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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 212367  
Subject: Yet More Notes From Berkshire Hathaway Meeting Date: 5/4/2003 2:13 PM
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Yet More Notes from Berkshire Hathaway Annual Shareholders' Meeting:

HOW BRK MANAGERS FEEL ABOUT COMING TO ANNUAL MEETING:
Managers not required to come. They come because they want to and volunteer to come as do many of their employees. They pick up new tricks from each other but none of it is mandated or managed from Omaha. Managers will work with each other and look at what they pay for certain items or services and may decide to work together but its not sponsored by BRK HQ.

RISING COST OF HEALTH CARE AND EMPLOYEE BENEFITS:
Fastest rising cost is workers comp., unrelated to health care. Costs rising. This is an inflationary part of the economy. It's a raw material cost and its going up but we don't have any answers. Certain states are better than others

Munger added that quality of health care is going up enormously and country is richer so its “not crazy if US wants to spend 15% of GDP on health care” Buffett noted that other countries spend less % of GDP so perhaps might be getting better value for their dollars but not sure about this.

HOW DOES BUFFETT DEFINE SUCCESS & HAPPINESS:
Buffett “you'll be successful if the people you want to love you, really love you. If Charlie and I could just buy $1 million of love, then we wouldn't have to try to be lovable” Buffett said he and Charlie know of many very successful people who deep down are not loved – even by their families.

Munger gave example of funeral of Hollywood movie producer “the funeral was so large, everyone wanted to make sure he was dead.”

INFLUENCE OF MUNGER ON BUFFETT'S INVESTING APPROACH:
Buffett credited Munger and said See's Candy deal did teach both of them about wonderful businesses. If See's had asked for $100 thousand more, they were prepared to walk. Munger's friend Ira Marshall told them – you guys are crazy, you're underestimating quality of the business. They took criticism and listened.

Munger added that you could say BRK was built on listening to criticism. They learned a lot from Graham who focused on quantitative, but he didn't dismiss qualitative, but felt he could make a lot of money just focusing on quantitative.

Buffett said Munger should take a lot of credit. Over time Buffett moved from cigar butts to paying up for quality.

DO COMPANIES THAT LOSE COMPETITIVE ADVANTAGE REGAIN IT:
Buffett said he did not know of any. Some companies get into trouble but not from losing competitive advantage. GEICO got in trouble in 1970's, but not because it lost its core advantage but rather took on some bad business for growth.

Pepsi had marketing advantage pre-WWII due to selling twice as much cola for 5-cents. World War II came and costs went way up (sugar) and Pepsi had to alter marketing formula and was able to recover.

Gillette maybe lost a bit of its advantage in 1970's due to rise of disposables. Packard had upscale image in its automobiles then went downscale to capture increased sales, sales did spike but it lost its upscale image and never recovered. Some department stores have made the same mistake (going downscale).

BUFFETT”S RECENT COMMENT ABOUT BRK PRICE:
Buffett recalled that in Fortune article he said that it was more attractive than owning general market. He never thought stocks were cheap at any time over the last five years. He wouldn't swap BRK for S&P 500 (tax-free) if given the chance. He's never recommended either outright purchase or sale on BRK.

Munger added that a fretful attitude to owning stocks is the enemy of the long-term investor. Focus on company's results not price.

Buffett did recall that on March 12, 2000 – day Nasdaq hit high and BRK hit recent low – he did say in annual report released that weekend that he would repurchase at $45000. But preference is to buy businesses and add to BRK business. If he thought that BRK was significantly undervalued and probability of allocating cash at better returns for the foreseeable future was low, he might repurchase shares but its not his #1 preference.

KEY QUALITIES IN MANAGERS:
WEB/CM love managers who have passion for their business. “We ask if they love the business or love the money?” They get calls from bankers who represent firms who bought and are trying to resell a business but “it's a piece of meat to them, how do I know that they haven't doctored the numbers?”

BRK managers are motivated the same way WEB/CM are motivated. Munger added that what matters is competence and passion – BRK has a peculiar competence/passion. Passion probably matters more because competence gets tested by competition along the way well before possible acquisition opportunity arises for BRK.

WHERE BUFFETT GETS INVESTMENT IDEAS:
Buffett reads a lot and knowledge accumulates – reads a lot of 10-Ks, annual reports. Back in his twenties, he visited companies but today relies on almost exclusively publicly available info. He says he does not find it particularly useful to talk to management – they aren't necessarily the best info source. When they buy business, they'll check out management but “don't give a hoot about management projections”.

