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No. of Recommendations: 89
My plane just landed from LA where I attended the Wesco Meeting at the Hilton Hotel in Pasadena on May 4, 2005 and here are my contemporaneous notes.
The ballroom was full with about 500 people in attendance. Most of the audience was middle-aged and male with more ties and jackets in evidence than at the usual BRK meeting.
Free coffee and cookies were available.
No admission ticket was required; the staff asked that we complete a form indicating if we were BRK or Wesco shareholders.
Poor Charlie's Almanack was available for $53 including the Ahnold tax vs. ½ price at BRK meeting, but if you were willing to stand in line for 10 minutes, you could get Charlie's autograph.
The Formal Business Meeting lasted about 3 minutes. Before it began, Charlie said that he would make some general comments and then open the floor to questions.
Charlie said that he would comment about three general areas: corporate governance, Sarbanes-Oxley, and the current state of the investment world. Some of his comments overlapped, but here is what I tapped out on my notebook. If I thought that a particular comment was telling and I could type quickly enough, then you will see it in quotes. Otherwise, the questions and answers are paraphrased.
1. Governance
a. There has been a “Mild revolution”, with new rules, now a majority of the boards must be independent directors,
b. Costco now has Gates Sr. age 78 on its board. Charlie enjoyed the fact that more “senior” citizens joined him on that board. He thinks that it is a plus at BRK, to have a board who are “rich and accomplished shareholders who are paid a pittance,” including Gates, Gottesman, and Keogh. “Few directors are more pro-shareholder than Gottesman.”
2. Sarbanes-Oxley
a. Has increased auditing cost, the increase is not 100% waste but 80% waste.
b. Companies are reverting to private ownership because of these burdensome requirements
c. The problem is that although executives can swear, they still rely on others to produce numbers. You cannot run a modern corporation without deserved trust. The CEO of Exxon is not going to count barrels of oil. With Sarbanes-Oxley, it will be easier to prosecute a CEO or CFO.
d. The recent prosecution and press coverage has had dramatic effect on lives, more so than the price fixing scandal of several years ago in electrical industry. This has had a positive effect. Enron, Tyco, mutual fund industry. Strong Fund was an outrage – directors allowed the management company to sell at a huge premium.
e. 99% of time the prosecutors are not abusing their press conduct. Spitzer has done a world of good, caused reforms that SEC could have caused. Only lawyers like endless due process. “When a lawyer goes to hell, he gets endless due process and no decision.”
f. The insurance business has changed almost overnight.
g. Almost all reinsurance is “finite” reinsurance. “Finite reinsurance” is a bad term.
h. Obsession with making quarterly earnings, first casues managements to fudge capital gains, then channel stuffing – the penalties were pretty light though the behavior was pretty bad. These tactics were common in software industry.
i. “A few public hangings will really change behavior.”Once there was a U.S. president who asked for three hangings per year without cause, in order to prevent dishonest behavior. When told by his aid that three hangings a year was an insufficient number he told the aid that he would publish a list of those being considered for hanging.
3. Adapting to changes
a. There will always be abuse with a sales force; you will never be able to stamp out improper behavior.
b. If you want good behavior, you don't pay on a commission basis.
c. Public accounting firms had gone to hell 4-5 years ago, with investment bankers this helped create the Enron debacle.
d. Buildings fall down in Latin America because of poor inspection procedures, but we have a good system of building inspection in the U.S. However, we allowed accountants to morph into other areas besides auditing.
e. 4-5 years ago, every major accounting firm was selling fraudulent tax shelters to their clients. Now they have thrown out these tax partners. Should audit firms do nothing but audit? Predicts that reforms will end with what has already been done unless there are more scandals.
f. Investment banks were just unbelievable. Read “Fiasco” about Morgan Stanley, read Eichenwald's “Conspiracy of Fools” about Enron. Eichenwald's book has a smart title because people deluded themselves. Investment bankers' behavior was disgusting.
g. Faults should be judged as the church did to wit mortal sins and menial sins. Earnings smoothing was a menial sin, but that view has changed.
h. Twain: “A mine is a hole in the ground owned by a promoter.” Similar behavior now. It is unpleasant to fire somebody.
i. Warren's policy to not lay people off in the Nebraska based insurance businesses serves to not create incentive to just write business.
j. Ghastly behavior of life insurance companies in selling annuities to the elderly.
