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I attended WESCO's annual meeting yesterday and did take some notes. For whatever they're worth, here they are. I didn't get everything and had to leave a few minutes early. The questions and answers are paraphrased except when in quotes. He often didn't answer the question well or added other info and/or made comments which led in other directions. Of course, that was the best part.

Q: What are the limits to Berkshire's growth?
CM: In a finite world, growth is eventually limited. But, will it be in the next few weeks or will it be another 15 years. That's the important question. [Note: By the way he said it, he's thinking it will be some time before they're tapped out]

Q: If you and Warren think share buybacks are such a good idea for other companies, why doesn't Berkshire engage in this?
CM: At some price or other, Buffett would do it. But, Berkshire's cult like status keeps the price too high (compared to alternatives).

Q: Why isn't your estimate of Intrinsic Value published in WESCO's annual report anymore?
CM: We published our estimates when we thought that WESCO was way overvalued. We don't think that is the case anymore so we didn't bother. We don't want WESCO's or Berkshire's price to get too high and when it does we try to talk it down.

Q: Berkshire has loads of bonds and cash; why so much and how should I value?
CM: We hold bonds because we cannot find stocks we like. When we find stocks we like, we will not have nearly so many bonds. We have a small finance subsidiary where Warren has made a few hundred million a year in a very low-risk operation that we might continue.

Q: What is the state of Berkshire's insurance accounting and what about General Re's culture?
CM: We're more conservative than average. Almost everyone in America mis-guessed reserves in the past few years. Averaged out over time, we'll be more conservative. They always tried to do it right at General Re but...

Q: You've been around a long time Mr. Munger (laughs from the crowd), how have the ethics of Wall Street changed over the years?
CM: Ethics on Wall Street have always been bad. Underwriting ethics, though, are worse than ever. There are differential incentives for brokers which are guaranteed to produce questionable behavior. If a brokerage offers a 5% commission on one product and nil on another, it's easy to see why the broker chooses to sell the 5% product. The broker's worried about making his monthly gross and sending his kids to school. The internet bubble was evidence of ethics being worse than ever. But, you can't blame the analysts because of all the twisted incentives -- you can't keep your job and be ethical.

Q: Can you expand on WESCO's insurance operation?
CM: It is decent but very small in relation to WESCO's net worth. It should be decent going forward. (No comments though on plans to vastly expand it...)

Q: What about Corporate Governance and Corporate Boards?
CM: There is little influence that boardmembers have. They pretty much do what the CEO wants. Lawyers can have the boards draw up minutes, etc., but they all just do what the CEO wants. There are a few exceptions -- when a board member has particular expertise in an area or some great influence. Then CM tells a little story about a friend who was asked to be on a board...."and that was the last thing they ever asked me."

Q: Why did we sell FRE at the "bottom" and why did we sell it at all? [This was an endless and stupid question, I thought, so I'm cutting it short]
CM: We're leery of finanical organizations in general and this position just started to make us nervous. When we get nervous we just get out. [another anecdote] -- I knew a guy once who ran a very successful business and he decided to fire his best producer. The big producer said "How can you fire me, I'm the top producer?" The answer was "You make me nervous" -- you'll get me into trouble down the road, was my friend's fear.

Q: Any thoughts on the Wealth Effect and why the stock market's drop hasn't cut into consumer activity to a larger degree?
CM: Obviously, there is a Wealth Effect. I think the WE is bigger than what most economists think. There are other factors that can influence things. For example, gov't spending is skyrocketing. We've swung from a huge surplus to a very large deficit. Gov't spending has increased 10% in each of the last two years. We haven't seen that kind of growth for decades. Low interest rates are now providing a housing induced WE. So, the gov't can have very large impact when they want to but it can't go on forever, in my opinion. So, there are many factors which affect these things. People always want a single answer or magic bullet but it doesn't work that way -- you need to approach things with a multi-factor analysis. For example, how many factors affect consumer spending.

Q: Thoughts on derivative accounting -- you compared it to sewage?
CM: If you write derivative contracts naked, you're extremely exposed both to the upside and the downside. No one really knows who their counterparties are and who is covered and who is naked, etc. The whole system is crazy. "If I am right, there's going to be hell to pay in due course." There's no easy way out, a big uproar is coming. When you buy and sell government bonds, you have to pay right away. Derviatives don't work that way and therefore much can change about the exposure, liquidity, etc. of counterparties. No one knows.

Q: Thoughts on Level 3 -- would Berkshire ever consider investing?
CM: Very hard to guess about the future of such a company when technology changes so quickly. But, it is conceivable that we might get into the telephone infrastructure business -- we're in electricity distribution in England and electricity generation and distribution in Iowa.

Q: How should I think about interest rates? Do both real rates and nominal rates matter?
CM: Yes, both matter. Everyone wants a magic bullet -- one single answer that will always work but things are always changing and so are the answers. There are many factors to think about regarding interest rates.

