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Berkshire Hathaway Press Conference

by Selena Maranjian

I had the privilege of attending the press conference held by Warren Buffett and Charlie Munger on May 5th, the day after Berkshire Hathaway's annual meeting. Here are my notes on the conference. Some information and caveats:

-- The conference lasted 2 1/2 hours, during which time the gentlemen answered questions from between 25-30 members of the media.
-- The information below is my good faith attempt to convey what was said. But it's relying on the scribblings of someone not trained in shorthand. There were times when I lost track of a question or answer, as I was busy finishing jotting down the previous question and answer. I may have mischaracterized a statement or two, as well. But overall, I think it's a pretty fair account of what was said -- if not word for word, then at least in spirit.
-- Much of the information below does reflect Buffett's and Munger's actual words, but some of it captures the essence of what was said, missing some words and/or inserting others. I wasn't able to capture every sentence. I've marked with brackets some words of my own that are there to try and clarify or convey what I understood to have been said.
-- There are definitely words and thoughts of theirs that I didn't include because I didn't catch and scribble them down in time. Still, probably at least 75% of the content of the conference is below. Enjoy!

BUFFETT: I'm Warren, he's Charlie. We're here until 5pm. We'll answer questions on anything.

QUESTION: Would it be possible for someone today to build up extreme wealth today?

BUFFETT: There have been periods when there are great opportunities -- but they're not that frequent. Looking at the ages of the people in this room, I think you'll see [several] such periods. At the moment, we're not in such a period.

MUNGER: Our assets are underemployed right now, but we've done considerably better than we expected in the last year or two.

BUFFETT: We've done 8-10 acquisitions in the last few years -- and that's pretty good. Some were sizable. We'd like to see more sizable ones.

QUESTION: Asked why they invested in Moody's and H&R Block.

BUFFETT: Both have exceptional franchises. They require little to no capital, so they earn extreme returns on capital employed. We got to buy them at attractive prices. Situations where a company is [overly punished] are made to order for us.

MUNGER: Very little of Berkshire, percentage-wise, went into them.

BUFFETT: Even though we bought 15% of Moody's and 8% of H&R Block.

QUESTION: Mr. Buffett, what would you say is your most important contribution to the world in your life?

BUFFETT: I don't think I've made any great contribution. I've had some good ideas, but [they've been based on the ideas of Ben Graham and Phil Fisher]. I just got more publicity.

MUNGER: I think Warren's being too modest. I think if he'd just gotten rich, collecting lots of small pieces of paper [i.e. money], he'd be a blip in history. But I'd argue that his example [what he's accomplished, and how] is a great contribution.

BUFFETT: I've had to keep some [baser] instincts in check, to keep Charlie around.

QUESTION: Related to why people come and keep coming to the annual meeting.

BUFFETT: Even years ago, people came for a tutorial -- we've always had the same tone. They weren't coming [just for entertainment, trinkets, a festival atmosphere, etc.]. People enjoy it -- that's why they come back. It's like a convention, they see likeminded people. Some see it as a seminar. They like to spend money when they come and we like to accommodate them.

MUNGER: I think the enthusiasm was greater this year. It's getting stronger.

BUFFETT: When I see other companies conducting their annual meetings like they're conducting a funeral, I [scratch my head]. If you're going to do it, you might as well enjoy it. [He alluded to how other annual meetings are planned and run -- I believe he mentioned advisors drafting lists of expected questions and issues, and management preparing to defend themselves.]

QUESTION: Regarding the utility of debt analysis provided by Moody's, and what they think about credit rating agencies like Moody's not downgrading troubled companies very rapidly.

BUFFETT: The moat around Moody's is huge. There's no question that when conditions change, ratings changes will always lag the market. Markets have to react fast. If Charlie and I ran a credit rating agency, we wouldn't be much faster.

MUNGER: But we'd mark some people down.

BUFFETT: You're darn right. We buy a lot of bonds -- some junk, too. We don 't look at ratings. Our job is to evaluate credit, [not to rely on someone else to do it for us]. In an Enron situation... it's tough. You can determine the fate of a company by your ratings. It's an awkward situation.

