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Press Conference Notes, part 1 of ?

I was fortunate enough to be able to attend a press conference in Omaha, following the big Berkshire annual meeting. Warren Buffett and Charlie Munger were present, although Munger had to leave after less than half an hour. Buffett joked that Munger is in the process of finally buying a fractional share of a jet through Executive Jet, and that next year we'll see a "liberated Charlie" -- but that this year he has a commercial plane to catch. (He also mentioned that last year Charlie also flew home on a commercial plane. It seems it was full of shareholders and when they saw him pass by first class to sit in coach, they all cheered.)

Buffett asked for anyone with questions for Munger to go first, as there was little time. So there are a few comments from Munger ("CM") below, but most of it is Buffett ("WEB").

What it's Like Working with Warren

CM: Nothing could be easier than working with Warren. There's such a general efficiency with Berkshire -- no meetings, no minutes…

On Failures

CM: When something is really failing, by definition it means that there's no solution. We've had every kind of failure, haven't we, Warren?

WEB: We will before we're done.

Asked "What's the best business you've ever seen?

CM: Coca-Cola.

If you never met Buffett, would you still have left law for investing?

[There was a remark about him seeing people dumber than him making more money.]

CM: The logic of the situation would have eventually gotten to me. But Warren speeded it up.

Munger, asked about the upcoming Janet Lowe biography of him

CM: Well, I found out that it would happen with or without my cooperation, so I decided to offer mild cooperation. I've actually gotten to like the biographer.

On George Soros and Julian Robertson

CM: As [someone] once said, "He may have double-bogeyed the last hole, but he still won the tournament."

*Charlie Munger leaves the conference at this point.*

On his approach

WEB: We look for businesses we understand with managers we like and we invest for the long haul.

There's no way we can have a huge edge over the market now that we're so big, but we can still have an edge. Now we're dealing with [mainly] big companies. It's a different universe.

On his admiration of how AOL overcame adversity

WEB: It can be a good indicator of a strong franchise -- when a company isn't felled by a big problem, when it overcomes it. If you understand that a company's problems are temporary, you might [find yourself with an attractive opportunity].

On froth in the market

Rational investing would eliminate maybe 90% of trading on Nasdaq. Big capital allocation decisions should be when you evaluate how much money a company can make over a certain time frame -- based on ascertainable facts.

On the Internet and revolutionary industries

WEB: We will have a higher standard of living in five to ten years due to the Internet and tech industries -- just as we did with electricity, cars, etc. We've always had things that had big effects.

The aircraft and auto industries probably haven't been good for investors, net. They'd have been better off investing in Wrigley's gum.

The question I asked: It seems that these days more and more people are jumping into the stock market without adequate preparation or information. In your opinion, what are the integral parts of a good investor's education? What should people be doing or reading or thinking about before jumping in?

[Buffett referred me to "The Intelligent Investor" by Ben Graham (, saying that the book changed his life. The following points he makes are based on the book.]

WEB: It all depends on whether you're going to be an active or passive investor.

If passive, you need to decide on a very long-term strategy that won't be affected at all by current events. There should be no need at al to read the Wall Street Journal. This approach could be 50% S&P 500 index fund, 50% something else -- whatever. Keep frictional costs [such as commissions from frequent trading] down. You don't bring anything to the game. You'd be a fool to listen to all the noise. Most people are in this passive category. Don't fool around. [<< Selena adds: irony noted] Don't listen to advice about asset allocation.

If you're going to be an active investor, you need to read and learn a LOT about accounting. If you want to bring some effort to the business, you have to understand the nuances of accounting very well. You have to know one or more industries very well and the businesses in them. That requires a lot of effort and no one can do it for you. You need to understand the businesses and value them effectively.

Read a lot of financial history. I'd read a ton of it by my teens. I never asked or read anyone's advice.

Find your circle of competence and know where the perimeter is.

On how Buffett and Munger work

WEB: We work fast. When I made a bid on Long Term Capital Management, on derivatives, a while ago, it was on a cell phone. I was in Montana. Charlie was in Hawaii and I couldn't reach him. But that's okay, because I know how he thinks. It was a huge amount of money, but we're ready to act like lightning at the right moments.

On Real Estate

WEB: I got an offer on Friday about a business.

I can tell in 10 minutes or less how much I'd pay and whether or not it makes any sense to pursue. You have to have enough expertise to have a framework on which to make decisions. With real estate thinking, there are probably 8-10 variables -- and then what you'd pay. We have no real estate department. If you do, you'll be making real estate deals [whether or not they make sense].

Acquisitions are very exciting. You get to fly to another city, they offer you this, you offer them that... I can't tell you how many dumb things I've seen done because one department thinks it's its turn. We don't have any of that at Berkshire. We just try to allocate capital. On the real estate front, we'd put in $10 billion tomorrow, with the right deal.

On his earlier purchase of Microsoft stock

That Microsoft preferred stock was just like commercial paper. It had nothing to do with Microsoft. It matured in December and is over already. The press misunderstood and said we were investing in tech stocks. We probably made $200,000 more than in common paper with it.

[Buffett expressed some bemused frustration with the media which doesn't seem to believe that he and Munger do as they say they do. "I can't think of any other company more open about what they do." He said the media is always trying to read more into things, to see what he *means*.]

I didn't see one article that understood that the stock had a 7% yield when common paper was 5.5%.

On Frequent Trading vs. Investing

WEB: Too many people are engaged in online trading. It makes it more of a casino. Investing in businesses relates to the productivity of assets. If you have thousands of people just guessing, you've introduced a huge casino element.

[Buffett referred to John Maynard Keynes' book, "The General Theory of Employment, Interest, and Money," and particularly to a chapter addressing beauty contests, where he distinguishes between a bubble on a sea and a sea on a bubble.]

Casinos are more interesting/fun than a church… you get shots of adrenaline, etc. But there are enormous financial costs. You have large effects from fear and greed -- it makes for wilder swings, when the market has more fear/greed investors.

[Globalization] makes the casino larger. You're much more likely to make a good decision on real estate in Omaha -- because you have no casino players, no minute-by-minute price changes, no experts offering advice. You have people evaluating the productivity or value of the property.

His thoughts on Berkshire's price

[Buffett was asked why he offered to buy back shares at $45,000.]

WEB: We will buy a dollar for 90 cents. I hope Berkshire never sells much above or below its intrinsic value. The last thing we want is for our stock to zoom up. We don't want people coming in or going out to be taken advantage of. We don't want to get the highest stock price to help those getting out, as it would hurt those getting in.

TO BE CONTINUED (In other words, this is long enough already, and I'm still typing. Stay tuned.)

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