Berkshire Hathaway Annual Meeting Notes for 2014
For those you have not attended a Berkshire Hathaway annual meeting, picture this scene at the 2014 meeting.
A stadium is filled to its capacity of 30,000 people with another 8,000 in overflow rooms at the adjacent conference center and hotel. For nearly six hours, Warren Buffet (age 83) and Charlie Munger (age 90) answer questions from three journalists, three analysts, and shareholders in a rotation. Over 60 questions are asked. I have been attending the meetings consistently since the 1990’s.
At this year’s meeting held on Saturday, here are some of my notes from this year’s question and answer session.
- Why no Berkshire copycats? At one point, Buffett turned to Munger and asked Charlie why he thought there weren’t more copycats of the Berkshire strategy. This is a great question, particularly because Buffett and Munger are so transparent about their strategy and actively attempting to educate others about what they are doing. The answer from Munger was that he thought their strategy looked very difficult to others. Buffett added that he thought it appeared to be too slow for most people. Both of those are true.
- To expand upon the comment about its difficulty, I believe the investment decision-making part is not that difficult to execute — it is not complex now that Buffett and Munger have explained it for decades. What is difficult is putting oneself in a fund structure and situation where one is able to pursue the strategy. This is because the entire infrastructure and systems of investment management are not set-up to support the Berkshire strategy.
- How does the 3G culture fit with Berkshire? There was plenty of discussion about the private equity firm 3G with whom Berkshire partnered to acquire Heinz. 3G is known for their extremely hands-on strategies of removing costs and adjusting the strategies of the companies they have been involved with — most notably Burger King and Anheuser- Busch. For me, this is an example of how Buffett is confident with the Berkshire decentralized structure and strategy, but he is flexible enough to implement other strategies where it makes sense.
- Buffett said that while he admired the 3G culture and strategy, it would not mesh well with Berkshire’s operating companies. “The blending of the two cultures would not work very well,” said Buffett.
- “Removing unnecessary costs is a service to civilization,” said Charlie Munger about 3G.
- They also recommended the book Dream Big about the 3G team.
- Why does Berkshire conglomerate work when other conglomerates do not work? There was another great question about why the Berkshire ‘conglomerate’ has been successful when most conglomerates through history have not been successful. To this, Buffet answered, “Owning a group of good businesses with outstanding managers, that are diversified, where we can allocate capital tax efficiently among companies, and that are conservatively capitalized is not a bad business plan.” He continued to say that what is not successful is when conglomerates become “perpetual chain letter schemes of buying companies with stock” and basically focus on consistently promoting the stock to have a currency to make acquisitions. Buffet said, “It needs to be done without stock promotion qualities” Munger added that he feels Berkshire is a lot like the Mellon Brothers and that they only buy things when it makes sense rather than a perpetual buying machine that many conglomerates are/were.
- Scrambling out of bad situations. Munger made an excellent and interesting comment that one reason he thought they were successful was that they were able to “scramble out of bad situations” that he mentioned included owning the terrible Berkshire textile business, a terrible department store, and something about a changing environment at Blue Chip Stamps. I would add that the Salomon Brothers example and the General Re example should also be included. It seems that all investors will find themselves in bad situations and being able to scramble out of them is very helpful.
- Larry Bird strategy for picking an agent. Larry Bird asked every agent that if they didn’t get the job, who else would they recommend. When Buffet was young and researching companies, he would ask each CEO which competitor they would most want to “put their entire net worth into if they had to” and which one they would short. They also used this strategy in selecting a new Salomon Brothers CEO at the height of that crisis.
- Ignorance removal is something we are pretty good at, says Munger. He made the point about how they keep learning and that there is a lot more ignorance yet to remove. He credited See’s Candies with giving them the insight needed to make the Coca-Cola investment several years later after some ignorance had been removed.
- Berkshire’s decentralized strategy. The fact that Berkshire defers to the operating managers on everything except capital allocation is always a big topic, and this year was no different.
- Someone asked about their policy on cash at subsidiaries. Buffet said that “he knows where it is and can go get it when he needs it” but that they don’t have any regular policy to sweep the cash from subsidiaries and they like the culture among the managers that this policy creates.
- Buffet is also very aware of how their decentralized strategy can create issues. Every year, he mentions how Berkshire has 300,000 employees and someone, somewhere is doing something wrong. He tries his best to convey how they don’t want to lose “a shred” of reputation but he acknowledges the risk.
- So, Buffett said, “There will be times b/c of our lack of oversight, we will miss something. There will be individual cases where we look bad because we could have prevented something by having more oversight. However, we also get much on the positive side b/c we give them leeway. On balance, we think it is a benefit.” Munger added that “in the standards of the world, we over trust. We operate with a culture of deserved trust.” He made the point that is a more enjoyable way to operate.
- They continue to tell the world how this decentralized strategy is key for them in acquiring new investments. When someone has built up a business over their life, they “don’t want to turn it over to a bunch of MBA’s who want to show their stuff.”
- With regard to expenses, their philosophy is to “encourage leanness by example versus edict.”
- Cost of Capital Discussion. Business school professors are often favorite punching bags of Buffett and Munger as they have criticized severely over the years the capital asset pricing model, efficient market theory, beta as a measure of risk, stock options, and more. This year, they made fun of how people measure their cost of capital, basically saying that various measures don’t makes sense to them. They simply use the idea of opportunity cost of looking at their next best idea.
- Bet of S&P 500 vs. Hedge Funds. Buffett took obvious delight in reporting that the S&P 500 index has returned 43.8% since 2008 while a fund of hedge funds has returned only 12.5% in the same time period. This is a bet that he made for charity that was sponsored by the Long Now foundation. Depending upon whether the S&P or hedge funds win after 20 or 30 years or something, one party gets to donate $1 million to their favorite charity.
- Returns at Utilities. It is obvious that they want to invest more capital into the railroads and utilities and they are comfortable that the regulatory bodies will allow them to “earn 11.6%”, as Greg Abel said, on the capital they invest in those businesses. That isn’t great if they have 20%+ opportunities, but certainly better than bonds and cash today.
- On activism by hedge funds, they believe this will continue to grow. They said this would be bad for society, but I suspect that the more craziness that happens in the public markets, the more it will help Berkshire.
- For future Berkshire investments, they have made it clear that they are focused on buying whole businesses rather than investing in the stock market with the bulk of their available cash. They said that value creation for private companies “is a slower build and more enduring, and the changes in value are not obvious” in the financial statements than public market investments that can rise in value rapidly. Plus, they have difficulty buying large enough positions in public companies that will make a difference to their returns.
- On the activities of boards of directors, they both made a point to emphasize the social aspects of being on a board.
- In particular, Munger emphasized how people should pick their spots to voice their disapproval. He said that one doesn’t accomplish much if you are shouting too much. Buffett added that it’s not only pick your spots but how you do it. “If you are belching at the dinner table, it is not long before you are eating in the kitchen,” said Buffett.
- Very bullish in Berkshire’s value today and in the future. They made it plainly clear that the would not invest their own money anywhere else other than Berkshire, that the Berkshire collection of companies will be strong well into the future, and that they believe the Berkshire brand will outlast Buffett and Munger. Munger said, “you young people out there, don’t be too anxious to sell Berkshire.”
- The table in the annual report comparing the S&P to Berkshire’s book value. Munger came out swinging saying that is “made no sense” because Berkshire’s book value is after-tax while the S&P 500 is pre-tax. Munger said that Buffett just wants to wear a “hair shirt” and make things difficult for himself. Buffett did not defend the practice and really didn’t say anything in response to the question.