This is a reconstruction of my notes and recollections of this morning’s meeting with Charlie. Much of it is heavily paraphrased with some interpretation on my part in various places when I missed exactly what was said. I invite others who attended the meeting to correct and/or expand areas as necessary.Wesco-Berkshire MergerCM felt as though he were captain of a ship arriving at home port after a long voyage with a larger-than-expected load on-board. Around half the WSC shares were redeemed for BRK shares and the other half for cash. Due to BRK’s recent low price, the merger was unfavorable to BRK. BRK has a reputation for doing the right thing, particularly when it has more power than the other party, and BRK has benefited from that reputation over the years.Charlie the AcademicCM has benefited greatly from studying Lollapalooza effects, which are a confluence of factors operating in one direction. He notes that these factors often arise out of separate academic disciplines. For example, many economist hours spent trying to understand why candy costs so much at a movie theatre and they cannot explain it using marginal utility concept. However, if one understands the psychology of car buying, where a buyer readily adds a $400 gizmo that costs $20 to a $40,000 car because $400 is small relative to the cost of the car, then one solves the mystery of candy prices in a movie theatre. For a second example, Japan used every Keynesian trick to goose their economy only to experience stasis for the last 20 years. Economists suggest those tricks have lost some of their power to influence an economy since they were introduced in 1939. CM has an alternate explanation. Japan’s economy is based on exports. Over last 20 years, competition from Korea and China has increased, and it is difficult to export as much as before. In short, CM recommends using a checklist approach and to consider multiple approaches. It’s a poor internist who sticks with his first conclusion and doesn’t consider alternate explanations.Current Investment SceneThe Great Recession came about from a combination of megalomania (Dick Fuld cited here) + insanity + evil. Greenspan overdosed on Ayn Rand. Can’t have complete freedom where gambling is permitted. Investment bankers had a great edge (better than casinos because no overhead required for entertainers, restaurants, bars, etc.) and they didn’t want to give it up. They essentially brought back the bucket shop with unlimited credit (30-50x equity in assets). The entire process was helped by the accounting profession who doesn’t want any serious responsibility (i.e., for a system collapse). Jamie Dimon is the only one to have expressed any contrition or shame. CM believes the US doesn’t need this kind of financial inventiveness; it’s ok to be boring. Activities should be regulated if government is expected to extend credit.Bill Gross has it right. Expect a “New Normal”, which will be lousy compared with past. Good stock picks will produce modest returns.Country is too divisive at the moment. No tax increase at all is crazy. Just let the rich pay is crazy. Need moderate taxes on broad base. Marshall Plan at end of WWII was good example where US was not vindictive. Need to tap into those kind of values again.Q&A SessionQ: What do you consider will be the three most important parts of your legacy?A: CM does not feel he is a good example for others to emulate. They will be unpopular without the same results. Irreverence will get you into trouble. One item CM did cite: relentless focus on self improvement. Basic morality + self discipline + objectivity = something that really works.Q: What does CM think about deterioration in WSJ editorial page and increase in mistakes since Rupert Murdoch bought it?A: Loves the WSJ, but never liked the editorial page anyway. The Economist is the best magazine.Q: Should the California legislature be organized as a single chamber?A: Unicameral system is not an obvious solution to anything. Agnostic on question.Q: Opinion of ETFs versus mutual funds?A: Doesn’t invest using ETFs and cannot comment on any specific ETF. In general, likes recommending low-cost index funds for the average investor.Q: As a retired real estate developer myself, how did you ever put up with being in the real estate development business?A: CM feels he is partly crazy. Feels it’s his duty to not use his wealth to shield him from misery. Will limit his masochistic ethos to a certain extent but not entirely.Q: Two-column approach suggests BRK price is very low.A: [CM said he didn’t quite get question, so would answer the question he hoped had been asked instead.] It’s hard to buy a business successfully. Can be very difficult to value a company. BRK failed to recognize looming Chinese competition when it purchased Dexter Shoes. WEB and CM are better investors due to the businesses BRK owns. Those who own BRK at current price will do all right.Q: Advice on dealing with adversity?A: Soldier on as best you can. Quitting or being frightened only brings contempt. People remember the guy who kept his cool. Cited the example of Jackie Kennedy Onassis as Robert Kennedy was dying. She urged that the plug be pulled while everyone else stood around blubbering.Q: What percentage of BYD would you recommend