Q: [I didn't catch this question. It was something about the importance of science. Interestingly, the questioner turned out to be the person who originally sent Munger the Ice Age book which he recommended at the Berkshire meeting]
CM: Science is very important and those that can do it should be encouraged to do it. [Then he gave an example of why it can be important in investing]. There was a plan to use sea-water to make electricity but if that proposal had been brought to someone who new the laws of thermodynamics, they would have laughed it out of the office. Instead, many millions were spent on something that never made any sense.

Q: What have you taught Buffett? What are differences between you and Warren and Lou Simpson?
CM: Warren learned at the knee of the master, Ben Graham. Graham developed his ideas while looking over the detritus of the depression and found many, many securities which fit his method. And, his method was very, very good and he developed this entire area of thinking about securities.... So, Warren was a little slower than I was to see the power of owning a great business. Lou is here today. Lou, why don't you answer that question. [Simpson stands up] I think the major differences are that I have the ability to make commitments that are much smaller yet still affect my returns. So, that's really it -- size.
CM again: I agree and since Lou has done so much better than us lately, maybe he got more talent as well.

I missed a question here

Q: Would Warren have been a successful investor if he hadn't met Graham?
CM: Warren is a much better investor than Graham was and would have been w/out Graham and if he had never met me.

Q: What was Benjamin Franklin's greatest contribution?
CM: We've never seen his equal. I cannot pick just one thing. In his day, he was the best writer, scientist, philanthropist, inventor and arguably the best statesman, he played 4 musical instruments. He was an amazing man. I cannot just pick one.

Q: If you were emperor of America, what would you change?
CM: Central City public schools are a disaster. In fact, our universities are a disaster too -- except for engineering and sciences, which are the best in the world. I would remove 3/4's of the teachers/professors [I think I heard the "3/4's" thing correctly].

Q: Will Berkshire ever be in the S&P?
CM: Eventually, but not now b/c we're not highly institutionally owned and we're not quite large enough to get in (without that institutional ownership)

Q: Do you use a computer?
CM: Finally just had one installed but it's still black. If you get the big points in life you don't need to know all the latest details. You can just walk by edge of a stream and pick up gold nuggets; you don't need to do placer (?) mining [I think that is strip mining]. Organized common, or uncommon, sense is the most important thing in life. "People calculate too much and think too little".

Q: Is consumer credit becoming a problem?
CM: In Germany after WWII, there was no credit, you had to save the entire amount to buy something and their GDP grew just fine -- that's a Munger Model. I don't like consumer credit, that's just me. Do I think we'll hit a big bump in the future because of the growth in this credit -- sure -- these things are self-correcting. Making money on consumer credit is like having serfs [indentured servants]. I wouldn't want to spend anytime writing advertising to convince people to use credit cards. Maybe the world is a better place with consumer credit -- I don't know but I wouldn't have so much of it around.

Q: Any (Richard) Feynman stories? Fooling yourself is so easy?
CM: He was a strange guy. His personal life was chaos yet he was such a rational person. He didn't fool himself. The reason it works (if you can avoid fooling yourself) is because it is so rare.

[I'm not sure I got the following question or answer right]
Q: I own some financial stocks -- FRE and FNM -- should I be worried?
CM: I have no mental models for deciding an answer to this. But, in general, you need a checklist, like an airline pilot. This is something that you should all be taught in college. How many of you were taught to always analyze things by going through a checklist? (One hand goes up). Where did you go to school? Answer: MIT.
That wasn't planned. But, I'm not surprised.

[then, I either missed a question or he just digressed -- the question might have been about WEB's nuclear prediction -- because he said the following]...
CM: Every other nation that has led the world has eventually lost the lead. We'll all die one day. If I were running things, I'd be in favor of foolproof identity cards, limiting due process for immigrants. I would be very risk-averse. Our country has handled this very badly. We were stupid. I mean, Arab men taking flying lessons on major airliners without wanting to learn to take off and land (many laughs from the crowd on this). But, Canada is worse, it might as well have a sign welcoming terrorists. Israel should close their border with the Palestinians for a while. But, it is a terrible problem..

Q: What about USG?
CM: (I didn't hear much of this answer) He said that we didn't predict that wall-board prices would get killed like they did. (He said some other things that I didn't catch)

Q: What about Lloyds?
CM: Lloyds became a sewer. 3 hour lunches with alcohol. They got lazy and things degenerated into huge scandals. Lloyds is much, much better now but not completely fixed. The jury is still out on the future.

Q: Would you share your mental model checklist for evaluating stocks?
CM: It is different for different businesses. The appropriate checklist is derived by understanding deep patterns. I can't make it easy. You won't hold it in your mind if I tell it to you anyway -- you have to develop it by experimenting and thinking.

I think the meeting was nearing an end when I had to leave, so that's all I've got.

best,

gdefelice
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