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Friday, May 10, 2013

Munger and Buffett: Wise Words with Peanut Brittle


The first weekend of May just passed. That means I was in Omaha to attend Berkshire Hathaway's annual shareholder meeting along with 35.000 other people including Bill Gates and George Lucas. The meeting always begins with two or three new humorous short films starring Charlie Munger and Warren Buffett, Vice-Chairman and Chairman of Berkshire Hathaway respectively. There is the same serious short film every year as well; Warren Buffett's 1991 testimony to the congressional committee on the Salomon Brothers scandal. The film has a famous line from Buffett," Lose money for the firm and I will be understanding. Lose a shred of reputation and I will be ruthless." I wish more firms followed this philosophy. See my summary of the 2012 meeting here.  

Buffett and Munger on the stage. See the peanut brittle? 
  
Both Munger and Buffett are my heroes. I like Munger more for his multi-disciplinary thinking. The meeting is inspirational every year. There were two differences this year. First, a short seller (traders who bet that the company is overvalued), Doug Kass, was invited to ask questions at the meeting. This may have been the first time this has happened in the history of corporate America. In most other shareholder meetings, questions are tightly controlled and there is no open Q&A session. Second, Munger spoke more at the meeting relative to previous years and he disagreed with Buffett a few times. The meeting is a great show and teaches you about business and life. If you don't know, Munger is 89 years old and Buffett is 82 years old. And, these two guys sit on the stage, eat peanut brittle, drink coke and answer diverse unscreened questions for five hours from the shareholders, journalists, and analysts. Fascinating! 

           Side view of the stage. See the Diet Coke?

See the Berkshire FY2012 financials and Buffett's letter in the annual report. Following are my random notes from the meeting: 

Book Value vs. Intrinsic Value 

1. The lifetime value [profit earned] of every GEICO [a Berkshire Hathaway company] policy is $1,500 [the point being that the book value of a company does not always capture the intrinsic value of the company and Berkshire's intrinsic value is much higher than its book value]. 

2. On May 2nd, 2013 Berkshire Hathaway was the 5th most valued ($264B) company on earth. 

3. Buffett has said for a long time that for any consecutive five years, Berkshire’s percentage increase in book value will surpass S&P's percentage gains (a calculation that includes dividends and price appreciation). For the last four years, S&P gains have surpassed Berkshire’s book value gains. If the S&P continues to do well in 2013 then Berkshire's streak of five-year wins will end. That would be the first time since 1965 [see page 103 of the annual report]. 

4. The main idea of management is to increase the firm's intrinsic value but that is not easy to quantify. Hence, Berkshire uses book value to measure progress. And, Berkshire is always willing to buy back its stock at up to 120% of its book value. 

5. Berkshire bought the remaining 20% (it already owns 80%) of Iscar last week for ~$2B and $1B was immediately taken off of Berkshire's book value because Berkshire paid ~$4B for 80% of the company a few years ago [Iscar was valued at $5B] so according to US accounting rules the rest of the company should have a book value of $1B [last week Iscar was valued at $6B]. Hence, book value gets distorted sometimes and does not always represent the true intrinsic value. 

6. The competitive advantage Iscar has over its competitor, Sandvik, is the brain power of its employees and their passion for the business. Munger said, "I have never seen robots and engineers working together so well anywhere else". 

Berkshire after Buffett and Munger 

7. Berkshire's culture will keep it going after Buffett and Munger are not there. 

8. Munger is confident that culture will stay alive because people who are running Berkshire companies  self-selected themselves into the [Berkshire] group. If a foreign body [bad manager] enters the system [Berkshire], the system will reject it. Just like the human body rejects a foreign body that tries to enter its system. 

Heinz Deal 

9. Earlier this year, Berkshire and 3G Capital bought Heinz for $28B. Berkshire paid a fair price for the deal and Buffett believes that the deal structure [Berkshire is buying $4B in common stock and $8B in preferred shares at a 9% dividend per year] is favorable to Berkshire. Buffett would have paid a little less if Berkshire was doing the deal on its own i.e. without 3G Capital because he believes in the management capabilities of Jorge Paulo Lemann. Having 3G Capital on the deal justifies the price. We will find out in five years how good the deal is. [I can tell you right now that it is a really good deal for Berkshire]

Insurance 

10. Generally speaking, reinsurance is not a good business but Berkshire has the right people and processes. That is why they are able to make money in that business. And, Berkshire wants to expand into the commercial insurance business. 