holding in a portfolio?A: CM doesn’t know much about early-stage venture capital but is learning. Admires BYD’s culture and will hold stock to end because he loves the people. However, CM cannot recommend what others should do.Q: US dollar has lost 95% of its value since 1955. How much longer before it loses the remaining 5% through inflation?A: It’s obvious the US will experience significant inflation over a 50-100 yr span with Keynesian tricks in its toolbox. Note that since 1955, the US has grown 2% per person over inflation, which is a success beyond CM’s expectations. It was a good period for the US. Looking ahead, one should be happy with 0% return after inflation. Greece, and to some extent Italy as well, is contemptible. Should not have allowed Greece into EU. (EU open but not for nut cases.) EU will have to draw the line somewhere. CM feels Lehman Brothers was a good place for the US to draw the line. For future economic conditions, assume it will be really tough. If you can bear that assumption, smile and get on with it.Q: Do you feel your investing activities have added value to society?A: Being a skilled investor has increased Munger family wealth but ashamed contributions to society weren’t of a higher caliber. This is the reason CM takes on certain masochistic activities. CM’s Q&A at the annual meeting is his atonement.Q: Advice on relationships with older children (e.g., financial support)?A: CM has helped his children financially and doesn’t agree with wealthy parents who create artificial hardships for their children to develop motivation. 100% of the evidence shows those children grow up hating their parents. “Lose graciously.”Q: Are there any companies that have historical similarity to today’s BRK?A: Of the top companies in 1911, only GE and Standard Oil have survived to this day. Standard Oil had a strong engineering culture and was in the right place/right time. Oil was seeping out of the ground and cars were coming to the fore. Getty couldn’t extract the oil from reserves quickly and prices rose, which further fueled the company’s success. CM can’t confidently identify any company today that would be like Standard Oil back in 1911. CM likes work ethic at BYD; they try harder when they fail. He has a love for BYD based on his admiration of its employees.Q: What is your view on value investors getting involved in corporate proxy fights?A: Doesn’t like the vulture investor approach or entrenched management. To paraphrase Oscar Wilde: Pursuit of the uneatable by the unspeakable.Q: Advice for segmenting life into phases and following a certain program within each phase?A: Take joy in learning new things. For example, CM is learning astronomy now. Doesn’t believe in dividing life into phases or stepping through some life program. Definitely not in favor of starting out in life as a greedy jerk and transforming into a nice guy later, as some might advocate.Q: Can we expect these meetings with you will continue in future years?A: No, this is the last meeting. You folks need to find a new cult hero.Q: If just out of college, what field to focus on for next 20 years to become an expert?A: Find something you like and in which you are interested. Intersection of interests and talents. Architect friend says he loves it so much, he never has to work.Q: How do you view KO’s prospects now versus 20 years ago?A: Not as good today. KO is one of CM’s favorite large companies, but its size precludes it from moving fast. They are doing what makes sense: pouring new drinks down existing distribution lines. If everyone needs 8 drinks per day, drinking a KO product is a cheap way to add pleasure to life for something you have to do anyway.Q: How do you prioritize your day?A: Day structured around prior commitments. Reluctant to accept new commitments on his calendar, however. CM and WEB have fairly open calendars to provide time to read, think, answer phone calls, etc. Faces hard problems that aren’t well understood. Consequently, CM needs to structure his time differently so that his day isn’t fully booked like a dentist’s or urologist’s might be.Q: WEB stated he expects BRK to exceed S&P by several percentage points. Will it?A: CM predicts WEB will get his wish through current mix of operating businesses plus purchases from owners who wouldn’t sell to any company other than BRK.Q: Advice for passing on values and habits to young children?A: Teach by example every day. Don’t preach something you can’t live yourself.Q: Has cult hero status opened doors for you or do you find it limiting?A: Both. Don’t want wider fan base than already exists. On balance, cult hero status is a plus.Q: When will we see a BRK dividend?A: When BRK can no longer increase market value over amount reinvested. CM hopes he dies before that happens, but some in the room will live to see a dividend.Q: What factors do you consider when evaluating a company’s durable competitive advantage?A: We consider all the factors we can in the time available. Need to focus on your own area of competence and figure out what works for you.Q: Do you see any parallels between the decline of the Roman empire and the US today?A: Yes, there are parallels. No empire lasts forever in a geographic sense, but parts of old empires are still with us