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Friday, May 9, 2014

The Best ROI on Education: The Berkshire Hathaway Shareholder Meeting

Line to get in at 6:15AM. By the way, the meeting is at a stadium! 

You can't get enough of Munger. He might be the smartest man alive. I was in Omaha last weekend to attend the "Woodstock of Capitalism" i.e. Berkshire Hathaway annual shareholder meeting. This year, 38,000 people showed up to acquire wisdom from Charlie Munger and Warren Buffett. This is my 7th or 8th time at the meeting and I am as impressed as the first time. See my notes from the last year's meeting here

Line to get in at 6:30AM

Following are the pearls of wisdom I gathered this year: 

Inside the stadium at 7:15AM. Q&A begins at 9:30AM


1. Berkshire always releases earnings on Friday after the market-close so that people have time to read and digest the information over the weekend before they trade. 

Insurance Business

2. Changes in insurance underwriting do not matter quarter to quarter. It is a long-term business and is affected by changes in foreign exchange rates in the short term. 


3. 96+% Berkshire shareholders voted against dividend issuance by the company. [Buffett said in one of the previous meetings that if a company issues dividend then it is telling the shareholders that it can not find a better use for the money]

Executive Compensation 

4. There is controversy around Buffett not voting against the Coca-Cola executive equity compensation package. Berkshire owns 9% of Coca-Cola. Buffett thought the compensation plan was excessive but not so bad that he goes to war with the Coca-Cola management. He likes the company and the management. Buffett expressed his discontent with the compensation plan to Muhtar Kent, Coca-Cola CEO, and abstained from voting. There were unintentional miscalculations by David Winters, who brought in the vote on the compensation plan. Basically, dilution of the options due to taxes was not considered. The compensation plan is valued 35% less with dilution.

New Partner: 3G Capital [for the Heinz Deal]

5. 3G and Berkshire are good investment partners but culturally they are very different companies. 3G is very focused on getting the extra-cost out of its companies [by playing an active role in management of the company and finding ways to reduce cost]. Berkshire lets its managers run their own businesses. 

6. Great businesses [like Berkshire] spill a little [waste money] because they don't want to be fanatic about saving every penny. It is alright if you don't save every penny. 

U.S. Business and Taxes

7. After World War II, taxes on corporate earnings were more than 4% of GDP and today they are less than 2%. U.S is a great place to do business. 

8. U.S. is the envy of the world when it comes to corporate earnings on net tangible assets.

S&P 500 and Berkshire 

9. Berkshire's book value and intrinsic value tends to underperform S&P 500 in five year periods when the market is up and it outperforms S&P 500 when the market is down. Over the longer periods, Berkshire has outperformed S&P 500 by a wide margin. 

10. Berkshire overall per share book-value gain (1964-2013) = 693,518%. S&P 500 (including dividends) overall gain = 9,841%

11. When you compare an Index (S&P 500) with a company book value (Berkshire), the index book value is pre-tax and company book value is after-tax. 

Intrinsic Value and Shares

12. Berkshire explains intrinsic value in its annual report like no other company does. It is important when the difference between the two can be big. For example, GEICO book value is ~$1B and its intrinsic value is ~$20B

13. Intrinsic value can not be calculated precisely and it changes every day. Even Munger and Buffett come to different numbers (usually within 5% of each other). 

14. Berkshire repurchases shares if they are trading below 120% of book value. 

15. Buying shares to cover options is not always a good idea. If you buy a dollar at $0.90 then it is good for shareholders but if you buy a dollar at $1.10 then you are not serving shareholders well. 

16. Berkshire is not in the game of issuing stock way above intrinsic value so that the existing shareholders can profit at the expense of new shareholders. The game works incidentally but not indefinitely. 

Deal Making 

17. The key to getting good deals is always keeping your word. Be careful what you promise. If you break a promise, the word gets around. 

18. Berkshire keeps below-average businesses in its portfolio because of the promise they made. The details of the deals are on the back of the Berkshire annual report. 

19. Berkshire attracts business managers who care about their businesses and want to continue running them despite their personal wealth. Private Equity does not care about people and hence they do not get the deals that Berkshire gets. 

Corporate Boards

20. Corporate boards are not all about business. They are part business and part social organizations. Buffett has voted for acquisitions and compensation plans that he did not like because of the social dynamics of the board. 