11. Different companies go about different ways in accessing the variables that determine the value of the insurance policy. Age is an easy variable to assess when writing a life insurance policy. For example, a 20 year old man should pay less for life insurance than a 100 year old man. For auto insurance,  a policy for a 16 year old driver should cost more than what Buffett would pay (Buffett is not trying to impress a girl sitting next to him like a 16 year old is). 

12. GEICO has a huge number of policy holders that provide data on how accurately the insurance writing variables were assessed. Hence, it does not need to add a new variable like Progressive's Snapshot [driving habits]. 

Social Media 

13. Accuracy and simultaneity are the keys to disclosure [from public companies]. Buffett thinks that the SEC's authorization that companies can use social media to disclose information will not have any ramifications on Businesswire [owned by Berkshire]. 

14. Munger said, "I avoid Twitter like the plague". Buffett said that he is not sure why he is on Twitter (@WarrenBuffett). 

Berkshire Performance 

15. Going forward, Berkshire cannot do as well as it did in the past. Size is a big factor [Berkshire is very big now so the opportunities to generate huge returns on a large amount of money are few]. However, it will continue to generate tremendous value. Looking back, there are a few other companies Berkshire should have bought 30 or 40 years ago. These companies are too expensive to purchase now. Munger said that Berkshire will do better than the giants of the past. 

16. Buying a very good business at a fair price is much better than buying a fair business at a very good price. Berkshire still follows this philosophy. 

US vs. China

17. China and the US will be the two super-economic powers in the foreseeable future. 

18. There is little chance of any other currency replacing US$ as a reserve currency in the next 20 years. 

19. Sooner or later every great leader is no longer the leader. It won't be the end of the world if US$ is not the reserve currency. 

US GDP and US Corporate Profits 

20. In 1999, Buffett said that corporate profits are 6% of GDP in the US and that is not sustainable. Today, corporate profits are 10% of GDP (including profits generated outside the US by US corporations). Buffett said that over the last decade business has come back much stronger than he expected in terms of profit [is it because Buffett did not anticipate the gains technology can add to a firm’s profitability?] but employment has lagged behind. 

21. Munger’s response to the relationship between GDP and corporate profits was, "just because Warren thought of something 20 years ago, it does not become a law of nature. There is no natural correlation between the two [GDP and corporate profits]". 

22. Although US corporate income tax is much lower today than 50 years ago, high corporate income tax could be a disadvantage to the US if other countries keep on lowering their corporate income tax rate. 

23. Both Munger and Buffett are in favor of higher personal income tax [for the rich]. Munger is a Republican and Buffett is a Democrat [a fine example of how bipartisanship can work]. 

Berkshire Organizational Structure 

24. Berkshire has a decentralized model of management [~80 operating companies owned by Berkshire have a lot of autonomy] unlike most other organizations which follow the imperialization model [centralized control]. 

25. A company should have at least $75M in pre-tax earnings for it to be considered for acquisition by Berkshire. 

26. Munger said that if what we were doing 20 years ago [buying companies and letting them run autonomously] was difficult then, what we are doing now would have been impossible. [Twenty years ago] people would have thought that it was crazy. How Berkshire is set up, it is not that difficult to run. 

US Economy 

27. The Federal Reserve's (Fed) balance sheet has $3.4T on its balance sheet [money it has pumped into the economy] However, all the liquidity that the Fed has created has not hit the market. The money is still with the banks. For example, Wells Fargo is sitting on $175B of cash to loan to consumers but it cannot find qualified borrowers. 

28. Buffett has a lot of faith in Ben Bernanke. He encouraged everyone to watch Bernanke's lecture at George Washington University

29. The Fed is buying $85B worth of bonds every month. That has to cause inflation at some point. It is unusual that US has not seen a rise in inflation given the Fed has flooded the market with easy money. 