in many ways. US may have a long period still ahead of it, but not forever. US has had a huge, and very constructive, influence on Asia. Lee Kuan Yew deserves credit for changing China.Q: Given high unemployment rate, do you predict a depression in the near future?A: Employment conditions are only bad when you contrast them to what is desired. Likes the word “gumption” and recommends gumption to deal with the crisis.Q: What is your prescription for lowering unemployment rate?A: US should recognize that it now has huge competition in manufacturing and that affects all kinds of things. Asians are so talented but, until recently, were caught in a Malthusian trap where they limped along for decades. Great human talent and culture. Benefit to US has been low inflation but there are side effects too. CM is philosophical about unemployment.Q: CIO who likes concentrated portfolios wants CM advice on that approach.A: On the right track. However, achieving better-than-average returns may still be disappointing to your investors (or employer). Under the New Normal, 8% growth assumption is not realistic. Concentrated approach is not typical. CIO has an important duty.Q: What company and CEO do you most admire?A: Costco. Jim Sinegal is one of the best retailers of all time. Costco will take a lot of future retailing territory. It is run as a total meritocracy with a fanatical desire to serve the customer. Recommends reading Costco annual reports to learn good retailing lessons. Everyone needs uplifting examples.Q: What % cash do you recommend holding in a $10 million portfolio?A: CM’s portfolio is larger than $10 million and he is holding $10 million in cash. [Not sure I captured this one correctly.]Q: What books do you recommend and what books do you regret reading?A: CM doesn’t get through first chapter of books he doesn’t like. Read fiction when he was young (all the great classics) but drifted out of it. Enjoyed Sherlock Holmes, so read other works by Arthur Conan Doyle and discovered Doyle really wasn’t that good – he simply stumbled into a gold mine (i.e., the who-done-it genre). Highlighted to CM the importance of finding a gold mine. Recommends that everyone should rub their nose in their own mistakes “with joy” and notes that one will never lack for opportunities to do so.Q: Advice for how to select an investment manager without a track record?A: Based on recent experience, this is really hard. Many upstanding candidates for BRK to chose from. Could find good managers who focused on a particular niche but they can not scale, and BRK needs someone who can scale. Does not like manager of managers concept – leave that to Harvard.Q: Given recent natural disasters, will insurance industry continue as before?A: Insurance has always been a mediocre business. Life is worse than casualty.Q: [Missed this one. Something about renewable energy and/or global warming.]A: Growing corn for motor fuel is an asinine idea. In Iowa, 20% of power comes from wind. Appears now that we will be able to supply our energy needs directly from the sun. Lots of natural gas available, albeit may have to dig deeper to get at it. US has problems with right-of-ways for power transmission (e.g., cannot cross state lines). China is installing huge power grids, and CM thinks they will work well. With sufficient power, every technical problem can be resolved. Can turn seawater into potable water with energy, for example. Ok for planet to be a little warmer. No one moving from SoCal to N. Dakota for the weather after all. If need be, we can influence warming through geoengineering.Q: Will new BRK CEO keep current position as well as assuming CEO duties?A: Ajit doesn’t want job. Duties for person moving into CEO position would change, of course.Q: Public versus private schools?A: Public education is good but nothing compared to the most selective private schools. CM feels his public education was good enough and his life wouldn’t have changed much if he had gone to a private school.I had to step out for a few minutes at this point and missed a couple questions. When I returned, CM was wrapping up his answer to the last question of the morning. At that point the audience gave him a sustained standing ovation, and CM seemed to beam with delight. For those who could not attend, the meeting reminded me of a last lecture by a well-liked professor before many of his former students. I have attended every Wesco shareholder meeting for the last 12 years and will miss the annual pilgrimage to the Church of Rationality and Charlie’s “sermons”.
Wow. "Thanks" hardly seems adequate.
marce, thanks for sharing the notes with us. were you told sokol questions were off the table or no one asked about the sokol affair ? no one asked why the buyback hurdle was so high, or why brkb did not have an authorized buyback in place ? thank you.
Q: Advice for how to select an investment manager without a track record?A: Based on recent experience, this is really hard. Many upstanding candidates for BRK to chose from. Could find good managers who focused on a particular niche but they can not scale, and BRK needs someone who can scale. Does not like manager of managers concept – leave that to Harvard.~~~~~~~~~~~~Interesting - is he referring to Sokol, or Combs, or what?
