Thursday, May 10, 2012

Berkshire 2012: The Times They Are A-Changing and Other Observations

Editor’s Note—
 This year we’re utilizing a shorter, snappier way to summarize the Berkshire Hathaway annual meeting as a way to spare readers the redundancies in Buffett and Munger’s question-and-answer session.
 After all, the commentary overlap with past meetings is probably 75% nowadays—we’ve even developed a sort of Berkshire shorthand for our note-taking, writing simply “Graham story” when Buffett launches into his dissertation on the importance of certain chapters in Ben Graham’s “The Intelligent Investor,” for example; “MBA joke” whenever Buffett or Munger make fun of the meaningless (and dangerous) risk-evaluating models of the academic world; and “IBK joke” when they go after investment bankers, another favorite target.
 Nevertheless, the meeting was, as always, interesting.
 For one thing, attendance was down, noticeably, even if Buffett wouldn’t say so—probably a side-effect of his high, and highly controversial, political profile these days.  Also, there was the added (and, we thought, welcome) presence of insurance analysts asking questions for the first time since the very old days when a few professionals would show up at the Berkshire cafeteria and fire away.
 Overall, there was a detectable “thrill is gone” sense hanging over the weekend.  Buffett himself did not show up at some of the side-parties that many of his most loyal shareholders routinely schedule, as he did in the past, and even the press complained about the tight restrictions on their cameras.
 But Charlie Munger, pushing 90, was in great form, and Bono was spotted in the crowd, a step up from last year when George Lucas made it.
 So there.
—JM, May 2012

Berkshire Hathaway 2012

Biggest Change: Tighter security and more of Buffett The Analyst than Buffett The New-Age Spiritual Guru.  
 Gone, unfortunately, was Buffett’s pre-meeting stroll to a seat in the middle of the floor of the arena to watch the kick-off movie (instead he was kept inside the Board of Director’s gated pen, up front near the stage, where beefy guards with earpieces and zero smiles stood watch).
 Gone, fortunately, were questions like “What should I do with my life?” and “Do you believe in Jesus Christ and do you have a personal relationship with God?” (That was actually asked—and answered by Buffett—a few years ago: you can read the answer in our book.)

Best Change: Three insurance analysts asking geeky business questions about Berkshire’s operations—the first time in years Buffett has been questioned in depth about the guts of Berkshire Hathaway.
 And while there was grumbling from the sightseeing-types in the crowd about the technical discussion (as well as from ace financial analyst/money manager John Hempton, who thought it was not technical enough and wrote about it here, although I knew what John thought before he wrote that because I sat with him), the fact is Buffett has gotten away with very few hard questions about Berkshire’s operations in the years since he became a CNBC staple.
 Expect fewer attendees next year, and the year after, and the year after…but better questions.

Most Fun: Getting to see and hear Warren Buffett discuss the insurance businesses in detail thanks to those geeky questions.  He didn’t create the track record of a lifetime by luck.

Least Fun: Two rants, both by people from Boston (where else?)—one about the Liberty Mutual scandal and the other about Fannie Mae/Freddie Mac, both of which Buffett and Munger handled far more patiently than the crowd.
 Also, way too many questions about Berkshire’s lagging stock price (it’s a conglomerate with a bunch of low P/E business for gosh sakes, not a closet mutual fund run by Warren Buffett any more.)  Speaking of which...

Most Delicious Moment: Charlie Munger blowing off a well-known hedge fund manager who used the microphone to talk up Berkshire’s stock before lobbing a softball, “what-am-I-missing” type of question about the lagging stock price.
 Rather than respond in Typical Public Company CEO Fashion about how Berkshire was “executing its strategic objectives” or complaining the stock was “not reflecting the underlying values of the business” or reassuring us that management would “pursue all means to enhance shareholder value,” as most CEOs would do, Munger simply said: “I wouldn’t worry too much.  I think you aren’t really welcome in this room if that sort of short-term orientation turns you on.”
 And that ended the discussion about Berkshire’s stock price.

Least Appreciated Line: “If you make your buy and sell decisions based on what a business is worth, you’ll make money.”—Warren Buffett.

Most Appreciated Line: (In response to a question about succession at Berkshire after Buffett’s death.) “The good fortune is not going to go away just because Warren happens to die.  It won’t help him, but...”—Charlie Munger.

Weirdest Moment in the Opening Movie: The cartoon, in which the University of Nebraska football team (Buffett’s favorite) plays a University of Washington team made up of robots coached by failed/disgraced presidential candidate Herman Cain. (I am not making this up.)
 Worse, during his half-time pep-talk, Coach Cain made a bunch of 9-9-9 jokes and then urged his men to hit hard, yelling “Take that, sucka!” like a, well, like a stereotypical African-American.
 Who thought that would be funny?

Best Comment on the Opening Movie: “Are they that corny every year?”—John Hempton.

Oh Puh-leeze Moment: When Warren Buffett defended “the Buffett Rule” with talk of “shared sacrifice” and the curious claim that his rule applied only to “a very few” people, meaning those with “the 400 largest incomes in the U.S.” which of course is no longer the case, as everyone in the place knew.