21. Buffett served on 19 corporate boards over the last 55 years and he has never seen a compensation plan getting a dissenting vote. 

22. The board organizes itself in a way that the tasks are delegated to committees. 

23. The independent board directors are not so independent. They are getting paid ~$300k to attend four meetings in a year. It is pleasant company and there is prestige associated with being on the board. And, you hope to get another job like that. "They do not look for a Doberman. They look for a Cocker Spaniel with a wagging tail" [to serve on the boards]. 

24. General idea that you shout about everything you disapprove of is just suspect. If you do that, there will be so much noise that you won't be able to hear each other. Pick your shots and learn how to do it. "If you keep belching at the dinner table, you will be eating in the kitchen." - Buffett. 

25. It is hard to change others' behavior and it is not helped by shouting. This is not a bad thought to keep in mind for marriage. 

I want to join the board! 

Yes, my master!

Cost of Capital 

26. Cost of Capital (CoC) is what can be produced by the second best idea. "I have never heard a sensible CoC discussion." 

27. CoC means different things to different people. The basic idea for a company is that every dollar in retained capital should produce more in market value than a dollar. "We bought a company yesterday [AltaLink] because that was the best thing we could do with $3B that day." 

28. "I have never been to a meeting where the CEO wanted to do a deal and the CFO said that it exceeds our CoC." - Buffett. It is a game. 


29. Last year, BNSF carried 58% of all cargo in the US. 

30. Railway is an outdoor sport and the weather last year has been exceptionally bad. Things are getting better. Last week, BNSF moved 206,000 units which is the largest amount any railway has ever moved in a week. 

31. BNSF will spend $5B on railroads this year. No railroad has ever done that. 

I can't believe how good I am at deploying capital


32. Berkshire Hathaway (BH) Energy (formerly MidAmerican Energy) is a leader in energy generation with alternate sources. This year in Iowa, BH Energy company will meet 40% of the electricity needs with wind energy. 

33. BH Energy has many subsidiaries. The company was originally bought from Enron ten years ago and at the time it was ranked number 42 in the list of 42 utilities in the US. Today is is ranked number 1. 

Who would have thought Iowa would lead the US? 


34. Having a number two is a good way to operate. Most successful CEOs have a great number two. 

Transparency and Executive Compensation 

35. Shareholders can get hurt if the salary of the top paying executives in the company is published in SEC filings because this will drive the salaries up all around. Corporate CEOs would be getting paid much less today if proxy statements did not include CEO salary. It is human nature to ask for more money if you know that your competitor is making more than you are. 

36. No CEO looks at a proxy statement and thinks that he (she) should be paid less. 

37. Envy is doing this country a lot of harm. 

Cash and Capital Structures 

38. A railroad business [BNSF] takes on debt for investments in making it the best railroad and not to buy new businesses. Because of the nature of its business, it can handle a lot of debt. It also gives earnings back [makes distributions] to Berkshire. 

39. A utility business [BH Energy] has a lot of opportunities to acquire businesses and it has to keep appropriate levels [because of nature of its business] of debt. BH Energy acquisitions are an attractive way for Berkshire to deploy cash [capital]. 

40. Available cash is like oxygen. You don't notice it when it is present. However, when it is absent that is the only thing you notice. 

41. Berkshire will always keep $20B in cash. It never feels a compulsion to use it just because it is there. Also, Berkshire does not count on kindness of strangers or on bank lines. 

42. Berkshire lent money to Harley Davidson at 15% interest when the interest rates were at 0.5%. They needed cash right away. 

Buffett and Munger Partnership 

43. They met when Buffett was 29 and Munger was 35 and in the last 55 years they never had an argument. 

44. Buffett is more inclined towards action than Munger is. 

46. They have their disagreements but they tend to agree on most things and that can be a weakness. 

47. Buffett once called Charlie "an abominable no man". 

48. Buffett is slow to make personnel changes. They took one of the managers from being an executive chairman directly to the Alzheimer home. 


49. Berkshire let's its operating companies manage its cash. Sometimes the operating companies send cash every 3-4 years but Buffett only asks for cash when he needs it for an acquisition. 

50. Berkshire does not have any sweep accounts with its subsidiaries. 

51. What Berkshire has is a positive environment which is tough to measure. 

52. Berkshire over-trusts its managers. Berkshire managers have a high degree of freedom which they enjoy and it enables them to accomplish a lot. A lot of places would be better of if they adopted a system of deserved trust. 

