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Selected Q & A from 1998 Annual Meeting
WB = Warren Buffett, CM = Charlie Munger
Efficient Market Theory
WB: Didn't believe in it. Dr. Aukins teaches anything but this theory at Univ. of Florida.
CM: "Massive contamination in teaching of this theory."
Existing Values in Japan?
WB: Didn't see as obvious bargains. Low ROE, 5-6%. Difficult to get rich by being owners.
"Cheap cigar at a good puff." Time is friend of good business, enemy of poor business.
CM: "Don't hope for liquidation proceeds before going broke."
Naming Successors
WB & CM didn't reveal name(s) during this meeting.
Selling Criteria
WB: Didn't buy stocks and businesses for resale. Trimmed business didn't mean negative. Sold only if needed money for other things or valuations were out of whack. Would have bought more current holdings if cheaper market. Practice "Bigger Fool" if sell at top. If price goes up after selling, don't worry. Useful to be reminded of errors.
Peter Kiewit's New Spin-off
No comment.
Insurance Business & Mission Statement
Insurance business most significant to Berkshire. Flight Safety came 2nd.
No mission statement, no strategic plan for opportunities. Keep things simple at headquarter.
Year 2000 Compliance
Good shape for Berkshire. No material effect.
Weak governmental units compared to commercial sector.
Campaign Spending
Battle of wallets for influence. Political influence was cheap in the past.
Berkshire's Income Tax
WB: Berkshire will pay a lot of taxes this year. Happy to pay taxes.
Bank Consolidation
Unprecedented ROE for banking sector. Unsustainable 20% returns on tangible assets. Against
classic economic theory.
Reading Recommendation
"Guns, Germ, and Steel" by J. Diamonds. Rare for CM to read twice.
Nightmares ( What kept them awake at night?)
WB: Not worried, world changes. If worry about something, will correct it and get back to sleep. Not worry doesn't mean lack of good ideas.
Forecast for Next Decade & World's Financial Market
Only look for decent businesses, important and knowable, and translate into actions for Berkshire.
Research on Market
Value Line gives quickest way to see key factors, quick snap shot, very efficient and up-to-date. Don't care about ratings, only look for facts. Value Line's charts, 10-15 lines, couldn't have been done better. Immense amount of detailed financial information. Meaningless chicken tracks, price and volume.
Insurance Merger
No threats to Geico and reinsurance business. Reinsurance very opportunistic and profitable.
KO's Buyback Program
KO is the best large company in the world. WB likes to see KO repurchase its shares, good use of capital despite high P/E. This isn't true with other companies. Consistent repurchase is good for Berkshire, increased ownership % without additional buying.
Float From Insurance Business
Now 7 billion, has negative cost or profit attached. Geico is major part. Its marketable earnings power, safer on the down side, better on the upside.
Dumping of Treasuries by Japan
WB: Not a threat to the US. Always 2 sides to a transaction or equation. If Japan sells the treasuries, it receives dollars. What's done with the proceeds. For trade deficits, foreigners get US dollars and become net investors while the US becomes a net consumer.
CM: Will be surprised to see dumping by Japan.
Equity and Government
Government should not get involved in equity market.
Brokers' Not Recommending Berkshire
WB: Berkshire isn't the stock to get rich on. Hard to buy in quantity. Looks for shareholders to stick around as long as WB and CM stay around.
Super Cat
Significant but not as significant as Geico. Super Cat has less volume but not less price.
Annual Report
Every business has problem and management should tell readers about it.
KO VS Pepsi
Long-term, KO will continue to gain against Pepsi. Pay no attention to KO's assets gains. Bottling transaction is incidental. Look at Unit Case Sales and shares outstanding.
Quality of Earnings
Have gone down due to stock options.
Valuation of Business
WB: Identify key variables of business and how predictable they are. Want dominant variables. Use long rate in discounting. Look at cash generated, discounted back at treasury rate. Investing is an art. Best company has constant incoming cash streams, no outflow. Worst company, grows a lot but forced to grow and invest capital at lower rate. Understand business and competition. Economics, how is it going to be like 5-10 years? Evaluate future streams. Comfortable with people running, price to pay for business? Know what you don't know. Good to study 1904 annual report of National Cash Register.
CM: Frozen Company, taught by Ben Graham. What's the enterprise worth?
Recommendations For Teens
Learn all accounting one can learn, read about investment, get business experience, talk to business people about what makes them tick, and under-spend income.
Babyboomers & Stock Market
Stock advance brought along more money. More money, more participation. Unrealistic expectation of earnings. Last 18 years, awesome returns. Next 18 years, won't be the same.
Disney's Accounting
WB: Disagreed with author on a few points. With Disney, you get what you see.
CM: No quarrel with Disney's accounting. Disney's economic earnings is higher than reported earnings.
Investing in High-Tech Companies
WB: No. Don't know what they will look like in 10 years. Don't like to play games that others have advantages on him. "Swing with easy pitches."