Around half the WSC shares were redeemed for BRK shares and the other half for cash. Due to BRK’s recent low price, the merger was unfavorable to BRK.For a guy like Munger who claims to belong to the church of rationality, this one always bugs me. Berkshire is buying the 19.9% of Wesco that it doesn't already own for a total of $548 million; half of that would be $274 million. Berkshire would like to do an all cash deal, since Munger considers that BRK's recent price is 'low' and thus that issuing shares is contrary to Berkshire shareholder's interests, but many Wesco sellers prefer shares for tax or psychological reasons.But Berkshire has about $40 billion on its balance sheet. About $400 million worth of Berkshire shares are traded every day. If Berkshire really preferred to do an all cash acquisition, they could just purchase these extra shares, for cash, with money on hand, and convert this partial share-financed acquisition into a cash-financed acquisition within a week or so, without influencing share prices.If Buffett and Munger want to increase the size of the company indefinitely by doing share deals instead of cash deals, fine, then they should say so, but complaining about the 'necessity' of financing acquisitions with shares strikes me as irrational. Since I can't believe Buffett and Munger are ignorant of this option, or irrational, I am only left with the explanation that they are being disingenuous.Regards, DTM
Yes, it would be a horrible horrible precedent to actually repurchase a single B share! It would ruin the narrative!A dividend was paid back in the '60s while the CEO "took a bathroom break." Maybe it is time to take a powder once again. et
were you told sokol questions were off the table or no one asked about the sokol affair ? All questions were fair game. Sokol’s name simply did not come up at the meeting.no one asked why the buyback hurdle was so high, or why brkb did not have an authorized buyback in place ?I think the question that started out with “Two-column approach suggests BRK price is very low” was intended to probe CM’s view on what an appropriate buyback price might be, but you can see from Charlie’s answer that it never went that direction. No one else asked about buybacks.Q: Advice for how to select an investment manager without a track record?A: Based on recent experience, this is really hard. Many upstanding candidates for BRK to chose from. Could find good managers who focused on a particular niche but they can not scale, and BRK needs someone who can scale. Does not like manager of managers concept – leave that to Harvard.~~~~~~~~~~~~Interesting - is he referring to Sokol, or Combs, or what?This was one of the more surprising revelations to me. A while back, I recall the plan was to hire up to three investment managers who would be incentivized in part to work as a team. After an open recruiting process, only one person has been hired to date. I’m not aware that WEB or CM have ever discussed the difficulties they’ve encountered before yesterday. Of course, CM did not name anyone specifically, so we are left to speculate. Combined with the Sokol incident earlier this year, one again wonders how well succession plans laid out on paper will be translated into actual practice.
<< If Buffett and Munger want to increase the size of the company indefinitely by doing share deals instead of cash deals, fine, then they should say so, but complaining about the 'necessity' of financing acquisitions with shares strikes me as irrational. Since I can't believe Buffett and Munger are ignorant of this option, or irrational, I am only left with the explanation that they are being disingenuous.>> BINGO, someone in brkville gets it. i'm sure no one asked this question and becky will never ask buffett. its all part of the buffett discount.
thank you marce, at this point nothing shocks me when it comes to brkb partners and what they think is material. what buffett and munger have done to so many nice kids like longreits speaks tons. very sad.
Q: What % cash do you recommend holding in a $10 million portfolio?A: CM’s portfolio is larger than $10 million and he is holding $10 million in cash. [Not sure I captured this one correctly.]This is not what he said, though he did kind of mumble his answer. He said his portfolio was $10 million, or larger, and he was holding $10 million or less in cash. In otherwords, he was not going to answer how much cash he was holding.RR
Here's my suggestion: Berkshire knows that it will occasionally want to acquire businesses, and their owners seem to prefer Berkshire shares, rather than cash. Of course, if given cash, they could just purchase the shares like anyone else, and it would amount to the same thing, but either this has not occurred to them, or perhaps there are tax reasons for preferring shares.So despite the fact that Berkshire occasionally trades at prices which may be beneath its intrinsic value, Berkshire has on numerous occasions (BNSF, Wesco) had to actually issue new shares at these low prices, essentially doing the opposite of the buy low sell high mantra it espouses.Anyways, knowing that this unfortunate situation seems to crop up fairly often, Berkshire could establish a special reserve of shares that owners have needed to sell, for one reason or another, for instance, because some people have been given shares where the bequest requires them to be sold, or just because people occasionally need money and Berkshire certificates are inconvenient for purchasing funeral services, particularly the A shares. Of course, to make sure the sellers are not 'taken advantage of', they should always be formally told that Berkshire management considers that shares may be underpriced, and that it has usually been profitable to hold on to shares and not sell them, etc. etc. They might even be given and extra 10c per share, as a gesture of appreciation for sellers' services in establishing this useful stock fund. They might call this stock fund a 'Share Treasury', for instance.Shares in the Share Treasury would never be cancelled (that would sound too much like some other practice whose name will not be mentioned here.) They would always be kept, cherished in fact, waiting patiently for that inevitable transaction where shares might be necessary. Good idea, no?Regards, DTM
how many people were at the meeting ? why did so many, 1/2, take the cash over brkb shs ? was taking brkb stock a tax free exchange vs taking the cash and a taxable event ? thank you.
