Impressions from Warren Buffett

Impressions from Warren Buffett- - Profit Pointers™ ,
From Christine Harvey, WomenForWealth.com

See quotes from Warren Buffett and partner Charlie Munger below...

Hello all,

I want to share with you the highlights of the Berkshire Hathaway shareholder meeting where we had the opportunity of hearing Warren Buffett answer questions from shareholders from 9:30 am until 3:15 with only a couple of breaks. Bill Gates was present too as a board member, and we saw them both again the following evening at Warren’s favorite restaurant.

The morning started with a 7am entry, where people rushed into the 30,000 seat arena and saved seats for everyone and their brother – a culture that has developed over the years. I would term it ‘sophisticated chaos.’ There were deaths and no pushing and shoving – just fast moving people in track shoes. We secured a second and third row position for our group of 11, about half way down from the podium and had excellent seats under our own ingenuity. The people in row four directly behind us, paid a runner $25 each to secure their seats – so what can I say – that was the start of our day. Within minutes, the whole arena was full, and the overflow watched remotely from the adjoining exhibition hall, crammed with Berkshire Hathaway owned company stalls.

Between 7 am and 8:30 am, we chatted with new friends and old, and the time flew by. At 8:30 am a movie started – now an expected event at these share holder meetings. For those who expected a staid epic, the tables were turned. We were glued for an hour to a most humorous film, as fast moving as MTV, with clips ranging from a BBC type spoof of the sub-prime crisis to Warren’s episode on ‘All My Children.’ The film’s quality was first class, staff of thousands, and Warren’s daughter listed as producer. A very funny and useful clip on the sub-prime fiasco exists on YouTube – a must see http://www.youtube.com/watch?v=SJ_qK4g6ntM

With that kind of introduction, I suppose it should have been no surprise that the opening included a female TV star pretending to take over Warren’s role in Berkshire Hathaway, followed by Warren and his partner Charlie Munger, coming on stage equipped with candy and cokes to consume while answering shareholders questions – of course all the products were under the Berkshire Hathaway umbrella – and those they couldn’t consume on stage, such as Dairy Queen, were touted unabashedly!

But hey, it was wonderful to see these two fellows, age 77 and 84, who have come so far in their own lifetimes, have so much fun with 31,000 people – and to hold their own against questions from shareholders all over the world for 6 hours straight – never wavering from their points of integrity, always answering with facts rolling out like wildfire.

Typically Warren would answer each question first, then throw it to Charlie, who most often answered, ‘I have nothing to add.’ We soon learned that Charlie had a way of cutting to the chase with one sentence of fully loaded words, when another human might choose three sentences, leaving room for interpretation! Neither of them cut any slack for the government regulatory bodies that failed to oversee the Freddy and Fanny Mae issues, or for the Enron executives of the world, or for the outrageous pay scales of some CEO’s.

Here are some golden nuggets covered in the Q&A by Warren Buffett, from my notes followed by points from Tom Harvey of EconomyGuy.com.

When asked about their joy in giving, they said to give things you have personal interest it.

When asked about Tungsten, they said there will be no substitute from Tungsten for cutting tools.

When asked about how they view life, they said “There is no reason to look at nuisances in life.” They commented on how they could have both stayed in their jobs at Warren’s grandfather’s store, and it would have been ‘hell.’

When asked about why they pay themselves so little, Charlie said it’s a good role model.

When a high school boy from German asked about what to do with the rest of his life, they said try to meet interesting people, read books, go to work for a business or person you admire, get the right spouse, and have the right attitude.

When asked about advice for the quiet types who want the recognition they deserve, they said to join with others who want to learn public speaking and learn to express yourself, as Warren had to do. “Force yourself into a situation where you have to do what you are afraid to do.”

When asked about the sub-prime situation, they said “When markets are dislocated, there are always opportunities.” Opportunities may be very brief and very extreme.

When asked “What if you could only see a financial statement and not talk with the management before buying a company, what would you look for?”, they said “Compare it to buying a farm again – Look at the asset – the income and expense. Only buy if you understand the company and the product.”

When asked about economics, inflation and the election, Charlie answered, “We’ll have turmoil that looks like a tea party – will have changes in regulations that will NOT work for everyone. Turmoil as far ahead as you can see!”

When asked about risk, Warren said he considers himself the Chief Risk Officer in the company, and he doesn’t want 1 out of a hundred possible risk, he wants 0.

