Buffett & Munger

Lessons from the Masters of Value Investing

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Meeting Notes from Berkshire Hathaway 2008 Annual Shareholder Meeting with Warren Buffett and Charlie Munger

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EO Nebraska hosted us for a fabulous weekend which culminated in the Berkshire Hathaway Annual meeting-widely known as "Woodstock for Capitalists."   The highlight of the meeting for me was Chairman Warren Buffett and Vice-Chairman Charlie Munger answering questions for over five hours with the Board of Directors (including Bill Gates) and Berkshire Hathaway managers and over 30,000 shareholders and fans watching.  I was impressed by their patience and grace in openly and intelligently answering questions from the crowd-it is far harder to come up with an intelligent and instructive answer to a dumb question than an intelligent one.  Mr. Buffett managed to make the answers to even the silliest questions instructive.

Following are a few notes that I took during the meeting.

On Energy

Charlie Munger:

  • When asked the over-under on oil in 25 years, he answered "Down"-we will be producing less oil in 25 years than we are now. Mr. Buffett says "That's not an insignificant prediction, believe me. If oil production is down 25 years from now, it's going to be a different world.""
  • In 200 years, all coal, uranium, oil, and natural gas will be depleted. If we are to survive and grow as a civilization, we will have to rely on the sun.
  • It is foolish to be burning precious oil as fuel when we need it as a chemical feedstock and we have no substitute.
  • In response to a question on what he thought of Al Gore and his movie-I agree with Al Gore, our reasons are different and you have to decide whose reasons you prefer.
  • Turning American corn into motor fuel is one of the dumbest ideas I've ever seen. This idea is so monstrously dumb that I think it's probably on its way out.

On Investing

  • Berkshire Hathaway will not have the returns it has had in the past. Berkshire will be happy with pre-tax returns of 10%. Berkshire will not give its shareholders the returns they have had in the past, either, because it is dealing with far bigger companies, with market caps of $10 billion to $50 billion. Buffett says that is a less profitable universe proportionately than having the entire universe of companies in which to invest.
  • Buffett said people should look at stocks as owning part of a business, use the stock market to serve you and not instruct you and to leave a margin of safety.
  • Buffett said that generally he does not use stock options. If he wants to buy a stock he buys it, if he wants to sell it he sells it.
  • In response to question, Mr. Munger says that Regional Banks stock offer a good prospecting ground. Mr Buffett jokingly says Wow that is a strong bull recommendation as he's seen from Charlie and he's going to go look at those stocks immediately after the meeting.
  • Tim Ferris, author of the 4 Hour Work Week (who had spoken to our group the day before) asked a question on what an investor who didn't have much time to investigate investments should do to invest a small amount of money (less than a million dollars). Mr. Buffett differentiated between the professional investor and the "know-nothing" investor. He said a "know-nothing" investor should invest in a low-cost index fund such as Vanguard and minimize the "croupiers profits."
  • The stock market will give you bargains. Individual owners will give you a fair price.
  • When asked why he did the Petrochem deal and why he didn't talk to company management, Mr. Buffett answered that he felt that he was getting the stock at about 35% ($35B/$100B) of company value and there was a huge margin of safety. He said that with that company management will always try to convince you that the stock is a great value so there was nothing to gain in talking to them. Furthermore, more due diligence might have been important if the valuation of the stock was close to the company value but with such a huge margin of safety it wasn't important. Mr. Buffett says they do not hire outside experts to due diligence-it is his job to manager risk in Berkshire Hathaway. Later, Mr. Buffett said he sold the stock when he felt that it had gone over a safe value-interestingly the stock kept rising even after he sold it.
  • When asked about the innovation pipeline of pharma companies and why he invested in Sanofi-Mr. Buffett answered it is almost impossible to figure out. He invests in pharma companies as a group. I don't know where the blockbuster breakthrough will come but it will come and the products are useful and needed.
  • "We like business that drown in cash"-gave a counter example of a building business where at the end of the year all profit is tied up in equipment-a gruesome business.
  • Over the next 10 years, the dollar will weaken.
  • A shareholder asked what deals Buffett and Munger have seen in the past that they were willing to sink large amounts of money into. Buffett says he has had up to 75 percent of his net worth in some deals, and people who know what they are doing should be shy about sinking 50 percent of their net worth into some investments. Buffett says someone could have put 100 percent of their stock into Coca-Cola back when Berkshire invested heavily in that company and their returns would have been fine. Munger says diversification is NOT key, but rather safe and strong investments are key. Buffett says A professional investor finds a place where it is safe not to diversify. It is safer for a "know-nothing" investor diversify.
  • On reading financial statements "Do I understand the business well enough to make sense of the financial statement?"
  • A shareholder asked about what Mr. Buffett thinks of mass transit-specifically people travelling by train. Mr. Buffett said that the American public is enamored with the idea of one person per car and he doesn't bet on ingrained habits changing.
  • Mr. Buffett said, As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight.

On Fraud

  • Don't trade a sliver of reputation for money
  • The term "Financial Innovation that diversifies risk" should be banned
  • There are a lot of Assets that are "Good until reached for"
  • No one has to loand you money. Bear Stearns worried about not getting unsecured loans but they always thought they could get secured loans. No one has to loan you money.
  • Buffett believes incentivisation of managers on the basis of earnings per share encourages disingenuous, if not downright dishonest, behaviour.

    Take the assumptions about future investment returns in corporate pension schemes. The average in America is 8pc, despite the fact that a quarter of pension funds are in bonds and cash (for which a 5pc return would be a reasonable expectation) and the rest in equities, which rose by just 5.3pc a year on average over the 20th century as a whole (a remarkable period of growth for the US economy).

    Managers don't really believe they'll get 8pc, but pretending they will means they can contribute less and so boost their reported profits. "If they are wrong, the chickens won't come home to roost until long after they retire."

On Learning

  • Make learning a lifelong quest. Mr. Buffett said he learned most from his father. Mr. Munger felt that books were his "fathers".
  • Read Chapters 8 and 20 of the Intelligent Investor
  • If you read 20 books on a subject, one of them will really educate you-the problem is you don't know which one.
  • A shareholder says she is a teacher trying to help introverted people become more comfortable in public settings. Mr Munger commented that it is nice to have and educator doing something Important and with consequence instead of unimportant and of no consequence.
  • Buffett says a business school should focus on two courses: how to value a business and how to think about stock market fluctuations. He says it is similar to teaching theology: It all comes down to the 10 commandments.

Scary Items

  • Mr. Buffett mentioned several times "a nuclear bomb going off in New York City"

In Closing

A shareholder asks what is Buffett's hope for Berkshire. Buffett says he hopes the culture remains, and it is strong with good managers and a strong board of directors. Buffett says he would like family-owned companies look to Berkshire as a place to grow. Munger says he hopes more in the business world look to Berkshire and learn from it. Munger says a great deal has happened at Berkshire that others could learn from.

Last Updated on Sunday, 02 November 2008 10:16  

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" Both Warren & I insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. "

Charlie Munger