Sunday, May 6, 2012

Berkshire Hathaway Annual Meeting Notes (of Notes) 2012

OK, so I was not there but since the information is all over the place on live blogs and things like that, I thought I'd just sum up some of the things I've read including things I've heard on interview clips on places like CNBC, Fox Business News and others.

Most of the actual meeting notes are stuff I jotted down reading through the live blog at the Wall Street Journal, New York Times, Motley Fool and Morningstar (I read this last night so not in real time).  

It's just so much reading I thought it might be useful to just write quick notes on what was said.

This may not be in any particular order, and a simliar comment might be repeated elsewhere as I just jotted down notes reading through various sources of the meeting.

Also, these are notes of notes, so may not be entirely accurate and is not necessarily meant to be a comprehensive summary.  Anyone who has played the telephone game (with kids or as kids) knows how things can get really inaccurate further away from the source.  Surely, there will be better notes dribbling out over the next few weeks (I remember we used to have to wait MONTHS for it to come out in Outstanding Investor Digest; that was almost word-for-word, I think, but six months (?) later).

Buffett feels great.  Cancer is a non-event.  Munger said he doesn't even allow PSA test on him and may have bigger cancer than Buffett does.

Buffett said GEICO is worth far more than tangible book.  Perhaps $15 billion more.  Another comment said Buffett said GEICO has an intrinsic value that is significantly greater than it's net worth and it's float.  He wouldn't say that about all the insurance businesses that they own.

Political Dialogue of CEOs
He was asked if he should talk less about politics (taxes).  The question got applause from the audience but when Buffett responded that he doesn't feel anyone should have their citizenship restricted (or that he hasn't rescinded his citizenship) there was even louder applause.   Those that don't want to own BRK because of his political views may want to won Fox instead.  Buffett said he doesn't know the political views of the CEOs of companies he owns large stakes in.

Almost Did $22 Billion Acquisition
Buffett considered a $22 billion deal a month or two ago.  He would have had to sell some stocks to get the deal done and he didn't want to do that.

Purchasing Run-off Books in Insurance
Will look at but won't make assumptions that include any return higher than risk-free rate.

9x Pretax Earnings
One live blog note said that he would love to buy businesses with similar characteristics to the ones that Berkshire owns for 9-10x earnings.  It didn't say whether this was pretax or net. In the past, I think Buffett has said he will pay 10x pretax.    In a video interview, one portfolio manager said that Buffett said he would pay 9x pretax earnings for businesses similar to what they already own.

That's a nice benchmark to value businesses and BRK too.   Of course, this is not intrinsic value. It's what Buffett would want to pay (and Buffett wants to pay less than intrinsic value).

Berkshire Valuation
There was a question regarding the cheapness of the stock.   Munger/Buffett said they don't care about the stock price; let the market serve you, not advise you etc...    Buffett said that BRK has traded at above intrinsic value and way below intrinsic value at various times in the past.  One note said Buffett said it traded just as often above as below intrinsic value.

Someone asked why he didn't warn people when the stock was above instrinsic value (2x book) and he said that in the prospectus for the B-share offering, he said that neither Buffett nor Munger would pay that price for the stock.  He said that is a collector's item.

Munger said that Amazon will be terrible for a lot of retailers.  Not slightly terrible, but really terrible (or "hugely" terrible according to another note).

Walmart Bribery Scandal
Buffett said Walmart made some mistakes but the scandal doesn't change the fundamental attractiveness of the business.  Earnings power five years from now not materially different because of this.

Railroad Capex
BRK will invest a lot in the railroad business, far more than depreciation expense.  They will be happy if they can earn 12% on the large amounts of capital they deploy.

MidAmerican may have opportunity to deploy $100 billion over the next ten to fifteen years at very reasonable rates (of return), Munger said, which is another reason there will be no dividend.

Energy Independence
Munger said that energy independence is the most ridiculous idea he's ever heard grown people (or adults) discuss (my comment: even worse than ethanol?!).  He says that the U.S. should import and use up other country's supplies and conserve our own.  He also said using natural gas is dumb too, that we should use up our thermal coal reserves first.