When asked why he bought a company in China based on the annual report only, he said “When you see that a company has a value of 100 Billion, but you can buy it at 35 B, you don’t need to do further valuations to find out if it’s worth 97 Billion or 103 Billion. If there is a significance between price and value, we buy it.”

When asked about what they look for in their replacements for themselves, they said track record, human qualities and integrity.

When asked about how they handle meetings with outside company directors, Charlie said they keep it short. “We might say for example, ‘We don’t buy start ups’ and the meeting is over.”

When asked about nuclear knowledge, they said “The genie is out of the bottle.” Choke point is the nuclear materials - in the hands of too many of the wrong people – think we need to reduce that. They suggest seeing the Nuclear Threat Initiative website on the internet.

When asked about what we should teach children in school, they said your mind and body are your best assets, i.e. yourself. Too few people invest in themselves. “You can be the person you want to be.” Pick up good habits. Charlie thinks that schools should teach people how not to be manipulated by vendors and suppliers. They recommended 2 books – Influence and Yes.

When asked about economics today and if they remind them of any time in the past, they said “Troubles that begin in one area, usually spread to others.” “I can’t remember in my lifetime, shockwaves being sent out like these.” “Some stupid things won’t be repeated quite the same way, but the primal urges will pop up  like desire for leverage, and belief in the tooth fairy!”

When asked about other good books, they referred us to Larry Cunningham who rewrites a lot of Warren’s principles.

When asked what their the biggest influencers had been, they said father, wife and books. Warren added about Charlie – Ben Franklin. They advised, “Teach your kids by what you do not what you say.” Warren said he visited he father’s office often when not in school and read all his business books. “Look at effective human beings, see what their qualities are, and copy them – don’t take the bad qualities from anyone.”

When asked about any last words, Charlie said he would like Berkshire Hathaway to have influence on other companies.

REFERENCES SUPPLIED BY: Christine Harvey – author of  In Pursuit of Profit, an international best seller, published in 8 languages and used by corporations and Institutes of Management around the world.

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Why not forward this to another person who can benefit – you’ll be helping them AND the economy at the same time.

More Buffett points below from EconomyGuy.com
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By Tom Harvey

Hi EconomyGuy readers,

Special Re: Berkshire Hathaway Shareholder Meeting, Saturday May 3 in Omaha

Here are the highlights as I saw them at the Berkshire Hathaway shareholder meeting.  There were 31,000 attendees with about 5 hours of questions and answers from any shareholder to Warren Buffett and Charlie Munger.  This was highly informative and entertaining, as not only were their answers refreshingly straightforward and honest, they were also amusing.

