The Berkshire Hathaway Annual Meeting
Below are a few words of advice from Warren Buffett and Charlie Munger yesterday at the Berkshire Hathaway annual meeting. Business owners and investors should make a point to attend a Berkshire annual meeting sometime. There are not that many opportunities in life where there are six hours of intelligent questions and answers about business that always generates nuggets of wisdom relevant for business owners and investors.
This year at the Berkshire meeting yesterday was no different. Many of the thoughts and concepts expressed by Warren and Charlie are ones that we have heard from them before, but it never hurts to hear some of them again. Here are some observations from yesterday’s meeting:
In giving an answer to a question about why he bought the Omaha World-Herald, Buffett said that shareholders should not be surprised if he buys more newspapers. This is very different from a few years ago when he said on a Charlie Rose interview when the Wall Street Journal was for sale that he would never buy another newspaper. He must be seeing adaptations in the newspaper business model that makes him comfortable buying newspapers with a strong local competitive advantage despite the negative impact of the Internet.
Reminder Thoughts on the Culture of Berkshire Hathaway
“We cannot put passion into someone, but I can create a structure that takes the passion away from them,” said Buffett on why he creates a culture where his business managers can “paint their own canvas” and “we do not want to do anything that erodes the feeling of the acquired business being their [the manager’s] business.”
On how involved they get in acquired businesses: “If we thought the success of an investment depended upon the company changing or taking our advice, we would move on to something else,” said Buffett. At another moment, he expressed how they do not expect management to change post-investment — they want them to continue doing exactly as they have been doing.
At Greybull Stewardship, we also allow the management in our investments to manage their companies as they want to manage them.
Berkshire’s Focus on Being Fair to Shareholders
Berkshire’s stock has been trading at a very low valuation lately, and many questions revolved around what Buffett could do to increase the stock price. Buffett and Munger seem hyper-cautious about buying back Berkshire stock from shareholders because they do not want to be seen as taking advantage of shareholders and buying them out at a low price. In answering one question that a shareholder would prefer that Berkshire buy back Berkshire shares at a valuation of 1.15 to book value rather than invest in some of the public companies that Berkshire has done recently (at valuations of much greater than 1.15 to book value). Buffett responded, “I agree, as a financial person. As a fiduciary to shareholders, however, I am reluctant to do that.” While Buffett is probably being more than fair and generous to existing shareholders, he has built his reputation as a not putting his interests ahead of shareholders and I understand why he would make great effort to maintain that reputation even with this decision that would clearly be a good financial decision.
Valuation of Purchase of Burlington Northern & Use of Stock in that Transaction
Prior to the Burlington Northern acquisition, he had expressed a high reluctance to use Berkshire stock in an acquisition, particularly when the Berkshire valuation was not super high. Therefore, I and many other people wondered why he paid for 30% of Burlington Northern using Berkshire stock. For the first time that I have heard, Buffett said that he was very reluctant to use Berkshire stock but thought it was worth it in this case. Yet, the Burlington acquisition price still seemed high, right? He explained that he was looking at the valuation in relation to the replacement value of all the fixed assets rather than only as a multiple of earnings. By the way, all indications are that Burlington Northern is performing very well for Berkshire.
To Buffett, “understanding a business” does not mean understanding what it does, it means “having a fix” on what the earnings and competitive advantage will be in five years.
On risk: “Never risk what we have and need for what we don’t have and don’t need,” said Buffett.
On judging managers: “We are more concerned with how a track record is achieved than the track record,” said Buffett.
“We buy barriers to entry, we don’t build them,” said Charlie Munger. “One competitor is enough to ruin a business.”
“The business of private equity is selling businesses, not buying them,” said Buffett.
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