MUNGER: If you're a doctor about to pull the tubes [pull the plug, that is] on a patient, they're going to shrivel and die. There's a natural reluctance to do so.

BUFFETT: Whoever yells fire starts a fire. I could create one right now by saying some things. [He mused about how in his position, he has power similar to that of a credit agency -- to cause trouble for others just by uttering some words. That he has a lot of power and needs to be careful. He reminisced here or at another spot about how important credit ratings were for the survival of Salomon when it was on the verge of going out of business.]

Things don't go from black to white or to zero all at once. It's hard to say at what precise moment a rating should drop a level or two. Charlie and I would probably rate debt less quantitatively and more qualitatively, regarding management.

QUESTION: Regarding why they sold their Citigroup (NYSE: C) stock recently.

BUFFETT: We didn't sell Citigroup this year or last. We issued a convertible about six years ago. At various times, that became converted [to stock] -- then when it expired, the final chunk of Citigroup was converted. It looked like we'd sold, but we hadn't.

QUESTION: Regarding why Munger sold some Berkshire stock recently.

MUNGER: I sold some Berkshire stock to get funds to lend to my children.

QUESTION: Regarding the estate tax, which Buffett (and Munger, to a lesser degree) has spoken out about. Asked if Buffett is against repealing it because that will affect how many companies are available for Berkshire to purchase.

BUFFETT: [Said that his position has nothing to do with purchasing prospects for Berkshire.]

It's an interesting question why this country has over 50% of the market value of all equities in the world, but only 4-5% of the world's population. It seems implausible -- we're not more intelligent than other nations. I don't know why it is, but one reason, I think, is the fact that we come closer to a meritocracy than other nations.

Imagine an Olympics where other countries chose their athletes by heredity and we chose based on talent. We'd beat them soundly. [Imagine the Nebraska football team being made up of players who inherited their positions from their ancestors instead of earning them. It wouldn't be much of a team.]

It's good for the country to give people an equal chance at starting at the starting line, [instead of giving some privileged people a head start]. Passing large resources to people hereditarily isn't effective. I'm not talking about $1-$2 million, but much larger amounts.

Sometimes the next generation is terrific; sometimes it's a disaster. The womb from which you emerge shouldn't [set the stage for] how you do in life.

MUNGER: In Europe, it's much more beaurocratic. More people are rising here that wouldn't do so in less entrepreneurial cultures.

BUFFETT: If I give my kids tens of millions of dollars, I'm giving them the power to command other people [insinuated that that's kind of crazy or wrong] If someone is getting $40 million [after having to pay the estate tax], they're not suffering. [Tax revenues have] to come from somewhere. Less wealthy people are paying taxes. Most people pay taxes at a similar rate to mine. [He marveled at the logic of that.]

MUNGER: I'd exempt the first $5 million. If a guy has built a successful plumbing business and wants to pass it on to his son, he should be able to.

QUESTION: Regarding Williams... [I didn't catch much of this question and answer.]

BUFFETT: We can act fast [much faster than just about any other company]. We can complete a deal in a day -- although it might take a little while to draw up the papers.

QUESTION: Regarding Munger's views on California's energy crisis, on which he expounded last year, very negatively.

MUNGER: My answer about California is that it's in better shape this year -- partly due to external circumstances, partly due to [smart actions]. [He explained that a brave woman had done great good addressing the energy crisis.] It's wonderful when a courageous person stands up to take action -- and it happens all the time in America. They pop up and alleviate problems. ... California will always be good at creating disasters -- there are some awful politicians there, it's very entrenched.

QUESTION: Regarding supercatastrophes.

BUFFETT: Supercats are not entirely quantifiable -- there are not as many data points [as with other kinds of events]. We write terrorism policies. We're willing to do it. We name a price. If we're right, we're right. If we're wrong, we're wrong.

As to the human aspect of it... millions wish us ill. We're the subject of envy and dislike. [He refers to his thoughts expressed on this at the previous day's shareholder meeting.] We're going to have a major nuclear incident in this country one day. New York and Washington are bound to be the top targets. Thinking like a terrorist, you'd want to cause us as much trouble as you can. The probability is very low that [a major event] will happen next year. But it'll happen one day. We have to conduct ourselves [the company, that is] so that we'll survive -- avoiding aggregations of risk.

