Monday, May 6, 2013
2013 Berkshire Meeting Notes Compilation
"Overall I would advise any young person who wants to manage or invest money to have an audited track record as early on as possible,"
"To attract money, you should deserve money... Record is a product of sound thinking."
Munger says most people start with friends and family. "It's hard to do when you are young and that's why they start so small."
Warren: You'll see it again, not necessarily in housing. Humans make the same mistakes again. People get fearful when others are fearful. You saw it in money market funds. I've often thought, if I owned a bank in a two-bank town, I'd hire extras to line-up in front of the other guys bank. But then, the extras would come over to my bank, after the other one went down. This is an area where Charlie and I have an edge. We don't get caught up in what other people are doing. We learned that over time, maybe. When we see failing prices, we think it is time to buy. We don't own on margin. Don't get out on a limb. Leverage is tempting when things are going up. Leverage was a huge part of housing.
Q: What would you tell your 30 year old self?
Munger: Be boring, stay rational and work where you are turned on. I've never done well in a job I didn't enjoy.
Q: if buying shares in the 20 best companies in the United States would be better than investing in an index fund.
Buffett: The results would probably be similar. Then he launches into a bigger point: there are professional investors, and then there are amateurs who invest. Being the former requires a lot of work and research, which many, many amateurs don’t have the time or inclination to do.
The main problem for most people, he says, is “trying to behave like a professional when you aren’t spending the time in the game needed to be a professional.”
Q: What identifies fraudulent financial statements?
Warren: It varies over the years. We can't identify 100%, 90%, 80%... but people give themselves away. In poker, its called tells. We try to assess the individuals that we're dealing with. We don't think we can assess everything accurately. But we try to be right when we make a buy. In looking at financials, for example, in insurance, you can see things done with lose reserves. Before offering stock to the public, reserve would mysteriously go down. I've seen how promoters act. You can spot certain people that are playing games with the numbers. I can't give you a 40-item checklist.
Munger's assessment of BRK's competitive advantage is a template for its success - Recruit well, buy well, and let people do their thing. Stay rational - easy to say for a little while, but so many get sucked into irrationality due to the weight and time and probably intense public scrutiny.
What BRK does is not unique or are they the only one who does so. In the book, "Outsiders," which showcased 7 or 8 highly successfully run businesses that are run by outstanding CEOs, that handily beat market and industry returns during their tenure, also employed the tricks that BRK practices! So these practices is similar to how the trick of value investing can be attributed to the village of Graham & Doddsville. No luck but skill!
Some people probably though I was running a Ponzi scheme, Buffett said of his early days investing other people's money. "Didn't you manage to scrape together $100,000 from your loving family?" Munger asked. Buffett said they might not have loved him immediately after. In sum, however, Buffett said, young people wishing to make a living as investment managers should develop an audited track record and start slowly. Munger said do as Buffett did and start with family money.
Warren: I don't understand the moat around IBM as well as Coca-Cola. I'd have more conviction around Coca-Cola or Wrigley or Heinz. But, I feel good enough about IBM, and I put a considerable amount of money in IBM. Nothing precludes IBM and Microsoft both being successful. I like IBM's financial policy. Its hard for me to think of things that could wrong with BNSF. I could think of things that could go wrong. IBM has big pension liabilities -- it's an annuity business on the side. The liabilities and assets seem equal, but the liabilities are more certain.
Warren: The example of used in the past is, "The Meek will inherit the Earth, but will they stay Meek?" You'll notice that I don't tell our newspapers who to endorse to for president. When I write that , I'm trying to box in my successor. We don't want a CEO using Berkshire as a power base. We want it to be run for shareholders.
Charlie: Sometimes somebody becomes CEO, who has the characteristics of a famous Californian CEO about whom it was said 'he could strut sitting down'
Charlie: A lot of them aren't being fraudulent, because they're deluded. They believe what they're saying.
Warren: Berkshire is an usually rational place. We know what we want to accomplish. We've benefited from a long-run. We've avoided outside influences that pushed us places we didn't want to go. Insurance should be run rationally. Other insurers have had Wall Street pressure to increase premiums. At National Indemnity, we decreased premiums 80% -- I doubt another company answering to external pressure could do that. We have no external pressure, and that's a great way to operate. We don't have outside criticism, and there is no reason for us to do something stupid in insurance. We were major writers of natural catastrophe insurance years ago when the prices were good. We don't do it today because the prices are right. We didn't leave the market, it left us. We won't price at $0.90 for a probabilistic loss of $1.
Charlie: Sometimes it's pretty obvious. I was once introduced to a man who wanted to sell us a fire insurance company. One of the first things he said to us - with a thick accent... Eastern European, I think - said, it's like taking candy from a baby. He said, 'we only write insurance for concrete structures that are underwater'
Charlie: On the subject of Warren's operating methods. We didn't know when we started out that you shouldn't make a lot of decisions when you're tired, or that making a lot of decisions is tiring. We didn't know that consuming caffeine and sugar was helpful for decision making (laughter). It turns out that this is an ideal way to sit where Warren sits. He didn't know that - he just stumbled into it.
