Here is some fill-in and supplemental info. to the excellent notes bvalue provided. Some of it is pretty closely related to information already posted but with perhaps an additional bit of inforamtion or nuance.Insurance: • GEICO had a combined ratio of 94 in Q1; GenRe had an underwriting profitOptions/Compensation:• WEB: “Lottery ticket, royalty on the passage of time”• WEB: “More misdirected compensation in corporate American in the last 5 years than the previous 100.” Value was created in the 1990's, but there was a tremendous wealth transfer.• CM: “Capricious”, “crazy”• WEB: Compensation is the “acid test” of corporate America. “Arise shareholders”• CM (later in the meeting): Carnegie, Rockefeller, etc. had founder's philosophy and drew little to no salary. Grew wealth by growing company. Bill Gates has done the same, no options and little salary. Didn't think Ballmer (Microsoft CEO and one of first employees) has taken any options either.I'm sure I also heard Buffett say he will be writing on executive compensation this year, but articles based on the Sunday press conference quote him as saying that he has basically said his piece and will pursue it behind closed doors in board rooms. I had taken what he said on Saturday morning as a possible Fortune piece or an Op-Ed somewhere, but maybe not.On the U.S. Consumer:• WEB: Thinks American consumer is slightly better off than 10-20 years ago. Thinks U.S. will do better over time, real income per capita grew 7X in last century. People will be better off decade after decade.Accounting:• WEB: “People don't obfuscate without a reason.” Best to stay away from companies that do so.On Insurance:• WEB: Curse and benefit of insurance business is that people hand you money upfront; tempting to do some foolish things. “If you are willing to dumb things in insurance, people will find you.” Even if you're in a rowboat in the middle of the Atlantic, if you whisper a dumb offer, an insurance broker will come swimming out to take you up on it.On Derivatives/Credit Risk:• WEB: Credit insurance is based on ratings, historical defaults. Doesn't adequately account for correlations. Unprecedented concentration of risk in relatively few financial institutions. Insuring BAA to AAA for 15 basis points when spread in market is 100 basis points doesn't strike me as smart.• WEB: With derivative accounting, recognize income as contract is written, underestimate losses to come. Derivative contract written with Dealer A and Dealer B, both record profits. “Wish I lived in that kind of world.”On Graham:• WEB: Graham focused on quantitative because he said it was easier. Qualitative took more insight and judgement, so why work harder when it wasn't necessary? But that was when there were a lot more bargains and he was dealing with much smaller amounts of money.On Berkshire, Stocks/Investing:• WEB: “Think Berkshire's value has improved significantly in recent years and Charlie does too.”• CM: Importance of “developing temperament for owning securities without fretting.”• WEB: Think about value, not price. The market is there to serve you, not inform you.Insurance/General Re:• WEB: GenRe has been tightening underwriting standards. They had it but lost it, now have it back.• WEB: There are a number of major reinsurers that they think couldn't pay in the event of a major catastrophe.On Desirable Attributes for Management of BRK Acquisition Candidates:• WEB: Want to see passion for the business more than for the money. That keeps them working even when they don't have to.• CM: Passion is more important than brainpower. If they weren't competent, they wouldn't get to the point of BRK looking at them.To Question About WEB and CM Charging Performance Fees in their partnerships, and thanking them for allowing BRK shareholders to invest as equal partners:• WEB: Was in a different financial situation, performance fee was only compensation, not 1-2% fee plus performance fee as is common now. Would have been double dipping to charge performance fees with Berkshire because he was drawing a salary.• CM: When I stopped working for performance fees it removed a psychological burden, as it will for most people that are conscientious about their relationships with others.On What they Read and Use In Evaluating Companies:• WEB: “Pretty much every thing we do I find through public documents.” “We do not find it particularly helpful to talk to managements.” He said he probably saw 20 managements a year in his early years but rarely does anymore.To Question Asking For Guidance on BRK Intrinsic Value Calculation:• WEB: “We want you to understand Berkshire and we hope that comes through.” Information provided is what he and CM would find necessary to calculate IV. (My take on his comment was that he was too polite to say that it requires a certain degree of financial sophistication to make an estimate, and without that more information probably wouldn't help much.)On Current Investments:• WEB: Bought a lot of junk bonds last year. “Not finding junk bonds this year at all because prices have changed dramatically.” Last year's junk bond prices had something to do with supply overwhelming demand. Money has been pouring into junk bond funds recently, $1 billion per week.