4. Hedge funds
a. Does not know about their behavior
b. Fudging their results – starting to have scandals.
c. “As we turn the wheel of time, the same old plots will keep coming up.”
d. Does not think that corporate governance will change corporate compensation, people will just get more sophisticated about how they do it. Maybe NYSE will get better, but the public corporations will stay the same. There are powerful psychological forces tending towards gross abuse. Jack Welch was underpaid for what he did for GE. "As you rise in American corporate life you have a duty as an exemplar to take less." Athenians ran Athens that way. That is why the United Jewish Appeal is a successful charity. One has a duty to be an exemplar. Moses, Maimonades were– most CEO's can't even pronounce it.
e. Boeing CEO – not the adultery, but the emailing was the cause of the Stonecipher's dismissal. The SEC should have such a standard as “conduct unbecoming an officer”.
f. Single error of allowing pricing of long-term contracts was responsible for 90% of Enron's problems. Arthur Andersen convinced SEC to allow it.
g. There is no reason why accountants should not be independent particularly now that there are only 4 major firms and it is a black eye for a public corporation to have its auditor resign.

5. Investment world
a. Harvard and Yale have done well with Hedge Funds. However, they are leading other not for profits “into a pernicious effect on civilization”.
b. Charlie estimates that five percent of GDP is going into money management and its frictional costs, worse, the people who are getting the 5% are the most advanced people in the civilization. This is not an intelligent allocation of the intelligence of the civilization. Nobody talks about it. CM feels like a lonely voice in the wilderness.
c. He is bothered by the activity, the trades, the ballooning of credit of the hedge funds. Will the Fed bail them out if there is a credit crunch?
d. The current lack of investment opportunities – “It's a lot like Easter egg hunter without many eggs”.
e. Never seen in his life it hitting all asset classes together – real estate, stocks, and fixed income securities.
f. Unhappy endings: Japan, 1929 Crash. Observing the result here will be interesting.
g. BRK and Wesco have an awful lot of cash and tremendous competition to invest.
h. It is “no fun to compete with Chinese manufacturing”. Wages ~1/20th. Delivery logistics are all worked out. Liberate those people with Confucian family values and educational values and it's awesome.
i. Look at symphony orchestras 80% of hard instruments to play have an Asian face.
j. Look at this meeting and see the Asian faces. Go to Berkley engineering department and you would think that you are in Asia.
k. One of the biggest businesses in Korea is tutoring.
l. What you're calling corruption is “Asian family values”.
m. There have been long periods (15 years) where returns were not very good. Size effects outcomes. Look at BRK – can only buy meaningful positions in big companies and only when there is some temporary reason for the low price.
n. Take the high road, don't abuse your own clients e.g. rather than using your time to think about investing you are using your time to get new clients, you wouldn't do it to your spouse.
o. “Enough of Munger musings.”

Question & Answer Session
John Schwartz (BRK):
Concerned about U.S. being in terrible decline, mentions Tom Friedman our becoming fat, happy, lazy, and stupid. What is your opinion on the intermediate future of U.S.?
CM: Over the long term the eclipse rate is 100%, CM is more optimistic about U.S. In one of Punic Wars 2/3 of debt was repaid before the war was over.
Mike Kruger BRK:
How would you characterize investing opportunity today?
CM: At BRK we have lowered our expectations not waiting for 1974 or even 1984. It may well be. The world will not give you extra return just because you want it. It is safer to reduce your wants, there are a lot of smart people out there, some of whom cheat. It's not easy, beating them.
Another BRK holder:
What mental models do you use on the super cats.
CM:The big mega cats are approved by both AJ and WEB not using standard actuarial technique.
Charlie Barshadar a self described 5%'er:
After a lifetime of reading how do you read? What are your observations on Rick Guerrin?
CM: After Guerrin got rich he stopped trying to get richer. There is nothing crazy about that; it's the rest of us who are crazy. Read the best people, read if you like learning. He does not read detective stories or romances. Eichenwald's' Enron book – it's like reading a tragedy you know the bad ending.
David Whittler Chicago:
Question about depleting energy supplies.
CM: You can never be 100% sure; some people think that maybe there will be another tech breakthrough. If we have to live with fewer hydrocarbons we could but it would be a painful adjustment.
A BRK investor:
Can value principles be used to currency investing over a longer term?
CM: It is conceivable if somebody studied it, it could be done but it isn't in my line of talents. I have no feeling that. The trouble with currencies is that it sucks you in using margin. If you are already rich why do it?
Peter Van der Brook BRK:
Is there some system that BRK uses for compensating the CEOs.
CM: There is no system. It is very simple. Huggins compensation is a one-page document that has not been touched in decades.
Harold Kalishman (BRK shareholder):
What are you feelings about investing Social Security in the stock market?
CM: I think very little of that notion. In England, the results were a disaster. If the country is going to be richer then why not spend more of GDP on old people. I'll tell you what is unthinkable, that so many people could be so stupid to think that is unthinkable.
BRK from Pittsburgh:
How do you deal with the fact that all asset class prices too high?
CM: I have lower expectations than before.
CM on credit: Awash in credit, awash in awful behavior by subprime lenders. It's a dirty business and a new way of creating serfs.
John Gordon (BRK and Wesco):
Is there price tiering in reinsurance?
CM: There is some price tiering, yes. Is there enough, no. People are not as credit aware.