Charlie: I have nothing to add... but I do think knowing the edge of your own competency is important. If you think you know more than you do, you're in trouble. Works particularly well in matrimony.
Warren: but you know that BNSF will carry more carloads in 10 or 20 years. There will be no substitutes. There will be 2 railroads in the West, 2 railroads in the East... It's not complicated, they have assets... It's silly to ignore what you know because of things you don't know. Any sort of normal (new, in-between, old, etc) doesn't mean anything to us. If you get a good business, and the price is good, you'll do very well over time. If you try to time the market based on forecasts, you'll make lots of money for your broker.
Warren: We will get a decent rate of return (on the newspapers). Most newspapers were bought as corporations or partnerships, so we get to write-down the intangibles, which affects after-tax returns. Everything that we've seen to date indicates that will meet or beat 10% returns.
Buffett: the consolidation in the airline industry is interesting to watch, but he's not looking to invest. Airlines have very high fixed costs but very low marginal costs. Too much temptation to sell that last seat at a low price. If we ever get down to one airline with no regulation, then it will be a great business.
Munger: It's hard to create a new railroad, easy to create a new airline.
Charlie: I cannot remember an important decision that Warren made when he was tired. He sleeps soundly. He eats what he's always eaten.
Warren: We don't look at forecasts. We have never made a decision on a stock on a macro forecast. We don't know what things will look like. So why spend time talking about something you don't know anything about. So we talk about the businesses. I like Bill Gross. But it doesn't make a difference to me what he or any economist thinks about the future.
How do you not ruin your children, a shareholder asks?
Buffett: "More kids ruined by parental behavior than inheritance. Your children learn through your actions. It is important and serious job. The amount of money left by rich person is not determining factor how children turn out."
Buffett: There is virtually no correlation between book value and intrinsic value. Investors should care about intrinsic value. In Berkshire's case, book value is used as a very understated proxy for intrinsic value. At 1.2 times book value, Berkshire would be willing to buy back a lot of stock.
Warren: Todd and Ted, working under a 2/20 arrangement, if they put the money in a whole in the ground, would make a $120m each this year. Not exactly an arrangement you don't want to think about ahead of time.
Charlie: The arithmetic attracts the wrong sort of people.
Charlie: Letting in Greece into the EU is a lot like using rat poison as whipping cream - an exceptionally stupid idea. It's not a responsibly capitalistic country... a place where people don't pay taxes and committed fairly straight fraud to get into the EU.
Charlie:There's a reason why all that stuff is in the bible that you can't covet your neighbour's ass... it's a terrible thing to do. How much fun can you have being envious... it's the only sin there's no fun in.
Buffett: Generally speaking if you have a chance to buy a wonderful business, you probably should stretch yourself (on the price) particularly if a company can invest new money at very high rates of return.
Charlie: We're in a different mode now. That has a great lesson in that if we'd kept our earlier molds, if we'd never learned. We wouldn't have done so well. The game of life is a game of learning.
Munger: "You can't make a lot of money just knowing what is going on now."
Buffett: "And you can lose a lot of money thinking you will know what is going on tomorrow."
Buffett: Some jump out at you. A lot of it is based on figuring out how promoters act. They generally give themselves away. If you have doubts, forget it.
Charlie: When you multitask like young people do, you're unlikely to do anything well.
Buffett "When people get scared, they get scared in mass. They get greedy in mass. Confidence come back individually."
Warren: Whenever you hear people talk about concepts, for instance, country by country ideas, they are probably better at selling than investing.
Munger on the Fed's policies (low interest rate) : Well they had to hurt somebody, and the savers were convenient.
Charlie: You can have a CEO who's 9 out of 10 on almost everything, but some deep flaws too.
Buffett: Four or five times in the average lifetime, you will see incredible opportunities in the equity markets. You need the mental fortitude to take advantage of them.
Buffett: Individuals tend to get excited about stocks at the wrong time.
Charlie: The railroads consolidated, grew their profits and what did we do? We missed it. It's conceivable that Bill Miller is right. It goes into my 'too hard' pile.
If you try to time the market based on forecasts, you'll make lots of money for your broker.
Buffett on bubbles: "It works for a while. Your neighbor gets richer because he goes along. The bandwagon is hard to resist. We just don't give a damn. If they can make a lot of money day trading, good luck to them."
Munger: "We are boring and trite. Keep plugging, stay rational. The old virtues."
Charlie Munger's life advice: "It's trite, but the old-fashioned virtues still work."
Charlie and I have simple lives. We do what we love. We both like to read a lot. Charlie likes to design buildings