• CM: Very excellent chance that CM and WEB won't live to see equity valuations at '73-'74 or even '82 levels. Means fewer absolute no-brainers.• WEB: Strange things will always happen in markets. Didn't think he would ever see 10 year Japanese government bonds yielding 5/8 of 1% as they do now.• WEB: Do expect to see some losses in junk bonds, but expect to get decent returns overall. We haven't seen our biggest losses yet but will also have some big gains. Different approach than they take in acquiring companies or buying equities, where they want a higher degree of certainty.On Typical Money Management (i.e. Active, widely diversified, virtually fully invested at all times):• CM: “General system for money management requires people to pretend to do something they can't do.” Terrible way to live but they're very well paid. “I would regard it as being put in shackles.”On the GenRe change in workman's comp discount rate from 4.5% to 1% for conservatism that bvalue covered, and some more general accounting issues:• CM: We “almost reach for opportunities to be more conservative.” Thinks it helps business decision making as well as providing more conservative financial statements.• WEB (following CM's comment about conservative accounting): “I felt more comfortable working with financial statements in 1960 than 2000.” Despite more disclosure requirements, financial statements often don't paint as clear a picture as they used to.• CM (after comment about substituting bullsh*t for EBITDA, which caused WEB to marvel that he had been waiting for something like that all day and was surprised that it took longer than normal): “Pension fund and medical liability accounting are the lollapalooza.”• WEB about expensing options: “It's amazing what people with high IQs will do to rationalize their own pocketbook.”• CM: Terrible way to run a society…somewhere between crazy and crooked. Like building a bridge based on crooked engineering.On Cost of Capital and Capital Allocation:• WEB: “I've never seen a cost of capital calculation that makes sense to me.”• CM: “Perfectly amazing mental malfunction.”• WEB: “We don't think the record of American industry on reallocating capital is very good.” Then he immediately points out that he is knocking the very procedure that has gotten them where they are today.On How BRK Looks at Compensation Policies:• On subsidiary business that doesn't require capital, we tend to reward on basis of earnings. If they require capital, we make an adjustment for it. Different for every business. We don't make complicated compensation arrangements. High standards of performance for terrific businesses, lower for tough businesses.• Compensation bureaucracy (consultants, etc.) is not going to break itself up. If they delivered you something simple on one page they couldn't charge what they get today.• BRK doesn't tend to develop #2's in their businesses because of no mandatory retirement age. Realize that sometimes people with the itch to run their own business and uncertainty about timing will leave.On Valuing Investments:• WEB: Value of any investment…stock, bond, real estate, etc. is cash flows that can be taken out over its lifetime discounted to a present value. Because the calculation of intrinsic value is not precise doesn't mean that it's not the right way to think about it.• WEB: “We do not believe in a little of this and a little of that.”• CM: “Everything we do comes back to opportunity cost. But we are guessing at our future opportunity costs.” (explanation for not dropping minimum return requirement on equities below 10% despite low interest rates).• WEB: “not terribly scientific”• CM: If rates were to stay down and they decided it was long-lived, might change their 10% threshold.On Underwriting the Pepsi $1 Billion ($250 million present value) Promotion:• WEB: Have no trouble writing that kind of policy for the right premium. Would have written $2.5 billion at a higher percentage premium. Would not write $25 billion.
One more from WEB that I think I left out:"I don't worry about what I don't know. I worry about being sure about what I do know."
One more from WEB that I think I left out:"I don't worry about what I don't know. I worry about being sure about what I do know."Will Rogers said it best: "It's not what we don't know that gets us trouble, it's what we know that ain't so."
• CM (later in the meeting): Carnegie, Rockefeller, etc. had founder's philosophy and drew little to no salary. Grew wealth by growing company. Bill Gates has done the same, no options and little salary. Didn't think Ballmer (Microsoft CEO and one of first employees) has taken any options either.as far as MSFT goes this is totally half arsed.db
• CM (later in the meeting): Carnegie, Rockefeller, etc. had founder's philosophy and drew little to no salary. Grew wealth by growing company. Bill Gates has done the same, no options and little salary. Didn't think Ballmer (Microsoft CEO and one of first employees) has taken any options either.as far as MSFT goes this is totally half arsed.What do you mean? It's true. Read the proxy statements.
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