53. The current accounting system [in most companies] of tight controls is a causing a lot of harm. 

54. If something goes wrong, people will say that Berkshire should have had these checks and balances and oversight. They will be right but only in that specific instance. Overall, the current environment of freedom is a benefit to Berkshire. 

55. Berkshire does not have a General Council or a Human Resources department. 


56. Historically, cities used to have a lot of candy shops. Chicago and New York were the leaders in number of candy shops. By the way, Pepsi was managing candy shops before it got into the beverage business. 

57. The See's candy brand does not travel well. Sees had trouble replicating its level of success outside of California. You never know how well a brand is going to travel. You figure it out by trying. 

58. See's taught Buffett the importance of brand after he bought See candy in 1972. Without Sees candy investment, he would not have invested in Coca-Cola in 1988. 

"Removal of Ignorance is the critical success factor." - Munger 

I can make you rich! 

Bank of America Investment 

59. Berkshire converted its cumulative preferred stock to non-cumulative preferred stock because he was offered a good deal by Brian Moynihan, Bank of America CEO. As part of the deal, Berkshire's preferred shares in Bank of America became non-callable for five years [at 6% interest per year]. In the world of 0.5% interest rates, it was good deal for both Bank of America and Berkshire. 

60. The recent news of Bank of America's accounting error in their tax filing after the Merrill Lynch purchase, does not bother Buffett. It did not affect their GAAP numbers and they will pay a penalty. Berkshire files 20,000 pages of tax documents. You do the best you can. 


61. Netjets is a perfectly decent business. It is not a growth business. After 2007, Netjets ownership has been declining until the last six months when the demand started to pick up again. 

62. Netjets owns ~67% of the market. It is now serving the China market in addition to the US and Europe. 

The only way to fly! 

Investment Strategy

63. Berkshire investments are about building earnings power. 

64. Berkshire tends to focus on buying really good big businesses with good management. And, to do that it has no problem leveraging-up [increasing debt] utilities. However, Berkshire will always keep the debt levels below required [by regulation].

65. Buying entire businesses is preferred to buying stocks. And, to buy these businesses, Berkshire will not have to sell the current stock in companies like Coca-Cola, American Express, etc. 

Equity vs Debt 

67. Berkshire used equity and cash in acquiring BNSF instead of raising debt at very low rates because it does not like the idea of buying a conservatively leveraged business and leveraging it up. 

68. Berkshire has $77B float from its insurance businesses and they are always looking to deploy that capital. 

69. Berkshire can easily raise $30-40B in debt. It prefers doing deals without debt but if it finds a good deal for $50B, it will do it even if it requires raising debt. 


70. BNSF is a common carrier and is required by law to carry anything it is offered. It does carry a lot of coal and will continue to do so. 

71. Global warming is indisputable. However, people who claim to understand climate change and how it will change economic and weather patterns are talking through their hats. 

72. Regardless of the changes in sources of energy, Berkshire is well-positioned given that it owns transmission lines. 

New Hires 

73. Todd Combs and Ted Weschler [new investment managers at Berkshire] are working out really well. They both know how Buffett thinks. The amount of money they manage has increased from $3B to $7B over the last one-two years. $7B is still less than 10% of total portfolio. The amount of money they manage will continue to increase. 

Is this the Superbowl XLVIII or a shareholder meeting?

Low Interest Rates 

74. Five years ago, nobody would have guessed that the interest rates would be so low. "I was surprised that it has gone on so well. This is an interesting movie which we have not seen before but we don't know how the movie ends." 

75. What Ben Bernanke has accomplished is remarkable. If you look at the meeting minutes from Fed meetings in 2007-2008, not everyone was getting it [seriousness of the situation]. Bernanke moved forward without getting unanimous views and did the right things. 

76. Nobody in Japan anticipated that the interest rates will go way down and stay low for 20 years. And, no one would have anticipated that stock prices can go down and stay low for 20 years. "If you think you understand, you are not paying attention." 

77. Cash is king when you can use it. People tend to cling to cash at wrong times [like during market crashes]. 

78. Zero interest rates had a huge impact on rejuvenating the economy and asset prices. What we have [economy and stock prices] is unusual but it is not a bubble. 


79. The conglomerate model has worked well for Berkshire. The right comparison for Berkshire would be the Dow Jones which is a collection of diverse businesses and has done remarkably well over the years. 

