Goldman and Wall St. Reform: Charlie and Warren agree that something needs to be done. Charlie even goes as far as blaming congress instead of the banks later in the day. Neither have read the current 1,550 page bill, so they won’t comment on it specifically.Munger, who said this week that Goldman was engaged in “socially undesirable” activities, told shareholders that he would have voted against SEC Prosecution.Buffett says Berkshire would comply if required to post collateral under the proposed financial reform bill. This has been a hot button issue surrounding derivatives that Berkshire has lobbied against. Finally, Buffett “loves” Goldman investment.
Ajit Jain: Buffett is asked about the potential (and hypothetical) retirement of Ajit Jain, one of his insurance geniuses who sells coverage on massive insurance risks. Buffett says he’s irreplacable, but that the company’s insurance operations will continue to succeed whenever he departs. In the past, Buffett has sung Jain’s praises in lofty terms, even telling shareholders that if they come across Buffett, Munger and Jain drowning in the ocean, they should “swim to Ajit.” On the Jain question, Munger follows Buffett with the answer that has become an inside joke to shareholders because he uses it so frequently: “I have nothing to add.” He’s far less verbose than Buffett.
Wager: Buffett gave an update on his wager against hedge fund of funds firm Protégé Partners. Roughly two years ago, the two made a bet on whether the Standard & Poor’s 500 index or a basket of hedge funds picked by Protégé would outperform over a decade. With two years gone, the S&P 500 is down 20.19%, while the hedge funds have lost 11.78%, Buffett disclosed. “I’m behind,” Buffett said.
Philadelphia Inquirer: Buffett says he considered buying the paper.
On Succession: The potential successors to the position of Chief Investment Officer did well in 2009 (one of them returned 200 percent), after a difficult 2008. The list of four possible replacements has changed over the past year, which is unusual news.
Future Berkshire Dividends: When asked about Berkshire Hathaway instituting dividend payment in the future, buffett says there comes a time when $1 of re-investment in the business results in less than $1 in returns, so a dividend would make sense when this occurs.
Derivatives position: As he understands it, BRK’s investments in derivatives will not be subject to the collateral requirements set forth in the bill. Warren compared it to selling a house: $120k furnished or $100k unfurnished. Buyer takes the unfurnished one, then the gov’t comes back and says that furniture is required on the house you already sold and now you have to give the furniture to the guy for free. Charlie says the law could pull capital out of an operating company, just to be sent to Wall Street as a bond. The law, as Warren understands it, will only apply to businesses who’s future is critical to the nation like the bailout banks were. BRK carries only about 250 contracts and total investment is less than 1% of what the specialists carry.
Harley Davidson: Someone asked why BRK didn’t buy stock. It was easy to figure out what 15% was going to make us. Buying stock would have required knowledge of the motorcycle industry and so forth. Junior securities may make you richer, but senior securities make you sleep better.
BRK Corporate Culture: It can’t be changed. Advice: build your own company around the culture you want to cultivate.
India: Hard to get into for insurance. Iscar should be opening there someday though.
Inflation: Bet on it. Maybe even much higher inflation. -Charlie Munger
Risk of Inflation has significantly increased because of the policies we are pursuing, and that does not bode well for either cash or fixed income. However, Buffett notes the dollar devalued by about 95 percent since he was born, and the country still did fine. He also notes the stimulating response to the financial crisis may have been necessary, but weaning the country off the medicine of massive debt may be harder than the ailment itself.
College: McDonald’s is better at educating than colleges are. They successfully teach people discipline and responsibility. Later notes no formal apology from any business school for the current economic situation. Adds, “Your money can be inflated away. Your talent cannot.”
Taxes: Guy asks Warren why, if he believes in higher taxes on the rich is he denying the gov’t any access to it. His move to bequeath nearly all of his estate to charity will keep it out of their hands. For society and humanity, he thinks his money will serve a higher purpose in the hands of a charity.
On taking advice: If the problem doesn’t bother people more knowledgeable in the area than you, it shouldn’t bother you either. – Charlie Munger
Stock tips: KRAFT was stupid to sell it’s pizza business and buy Cadbury. The company’s stock is now valued at less than the sum of its component parts. While the move seems stupid, he hasn’t discussed the reasoning behind it. Of course, BRK is always suggested buying. Charlie’s sales pitch goes something like this: Berkshire is a good stock. While we are stupid in many ways, we have avoided a small, but important, subset of stupidity.
Buffett and Munger were very optimistic about America’s future. Berkshire sees plenty of opportunities in the US and sees no reason to shift the center of its investments to other countries.
On Capitalism: Given that capitalism constantly looks for ways of doing things better and with less people, we need a social safety net. Society owes a minimum standard of living to people who are temporarily out of work.
Long term investing: Look at a stock as a portion of a business you expect to do a certain amount of business each year and produce a predictable amount of profit. Think about it like buying a farm. Don’t look at day-to-day stock prices which are irrational and emotional. Look at the produce it will create at harvest.
Berkshire is now placing large amounts of money in businesses that have lower return on capital, and regulated businesses that are capital intensive (Burlington Northern and Mid American Energy). Those limitations inevitably come with Berkshire’s size.
Predictions: Lowering the expectations is easier than delivering results.
Energy: Charlie says he never misses an opportunity to put solar panels on his roof. Too expensive and he’s gotta think about the long term payoff since he’s 86. He does, however, believe that prices will fall and humans ingenuity will solve the future energy needs of the species through solar energy, enhanced power grids, and things we can’t imagine yet.
The short, overall message is this: Be honest. Be logical. Do what you love. Invest with Berkshire. Fix the problems.