Both are huge companies with high returns on capital and tough to dislodge.  Buffett wouldn't be surprised if they were worth significantly more five or ten years from now, but can't get to the level of conviction needed to buy the stock(s).

New Investment Managers
Buffett/Munger very happy with new managers.  BRK hit a home run with these hires.  Buffett is happy with their returns so far.  Each get a fixed salary of $1 million, 10% of outperformance versus the S&P 500 index on a three-year rolling basis.  80% of the performance bonus will be based on their own return and 20% will be based on the return of the other.  They now each manage $2.75 billion, up from $1.75 billion.

GDP (or GDP per capita) went up 6-1 in Buffett's lifetime.  2.5% real GDP growth is remarkable growth for this country.  Munger says real GDP over the next 20 years in this very mature economy with a lot of social safety nets and lots of competition from foreign countries is 1%/year.  Trying to get more than that is asking for trouble.

The country is not broken.  The politics is, but not the country.

Even though we all know what he's going to say, people keep asking Buffett about the possibility of a dividend.  He says shareholders would have been better off selling 2% of BRK every year than BRK paying a 2% dividend yield.  As long as he can keep investing for good returns and a dollar retained is worth more than a dollar paid out, they will not pay a dividend.

1.1x P/B Ceiling
Buffett doesn't think the share repurchase price of 1.1x book value sets a ceiling on the stock price.  Some have argued that if Buffett will only pay 1.1x book, why would other investors, particularly value investors?  And if they don't pay more than 1.1x book, how can the price ever get above 1.1x book?

Buffett disagrees with that view. It won't set a ceiling.  Mr. Market will be Mr. Market.

Buffett said that U.S. banks are in good shape.  The Europeans aren't in good shape, though.  They really had a liquidity problem which the ECB has resolved, but they still do have a capital problem that hasn't been addressed.  The U.S. banks though, thanks to Bernanke and Geithner are in fine shape.

Personal Investments
He was asked about his personal investments; he owns JP Morgan (personally but not for BRK).  He says he likes JPM but likes WFC better (easier to understand).  All of his best ideas are in WFC.    He said he also owns some Korean stocks in his personal portfolio.  But shareholders should be assured that the best ideas are in BRK.

Successor CEO
Buffett was asked about the risk-management capability of his successor.  He said that no candidate would NOT have a risk-management capability.  He said the board has good risk management skills.  All CEO's must be risk managers.  Those that delegate risk management get into trouble.

He also said the next CEO can be better in different ways.  He may not get the BAC/GS/GE-type deals, but he will get others.  The GS/GE-type deals are just peanuts compared to his investments in KO and IBM, for example, which are just open market purchases of stocks.   So it's not an issue.

Corporate Taxes
He said corporate taxes are not an issue. There is plenty of capital.  Higher rates won't have an impact as the U.S. did fine in the past with higher tax rates.  The tapeworm of the U.S. economy is medical expenses which runs 17% of GDP.  This is a problem as it is much higher than other countries.

He said he wouldn't make judgements based on short term price movements.  BRK was $15/share and gold was $20/ounce when Buffett took control of BRK.  Now gold is $1,600 but BRK is $120,000.

Buffett says he thinks many gold supporters are more emotional than rational about the metal and don't like it when he criticizes it as an investment that doesn't generate any wealth.

Minimum Wage
This was in a video interview after the Q&A session, but Buffett said that he is against an increase in the minimum wage as it will take people out of the work force.  To the extent that people don't have the skills to earn more, they will be forced out of the job market.

In an interview after the Q&A session, he said that housing will turn.  It won't be five years from now or three years from now (implying it will be sooner).  He said that he tried to call the turn before and was dead wrong so he won't put a date on it but the housing market will turn.

He said that the housing related BRK businesses are turning very slowly (small uptick).  He said he spoke to the head of Clayton Homes,  a BRK subsidiary that is the largest maker of manufactured homes.  Clayton homes made 50,000 homes last year and will make 60,000 this year.  That's a meaningful improvement and next year could be considerably higher.

That's it for now.  We will see and hear more this coming week. 

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