30. The easiest way to grow nominal GDP is to inflate it [with inflation]. 

31. Generally speaking, what's happening with the economy has surprised the economists. Never before, have interest rates remained so low for so long. And, Japan has had 20 years of stagnation despite economists trying all the tricks in their bags. 

32. We are in uncharted territory. We will see more trouble in developed countries because of current fiscal policies and impending inflation. At some point, the interest rates have to rise. If the Fed can pull off a raise in interest rates successfully then we will all be better off. 

33. Interest rates are to asset prices what gravity is to apples i.e. if interest rates rise the asset prices fall. The current interest rate on the 30-year US Government bond is ~2.8%. 

34. Interest rates power everything in the Universe. 

35. "This [the current economic policy of pumping money] is like watching a good movie. I don't know how it will end.", said Buffett. 

36. The Fed policy of cheap money over the last four years has helped the US and Berkshire. And, it also made it easier for Berkshire to do the Heinz deal. 

37. On the other hand, the advantage Berkshire had with its insurance float is now worthless because of low interest rates. Berkshire has $49B in cash which is not earning anything. 

Build vs. Buy 

38. "There aren't many big commercial insurance companies out there to buy. The ones available are too expensive. It is better to build than to buy if you have good people. [We have great people.] We will build our own commercial insurance business", said Munger. 

Virtual Currency 

39. Buffett said that he does not know anything about Bitcoin but it does not stop him from talking about it. Berkshire is not planning to move any of its $49B cash reserves to Bitcoin. 

Multi-level Marketing 

40. Buffett did not comment on the Herbalife controversy and said that Pampered Chef is a business of selling directly to consumers and whatever is happening at Herbalife does not affect Pampered Chef sales. Munger said that there’s, “gotta be some flimflam when you are selling magic potions (Herbalife products) vs. when you sell pots and pans (Pampered Chef products).”

Berkshire in Tough Times 

41. Buffett's successor will have unusual capital (even more than Buffett) and a willingness to commit it in tough times. 

42. Berkshire is the 1-800 number people call when there is a panic in the market. GE called Berkshire in 2008 when all the other doors were closed and Berkshire was the last stop. Berkshire has a lot of capital and is willing to act quickly. 

43. When the tide goes out the naked swimmers call Berkshire. 

44. In the early days of Berkshire there was a lot of competition and a lot of opportunities for capital deployment. Now, the competition is limited and so are the opportunities. 

45. Berkshire has never bought a company from an unwilling seller. 

Berkshire's Competitive Sustainable Advantages 

46. We have tried to stay sane when other people go crazy - Munger. 

47. We treat subsidiaries like we would want to be treated if we were in the subsidiary - Munger. 

48. Be a good partner - Munger. 

49. Munger wishes that they had come up with these competitive advantages on purpose. They just happened. 

50. Buffett told a story about a guy who wanted to sell his business because he saw what happened at another firm after the owner’s death: the family fights and the business gets ruined. He did not want his business, which he had built over decades, to be ruined. If he went to a competitor, which is a pretty logical thing to do, then the competitor would sack all his people in the name of synergy. These people worked for a long time building the business. If the guy went to a Private Equity firm they would load the company with debt, sack the employees and then sell the business to the competition. Hence, Berkshire is the logical choice when people want to sell something they built over the years. 

51. The competitive advantage Berkshire has is that it has no competition. 

Oil

52. Oil moves much faster by rail than through a pipeline. 

53. BNSF (a Berkshire company) is lucky that new oil is being discovered in the US close to their railway lines. Bakken Formation is a good example. 

Harley Davidson 

54. Berkshire invested in Harley Davidson in 2008 because they knew a company that inspired such devotion that people tattooed their ads on their chests would not go broke. Berkshire invested $300M in Harley Davidson at 15% per annum interest! 

Investing Principle 

55. The two people who will succeed Buffett in the investment business of Berkshire are Todd Combs (Todd) and Ted Weschler (Ted). Both Todd and Ted have bought things which Buffett would not have bought. Todd and Ted have free rein on how they invest the money. 

56. It is your choice to give me money to invest and after you have given me the money, you should not tell me how to invest it. I don't like to be held responsible with my hands tied - Buffett. 

