2012 Berkshire-Hathaway Annual Meeting

This year, I had the good fortune to score four visitor passes to the Berkshire-Hathaway meeting from a coworker who couldn’t use them. It was held at the CenturyLink Center Omaha, which also hosts events like the U.S. Olympic Trials and the NCAA World Series. About 40,000 people came, which is roughly equivalent to the population of last year’s Burning Man. Aside from middle-aged and older folks (the more typical long-term investor), there were business students in slacks and sheath dresses and young sunburned kids in shorts and loose T-shirts. The attendees were mostly white, tall, and Midwestern-looking, with the exception of the business students.

My boyfriend and I arrived on time, but not early enough to secure a good seat. From our vantage point, Warren Buffett and Charlie Munger were each about the size of my thumb. Fortunately, their faces were captured on massive screens placed throughout the auditorium. On their table was a box of See’s candies, and there was a See’s lollipop in every seat. The meeting began with a movie, which mainly consisted of commercials for Berkshire companies, with occasional moments of hilarity. The highlight of the movie was a scene involving Buffett’s secretary, Debbie; a frazzled Warren fielded calls while Debbie preened and held media interviews. (Debbie famously pays a higher percentage of income tax than her employer does.) Another memorable but perplexing segment involved Buffett leading the University of Nebraska football team to victory against a team of robots, led by Herman Cain. (A Google search reveals that Herman Cain opposed the “Buffett Rule“, which would increase income taxes on the very wealthy.)

The remaining five hours of the meeting — what we had come for, really — consisted of an unscripted question-and-answer session. Half of the questions came from members of the press, and the other half came from shareholders. It was impressive to watch Buffett and Munger in action; their ability to quote statistics and recall minute details about their underlying investments without the aid of computers or notes was unlike anything I’ve ever seen. (See below for my notes.) I was also impressed by their honesty — when asked about China or the tech sector, they admitted that these were areas of the investment universe that they didn’t know anything about.

The rest of my visit was pleasant. Despite the influx of attendees, Omaha remained comparatively tranquil, almost dead in places. Even in the Old Market, a popular dining district, we managed to escape the everyday agony of waiting in line at a restaurant. I marveled at the wide, weathered-looking sidewalks, and the cheapness of a one-bedroom apartment (a range of $450-$700, per Craigslist). Our only misfortune was staying at a cheap motel, where I may have suffered bedbug bites. (To be clear, there have been plenty of bedbug reports about that hotel and even the floor where we stayed, but I never directly spotted any bedbugs. But the scars remain.)

Berkshire-Hathaway Q&A Notes

Q. “Will the next CEO of Berkshire also be the Chief Risk Officer?”

A. Yes, Buffett has long believed that the CEO should also be in charge of risk, and his successor will be just as capable. He & Munger have seen other companies with separate risk departments; they generally do not agree with this practice. [They do not seem to have much faith in mathematical ways of quantifying risk, though, and mock VaR and other things taught in b-school.]

Q. “Do you have any advice for new Chinese leadership and CEOs?”

A. Not really. Buffett says China has done “very well from a rough start”; we should probably ask for their advice instead. But in general, advice-giving is useless. Munger says “it is amazing how little influence we have” over Berkshire investments. Buffett says that he talks to the CEOs of their four largest investments twice a year, if that. He lets them do their own thing; if he thought that a portfolio company needed his advice, he’d go buy another company instead.

Q. “What is the difference between European and American banks?”

A. They are “night and day”. American banks are better than they were 4 years ago. They have taken most of their abnormal losses and increased their capital reserves; they have a great deal of liquidity. They are in “fine shape”. When US bankers were forced to take capital, Buffett thought the Fed was “overdoing it”, but actually the policy proved to be right. European banks, on the other hand, were reluctant to raise capital because they didn’t have as much as access to customer deposits as American banks. At long last, they recapitalized when Draghi opened his wallet (1T euros, or about 1/6 of American bank deposits, for 3 years at 1%). Munger points out the lack of a fiscal union in the EU as being a major structural issue. Buffet says that “when you get 17 countries that surrendered their sovereignty as far as currency is concerned,” the result is generally indecision.

