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Author: bvalue Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 214625  
Subject: Even More Notes from Berkshire Hathaway Meeting Date: 5/4/2003 3:39 PM
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Recommendations: 65
Probably one more batch left after this...

WHAT PROMPTED BUFFETT TO BUY $100 MILLION OF LVLT CONV. PREFERRED:
We like the people, they owed too much money and they recognized it. They're doing some intelligent things – WEB doesn't have a strong opinion on the business so its about the management.

IS COCA-COLA STILL AN INEVITABLE:
KO is still gaining global share and it has a huge distribution system. This is helping them to get into the minds of more and more worldwide consumers. Over time they should be able to make a little more profit per drink.

COMMENT ON ENTHUSIASM FOR MANUFACTURED HOUSING & CLAYTON HOMES INVESTMENT:
While practically everyone is losing money, Clayton is making money. Clayton has system where profit and loss goes to dealer. If he signs up bad credits, dealer will get loss and will even get repo back. Creates a different incentive than industry where dealers will sign up “warm bodies”. Not an easy business. The book (autobiography of Clayton founder Buffett received as gift) describes some of the gamesmanship. These industry practices are coming back to roost.

Clayton is still the only one in the industry who still can securitize their loans and only in a limited way. They'll do better with BRK. We won't securitize Clayton's loans, “we'll keep them”. Munger added when you see a company with gains in securitization – its fishy.

COMMENT OF VALUE CAPITAL:
Buffett said that BRK has made a lot of money over time with the Byrnes' (father and son). Son is running a hedge fund specializing in fixed income. BRK has 95% of capital, Byrne has 5%. Operates with less leverage than similar firms. This is all disclosed in upcoming Q1. Involves derivatives and some borrowed money. Buffett has looked at all positions and is comfortable with them. Accounting rules force BRK to consolidate results and this creates a little distortion so BRK will break out in 10-Q.

EBITDA AND OTHER PITFALLS IN ACCOUNTING:
WEB felt that BRK handed goodwill amortization the correct way and highlighted it in past annual reports and now current accounting rules have caught up in not having to amortize goodwill. “We're willing to tell you when GAAP doesn't fairly represent economic reality”.

Not thinking about depreciation as a real expense is crazy. At some point assets need replacement or they become obsolete. There are very few businesses where you can spend less than depreciation and maintain competitive position. BRK will spend more than depreciation this year, same as last year and same as year before that. Its “reverse float” in that you have to lay out cash up front.

Munger said that you would be well-served if as you listened to presentations, you substitute for references to EBITDA with “bullsh*t accounting” . He also thought pension accounting horribly understates liabilities. WEB added that he sees companies reporting “income” of $100s of millions while being underfunded in their pension by $ billions.

They also took another shot at options by dismissing that expense is reflected in footnotes. Buffett mused “why not put all expenses in footnotes and have profits equal revenues. Munger chimed “it's a rotten way to run a civilization. Rotten accounting is like rotten engineering.” Current accounting is somewhere between “crazy and crooked”. Buffett was clearly amused that four audit firms (called them the “final four” to laughter) are finally saying that options are an expense.

BOND INVESTMENT STRATEGIES/BANKS AS AN INVESTMENT/COST OF CAPITAL:
Not a long life to Buffett's bond strategies – he clearly wouldn't talk about what he was doing other than to say that formula he's using is opportunistic and he is set to engage in it when the opportunity arises.

Banks are a good business most of the time – particularly if management doesn't pursue latest fads. WEB/CM were surprised that margins haven't been competed away. They feel that they misappraised the industry and they didn't think it would be as good as it has been. In a world of low rates of interest, its surprising that banks still make high returns on capital. Some of that is the inherent leverage but some banks continue to make high returns on assets.

Cost of capital is determined by looking for the most intelligent thing they can do with capital BRK has. They measure alternatives between relative investments, dividends and repurchases. Munger said that Mankiw at Harvard has a book that explains it well based on opportunity costs. The rest of the world uses formulas, including cost of equity – “it's a mental malfunction”

CHINA INVESTMENT/PHILANTHROPY:
WEB noted that BRK has five investments in companies domiciled outside USA. In Hong Kong – 5% of public stake must be reported even though Chinese gov't owns 90% of shares. So BRK had to report 13% of H- shares (owned by public) vs total enterprise value. WEB/CM don't make any judgements about China – they prefer US because they understand the laws, etc. But they feel they understand the oil business even in China. The stake is not a big deal and was disclosed due to peculiarity of HK securities law.

On philanthropy, CM says there are different approaches – give as you go along or Buffett system of moderate giving followed by immense giving. Buffett used ovarian lottery story and talked about him and Charlie having 50-1 odds of being born in the USA. They both feel that their money has to go back to society.

RETURN ON CAPITAL/REINVESTING AT HIGH RETURNS:
Ideal business is one that earns large amounts on capital and has opportunities to redeploy large amounts of capital. Unfortunately, these situations are rare. Most businesses, like KO or See's Candy don't require incremental capital. They generate lots of money but they don't need any more additional cash. See's generated over thirty years almost $1 billion in cash and if WEB had reinvested in See's business it would have earned lousy returns.

Fortunately, BRK structure facilitates redeployment of strong cash generation. Munger noted that there are two types of businesses. Business that earns 12% but creates no excess cash because every dollar has to be reinvested just to stay in place (used example of farm biz where his friend would show his profits by pointing to the farm equipment in the yard). Second type of business generates cash at year-end that sits on balance sheet which can be redeployed and taken out of the business without biz missing a beat.

SOCIAL SECURITY – ALLOWING /ACTIVIST ASKING FOR BUFFETT'S HELP:
Another dumb question based on crowd mood. Buffett says he doesn't do requests. He gets them all the time and they ask him to get to someone. He worries that if they say yes are they saying yes to cause or because WEB is the one asking. Doesn't want to put friends and acquaintances in that position.

On public policy, WEB will occasionally write an op-ed (in fact he has some written that he's waiting on right time to send if at all). But overall, thinks there is a danger to “I'm rich therefore, you have to listen to me.” He hates it and thinks others do too. Worries about overexposure and thinks its always a risk.

On social security, it's a good intergenerational compact. Basically, according to Buffett, it says that if you produce for society, society will provide some basic level of income security. He thinks it's a good system and country is better off because of it.
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