GEICO

56. GEICO will acquire 1M new customers this year. That is two-thirds of all people who will new get auto insurance policies this year. 

Decision Making 

57. Buffett has never made a list in his life. He tends to do what he likes and is not self-disciplined. He reads a lot, something he enjoys tremendously. 

58. Munger said, “Do not make decisions when you are tired. But making important decisions is tiring. So, ingest a lot sugar and caffeine.”

59. Munger mentioned that Buffett has the perfect human cognition. He is on auto-pilot for all daily decisions. What to eat, what to wear, etc. So all his mental energy goes into making important decisions. 

Newspapers 

60. Berkshire will get decent returns (~10% pre-tax) on its newspaper acquisitions. Buying the newspapers was very cheap because earnings are not going higher. Investment bankers are used to selling things where the earnings always go up, but in the case of newspapers they can't ask for high prices. Munger's response to Buffett, "it is an exception, and you like doing it."  

Breaking-up Berkshire 

61. Breaking up Berkshire into several companies will result in poorer performance. 

62. One of the CEOs Buffett admired in his early days was Dr. Henry Singleton whom he called a 100% rational man. He broke up his company Teledyne when it became very large. However, it does not make sense for Berkshire to do the same. The end result for Teledyne was not good. Singleton issued stock like crazy and took advantage of the shareholders. Berkshire sees shareholders as partners. 

63. Munger said that many companies play a game where i) they issue stock at a high price, ii) then buy back stock at a low price and iii) they swap stock with another company. Berkshire does not play that game. 

US Competitiveness 

64. 17.5% of US GDP goes to healthcare. This is the biggest problem we have. 

65. Countries that are similar to the US spend 9.5% to 11.5% of GDP on healthcare. 

66. One of the reasons Toyota did well compared to GM is that GM had $1,500 in healthcare costs associated with every car. 

67. Grossly swollen securities and derivatives markets are another big problem in the US. Smart engineers from Caltech and MIT are now going into these markets rather than building new things. 

68. Berkshire has 300,000 employees and ~80 operating companies. So, the healthcare costs are huge. Berkshire lets the operating companies decide who gets health insurance and of what kind. 

Solar Energy 

69. If a lot of people put solar panels on their roofs then it may increase electricity cost for others. Utility is a fixed cost business and if it has fewer people to serve then it will have to raise prices. 

70. There will be more energy generation in the desert than on rooftops. 

71. Home solar energy will not become a big business. 

Luck

72. Being born in the US and being male was a huge advantage for Buffett who was born in 1930. If he were born five years sooner he would have been luckier and if he would have been born 15 years later he would been less lucky. It is because the1930s were just a really bad decade for stocks. 

73. The luckiest person is the baby born today in the US. There are just so many more opportunities available now vs. 80 years ago. 

Secrets of Success 

74. For Berkshire, competition is higher now than 50 years ago when it had a lot of ideas but no money. Now Berkshire has a lot of money but no new ideas. 

75. Munger and Buffett are boringly trite but they are rational and energetic. 

76. Find what turns you on and do that. 

77. When we started running Berkshire, it was so much fun that it was sinful. When you find what you love to do, pursue it tremendously. 

78. Berkshire is an unusually rational place. 

79. The temptation to do irrational things can be hard to resist when people are doing stupid things and Wall Street is cheering them on. Remember the dot com bubble? At Berkshire, there is no pressure on people to do stupid things. 

80. When people see other people making easy money, a social group is created which is hard to resist. Hence, people join that group and do irrational things. 

81. You should not do something just because everyone else is doing it. 

82. Envy is the only sin that has no fun in it. 

Hedge Funds and the Reinsurance Business 


84. "Anything Wall Street can sell, it will sell", said Buffett. 

85. The Hedge funds sometimes do dumb things in the insurance business. You (Berkshire) just can't afford to go along with the crowd. 

86. If you own a gas station and the gas station across the street starts selling gas at cost (which is the same as yours), you should not start selling gas below cost to compete. 

89. Since 1980, Hedge Fund expense ratios have increased significantly. 

90. Berkshire has hit the jackpot with people. They do not get pressured to do dumb things. As a result, Berkshire does not have to worry about Hedge Funds entering the insurance business. 

