E. Feit (safety of brokerage accounts)

Wouldn't want 100% of assets in a margin account at even the strongest brokerage firms

Jason Holzer

Foreign stocks and errors of omission

He doesn't know that much about foreign stocks. Most opportunities have been too small.

Desai

Is “Fortune's Formula” plausible for investment operations? Maybe.

Patrick Jangosa (NYC)

What did you learn in 1973-74 from losing?

Didn't bother me from my own money but it bothered me for my partners particularly because I knew that the stocks would rise.

Robert Thacker

What things over the past 15-20 years would you have done differently?
I have been a very fortunate man. I'll soon be dead but I use the Jewish system-humor. Some people use religion I use humor.

Playing the game with character and rationality rather than having an extra zero after your portfolio when you die.

Question re Wertheimer (Iscar)

Paper record of Wertheimer was unusual. He has obvious character and intelligence.

Dan Hansen (NJ)

Irresponsible assumption of 9% rate of return for pension funds to make.
Demosthenes “The wish is the father of the thought”.

Mark Rabinoff

Is float equity or should there be a discount factor? CM didn't answer the question.

Nick Allen

You have said that you should destroy one's best ideas yearly, what were yours?
I had more scorn for fixed income arbitrage, destroyed some of his scorn. Was more hopeful for troubles in the Mideast then he is now.

Many of us spend as much time with our businesses as with our wives.

Grady Smith (NYC)
Foreign investments decisions

Can often times discern despite cultural differences.

Indonesian dictator “What you call embezzlement we call Asian family values”.

It's a lot better to buy a good business and sit on your ass for 30 years.
You need some mumbo-jumbo if you're going to be a witch doctor and you need to learn to dance.

Alex Vaisman

United Health – If the allegations are true “Backdating stock options is embezzlement”. “Doing God's work better”.

Cost of the War in Iraq

When you have a war put a line on tax returns to send an extra 10% and publish the names of those who don't. I was raised on the UJA.

Bill Henry (Hawaii)

Drain of brainpower into money management.

CM- It is scandalous. We have created a perverse incentive system that drives the most intelligent people into a gaming system. A rich civilization can afford a fair amount of waste and slush but do we want it?

San Diego
What are the largest threats to the economy?
CM hasn't made way through life gambling on macroeconomic predictions.

Joe Gerrity (Las Vegas)

Wesco
Price of Wesco has been bid up so it is higher than it's liquidation value, which is why it can't be folded into Berkshire.

Jay Chan
Are audited statements of foreign companies less accurate than U.S. companies?
We have long-term experience in evaluation so it is not a huge disadvantage.

Patal
Rhode Island lead paint case.
Benjamin Moore is a tiny part of Berkshire

Jim Llewelyn
4.5-5% rate of return on real estate may not be bad

BRK is the ultimate didactic enterprise.

Carla Nava

How do you find an investment manager today?

There are a lot of honorable people and a lot of charlatans.

1. Eat their own cooking
2. Avoid high commission
3. Finding those who know from those who don't takes a long time.
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