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On Thursday evening, Columbia Business School's Seminar on Value Investing welcomed Warren Buffett as the guest speaker. I was lucky enough to worm my way into it. Here are my notes. (I don't claim that everything is completely accurate, but I think I captured at least the proper meaning of everything).

3. Concerning the comment about a nuclear attach made at the annual meeting – how is BRK insurance adapting?

BRK writing probably more terrorism insurance than anyone else. Amazingly it is almost all being sold with NCB (nuclear, chemical, and biological warfare) exclusion. A few policies have been sold without that exclusion, but not many. BRK can't sell very much insurance without NCB exclusion.

WTC is the largest workers' comp event in history – about $1.8 billion in workers' compensation claims. The other day, BRK wrote time-sensitive earthquake insurance – it only pays if the earthquake occurs between 6 am and 6 pm. The Northridge earthquake in 1994 would have been a huge workers comp event, but it occurred at 4:30 in the morning.

With regard to his prediction about a nuclear attack on a major American city: The chance of anything (NCB) occurring in the next year is very low. Over the next 10 years, that likelihood increases – there are more people in the world, more people hate us, and technology is improving. Over 50, that chance increases to a virtual certainty. In the early 1960's, only 2 countries had nuclear capabilities, and we damn near screwed it up. [Noted there was a good movie on the Cuban missile crisis a couple of years ago. I assume he means 13 Days, which I thought was good.] Now the chances are higher – there are way more people.

4. BRK has a history of striking quick deals and deals done over a handshake. Has there been a change based on the Enron-type financial deceptions?

No. Talked about how he closed the deal with Larson-Juhl, the custom frames maker. Got called up, talked on the phone for 20 minutes, heard the financials and heard the price, flew the guy to Omaha. “I've never seen the Company. I hope it's there.” [This was actually pretty funny as WEB did an impression of some scam artist: “Hey, what numbers should we report to Warren this month? Hahaha”] It's a great business – price is not a factor in custom frame purchasing. There are a ton of small framing businesses, dozens in Omaha alone. LJ supplies them all, usually delivering the product within a day. [Is this right? For a custom frame?]

“I could give you $100 million (I'm not going to do that) to build a competing organization. You couldn't do it. It won't double in size, but it's a great business. I can see the durable advantage of that business. You can't mess it up.”

We just don't spend a lot of time researching deals. It's like teaching a class on the Efficient Markets Theory. You walk into class on the first day and say, “Everything's priced right.” Then what? What else do you need to say? You just don't need that much time. If it's not obvious right away, it won't be obvious with a year's worth of due diligence. (Used Chrysler and Ford as examples.)

Somehow moved into a Snickers and Wrigley's example. Snickers has been the top selling candy bar for 40 years and probably will be in 10 years. If you were chewing spearmint gum 10 years ago, you're still chewing it today. Those are great businesses. If you walked into a store for a Snickers bar and the guy behind the counter offered you a chocolate bar with the same taste and same gooeyness for 5 cents less, but it was “Joe's Chocolate Bar”, you wouldn't buy it. Due diligence – whether or not they have a bad lease or their bad debt reserve is too low – doesn't matter. It's about the durable advantage.

5. Do you see value in tech stocks today? Is there ever value? Where would BRK invest in tech?

If we could look out 5-10 years and see durable advantage and likelihood of high incremental ROE, that would be the place. We're not religious about not investing in tech stocks. (“In fact, I don't even know if there are religions against investing in tech stocks.”) “There's no reason to look for a needle in a haystack if the haystack is made out of gold.”

You could have bough the pharmaceutical industry in 1993 with a high degree of conviction. Maybe you couldn't identify the one or two winners, but the industry had marvelous economics and you know there wasn't going to be some new kid on the block to just completely up-end Merck or Schering Plough.

6. Can you speak about investments you made that didn't work out?

Errors tend to be of omission, not commission. Not necessarily Intel or Microsoft, but those situations where he knew the business and did nothing. “Thumb sucking”. Often happens when he is buying a stock at $x and it goes to $x 1/8. He goes into paralysis. Fannie Mae is one example. Errors of omission have cost BRK billions and billions (20 – 30 billion).

BRK almost lost a lot on US Airways. “As the ink was drying on the check, they started losing and losing money.” Salomon investment. 9/11 insurance – not the fact it was a catastrophe, but that the terrorism insurance wasn't built into the premiums.

The biggest mistake in management is not recognizing that very smart people will do dumb things – without trying to. [References Lowenstein book on LTCM.] Once an organization starts to gain momentum, it's impossible to stop them. Often happens with acquisitions. If the hurdle rate is 84.3%, the deal will be projected to return 84.4%. If the CEO wants it, it'll happen.

7. As you look at the entrepreneurs of the firms you've bought, what do you look for? What advise do you have for potential entrepreneurs?

We look for passion. WEB talked about Al Ueltschi for a while.

Sit down with them and find out if they love the business or love the money. We've never bought a business from a financial operative. We've never participated in an auction. If a guy auctions his business, we don't want him/it. There's nothing wrong with loving money, it's just not for us.

8. As the best professional in the industry, are you still getting better?

[At this point, Greenwald paraphrases the question as, “Do you still have the mental capacity to do the job?” I'm having flashbacks to Mycroft.]

Investing is great because you're always building a database. Every year you're adding a little bit more (new industries) and there's not that much leakage on the other end. GEICO purchase was a result of his existing database.

“I understand underwear”, so Fruit of the Loom wasn't a tough decision.

Everything is cumulative in investing. When he hears something today, it fits in some way into a model built by years of experience.

[Side note: This is an integral part of the whole “no due diligence” phenomenon. They don't necessarily perform due diligence prior to doing a deal precisely because they are performing an abstract version of due diligence on companies and industries every day by adding to their database.]

9. Asbestos payouts seem like they're being accelerated. Comments?

The claims acceleration has tended to be those companies that are in bankruptcy. For companies not in bankruptcy, claims rate hasn't really changed.

BRK has some asbestos claims out there (a lot from Gen Re) that arose under the normal course of business, and a lot of claims resulting from retro insurance. The deals rely upon timing of payments. BRK is conservative both in the premium demanded and the accounting for the deferred charges. Most asbestos claims are from policies where there is a finite limit.

Overall, payment rate is somewhat slower than anticipated. The results have been perfectly satisfactory so far. [The retro deals, I assume.]

more to come...
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