You-Could-Hear-A-Pin-Drop Moment: When Buffett casually said Todd Combs and Ted Weschler, the recently hired money managers at Berkshire, are being paid “one million dollars a year,” plus incentive fees.  Buffet’s no fan of “shared sacrifice” when it comes to incentivizing his own moneymakers…

A Lesson For Every Money Manager Department: Buffett’s revelation that in all of his and Munger’s years of managing Berkshire together (47 and counting), “We’ve never talked about macro stuff.”

Most Surprising Applause Line: Becky Quick’s question on behalf of a man who first noted that his 84 year old father wouldn’t buy Berkshire stock because of Buffett’s constant yapping about a Buffett tax, and then asked what impact Buffett’s high profile might be having on the stock price. (This got spontaneous, fairly loud applause despite the Buffett-friendly crowd.)

Least Surprising Applause Line: Buffett’s response to the young man, which was “I don’t think anyone should have their citizenship restricted” simply because they run a public company, plus this zinger about the young man’s 84 year old father: “Maybe he oughta own Fox.” (This got louder applause than the question, naturally.)

Feel-Good Question, Literally and Figuratively: From Andrew Ross Sorkin, on behalf of “many” in the crowd who had urged him via email to ask, “Warren, how’re you feeling?”

Feel-Good Answer, Literally and Figuratively: Buffett’s response to Sorkin, “I feel great.”

Best Munger Retort: (To Sorkin after Buffett said “I feel great.”) “I’m jealous.  I probably have more prostate cancer than he does.”

Least Interesting Question: About gold. ‘Nuf said.

Most Interesting Question: “How do the large sovereign debts get balanced, and do they concern you?” 
 Buffett’s answer was, “I don’t know how it plays out in Europe…I would totally avoid buying medium or long term government bonds.”  Munger added, “He’s asking the really intelligent question of the day and we’re having a hard time answering it.”
 For the record, this “really intelligent question” actually drew applause from the crowd when it was asked, which tells you what’s on people’s minds regardless of which party they’re voting for in November.
 Also, for the record, the fellow who asked it was from Boston, which just goes to show not everyone in that Commonwealth is certifiable.

Least Convincing Answer: Buffett, asked by the fearless (and good friend of Buffett) Carol Loomis whether buying the Omaha World-Herald newspaper was “some self-indulgence?”
 The Oracle spent a good five minutes explaining how the paper “still tells me some things I can’t find out about elsewhere,” such as—and I am not making this up—the obituaries and the wedding notices.  Nobody was buying it.

Most Convincing Answer: Buffett and Munger, when asked by one of those geeky insurance analysts whether Berkshire would ever be subject to the Investment Company Act of 1940.
 Buffett said he’s read the Act “20 times” (and when Buffett says he’s read something 20 times, he’s not kidding), and “I see no way Berkshire comes close to that.”  Munger said flatly, “We are NOT just an investment company.”

Something Every Investor Should Always Keep in Mind: Asked about why Berkshire keeps such a large cash reserve, Buffett said, “We don’t ever want to go back to ‘Go.’”

Worst Answer: Buffett, when asked how Amazon.com will affect Berkshire’s various businesses, said, among other things, “It won’t affect Nebraska Furniture Mart.”

Best Answer: Munger, to the same question, “I think it’s terrible for most retailers—not slightly terrible, really terrible.”

Most Concise Answer: Munger, when asked how a business can “build barriers” around itself: “It’s tough.  We sort of buy barriers, we don’t build them.”

The Single Most Revealing Comment About What Made Berkshire A Growth Stock And Why It Is No Longer One:  “There were times when Ajit [the genius who runs Berkshire’s reinsurance business] would generate billions of float and Warren would generate 20% returns on that float, and that would happen over and over and over…and that was fun.” —Charlie Munger

One More Mungerism Before We Go: “I rejoiced the day I got rid of a stock quoting machine.  I like this idea of owning businesses forever.”

And Warren Buffett’s Successor as CEO of Berkshire Hathaway Is Who? The answer is clear.  Read all about it in the forthcoming 99c mini-eBook on Amazon.com, “Buffett’s Successor: Who it Will Be, Why it Matters.”  To be published by eBooks on Investing this summer.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at Amazon.com

© 2012 NotMakingThisUp, LLC
                                   
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

2 comments:

Anonymous said...

Jeff,

On the 'you could hear a pin drop moment', I don't see why (say) $1m per year salary and 10% incentive fees based on 10% of index outperformance is such a big problem.

Let's put it in context - they are each managing about $1,000 million and, if they had their own fund, they would be charging (say) 2/20.

So, if these guys are as good as WEB and CTM think, then BRK is getting a bargain.

Comments?

Cheers,

Zip-A-Dee-Doo-Dah

Jeff Matthews said...

No argument from me.

But hearing their Tax-the-Rich-More CEO casually mention he'd dropped a million bucks in cash on each new hire, before incentives, jolted a lot of people in that room.

And that's what I reported. You really could hear a pin drop.

JM