The financial burden of this increased risk [involves increased premiums]... but you shouldn't ask those making the greatest physical sacrifices to make great financial sacrifices, too.

Terrorists like to have people be aware of their vulnerability -- to scare people. If you have bombs going off in random places, [you'll terrify people]. We are the world's No. 1 target.

MUNGER: Our [the nation's] precautionary response to the threat was inadequate, [to vastly understate the case]. In retrospect, we were demented... people taking flying lessons without learning landings... I think we need way more precautions than we're used to. A lot more intelligence... [The previous day he alluded to the need for immigration changes.]

BUFFETT: It's the great problem for this country. Everything else is going for us. We're probably selling more terrorism insurance than anybody else. I think some insurance companies are exposed to ruin from some improbable but not inconceivable things.

QUESTION: Regarding the supply of reinsurance.

BUFFETT: We'll write more this year than last. Not because of more capacity -- we can always write more -- but due to better prices.

Before 9/11, the product was way underpriced. Companies' exposure moves up each year, so prices have to go up.

MUNGER: Reinsurance as a business, generally, is a pretty lousy one. It's seductive for someone to write you a big check... I think the nature is that only a few companies will do well in it. We'll be one of those. Due to discipline.

QUESTION: The average American still seems transfixed by the stock market. Is that healthy or should we lighten up?

BUFFETT: 1982 to 1999 was one hell of a period -- falling interest rates, decent earnings, etc. Many people got conditioned to think they were idiots if they weren't paying attention to stocks. As Charlie says, even when you make it difficult to gamble -- having to travel to Las Vegas -- people do it. With stocks, it's even easier. If stocks don't move for a while, attitudes change. We saw that in the 1960s.

It's hard to predict what direction the market will go in next, but you can understand how attitudes rise and fall. People want to get rich -- especially without working. People did idiotic things in 1999 and 2000 -- smart people, too.

MUNGER: Widespread attention to stocks is not a good thing. We'd be better off with less interest in getting rich quick, in legalizing gambling... many Midwestern cities now have casinos... It's always a mistake when government encourages gambling. It's like offering 50 cents for a dollar. When it entices people [who can't or shouldn't get involved, it's terrible].

BUFFETT: It's a tax on stupidity [lotteries, gambling]. I don't think governments should behave that way.

QUESTION: Regarding the insurance coverage for nuclear events.

BUFFETT: We can't exclude nuclear events from policies -- we've talked about it -- but there are regulations. There is a war exclusion in most policies. Worker compensation policies out there -- you can't fool with them. You can't exclude some risks in every case. A worker's comp company can't exclude it, unless it gets reinsurance -- or regulators' permission.

I think the government has to be the insurer of last resort, which in effect it is. The insurance industry has just $300-$350 billion in capital -- [that's not nearly enough to cover all the risks out there].

QUESTION: Regarding their interest in the cable television industry.

BUFFETT: We've looked at cable over the years. We own a little through the Washington Post Co. (NYSE: WPO). It's very capital-intensive, and hasn't delivered as much cash as expected. It's a fundamental business, it depends on the rates that are charged. There can be regulation -- it's a business with a given mathematics to it. I've sat on the Washington Post board and voted to approve [involvement in cable]... and I would buy such businesses -- for the right price.

MUNGER: [Something like "I'd be interested at a different price" or "I'd be less comfortable considering cable."]

BUFFETT: What price would be comfortable for you?

MUNGER: Probably a lot lower than for you.

QUESTION: Regarding our national trade deficit.

BUFFETT: Herb Stein said, "Anything that can't go on forever will end." No other country could run the kind of deficit we run. It looks like it'll continue. To the world, it looks like we want 4% of the world's gadgets -- in exchange for obligations or assets. That has and can go on for a long time... Four percent is a big number.

We're disinvesting in our country -- by living beyond our means. Others are [therefore] investing in our country.