Women in Business 

91. Buffett has two sisters, one younger and one older. They did not have the same opportunities in business as Buffett did because of the social structure at the time. 

92. Society is getting better and the external (societal) hurdles for women are crumbling. The country (US) is moving in the right direction. However, there is a pipeline effect to these changes, i.e. everything is not going to change in one day. 

93. Kathryn Graham faced both external and internal hurdles when she ran The Washington Post. Internal hurdles refer to her self-doubt. Buffett was on the board of The Washington Post for many years and he helped Kathryn overcome the internal hurdles. 

Dodd-Frank, the US Banking System, and the Bubbles 

94. The Dodd-Frank bill is not impacting Berkshire's insurance business. Because of Dodd-Frank, Capital Ratios for the banks are higher and that affects their Return on Equity

95. We will have a new bubble but the next one will not be a financial or housing bubble. It is the nature of capitalism that bubbles will exist. After all, people are not perfect.  

96. Munger is less optimistic about the banking system. He said, "Derivative books should not be mixed with insured deposits". 

97. Berkshire follows unusual restraint to avoid getting sucked into bubbles. 

S&P500 vs. Hedge Funds 

98. Buffett made a bet with a hedge fund manager that over a ten year period any hedge fund (fund of funds) will not beat S&P 500. This year marks the fifth year and over that time S&P500 is at 8.6% gain and Protégé Partner Funds is at 0.13%. [The score card for this bet is shown every year at the meeting]. 

99. For other long-term interesting bets see http://longbets.org/. 

 
Is this really a shareholder meeting? 
  
Learning and Investing 

100. You have to love something to do well at it. And, intensity adds to your productivity. 

101. You can't separate the score from the game. That is how you keep track. 

102. When Buffett bought American Express (Amex) for the first time in 1951, the credit cards were called Travel and Entertainment cards. He had to do a lot of research because he did not know anything about that business. The second time, the Amex buy was easy. Learning is cumulative. Amex had recently raised its rates and Frank Olson told Buffett, while golfing, how he can't get rid of his Amex card despite the rate increases. That information was enough for Buffett to buy more Amex. 

103. Always think as though you are buying the entire business even if you are buying a single stock. 

104. Over time Buffett and Munger have accumulated background knowledge on all kinds of businesses. Now they can make quick decisions on investments. 

105. Buffett read Biography of a Bank a long time ago to understand banking. 

106. Some brands travel well and others don't. 

107. A disparity in future value and current value is an opportunity. 

108. Before buying a stock, understand how the company actually functions. Can you predict how the business will look like in five to ten years? How confident are you in your prediction? Following this criterion, Berkshire is not going to invest in any auto company or even in Apple, despite the fact that they are sitting on a huge pile of cash. 

109. BNSF will have a sustainable competitive advantage in 15 years. Buffett could see that before buying the company. BNSF will carry more carloads in ten years. 

110. Understand the reasons for competitive advantage for a business. Why does it exist and how it will exist? 

111. Berkshire does not pay attention to any macro forecast when investing. "Why spend time talking about things you don't understand. It is not very productive. And, if we don't know, nobody knows (joke)," said Munger. 

112. Ignoring what you know because of someone else's forecast is silly. 

113. Stock market returns will be lower in the next ten years compared to the previous ten years. 

114. Berkshire has invested in 400-500 companies but most of the money it has made comes from less than ten names. 

115. Ben Graham's "The Intelligent Investor" gave Buffett a bedrock philosophy on investing. Phil Fisher was another author who influenced Buffett. 

116. Munger likes to read a lot of biographies. The last one he read was of Joe Kennedy

Airlines 

117. Airlines is a capital and labor intensive business. There is a very low incremental cost in selling that last seat on the plane. This drives prices down. It is a terrible business for investors and it is too hard to predict. 

118. You could not create another railroad easily but you could create another airline easily. People like the airline business. There is something glamorous and sexy about it. Hence, it attracts a lot of people and it is relatively easy to raise capital to create an airline. 