80. The conglomerates, as we know them today, were put together to perform financial magic. The idea was to issue stock at 20x earnings and buyback stock at 10x earnings. It was a chain letter approach to fool people. 

81. Berkshire is about great businesses with great managers and conservatively capitalized. 

82. Capitalism is about allocation of capital. Berkshire [as a conglomerate] can take capital from See's candy and allocate it to BH Energy, for example, without tax consequences. 

83. Capital allocation has to be done with business like principles and not for stock promotion. Look what happened to TYCO. They were constantly issuing stocks and playing a chain letter game. 

84. Another difference between Berkshire and other Conglomerates is that when Berkshire does not have businesses to buy, it buys securities. Most conglomerates are hell bent on buying while Berkshire feels no compulsion to buy. 

Recreational Vehicles (RV)

85. Forest River (a Berkshire company in RV business) is a $4B business with an IT staff of 6. 

86. Forest River has Gross Margin of 11-12% with 5-6% SG&A, and ~6% operating margin. Over the ten years of owning this business, Buffett had four phone calls with the CEO, Pete Liegl. And, Buffett has never visited the business headquarters. Buffett and Liegl agreed on an incentive plan during the acquisition and it has been working out well for both parties. 

I am a $4B business and no one has ever heard of me! 


89. Berkshire has a large stake in ExxonMobile

90. BNSF moves 700M barrels of oil everyday. Railroads are much faster in moving oil compared to a pipeline. 

91. Oil Sands are an important source of energy for mankind in the long run. 

92. The current dynamic of getting the oil out of sand works because oil prices are high and natural gas prices are low. Natural gas is used to get oil out of sand. It is a peculiar situation. 

Change and Mistakes 

93. Berkshire investment in Energy Future Holdings (EFH) was a mistake [Buffett takes full responsibility for the mistake]. The company is going to declare bankruptcy (most likely) due to drop in prices caused by fracking and low natural gas prices. The assumption at the time of investment was that the energy prices will stay high. It was wrong. All businesses should always be looking at risks to their businesses. 

94. GEICO started out in 1936 with providing low-cost insurance by US Mail. Later it moved to selling by telephone, then to the Internet and now it is using social media. It almost went broke once. So, there are always changes going on with Berkshire businesses and the managers are always thinking about what is going to be needed for the future. 

95. Berkshire businesses generally deal with strength and are not subjected to disruptive change. But, slow change is hard to perceive and that implies that Berkshire will make mistakes in the future. 

96. Berkshire never makes "bet the company" decisions. 

97. "You are going to make mistakes if you make a lot of decisions." 

98. "You have to be very alert [about risks to your business]." 

99. "Remove ignorance piece by piece." 

"Scramble out your mistakes" -Munger 

100. "Face the facts around you."

101. In 1966, Munger, Buffett and Sandy Gottesman invested in one of the four department stores in Baltimore. None of them are around today. Sandy did well in selling it. The $6M invested in that department store became $45B in Berkshire stock because Buffett and Munger did other things with the money. 

102. Berkshire made success out of failures like investing in a textile mill and department stores. "Imagine if we had a better start." - Munger 

103. Change is always happening in business. In 1929, Buffett's grandfather wrote him a letter stating that the days of the chain stores are over. In 1969, the letter would have been about grocery stores


103. Heinz is a reasonably run business with operating margins of 10-15% and that is considered good margin in food business. 3G is going to restructure the business model and Heinz will have significantly higher future earnings. 

104. 3G will significantly improve the cost structure without cutting into Heinz marketing spend. 

I am going to get thinner! 

Stock vs Entire Business 

105. When you buy shares, you can't buy large amounts without increasing the price. "I love buying transmission lines in Alberta. Who else is doing that?"

106. It is tough to predict the bottom [of stock prices]. Berkshire bought a lot of stock [$15B] in companies they like in September/October 2008 and the market hit bottom in March 2009. This will always be the case because we have not figured out how to predict the bottom. The prices Berkshire paid for these shares was still a bargain. 

107. Given the current size of Berkshire, what it would really like is to buy large good businesses with good managers at reasonable prices and build them over time, 

108. When Berkshire buys the right stock, it shows up in the market value of Berkshire. When Berkshire buys the right entire business, it shows up in future earnings power. One is more visible (stocks) and the other is more enduring (entire business). 