Q. “Do you view any tech companies as inevitable, such as Google or Apple?”

A. Buffett says that they are both great companies, hard to dislodge, and have great returns on capital. He doesn’t have the conviction to buy either company, but he wouldn’t short them. Munger says that they have the “opposite of an edge” in the technology sector. “What do we know about computer science?”

Q. “What is the outlook on coal and natural gas investments?”

A. We are still very dependent on coal; it is key to all railroad traffic, heating, etc. Now natural gas is trading at a 50:1 ratio to coal, which is “crazy”. Buffett seems to think that natural gas will supplant coal, but it will take some time.

Q. Question about sustainable energy policy.

A. Buffett says that they are much more invested in wind power than solar, but that in general, a federal subsidy (2.2 cents/Kwh) is what makes wind projects work. Subsidies are the only reason why these projects make any sense. One problem with windpower: “just because the wind isn’t blowing doesn’t mean everybody wants to have their lights off”.

Q. “Will increasing U.S. energy production improve the trade deficit?”

A. Buffett and Munger seem to be divided on this. Buffett says that it’s good if we become energy-independent; we can’t be self-sufficient in oil, but maybe in gas. The energy picture has changed for the better, but we still have a ways to go. Munger seems to disagree. Energy independence is “ridiculous”, the U.S. should use other nations’ energy supplies and conserve its own. We need to leave precious natural gas for our descendants. If we’d become energy independent earlier, there would be nothing left now.

Q. “What should we do to get America growing by 4% again?”

A. Buffett thinks that 4% would be unrealistic. He would be happy with GDP growth of 2.5%/year and a population growth of 1%/year. Over the course of five years, that would be “remarkable” for the economy, and “huge” over a lifetime. Even if inflation-adjusted GDP growth were just 1%, each generation would still be a quarter richer than the previous generation.

Q. “How many years can Fannie Mae and Freddie Mac spend in conservatorship?” (part of an extremely long rant by the questioner, who seems to disapprove of the current mortgage market)

A. The two agencies are “a mess”, and we have no agreement on the best structure to finance mortgages. Though a government guarantee helps to reduce the cost, the agencies “went wild when they added a profit motive.” The housing mission was outweighed by a profit mission. Buffett thinks the agencies will be stuck in conservatorship until the government reaches a resolution on its future mortgage financing policy. Munger points out that Canada kept responsible mortgage lending standards and had no problems.

Q. “How do you determine executive compensation and how do you motivate your executives?” (question goes on to ask about investment managers Todd Combs and Ted Weschler).

A. Buffett says that he loves what he does every day, and is happy to “paint his own painting” in the morning. No one hands him a paintbrush and tells him to use blue paint; he paints it however he wants. If it works for him, then why not others? Combs and Weschler already have enough money to retire on, they are doing what they do because they love it, and they have the autonomy that they desire. Munger says that “prostitution would be a step up for” compensation consultants.

Q. “What should I learn in business school?”

A. You only need two classes: one about valuing a business, and one about markets. Business school teaches students “one fad after another” and is “very mathy”, but you don’t need classes about modern portfolio theory or option pricing, they say.

Notable Quotes:

“What do we know about computer science?”

“[Munger and Buffett] have never had an argument in 53 years.”

“You can’t bring a job back if it never left” – in response to a question about Buffett bringing Berkshire jobs back to the U.S.

“Really, it’s a non-event. I’d be more worried about getting shot by a jealous husband.” – in response to a question about Buffett’s prostate cancer diagnosis.

“CEOs shouldn’t have their citizenship restricted.” – in response to a question about Buffett’s recent outspokenness on income taxes on the wealthy