1. About the liquidity crisis - Warren states that while it is probably over, disruptions will continue. The FED action with Bear Stearns was the high water market in the crisis.  Warren Buffett was asked to take over Bear Stearns before JP Morgan was asked to.  Warren’s reasons for not doing it was stated to be that he didn’t have enough cash (he only had $35B of the $65B required) on hand.
2. If Bear Stearns had failed on the Sunday it was taken over by JP Morgan, it would have had to declare bankruptcy. It held $14.5 Trillion in derivatives that would have been unwound in a very short period – think 2 weeks.  That would have resulted in 1 or 2 major other failures.  This is why the FED acted so decisively, and changed their rules that day.
3. A great book to read on investment is “The Intelligent Investor”, chapters 8 and 20. (I have personally purchased this book, and intend to study it – perhaps with you.) He mentioned it several times during the meeting and said it was the book that opened his eyes to investing.
4. What is the stock market future?  Warren states emphatically that he has no idea.  He and Charlie are not in that business, and never discuss it.  He is only interested in buying low priced businesses, and considers his buys a long term hold.  One exception was a Chinese power company that he bought low, and sold at a fair market value a few months later.
5. When he buys a company, he retains the current management.  He has no contract with the CEO of the business, but gives lots of appreciation.  He looks for managers with lots of passion for their business.  His cookie cutter business is a privately owned business where the owners want their cash out, but want their company legacy to continue.  Berkshire Hathaway is the perfect solution for them. In fact, he is traveling to Europe in two weeks to speak to business groups and thereby solicit interest mainly from large, multi generational, family owned businesses. He wants to get on their radar screen, so that when they get ready to sell even years in the future, they will think of Berkshire Hathaway first. He stated his interest in German companies, because of their quality machinery, much of which works it’s way into the US, such as printing machinery.
6. Does Warren Buffet use stock options?  Basically, no, he just doesn’t use them.  He used one once as a Put on Coca Cola.
7. MBA schools should concentrate on teaching just 2 things.  First, how to value a company, and second, how to value stock market indices.  He also thinks MBA schools don’t provide enough communication skills like public speaking. He was so frightened of public speaking that he signed up for a Dale Carnegie Course and then canceled his deposit, later went back and paid cash so as to not back out. He advocates fighting fears and progressing in areas of fear by getting a support group around you, such as the Carnegie Course did for him.
8. Berkshire Hathaway won’t produce the same results it has produced in the past. It is just too large to grow at the same rate as it did in the past.  It will continue to buy companies, and these will be great investments, but you can only invest that one company’s worth at a time, and now Berkshire has much more money to invest than that.  The inability to invest all its income in great companies is the major slowing process in Berkshire Hathaway’s growth.
9. High CEO salaries are ridiculous in US industries.  His recommendation on how to stop this practice is to have the top 5 shareholder groups unite in communicating to the board of the top companies to stop this practice. He likes to lead by example. He takes little in salary, thus the CEO’s of companies he’s invested if see the example. Most are independently wealthy anyway.
10. Warren does not do “pairs” trading where he buys one stock long, and shorts a related stock.  The odds are you will get 4 pairs right, and one wrong.  The wrong one will wipe out the profit of the 4 good trades.  So, why do it, he says.
11. There have been huge market dislocations in the Tax Exempt Muni Bond market. There is $330B of these bonds out there.  Currently, Berkshire has $4B of these bonds.  The dislocations show up as major swings in the interest rates offered for specific municipal bonds.  He cited examples of the same bond selling at a 4% interest one week, then 8%, 10% and 11% the next week.
12. Berkshire Hathaway did re-insurance in the Municipal Bond market during the first quarter 2008, and received $400M premiums.  This insurance insures the primary insurer of the bond, so both the underlying bond issuer and primary bond insurer would have to default before the Berkshire Hathaway insurance paid out.  This business started out of the blue, as people came to Berkshire asking for their help.  With the Berkshire insurance attached, those bonds now trade at a lower premium than those without their insurance.
13. Here is what Warren looks at when he buys a business.  He looks at the asset first.  He must understand the business, so he can value its future.  He tries to buy at 40% of value.  He wants lots of free cash flow from the business.
14. Regarding the current US exchange rates.  The Euro and Pound won’t depreciate against the US Dollar in the long run.  The US Dollar will continue to weaken over the next 10 years.  There is no need to Hedge against a falling Dollar, if you are in a Dollar economy.  Warren doesn’t like to purchase a company that has all its income in US Dollars – he would like to see some of the income coming from non-Dollar sources.
15. Investment Banks can’t assess or appreciate the riskiness of their own business.  This is a major risk to those industries as proven by the Bear Stearns debacle.
16. Fannie Mae and Freddie Mac are overseen by a government organization called Otheo.  The only job of this organization is to oversee these two companies.  It failed 2 for 2 in its job, as clear misrepresentations in both companies occurred.  This was a clear failure in a government oversight organization.  Warren was basically disgusted by this.
17. The US Government needs to “reign in Investment Banks.” Also, “US accounting standards are all wrong.”  Companies can choose how they value their assets.  For example, they can choose to estimate their current market, or they can choose to report what they paid for the asset.  Think about the sub-prime mortgage security instruments in this context.  This accounting problem is still happening today.
18. Charlie Munger defined some securities out there as “good until reached for”.  This refers to paper assets, meaning they had value until someone tried to actually cash them in, then their value disappeared.
19. The Credit Default Swaps (CDS) market on Wall Street is a “crazy market”.  It absolutely need to be regulated by the government.
    

In short, I would highly recommend attending this shareholder meeting next year. I enjoyed recording the key thoughts on your behalf, but a personal visit would be good. Perhaps we can even organize an EconomyGuy.com members cocktail party for next year! We had 6 friends here to brainstorm after the meeting and it was extremely useful. My wife Christine and I thought of several business ideas to pursue, based on Warren’s comments. Tonight we are off to a special restaurant that Warren frequents and expect to glean more ideas here from Warren and the attendees.

More later,
Tom
EconomyGuy.com