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No. of Recommendations: 111
Berkshire Meeting Notes, 5/4/02

I just returned from my 7th consecutive BRK annual meeting. Following are my jottings . . .

Get rich slow. Long-term greedy, not short-term greedy.
Buy into success stories.

General Re is going to be our #1 asset.

Shareholders in partnership with managers.

$1.8 billion gain in float in Q1
Underwriting profit for Q
Geico is getting 30-45k of new policy holders a month year to date. Each new good policyholder is worth at least $1,000 to BRK.
Float: not growth, but intelligent growth. Key is cost of float.
Retroactive contracts provide sticky float. Value is in the speed of payments; everything is capped, asbestos is not a worry with these.

Reasons for selling DIS, MCD. Turned out not to be as good of businesses as they thought when they bought them. They did not say anything about valuation or management, though you have to wonder about what wasn't said.

Asbestos is a huge problem. Plaintiff's bar has the ear of Congress. No progress on this front.

Index funds good; dollar cost average in over 20 years!

Keys to doing well with investing: realism and discipline. High IQ is not required. Must define what you don't know.

Business value: ROE and incremental ROE are key ratios.

According to Charlie, if they ever get fraudulently taken, it will be by a guy with a modest office and modest demeanor.

If management is talking about EBITDA, they won't invest; management is trying to mislead. Percentage of frauds in this group is high.

If you set up to con others, you often end up conning yourself. This happened with a lot of Internet company founders.

Be careful of those that try to dress up numbers.

Many of the crooks look like crooks.

Crooks say things that aren't true such as labeling some of their mediocre businesses as being great (made me think of Tyco).

Frauds give off a lot of signals.

Management that loves the money is a warning sign.

Talk to them for 20 minutes and you can just tell.

BRK's new picture frame company: they call on 18,000 customers 5-6 times a year.

Good managers care about their employees.

Most good businesses can be understood in a few minutes.

2/3's of buyout mergers fail to live up to expectations. With BRK almost all work out well; BRK has the patience to wait for no-brainers.

An unnamed big company did ten acquisitions in the last 5 years where not one out of the ten met expectations. Ten out of ten failed miserably with the help of investment banks.

Warren, at 71 feels great, never been happier. Lucky to be in the business world.

Never would have bought Fruit-of-the-Loom without management. Buying out of bankruptcy is a difficult process; Buffett almost gave up on deal a couple of times.

Munger recommended a couple of books: Ice Age book that will be available in US this fall and a book on the Scottish people and their historic huge impact on the world. Munger noted Scots are similar to the Irish but with a different religion.

Buffett strongly plugged Bob Miles' book on the Berkshire CEO's.

Selection of friends and business partners. Warren & Charlie have been friends for 43 years. They know of some successful businessmen that have no friends and deserve no friends.

Suggested making list of what you like and don't like in others. You can develop and work on good habits and choices. Ben Franklin made such a list. Mentioned potential bad things like bragging and dishonesty.

Great investors are probably not born, it can be learned. Must be able to detach from the crowd and have the right temperment (one may be born with some of this ability). Must be able to think.

Munger says good investors should strive for deeper level of generality. Ask, why is this happening? Keep thinking about what caused this? Figure things out. Worldly things.

Coke has lost a few venues because they did not want to overpay for some marquee properties. Pepsi may have outbid Coke for Nebraska Cornhusker stadium rights to get back at Warren for Coke's coup in Argentina.

There are models for building businesses. There are also models for destroying businesses; Arthur Anderson is one of these.

KO and G have made reasonable progress since Buffett's infamous “Inevitables” remark of a few years ago. However, the stocks have not done well since the prices had gotten too high.

A lot of management feels they have to “prove their manhood.” The cigarette companies, even though they had a highly profitable, addictive product, had to go out and buy other companies to try and show they could do well with less-easy products also.

Terribly important to have feedback mechanisms. Charlie does not accept everything that Warren says like others do. Charlie pointed out he doesn't disagree with Warren very often.

Annual report is good feedback mechanism for Buffett. (For me, my newsletter is a good feedback mechanism.) Finding some type of feedback mechanism is good.

Buffett has found a logical, not subservient partner great. This is not normal in most corporations where subordinates usually come up with whatever the CEO wants.

Helps to be able to reverse course when necessary even if it is painful. BRK doing that with Gen Re's derivative book right now.

Derivative accounting is in the sewer. Actually derivative accounting is an insult to sewage.

Derivative accounting is absolutely terrible. Enron marked to model.

Hell: Easy to get into, hard to get out of.