109. The mix of stocks and business ownership has changed at Berkshire. It used to be that Berkshire owned more in stocks than in businesses. Now, Berkshire owns more in businesses and that will continue. 

110. Berkshire spent a lot of money buying Wells Fargo stock over the few years and because the economy came back, Berkshire would have done better by buying other banks. Berkshire felt 100% comfortable buying Wells Fargo and 50% comfortable buying the low quality banks. The ones that fell the farthest had the highest recovery potential. 


111. Pricing car insurance is about co-relating different variables (age, location, sex, credit score, etc.) and evaluating the propensity of loss when calculating premiums. Progressive Snapshot, usage based pricing, is just another variable to the mix added by Progressive insurance (GEICO competitor). There are other companies using "pay as you go" pricing as well and it is working out for them. The system GEICO has is working fine and they have no plans of changing it. Berkshire has faith in GEICO management's ability to manage risk. 

112. Self-driving cars could happen. If they do, it would be a threat to GEICO but Berkshire does not spend a second thinking about it. For the next ten years, GEICO business will continue to grow. In 30 years, who knows. 

113. People tend to overestimate how long it takes for new disruptive technologies to get widely adopted. Self-driving cars may take 30 years. 

I will help you see more digital ads

Investments Outside the US

114. Berkshire has no hesitation in investing outside the US. It is just not seeing good deals. ISCAR (based in Israel) acquisition is working out really well. 

Circle of Competence 

My question: "You often advise people to operate within their circle of competence. How does one figure out what one's circle of competence is?" [I also thanked them for being extremely generous with sharing their wisdom]. 

Buffett commented that it was a good question. 

115. Be self-realistic. Understand your shortcomings. There are number of CEOs who do not know where their circle begins and ends. 

116. It is easy to fool yourself into thinking that you understand something when you don't. Buffett thought that he understood retail and he got into it and he realized that he did not. The durability advantage a retailer enjoys today may not last. 

117. Knowing when you are playing the game versus playing outside the game is a huge advantage. How you figure that out is difficult. Ask your friends about your strengths and shortcomings. Munger has asked Buffett many times, "what the hell do you know about that..."

118. Some things are obvious like if you are 5'2'' don't try to become a basketball player or if you weigh 350 pounds don't try to become a ballerina, and if you can't count cards, don't play blackjack. Narrow things done by process of elimination then try different things and eventually there will be one or two things left where you are really good at. 

119. "Competency is a relative concept. For me to get ahead, I need to be competing against an idiot. Fortunately, there are plenty of them around." - Munger 

Comparison of Berkshire Book Value Per Share with S&P 500

120. "Warren likes to make things extremely difficult for himself. If you don't understand why people wear hairshirts, you will never understand this. It is completely insane." -Munger 

Some people wear me by choice

ISCAR and Marmon 

121. The deals were structured in a way that pleased the families who owned ISCAR and Marmon. Both parties felt good about the transaction. It pays to have people feel good about it [deals]. 

122. After talking to both families [ISCAR and Marmon], Buffett and Munger realized how smart these families were. 

123. Both ISCAR and Marmon have added tremendous intrinsic value to Berkshire. Because of accounting peculiarities, their carrying (book) value is much lower than their intrinsic value. 

124. Later in life, you are going to end up doing business with people who you thought were "one stop shop" when you met them for first time. 

Industry Analysis and Career Choices 

125. When you want to learn about an industry, talk to a lot of people in that industry. Ask a lot of questions. Buffett used to ask CEOs two questions [within the same industry]: 

(i) If you had to put all your money in one company (except the one you are running) in your industry and go away for ten years, which company would you choose? 

(ii) If you had to put all your money to short one company in your industry and go away for ten years, which company would you choose? 

Asking these two questions to eight-ten CEOs gave Buffett more insights into the industry than anyone else. 

Buffett applied the same technique when he was running Salomon Brothers. He asked the managers who can replace them and why. 

126. There are a lot of ways you can learn about the economic characteristics of the companies. Reading and personal contact are easy ways. The most important thing you need is intellectual curiosity. It has to turn you on. 

127. Larry Bird used to ask his potential agents if they did not get the job who would they recommend. If everyone recommended the same guy then Larry hired that guy. 