Repurchase of Berkshire Shares
WB: Missed the boat at various times. Will see what's best to do with money in the future. Don't like to leverage up.
Acquisition Filters
WB: Need management with purchased businesses. Determine management's primary motivation, money or love for business. Identify the ones who love businesses or make conditions to love their businesses. "If you've been around awhile, can identify." Definite wait for attractive investment. Get paid for being right, not activity.
CM: "Integrity, intelligence, experience, and dedication."
High Compensation VS Performance
Both bothered by irrational sums, costly to companies via options. Pay:performance =10-20:1. Will not go away, akin to campaign finance.
"B" Issuance
Felt good how it worked out.
Nonreporting of Businesses Under 750M
Immaterial cutoff size. Will move up as go along.
Travelers Merger
WB: Good Travelers CEO with proven records.
Pharmaceuticals Investment
Missed it. Didn't recognize or didn't identify within circle of competence.
Berkshire's Operations
WB: No formal systems or no operating plans to submit to headquarters. Management continues according to past success. "Talent is a scarce commodity-let management do their ways." Personal enjoyment in daily discussion or involvement in reinsurance business.
CM: Berkshire's systems isn't right for everybody.
Non-US Investment
Yes, at attractive price. Not reluctant to invest abroad. Currently, not finding bargains around the world.
Selling Berkshire Shares by Buffett Foundation
WB: Immaterial price fluctuation from selling of shares. Demand about 500 shares a day. Prospects of businesses matter despite turnovers due to events.
CM: People have more important things to worry about.
Buffettoloy Book, written Mary Buffett
WB: Two authors. No quarrel with theory. Not the book would have written. Get more philosophy from reading Berkshire annual reports.
End of Cold War
Not factored in investment decision. KO, AXP and Gillette will be helped by prosperity internationally. Inexpensive products help.
Dairy Queen (DQ) VS McDonald's (MCD)
No connection in DQ acquisition and McDonald's disposal. DQ has 6,000+ operations. DQ's investments in fixed assets are different from MCD. DQ's capital employed is smaller than MCD's.
Tobacco Settlement
WB: Trouble for tobacco companies, bound by agreement when the other side isn't.
CM: No expertise in this decision.
US Market Overvalued?
Not overvalued if rate remains at current level or lower and corporate profitability at present likely to maintain. If either condition breached, overvalued.
Split, Valuation and Berkshire Financial Stability
No plans to split. If owners want, convert A to B shares. Not give advice on stock. Answer will be magnified. Up to people to buy and sell. Berkshire's market price tracked intrinsic value well. Not perfectly, but tracked better than most companies. Prepared and ready, but did not anticipate 1929-like era.
KKR & Dura Cell
No effect on Berkshire.
Health Concern (from poor diet---See's and DQ's sweets)
WB: Heavily relied on genes. Will get standard rate for life insurance.
Real Estate Investment
Discernable records of failure. Both understand other things better. Prices don't intrigue both.
Nike & CEO, Phil Knight
Terrific operator CEO. Both keep opinions about Nike to themselves.
US Economic Expansion
WB: Significant credit to Vockler, Reagan, Rubin, and Greenspan.
CM: No quarrel about the economy, better than people anticipated.
WB & CM on See's Commercials
Opted for a 110-year-old actor instead.
Risk and Capital Asset Pricing Model
Nonsense model. Evaluate without knowing what the future is going to be like. High discount rate won't help. Want favorable odds. Prefer high volatility to low volatility if know business for certain. Example, investment in Washington Post.
Preferred Stockholders
High caliber stockholders, who understand the business, compatible, and look at the business the same as them. Prefer consistent relationship.
Tax-free Spin-off to Shareholders
Meaningless, more frictional cost and overhead. Operating cost about .5% of capital base.
Sales at Furniture Mart & Borsheim's during the Annual Meeting Weekend
Furniture Mart about $800,000 a day. Borsheim's, twice of last year's level.
Auto Industry
Interesting for both to follow. Anyone can follow. Didn't feel that they understood more than most people.
Geico, Borsheim's and the Internet Commerce
Huge potential. Internet facilitates growth nationwide. Berkshire's name will help. Geico's brand potential is big. Borsheim's has lower operating cost, 15-20%, than most public companies.
Spotting Honest People (a question from a young boy)
After a few months of working with, you can tell if you are nervous or feel good about. Take credits for things? "People leave track in life. Best way to get what you want is to deserve what you want."
McDonald's & Spin-off
Can't separate real estate from franchising business. No more value for spin-off, huge problem.
Double Taxation: Corporate Ownership of Securities
WB: Drag on performance. Pay a lot of taxes, at 35% compared to 20% for individuals.
CM: Real mathematical disadvantage shrinks from long-term holding of these securities.
Due Diligence Problem
Over 30 years, mistakes (due diligence problem) never occurred on deals. Ninety-nine percent of deal making involves business economics.
Cheers,
Jim Chuong
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