119. US Airways went bankrupt twice while Berkshire held its stock. 

Stock Buybacks

120. Generally speaking, Berkshire's intrinsic value is considerably higher than its book value. Any company that can buy back its shares at a price lower than its intrinsic value should do so. Berkshire has mixed feelings about it because it sees its shareholders as partners and a buyback is like buying out your partners at a discount. 

Buffett and Munger’s Relationship 

121. We know each other so well that we don't even have to phone each other (and the phone is the extent of our technology use) to find out what the other person will say. 

122. "A third of the life of the country passed during our lifetime, so we expect a little change," said Buffett. 

Environment 

123. There is a reasonable chance that the CO2 people (environmentalists) are right about humans permanently impacting the environment by producing CO2 gases. 

124. CO2 production does not make any real difference in pricing insurance. 

125. Carbon trading is pretty impractical. A better way to deal with CO2 production is carbon tax just like the Europeans are doing by heavily taxing gasoline (petrol). European countries are socialist societies and the idea behind the gas tax had nothing to do with CO2. It was done to increase governments’ revenues. However, it has the added benefit now of helping them reduce CO2 in the environment. 

Short Selling 

126. Short selling has a huge asymmetry between reward and risk. The risk is too high. "We don't like trading agony for money," said Munger. Berkshire does not do short selling and focuses on buying great businesses. 

127. There is no perfect mathematical formula for calculating the fair price for a business. Great businesses are few. 

128. The stock market gives you the opportunity to buy great businesses inexpensively unlike in negotiated agreements where you pay a premium. 

Politics and US Debt 

129. The big debt the US has today is not entirely Obama's doing. A lot of it comes from Bush. Regardless, the amount of the stimulus that the government provided has been good for the economy. 

130. Bush said ten very effective words on the economy in 2008 and he does not get credit for it. He said, "If money does not loosen up, this sucker could go down". And, not everyone in Bush's party supported him. There was good work done from both sides (Democrat and Republican) to avoid more pain than the country may have suffered. 

131. Debt is a better problem to have than austerity. We (the US) have encountered far worse problems (WWII, the 1929 Depression) than what we face today. We will do just fine. 

132. "Our current problems are quite confusing. If you are not confused then you don't understand it," said Munger. 

133. The off the book debt the US has is even bigger than the on the book debt. 

144. All other problems will fade away if the US GDP continues to rise 2% per annum. 

Keeping Promises 

145. Benjamin Moore (a Berkshire company) is not sold through big-box retailers like Home Depot because when Buffett bought the company he promised they would keep the distribution exclusive to the dealer network. 

Individual Stocks vs. Index Funds

146. If you buy stocks of the top 20 companies (by revenue) then the performance of your portfolio will match the performance of an index fund. 

147. Non-professional investors should stick with index funds. Being a professional investor requires a lot of work and research which many amateurs don't have the time or inclination to do. 

148. Knowing the edge of your competency is critical. Knowing less than you think you know can get you in a lot of trouble. "This works particularly well in matrimony," said Munger. 

149. "An extra $2B to an old man means nothing," said Munger. 

150. The US economy has not come roaring back but it has not faltered either. The housing overhang has ended. 

151. In financial markets, the opportunity comes in a huge way [you should be prepared to act]. Most people here (at the meeting) will see three or four huge opportunities in their lifetimes. 

Attracting Money 

152. Start developing an audited record if you want to start attracting money. When Berkshire hired Todd and Ted, it looked for their investment record; one that could be believed and understood. 

153. Let's say 300M orangutans flip coins and 300k of them get ten heads in a row. Are these 300k orangutans good investors? Investing with them would be investing in coin flipping. To attract money you should deserve money. 

154. Start with getting money from people who know you; i.e. friends and family. 

Compensation 

155. The hedge fund manager compensation model is flawed. If Todd and Ted were compensated under the 2/20 compensation model of Hedge funds, each of them would have made $120M last year even if they had merely buried the money in the ground [each manages ~$6B]. They each made $50M+ at Berkshire. 

156. At Berkshire,  the people who are running the businesses are not doing it for the money. 

Boards, Chairmen, and the CEOs

157. Howard Buffett's (Warren Buffett's son) main job as non-executive chairman (to be assumed after Buffett's death) will be to protect the Berkshire culture. He will only become active when the board needs to change the Berkshire CEO. 