128. Keep on learning. Go to bed a little wiser everyday. Be open and curious. Eventually, you will find your groove. 

129. You can learn a lot by talking around. People like to talk. "Look, what we are doing here." 

130. "I took thermodynamics at CalTech by Professor Homer J. Stewart and I knew that no matter how hard I studied I will never be as good as Dr. Stewart in thermodynamics. I tried other fields with the same results. So, I kept going until I ended up here [investing]." - Munger 


131. Buffett has criticized the hotels in Omaha that charge large amounts of money for lodging during the Berkshire shareholder meeting. He does believe in free markets but he also understands supply and demand. He increased supply by bringing Airbnb to Omaha. He is concerned that if prices keep on increasing then demand will go down i.e. less shareholders will attend the meeting. He does not want that. 

132. The Berkshire shareholder meeting is staying in Omaha and is not moving to Dallas. 

133. Buffett likes businesses to be fair. Hotels charging three night minimum for a day meeting was what bothered him the most. He did not mind price increase for one night as much. 


134. GEICO continues to grow with attractive margins and lowest cost structure in the industry. It is bigger than Allstate now. 

135. State Farm was started in 1922 by a farmer with no insurance experience. He had a better business model. The story is well captured in the book -The farmer from Merna. In 1936, GEICO came along with a better business model than State Farm. If GEICO will become bigger than State Farm remains to be seen. 

136. GEICO is a lot like Costco. Both companies act like it is their holy duty to give value to customers. A lot of companies talk the game but a few do it. 

137. An interesting fact in the auto-insurance business is that people don't move around. GEICO does not have anyone [senior] from its competitors working there. And, GEICO people don't leave to go to the competition. People have their own ideas on what should be done and how it should be done right. 


138. Standard of living does not correlate with cost of living beyond a certain point. After you have good housing, good food, good transportation, etc., there is inverse correlation between happiness and number of things you own. "I couldn't be happier. In fact, I would have been worse off [as it relates to happiness] if I owned six-eight houses." 

139. Buffett still lives in the same house bought in 1958 for $31,500. 

140. Berkshire is built on frugality.

Berkshire Location 

141. Berkshire will never leave the US to save money on taxes or any other reason. Both Buffett and Munger became very rich because of the environment and opportunities the US provided. They are happy to pay taxes in the US. However, Berkshire does not add a 20% tip on top of its tax return or forgo tax advantages in deals. 

142. Getting taxes to zero would not be a legitimate idea. 

Omaha: I am the most popular destination for one day

BSNF Acquisitions

143. BNSF has no plans for buying another railway company. They are at a size that there won't be an advantage in buying a competitor. 

144. Buffett does not know who came up with the concept of Intrinsic Value first [Graham or Fisher]. Actually, Aesop was the one who came up with it when he said, "a bird in hand is worth two in the bush." He said that in 600BC and business school professors have not improved much since then. "The question is how sure are you that there are two in the bush. How far is the bush? What are the interest rates? Well, Aesop wanted to leave us with something to work on...but that is Intrinsic Value." 

145. The Intrinsic Value of any business is the present value of all the cash distributed from now to judgement day. 

146. Fischer would look at qualitative factors to calculate the value of birds in the bush. Graham would want to see $2 [for every $1 in hand] in the bush. So, Fisher looked at qualitative factors and Graham looked at the quantitative factors to calculate Intrinsic Value. 

147. "I started out influenced by Graham so I emphasized quantitative factors then Charlie came along and said that I should value qualitative factors more. He was right. Qualitative factors are more insightful" 

148. Business is about cash-in, cash-out, and discount rate

I had no idea I will be so popular! 

Berkshire Competition 

149. Berkshire does not see anyone else trying to do what it is doing i.e. buying great business with great managers who to sell [and still run the businesses]. Private Equity companies are buying lousy companies and leveraging them up because debt is cheap. But's that not really competition. 

150. Berkshire has the momentum and the ethos in place. The people running the business [Buffett and Munger] are less important now. Berkshire has an advantage and it last a really long time. "We will keep on going. We will keep learning from our mistakes." 

151. Berkshire is an exception. Few of the great businesses have gotten big and stayed big for long. Berkshire will be more like Standard Oil than any other business. 

152. Ed Davis, a urologist who introduced Buffett and Munger, came up with an operation that was very successful. So, a lot of urologists came to Omaha to see Ed perform the operation. After they saw the complex and custom tools Ed was using, they decided not to copy him because the operation was too difficult. It is the same story with Berkshire. People find it difficult. 

