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.
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Buffett and Munger on the stage. See the peanut brittle?
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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!
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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/.
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| 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.