158. It is a very recent phenomenon that US corporate boards started meeting without the chairman once a year. It used to be that the boards always met with the chairman, who also held the CEO title, so it was difficult for the board to change the CEO. The Chairman/CEO controlled the agenda and appointed board members. 

159. A CEO can be a six-out-of-ten in terms of performance but he is a really nice guy and he is the chairman of the board as well. He appoints his friends as board members. In those cases, it can be really difficult to replace that CEO. 

160. The board may hire the right man for the job but the man may change after he gets the job. There should be provisions to get rid of the man if he is not performing. 

161. Buffett has heard a lot of stupidity re: qualifications of CEOs. He was once told by a board member that they hired someone as the CEO because he was the only man who could “strut sitting down.” 

Fixed Investments 

162. Owning businesses earns more than owning fixed dollar investments. 

163. The fallout from low-interest rates is largely hidden. People who are retired and who have $300k in savings don't know what to do. 

IBM

165. IBM has a big, sustainable, competitive advantage. 

166. IBM has a large pension obligation of around $70B-$80B. Sometimes it seems like an annuity company. 

Options 

177. You always want to receive an option and not give an option. 

178. A 30-year fixed-interest rate mortgage is a good deal for borrowers. If  interest rates go up, the borrower does not have to worry about it and if the interest rate goes down, the borrower can refinance. 

179. Munger used to make money from the float on his income tax.

Housing

180. People are susceptible to bandwagon effect i.e. when people see other people making easy money they want to do the same. Overwhelmingly, people get caught up in the grand illusion. 

181. This is a good time to buy a house because financing is very attractive. 

182. "The government helped cause the housing bubble" is an accurate but incomplete statement. 

183. The government provided a home-ownership dream to everyone. It was like providing a punchbowl filled with alcohol. And, in a democracy it is impossible to take away that punchbowl. So, let's not complain about what's inevitable. 

184. Humans will continue to make the same mistakes they have made in the past. 

185. People get fearful and greedy en masse. 

186. Berkshire's edge is that it does not get caught up in what other people are doing. 

189. You should not get in a position where others can pull the rug out from under you. 

Europe 

190. Berkshire is open to acquisitions in the 17 European countries which are part of the Eurozone

191. In Europe, Berkshire would mainly look for a "bolt-on" acquisition, i.e. the acquired company would become part of an existing Berkshire operating company. 

192. The European monetary union has a major flaw [no fiscal or political union] and they are trying to correct it. 

193. Nature finds fatal flaws and so does economics. 

194. Letting Greece in the European Union was an exceptionally stupid idea. It was like mixing rat poison with whipping cream. They committed fraud by lying about their debt to gain entry. 

195. Despite all the current problems, Europe will muddle through. 

Teenagers and Social Media 

196. There is a time when your ignorance and folly has got to be hidden. Social Media preserves the dumb comments of teenagers for eternity. It is a bad idea. 

197. When you multi-task, you won't be able to do any task well. 

People and Accounting 

198. People give themselves away a lot. They have 'tells'. We are always assessing people. We just have to be right about the ones from whom we buy companies. 

199. There are many ways you can cheat in accounting. 

200. Financial statements are much harder to understand now than 20 years ago. 

201. Some financial companies have assets that are good until reached for. 

202. At Salomon brothers, they were using a "plug-in" number of ~$180M for 10+ years. It was a number accountants made up when they could not balance the books. 

203. Sometimes accountants act like the mailmen in Italy. When they get too much mail, they throw some away. 

Parenting 

205. More kids are ruined by the behavior of their parents than by inheritance. 

206. Parents are natural teachers. Kids learn from their parents' actions, not their words. 

207. Buffett thinks that it is crazy for children to wait to read their parent’s will until after their death. What if they have questions? The parent should be able to explain why he/she thinks that the wealth distribution is fair. And, the kids should be able to make a different case. Buffett revises his will every five years after discussing it with his kids. 

208. "Don't discuss the will with your kids if you are going to treat the kids unequally," said Munger. 

Pass to wisdom 

Just like the previous meetings, it was a fun learning experience. Please send me a note if you would like to join me next year.