MUNGER: Conventional wisdom from economists is "It doesn't matter." We don't believe it. Sooner or later there will be a price to pay.

QUESTION: Regarding Berkshire's "fervent shareholders" who are "fixated" on Buffett and whether he worries about creating a cult of personality.

BUFFETT: There's a danger of expectations getting too high. We don't want people to translate enthusiasm for our company/weekend/meeting into unrealistic expectations [for the stock performance].

MUNGER: A lot of enthusiasm is people who think they're learning something here. To the extent that that's true, [it's good].

QUESTION: Regarding American companies moving abroad for tax advantages which can benefit shareholders but hurt America -- how they think companies should balance responsibilities toward shareholders and the national interest.

BUFFETT: Let's assume we could vote on relocating Berkshire to Bermuda and that doing so would cut our corporate taxes in half. Would we do it? I don't know. [Has trouble with the thought of moving out of a country while continuing to enjoy American benefits.]

MUNGER: The Bermuda thing worked only for the company with a lot of foreign earnings... I have always thought it stupid of California to charge high taxes on companies that earn much money from operations in other states. I think few things are better for the country than having big corporate headquarters around.

Unfortunately, we live in a world where there are always people gaming the tax system. There's way too much gaming of the corporate tax system and Europeans have led the way.

QUESTION: Regarding any plans they may have for acquiring companies in Japan, and thoughts on a consumer finance company [one in Japan?].

BUFFETT: We're open to it.

MUNGER: I'm a touch different than Warren here. I've been such a small user of consumer finance -- I don't believe in it.

BUFFETT: When I talk to students -- what I always say is to avoid credit card debt. Yet we [Berkshire Hathaway] offer credit cards at our various operations. My advice is not to get into credit card debt -- it makes life uphill.

We offer it [credit cards], we profit by it, and we'll continue to do so. It's a part of our culture. If we don't offer our credit, people will use someone else's.

MUNGER: What turns us on is a business where we're very proud of what it does for people -- how it serves people [and makes their lives better. Consumer finance isn't such a business.]

QUESTION: Regarding whether they see value overseas.

BUFFETT: Right now we own stock in three big companies that do no business in the U.S. Also, Coca-Cola (NYSE: KO) and Gillette (NYSE: G), for example, get much of their revenues from outside the U.S. We've looked at foreign companies but have had no luck yet. We're not on their radar screens as much. I get some calls, but nothing has materialized. I think eventually we'll have some [foreign companies]. We may not know about [those companies] yet, and they may not know about us.

With those three companies, we can't buy the whole companies -- but if we could, we would.

QUESTION: Regarding pension fund accounting and executive compensation.

BUFFETT: Yeah, we're bothered by pension fund accounting, and as it gets more extreme, we get more bothered. [Regarding the pension costs of recent acquiree Fruit of the Loom, I may not have liked it, but it was in line with others so it wasn't a strike against it. But it did factor in my calculations.]

Regarding excessive executive compensation, it's everywhere. It makes us gag.

CM - But we swallow. [Implied: we have to.]

BUFFETT: We sold something recently in part because of compensation issues. We're bothered more and more because it's gotten worse and worse. But to be a big problem [these days], it has to be extreme in a universe that's already extreme.

When a CEO sits down [with the board to set] his compensation, as they do, it doesn't become a barroom brawl. We don't know how to make it one.

MUNGER: What's particularly pernicious is that it feeds on itself -- because everyone else is doing it. It's human nature. If you're already rich from founding a company, [it's crazy to be trying to get overcompensated]. It's not uncommon for companies to be giving away 1-2% of the company in overcompensation. Certainly, you'd have to argue that fiduciary standards are deteriorating. If standards are falling among people at the top, it's not good for the country.

BUFFETT: Time after time after time -- since the 1960s -- we've never had anyone leave us over compensation. People want to be treated fairly.

I wouldn't be on a compensation committee that used a consultant. If I can't evaluate/make compensation decisions, why would I be on a compensation committee?

At Berkshire, I'm the compensation committee. I know the businesses -- which ones are harder than other ones, etc. I offer what's fair.

