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Author: dardashti Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212378  
Subject: Re: 2005 Shareholder Meeting Notes Coming Soon.. Date: 5/1/2005 10:24 PM
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Question:
Someone posed a very longwinded question that ultimately asked, in short: “Would the rising prices for commodities hurt the margins of Berkshire's businesses?”


Answer:
The carpet business (i.e. Shaw) has been hit time after time with rising raw material costs; product is derived from petroleum products. Acme Brick's manufacturing process uses a lot of natural gas. Over time, companies with a strong position can pass the material costs (like labor) to the consumers.

First, Warren made two excellent points:
1. Even with the record commodity prices, corporate profits vs. GDP is at an all time high and Warren would “bet” that the ratio would drop somewhat.
2. “Corporate taxes paid vs. all taxes paid is close to an all time low.” – (Shai Dardashti note: I presume Buffett meant this fact both as a criticism for corporate tax avoidance schemes and a note that with time the chart will revert to the mean, at which point companies will have larger expenses and lower profits.)

Warren went on to share some commentary on businesses in general: He likes buying business with some untapped pricing power.

In 1972 with See's Candy, Sales were $4 million pre tax. He asked himself, “if prices raised by a 10% point, would sales fall off a cliff?” The answer was obviously a resounding no. A great Buffett quite: “It's not a good business if you need a prayer session before raising the price by a penny.”

A criterion for a business' strength is the sales sustainability at increased price levels. Warren reviewed the newspaper industry as a quick case study. Newspapers function as the “megaphones of merchants to their audience.” In the 1970s and 1980s, newspaper publishers raised rates on an annual basis, and didn't worry that people would drop their subscriptions or that advertisers would stop advertising. Now, publishers agonize about losing advertising and if a 20 cent increase will cause readers to just drop their subscriptions. [Shai Dardashti comment: The single change in newspaper business economics is clearly the widespread availability of free news coverage over the Internet.]
One can judge the durability of the economics of a business by observing the price behavior. Warren noted in the next breath that beer prices have increased each year, and expects to see rollups.

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IMPORTANT Question:
With just a 15% tax on dividend, what are Buffett's thoughts on a special dividend for Berkshires excess cash reserves? [Shai Dardashti comment: Historically, dividends were taxed at personal income levels, i.e. ~30%. Earlier, Warren explained he hesitated to pay a dividend due to the high tax rate, and then explained the concept that he'd return the money if it became clear than the shareholder could generate better returns on the cash than if the money remained with Berkshire.]

Answer:
Buffett acknowledged that dividends are now lightly treated for taxpayers. If there were no taxes whatsoever, there would have had some dividends.

And then Buffett explained the standard answer: “If I retain $1 and in present value terms have it worth in excess of $1…” Buffett would opt to hold on to the money. If not, then would return t.

Warren stated that in *three years or so* it would be prudent to look back and decide at that point if Berkshire's performance warranted a distribution of cash reserves.



===

Plenty more coming...just need some more time to type it all up
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