Phil Guzek (credit analyst):
China, dividends.
CM: By no means have we given up, we can always give the money back. It is very tough to make money in China. We may not have many investment opportunities there.
Bob Klein (BRK & Wesco):
Benchmark risks.
CM: We are in a benchmarking world in terms of institutional investing. We have closet indexers, in which case you are being played for a sucker.
Greg Hilman (not a shareholder):
Feelings about AIG?
CM: He never examined AIG in great detail. It was run by a truly brilliant dominant personality. Does not feel it was like ENRON. Greenberg gilded the lily a little. Charlie agrees with David Boise that Greenberg thought that it was his duty as CEO to enhance AIG's reputation a little. AIG was a huge human achievement. Greenberg was very trustworthy in dealing with us. It was a little like GE. With success, it morphed into a massive carry trade business. It was a lot like GE credit. We never owned GE or AIG. It just made me nervous.
Leora Gardner (BRK & Wesco):
Can you give us a book recommendation; you didn't do so in Omaha.
CM: It costs $49. If you buy it and don't like it, you can always give it to a more intelligent friend.
Mike Armheyer:
Is Mr. Market offering an opportunity to buy back BRK?
CM: “We are not looking for a chance to gleefully help some shareholders at the expense of others.”
Glenn Tongue (BRK & Wesco):
Question re valuation.
CM: We have reduced expectations from common stocks in terms of what we are buying. We have some good days ahead.
Jason Young (Wesco):
How are the retail consolidations affecting Costco's?
CM: Perfectly natural
Larry Coates:
What is BRK's exposure in mobile home financing?
CM: It's manufactured home not mobile home. Anytime you let the commission sales people determine the credit policy you have a recipe for disaster. That is what happened in the manufactured home industry. Clayton was always the best at the credit extension business. It was unable to continue to securitize its loans because of problems in the industry. It's amazing how many people think that they know more about the value of a business then the people who run it.
Chris Ing:
How do you judge management's intelligence and competence?
CM: It's not easy; there is no shorthand. Mentions Kozlowski, short of the video it is difficult.
Paraphrased questioner with thick Chinese accent:
Have we made a pact with the devil with Wal-Mart?
CM: Wal-Mart is a fabulous enterprise that does a lot of good, more efficient system of distributing the goods. Wal-Mart is one of the glories of civilization. McDonald's does a wonderful acculturation job, better than Harvard. By and large, you do better when you let your winners run. China is a nuclear power, we have no alternative but to have friendly relations with China so he is not bothered by the fact that China supplies so many of Wal-Mart's products. He said that he admires Wal-Mart despite being a Costco director.
Question re CORT Furniture
CM: You could argue that we made a macroeconomic bet and that we blew it. There is a class of people who want to rent furniture and not own it. CORT is trying to be the Enterprise Rent a Car of the furniture business.
Ralph Burchmeyer (Wesco):
What were the common characteristics of the top 15 BRK investments?
CM: They all worked. See's is different from Shaw's. You need to understand multiple business models. It tends to show how few good deals you need to make in a lifetime. Patience and aggressive opportunism are part of our game. Many of our successful investments were those where we thought that there was something basic to cover our costs.
Question about disasters:
What do you see as the biggest threat; do you see it coming sooner than later?
CM: In the next 60 years we will have a nuclear event in the U.S. I won't say where I think it would be because I don't want to give a terrorist any ideas.
Question re telecommunications industry Level 3 and Leucadia?
CM: Leucadia people are very smart, but when CM looked at the telecommunications industry he was reminded of a quote from Samuel Goldwyn “It moves me out.”
Harkey (BRK):
What is the most positive message that you and Warren send to operating executives?
CM: People like to be appreciated and like to be trusted. Charlie told an anecdote about his son was ecstatic on getting the key to the computer lab at college. What works in life is a seamless web of deserved trust. Creates enormous efficiency and eliminates frictional costs. Who would want to be in a family without a seamless web of deserved trust? It's not rocket science. We only started doing it after the Japanese beat us and they copied it from us.
Question re GM and Kerkorian's tender offer.
CM: Never short a company doing $160B year of business. A lot of decent people blew it for what they thought was a little problem. GE gradually gave the total value of their enterprise to their employees. “A small leak can sink a great ship.” Poor Richard's Almanack. They should have bargained with the union as a unit.
Question re if a nuclear weapon detonated in U.S.
CM: If it happened here in Pasadena I would tell you to crawl under the table and kiss your ass goodbye.
John ____ (BRK & Wesco):
What will happen when stock Warren's goes to the Buffett foundation and the foundation must distribute 5% of its assets yearly?
CM: “No matter what happens, if the foundation sells shares, BRK declares a dividend, or with >$40 billion in cash does a buyback, the outcome does not bother me. It is a non-problem. You have a very favored life if you worry about things like that.”

Charlie ended the Q&A session at 5:30 p.m.
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