153. "I think slowness [of Berkshire] turns people off more than anything else." -Buffett

154. Berkshire is difficult and slow. "The problem with being slow is that you are dead before it is finished." -Munger 

155. There is nothing being taught in business schools today that will create another Berkshire.


156. Inflation would hurt Berkshire. It would hurt most businesses. Certain assets that are highly leveraged may benefit from it. 

157. You don't create wealth by inflation. Let's assume that every household in the US gets $1M. Would US be better off? No. Berkshire, for sure, would be worse off. Berkshire's EPS would go up and Intrinsic Value in dollars would go up but the value of the business in real terms would go down.  The trick is to realize that you got $1M before anyone else. 

158. There are limits to printing money. Remember Weimar Germany. People that owned stocks like Berkshire got through but everyone else got wiped out. If you create so much misery that you get hit by war and holocaust, it is not a good idea to go that far with inflation. 

159. "I don't like this huge confidence of people creating a whole lot of money and spending it. I don't forget Weimar Germany and the US should not either. We shouldn't risk blowing up the whole thing because of some crazy politicians." - Munger 

Mergers and Acquisitions (M&A)

160. Most M&A in the US are dumb deals. It is in the nature of prosperous corporations to want to get bigger. Berkshire is peculiar in how and why it acquires companies. Luckily, not many companies want to be peculiar in the Berkshire way. 

161. GEICO made acquisitions in the past that got it off track but it recovered and is prospering. 

162. Bureaucracy feeds itself. Big companies buy other big companies. Think about the secondary effects [culture, distraction away from customers, etc. ]of these acquisitions. 

163. CEOs of big corporations have animal spirits. They like doing things. The investment bankers are calling them to do deals. The head of strategy is coming up with deals. What would the strategy guy answer if the CEO asks what have you done in the last three months? So, he comes up with deals. All these forces push toward the deal. If you push towards a deal, you get a lot of dumb deals. 

164. Berkshire is not eager to do deals but it is eager to do deals that make sense. 

165. There is nothing that changes behavior more than individual punishment. 

166. Wall Street behavior has enormously improved after the drama [2007-08 financial crises] we went through. We are over the worst but there will always be misbehavior when you are living in the center of easy money. 

167. "I maybe biased from my Solomon experience but I lean towards prosecution of individuals over corporations. I saw bad acts by a couple of people and negligence by a couple more [at Solomon] and it ended up destroying thousands of lives." - Buffett 

168. It is easier to go after corporations because they can write a check with someone else's money and the prosecutor gets a win. It is much more difficult to get a win from an individual who is fighting to stay out of jail. 

169. "We have really changed behavior on price fixing by criminal prosecutions. We haven't done that in finance yet but I think we are on our way." - Munger 

170. "Berkshire has 300,000+ people and somebody is probably behaving badly right now. The problem occurs when that individual bad behavior reflects on the corporation. Despite Berkshire reinforcing the importance of reputation, it is really hard to make 300,000+ people behave properly everyday. The way to change behavior is to have fear among the ones doing wrong. The fear that is going to come home to them and hit them hard. If the result [of doing wrong] is that the corporation writes a check then it is not going to have an impact." - Buffett 

I don't need another million. Just keep me out of here!

Disasters on Trains 

171. The big four railroad companies in the US have the capacity to handle major accidents. The worst disaster in railroad costed $200M. 

172. Berkshire is willing to sell disaster related insurance to the railroad companies but no one is willing to buy. 

Commercial Insurance 

173. Berkshire entered the commercial insurance business last year [despite high prices] because it has the capital, reputation, capacity to underwrite more intelligently than most other companies in the field. And, Berkshire cost structure is lower than average in the industry. On top of that, Berkshire has Ajit Jain

174. It was a logical thing to do for Berkshire. When something is logical, Berkshire does not hold back for better business cycle. Reinsurance is a long term business. 

175. "When we see a chance to enter the business we like with fundamental competitive advantage and outstanding people, we are going to play the game and play it hard." - Buffett


176. Berkshire has no plans of owning a sports team. 

177. Businesses like helmets and airport security should be owned by people with net worth in two figure. If a big company owns these businesses, it is a perfect target for people to sue. 

Why is Buffett not giving us money?

178. Berkshire has never used derivates to accumulate stock to get around rules of reporting. Buffett has no idea what activist investor, Bill Ackman, is doing with Allergan

179. Activism is not going to go away and it scares managers. There are some cases where managers should be changed. However, activist investors are not looking for permanent value increase in the business. All they want is increase in share price one way or the other and that ends their interest. 