<< Of course, if given cash, they could just purchase the shares like anyone else, and it would amount to the same thing, but either this has not occurred to them, or perhaps there are tax reasons for preferring shares.>>often times if you take stock, its a tax free exchange, taking cash is a taxable event if you have a profit. those who took cash are in effect saying buffett and munger are wrong about brkbs current share value.
http://www.huffingtonpost.com/2011/07/01/charles-munger-berk...interesting that this thread leads the fav list here on MF. Charlie is quoted on Huff Post:“The bubble in America was caused by some combination of megalomania, insanity and evil in, I would say, investment banking, mortgage banking,” Munger said at a conference in Pasadena.In assigning responsibility for the housing bubble that precipitated the financial-sector collapse of 2008, and ushered in a period of prolonged economic contraction, Munger also took issue with the accounting industry, calling it "contemptible" for its role in the debacle.And he had particular scorn for Richard Fuld, the former chairman and CEO of Lehman Brothers.“I would guess that Dick Fuld has not a single ounce of contrition
Since I can't believe Buffett and Munger are ignorant of this option, or irrational, I am only left with the explanation that they are being disingenuous.How about this explanation:If Berk announced they were buying shares to supply the shares for the Wesco deal, the price of the shares would go up. Do we then give Wesco shareholders fewer shares per Wesco share than we would have otherwise, and stand accused of manipulating our own stock price to lower our acquisition costs? Or do we give Wesco shareholders the number of shares we calculated BEFORE we announced the buyback, and subsidize the purchase by buying shares in at a higher price than we are issuing them to Wesco shareholders at?R:
If Berk announced they were buying shares to supply the shares for the Wesco deal, the price of the shares would go up. Do we then give Wesco shareholders fewer shares per Wesco share than we would have otherwise, and stand accused of manipulating our own stock price to lower our acquisition costs? Or do we give Wesco shareholders the number of shares we calculated BEFORE we announced the buyback, and subsidize the purchase by buying shares in at a higher price than we are issuing them to Wesco shareholders at?No, we do neither of these things. We pay cash and shares as promised, and use shares that we have bought back opportunistically when the price is low. If the announcement of a gnerally applicable buy back policy sent the price of shares up, as you suggest, then Berkshire would have to wait for the price to settle back down before proceeding. If the price stayed permanently higher because of a standing permission to buy back shares, and if they were thus permanently trading close to intrinsic value, then this would be an unanticipated bonus, and might make the share buy back impossible, but that has yet to be established.I doubt it would make much of a difference, but I am unlikely to have the opportunity to prove this, since I think the lack of share repurchases is totally unrelated to the share price, and is more of a fundamental orientation, but that is impossible to prove as well.Regards, DTM
No, we do neither of these things. We pay cash and shares as promised, and use shares that we have bought back opportunistically when the price is low.So your post is just the usual "we should do buybacks" post and is not really related to acquisitions at all. R:
So your post is just the usual "we should do buybacks" post and is not really related to acquisitions at all. Not really the usual version; it came in response to the hypocrisy of saying "we would like to pay cash for acquisitions, but we are FORCED to issue underpriced shares, destroying value", when they have oodles of cash on hand and could buy back those underpriced shares any time they felt like it.dtm
So your post is just the usual "we should do buybacks" post and is not really related to acquisitions at all. Not really the usual version; it came in response to the hypocrisy of saying "we would like to pay cash for acquisitions, but we are FORCED to issue underpriced shares, destroying value", when they have oodles of cash on hand and could buy back those underpriced shares any time they felt like it.Not only that, but most bought back shares are cancelled. In this case they would be stored as currency for acquisitions, so it's pretty clearly "related to acquisitions." In the usual version, the purpose is to increase the value of the remaining shares. In this one, it's merely to avoid diluting it.
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