WEB/CM said they read business journals, newspapers (CM said Wall Street Journal is indispensable) but that they never read analysts reports. Buffett said “they'll read'em if funny papers aren't available.”

You only need one good idea every year or so. You don't need to be right on 20% of stocks or 10% of stocks or even 5%. Munger noted that 90% of investment management doesn't think like WEB/CM do.

CURRENT MARKET, OUTLOOK FOR INTEREST RATES:
BRK has $16 billion in cash because we don't see anything that would cause us to part with that cash. Last year, BRK bought a lot of junk bonds but Buffett said he is not finding value there anymore. “You had a somewhat disorganized junk bond market last year”

Munger noted that in terms of future opportunities, its unlikely that he or Buffett will see a 1973/74 or 1982 again so “we'll have to grind it out”. In Japan, 10-year bonds yield five-eighth's of a percent. If that could happen in Japan, it's not out of the question that it could happen in the US.

INTRINSIC VALUE CALCULATION – HOW DOES WEB KNOW IV WON'T DECLINE:
Model builds in what you think will happen to value and cash flows over time – so its built into your calculation of IV. With pipelines, surprises over time should be few but if contracts expire in two years and you expect more competition – its not that IV is going down but rather you're building that knowledge into your IV calcs. If properly calculated, you build in expected declines in earnings. Lots of businesses earnings are going to go down, but you'll never see it in an investment prospectus. Trying to project earnings always upward is nuts. “The idea that you're setting out to do something you know you can't is insane.”

For example, Buffett made a mistake in Dexter Shoe. We thought that current levels of operating earnings would stay at those levels. If you feel you can't come up with reasonable estimates, then you should move on.

IMPACT ON US DOLLAR DECLINE AND HIGH INFLATION ON BRK:
Munger answered that all kinds of things can happen that are unlike anything in recent history. In the long-term all currencies “go to hell” “Will some politicians ruin the currency? – the answer is yes.”

Buffett said inflation is always latent – right now its in remission. It's a function of how legislators govern. Probability of high inflation in twenty years is not zero.

Most BRK liabilities are in US dollars and very little in foreign currencies but they are matched by assets in those foreign currencies. BRK has $2 billion in foreign currency-denominated assets – mostly Euros.

HOW DOES BRK GENERATE DEAL FLOW:
Buffett doesn't like the term - connotation of something to be bought and sold. The key to getting opportunities is assuring that BRK is in position to get calls that we should get. That wasn't true twenty years ago. It builds on itself. If first acquiree is happy, then the second – it builds on the probability that similarly-minded businesses call us. Snowball has built up and Buffett hopes it gets bigger.

Buffett talked in funny terms about 1967 acquisition of National Idemnity for $7 million. It was known that something would set off Jack Ringwalt, and every year for “about 15 minutes” he wanted to sell. Munger kidded that everyone referred to it as “Jack is in heat”. One day, Munger friend called and said “Jack's ready”. (laughter in auditorium). Meeting was in Charlie's LA office and Jack was 10 minutes late because he was looking for parking meter that still had free time left. Buffett said “I knew right then that Jack was my kind of guy”. Deal got done but Buffett could feel Ringwalt was remorseful and was looking for excuse to kill deal. Jack said “I suppose you want audited financial statements?” Buffett knew that if he asked for them, Jack would kill deal so he said “nope”. This went on for a while but eventually deal was closed and ultimately Ringwalt realized he still ran the business.

WHY DOESN'T BRK BUY GLOBAL CROSSING FROM BANKRUPTCY:
Kind of a dumb question but Buffett said he didn't have the faintest idea how to value these types of businesses and he said “I might add that those people who thought they could value it three years ago didn't either.” Whether its BellSouth, Verizon – it's a game Buffett doesn't understand. “I don't worry about what I don't know. I worry about being right about what I do know.”

He said that BRK might buy junk bonds in this area but he expects losses in junk bonds. Overall, he expects to make a profit on a basket of junk bonds. But you're dealing with companies that don't have a margin of safety and sometimes managements that aren't entirely honest or capable. “We want to buy businesses that have virtually 100% certainty to be great.”

NOTE – I STILL HAVE MORE NOTES AND MAY POST THEM LATER TODAY.
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