180. Activist investors are attracting more money. They can play the game at a bigger scale. On Wall Street, anything that looks successful keeps on going until it is no longer successful. 

181. Activist investors have made a lot of money. Our culture allows money to be made any way possible [legally]. You would not want some of these activist investors marrying into your family. And, these people buying companies is not particularly good. What's happening is not good for America. 

182. Activist investing is what Oscar Wilde would called fox hunting - the pursuit of the uneatable by the unspeakable. 

183. Activist investing will be bigger in three years from now because nobody is stopping it. 

Let me make another billion quickly or...

Small Companies 

184. Berkshire leaves the buying of small companies to its subsidiaries. Last year, Berkshire subsidies made 25 acquisitions. 

185. When Berkshire buys companies it is looking at real impact on earnings power of Berkshire. 

185. There is a lot of competition in buying small companies because of a lot other companies and Private Equity firms can buy them. 

Capital Allocation to BH Energy

186. Berkshire allocated capital to BH Energy based on returns on cash invested. Berkshire is looking to invest more cash into BH Energy as long as as it is treated fairly by regulators. 

187. There are times when no net investments are required in businesses. Berkshire prefers investing in utilities [BH Energy] because it gets reasonable returns. Berkshire is betting that regulatory bodies will present these [investment] opportunities in future because BH Energy performs better than its competitors. 

188. BH energy is low cost provider. It rarely raises prices. Regulators are very supportive of its projects. 

189. BH energy is going to invest $1.9B in Iowa over the next two years with 11.6% return on capital. 

Education Systems

190. "I think the US made a big mistake by asking the public schools to go to hell. The Asian countries are less likely to do that. I think we should be more like them." - Munger 

Housing Reform

191. 30 year fixed-rate mortgage has been a terrific boom to home ownership. 

192. Home mortgage is an $11T market. There is no capacity for the private sector to do it. The question is how to keep government in the picture without keeping politics in the picture. You found Freddie and Fannie doing dumb things with the politicians prodding them into it. 

193. The biggest problem with Freddie and Fannie was that they had two masters. They had to insure mortgages and deliver double digit earnings growth. They should just stick to insurance. We saw what happened when tried to become the biggest hedge fund in the market. 

194. Privatization of Freddie and Fannie was a total failure. "They [Freddie and Fannie] are behaving pretty conservatively now. Let them just keep doing what they are doing." 

195. Berkshire will play no role in insuring housing mortgages. 

3G Capital (3G) Success Formula 

196. The reasons for 3G's success go beyond Zero Based Budgeting. They are pretty well outlined in a book by the founders of the company. The book is called Dream Big

197. The partners at 3G are smart, hardworking, focused, and honest. They are trustworthy. They never overreach or over-promise. Berkshire is lucky to have them as a partner. 

198. "You get the partner you deserve. If you get a good partner, you deserved it. Just behave yourself correctly. It is amazing how well that works." - Munger

199. Removing unnecessary cost is a service to the civilization. However, it should be done with some sensitivity. In the end, it is good for the system. Berkshire is learning from 3G. 


200. At some point in future, Berkshire will have more capital than it can intelligently deploy. At that time Berkshire will do what is best for the shareholders. All Berkshire decisions follow that principle. 

201. "It is not a tragedy if the future [Berkshire's] returns go down. It is success. It is winning." - Munger 

202. When an existing business is threatened, it fights back with regulation, competition, etc. The companies like Airbnb and Uber are threatening hotel and taxi companies. And these companies are fighting back. It is tough to say who the winner will be. Berkshire does not invest in the industry where it can not predict the winner. 

203. The new technologies will be quite disruptive particularly in retail. When you get computing power at this scale, it changes the world. Berkshire companies will do fine. 

Financial Literacy 

204. Financial literacy should start very early in people's life because habits are a powerful force in peoples lives. Getting out of holes that financial illiteracy digs for you can take a lifetime. 

205. More than schools, parents are at fault for not teaching their children about finance. "You can't fix people with wrong parents." - Munger 

206. Net utility from people who study finance in colleges has been negative. Universities are teaching some very dumb things. To get a job at a University, you have to subscribe to the orthodoxy. It is bad. 

Pass to wisdom

Please join me next year.