If someone is doing something to hurt the company, I'll know about and deal with it. But it doesn't happen. If Fruit of the Loom does some acquisitions and increases its capital, we can [revisit] the CEO's compensation.

MUNGER: We're not illiberal. We have lots of people earning millions.

BUFFETT: Some even earn tens of millions. There are no caps. We've got a lot of people making a lot of money from us -- but they're making a lot of money FOR us.

The person who succeeds me could very logically have a very significant option arrangement -- it could be constructed logically -- [if they get richer if shareholders get richer].

MUNGER: We are pariahs in the compensation world.

QUESTION: Regarding proposed reforms of the accounting industry, such as rotating auditors and separating accounting and consulting operations done by auditing firms.

MUNGER: Prospects are low of reducing trouble by rotating auditors and separating auditing from consulting.

BUFFETT: I agree. The problem arises not from consulting mixing with auditing and not from [a lack of rotation of auditors]. It's that auditors were working for management, not for shareholders. If there was a desire in management to [obfuscate things, auditors have often gone along.] Management wants to paint the [rosiest] picture they can.

I think the reforms we get will have little effect on auditors' desires to please management. Another problem -- managements care more and more about [short-term results].

I can guarantee that some of the things that Arthur Anderson let go by with Enron would have been permitted by other firms, too.

QUESTION: Regarding succession at Berkshire Hathaway.

BUFFETT: There are at least four people at Berkshire who would be quite good at my job. I think maybe one might want the job -- maybe none would. But any of them would do it if needed. Shareholders should be reassured. Ten years ago there weren't four.

There's no sense naming names now because in a few years, the situation may be different.

For each CEO, I have their thoughts on succession in their company.

The four people -- none is lusting for the top job.

MUNGER: It's very interesting how little turnover we've had at the top of our companies and how successful our few transitions have been.

QUESTION: Regarding whether the U.S. free enterprise system can do anything to resolve conflicts in the Middle East.

MUNGER: I can't think of any way.

BUFFETT: I see no magic bullets. If you grow generations of people to feel that someone next door is an enemy to hate, I don't know how you get that out.

MUNGER: On the other hand, in Northern Ireland, it looks like it can be done.

[To help the Middle East,] we may have to do some unusual things -- some things we can't tolerate. And I include Europe and even Japan when I say "we."

BUFFETT: That's why Charlie and I stick to doing things like buying underwear companies.

QUESTION: Regarding whether they've thought of investing in emerging markets such as China.

BUFFETT: I wouldn't rule out China. We're looking for big opportunities. We're not too interested in countries where the third-largest company makes $25 million a year. We'll look internationally and will apply the same principles [we do domestically]. When considering attractive businesses [in emerging markets], we'd probably be hoping to buy them at a lower price than usual, since we know less about it.

MUNGER: Some companies are being forced into China [by competition? I didn't catch this] and our operating businesses are not immune. That may ultimately be how we enter China.

QUESTION: Regarding how to avoid the fate of Teledyne <<<<<<.

MUNGER: Teledyne was run very well by Henry Singleton, whom I knew. He had an elaborate budget and control system -- like GE's (NYSE: GE) a little. Eventually, some units were cheating the government in order to try and make budget. If you whip the horses too much, sometimes they can get exhausted and can't perform.

It's not comparable. Our structure is radically different with different incentive systems.

BUFFETT: The question is does [the company] keep working as people eventually retire or die and a few companies are added each year?

How many people can one person supervise? You can't supervise one if he's no good, and you can supervise 100 if they're terrific people. If you have 30 businesses, you'll have 1-2 managerial problems per year, usually due to death or some inability to perform.

After I die, can our culture be maintained? I've thought about that a lot. My son Howard will have no operational responsibility. He and my wife will ensure continuation of the culture. Everything Charlie and I do is to reinforce our [culture, plans, etc.].

If you had to turn over all the managers in one year, that would terrify me. Half, that would be [something extraordinarily tough]. But that's not how it will happen.

MUNGER: Singleton wanted only us to acquire his company, but the price wasn't right. He was a brilliant businessman, but in the end he [opted for/preferred] our culture.
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