Pension assumptions are another window into management. If they are using 10-12% or something, they are not realistic regarding the world. Would rather see 6%.

New goodwill accounting makes sense. (Note: This came out just like Warren/Charlie had been proposing. Now, if option-compensation accounting could also get corrected.) Ironically, BRK may have a little more competition buying companies now that goodwill does not have to be written off since some CEOs did not do deals because of this.

CEOs that have been with their companies for a long time and are now in their 60's should not be thinking about stock options, they should be thinking about the example of the company. (Made me think of Eisner.)

Buffett noted that sometimes CEOs don't want to sell their company at $30 a share, for example, but they are quite willing to take stock options at $15 a share. This kind of behavior disgusts Buffett.

Munger: A lot is horribly wrong with corporate compensation in America.

Munger: We are not excited about equities, current bond holdings are default holdings.

Buffett doesn't know what the right rate for bonds is.

Buffett spent years searching for correlations with stock prices; ultimately never got anything to keep. (Did I take this note accurately?)

A company's value changes relative to interest rates. A company's value does not change relative to gold prices.

Buffett bought some REITs a couple of years ago since he thought 11-12% was attractive; not attractive anymore.

Munger: There are Ponzi-scheme effects in the stock market. Overvalued gets more overvalued. This makes it hard to make money shorting stocks.

Buffett: We've uncovered 100 frauds. If we shorted them, we would not have made money even though we were eventually right. They eventually pop, but don't know how it will go.

Ben Graham invested in paired stocks (long one, short the other). It did not work well for Graham.

Buffett almost lost a lot in shorting a stock in 1954. Just takes one short to kill you.

Creative accounting is an absolute curse to a civilization.

Coke. Trademark company is better than bottling company, but bottler is not a bad business. Bottler's have valuable relationship with trademarks.

If you have doubts about something being in your circle of competence, it isn't. Buffett: Be well within the circle, versus tip-toeing on the line. There will be enough to pick from.

Munger: If you have competence, you know where the boundaries are. Your question answers itself. Munger suggested stretching your boundaries with work (study).

World population. Population projections are just that: Projections. Discussed “carrying capacity” of the world. Overshooting is worse than undershooting. Munger noted that the two opposing groups on this issue don't even listen to each other and this isn't good. Also, he noted it was not a credit to Buffett's side that many of their dire predictions did not come true.

6-7% returns for the stock market is not a bad thing. Higher returns would have to come out of somebody. (Note: more for the owners, less for the employees, etc.)

Dampening expectations is wise.

Munger @ BRK: I like our model, what's in place, what's coming in recently.

Buffett story. Genie will give you a car, anyone you want. One catch, it will be the only one you get. How would you act? You'd read the owner's manual, keep tires inflated right, change oil, keep garaged, etc. With yourself, you get one mind, one body. For most people, their main asset is themselves (unless they inherit money). Start young, take care of yourself.

Tort system. Bad, but probably won't be corrected soon. You can avoid certain businesses and industries where the legal problems appear too bad.

There are a lot of things that a rich corporation should not do because of tort-system liability.

Real estate is more accurately priced most of the time. Hard to find mispriced real estate. Chaos in real estate financing may create opportunities. C-Corp (like BRK) holding real estate does not make sense; other tax structures are better. Overall, not a great business.

Buffett thought about, or did, options on farmland of Omaha city-edge farms when he was young.

Buffett does not think Black-Scholes (B-S) is the best way to price options. Munger: B-S is insane way to value options if you know something about the business.

BRK is set to make $60 million in June on S&P 500 puts! Apparently they were options Buffett put in place 2 years ago.

Option grants for employee compensation do not show up on the company's income statement, but if option grants were given for other corporate expenses, like insurance, they would have to go on the income statement.

Munger about options again: “Whole thing is disgusting.”

Enron is bound to have favorable fallout. Plus for economy.

Charlie and Warren think they should criticize improper things. But overall things are good.

Compensation is an unlevel system. Buffett stated that is why he is favor of a progressive tax system.

Investment banking. Lucky part of society. Paid too much. Culture of investment bankers has deteriorated over the last 30-40 years. When Buffett/Munger did an offering on Diversified Retailing long ago (25 years?), investment bankers went over things carefully because their friends/clients would be buying. Not the case these days.

Wall Street will sell anything that can be sold at a profit. Question is: Can it be sold? Not, should it be sold?

A questioner stated that the Dow companies with high consulting fees had worse returns over the last 5 years.

Buffett/Munger stated they like places that care about expenses.

Munger: We have a passion for keeping things simple. We like companies where audits would be simple. Noted See's Candies goes to cash each summer.

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