2016 Berkshire Hathaway Annual Shareholders Meeting Notes

[Dexter]

Here are some notes I took during today's Berkshire Hathaway Annual Shareholders Meeting.  Please feel free to post any thoughts or additions you have.  Enjoy!

2016 Berkshire Hathaway Annual Shareholders Meeting Notes (4/30/2016)

• Precision Castparts (structural investment castings, forged components, and airfoil castings for aircraft engines and industrial gas turbines) is a business that requires a superior management.  In the old days, Berkshire could purchase businesses that didn't require superior management.  But that's not the case now.

• Reinsurance business will not be as good in the next 10 years, as it was 10 years ago. Berkshire sold holdings of Munich Re and Swiss Re.  Much of this is due to lowering of interest rates because float can't be invested as profitably.  However, within Berkshire, there are more attractive reinvestment opportunities – this is a benefit for Berkshire Hathaway Reinsurance Group and Gen Re.  There is more competition now in reinsurance.  In reinsurance, supply has gone up (e.g., money managers want to set up an investment operation offshore in a friendly tax environment) and demand has not gone up.

• Distracted driving has probably gone up.  This has affected Geico.  Progressive had a better recent quarter than Geico.  But Charlie Munger says he doesn't think that we should worry too much that another auto insurer did better than Geico in one quarter.

• Discussion of push vs. pull marketing (Amazon).  Berkshire is not going to out-compete Amazon at its own game.  Berkshire, though, is well situated.  Berkshire is not focused on any one industry – and is willing to be flexible about where to go with capital.  Berkshire has been helped by the internet overall.  Berkshire's retailing operations shouldn't be hurt by Amazon for a while, and Berkshire is not concentrated in retailing.  Past failures have taught Berkshire management that retailing is a tough field – and the current retailing environment is no exception to that.   

• Discussion of Coca Cola health effects.  Can't discuss costs without also addressing personal benefits (happiness, etc.). 

• Discussion of renewable versus fossil fuel energy generation, as well as government regulation, tax benefits of renewables, and charging affordable rates to customers.  Berkshire pays lots of taxes, and thus can take advantage of tax credits related to renewable energy generation.

• Float is worth more to Berkshire than a typical insurer because Berkshire has more investment options.  But float is definitely worth less with lower interest rates.

• Railroads (e.g., BNSF) carrying coal is in secular decline.  That is about 20% of revenues, and it is a significant factor.  BNSF is a very good business to hold forever.

• Solar and wind need to be subsidized in order to be competitive with natural gas.  The question of who subsidizes renewables is going to be a question for some time.  However, the subsidy shouldn't hurt the 99% of people in favor of the 1% of people with solar panels that can sell energy back to the grid at much higher, subsidized rates (e.g., the situation in Nevada).

• From 2010 to 2030, Berkshire Hathaway Energy will reduce coal generation by 57%.

• Berkshire is not making a bet on the price of oil with its investments.  For example, Phillips 66 and Precision Castparts.  These investments were made for other reasons.  Berkshire can't predict the prices of commodities.

• If Donald Trump or Hillary Clinton becomes president, Berkshire Hathaway will continue to do fine.  Berkshire has operated under higher tax regimes and various regulatory regimes and done fine.

• Owners of business have done well over time.  Business owners have not suffered like owners of fixed income investments.  Business is the engine of the market economy that has delivered output that is staggering.  In Buffett's lifetime, the real per capita GDP output in the United States has increased 6 times.  The future may not be as good as the past, but it doesn't have to be for everyone to do well.

• Since 2008-2009, capital requirements have increased for large banks.  Intent is to make large banks less profitable relative to smaller banks.  Capital requirement changes can change banking profitability significantly.  With higher capital requirements, returns on equity go down.  Wells Fargo is Berkshire's largest non-controlling investment.  Buffett likes Wells Fargo because of the deposit base and because it is well run.  Buffett didn't buy Wells Fargo because it was going to buy Wachovia (an investment bank).  Generally, Charlie Munger and Buffett fear the investment banking industry more than they like it.

• Could Berkshire Hathaway be broken up if it trades at a discount in the future?  Buffett doesn't fear that as much as he used to.  Berkshire Hathaway is willing to do repurchases if the stock price drops below intrinsic value (Berkshire should always have money for investment).  Also, businesses inside Berkshire would be worth less if Berkshire were broken up.

• In leasing, Berkshire needs to bring something to the party.  In pure leasing (e.g., leasing of new cars), the banks have an advantage over Berkshire.  Banks have a lower cost of funds in this area.  Aircraft leasing doesn't interest Buffett in the least.  Charlie Munger doesn't view leasing as a large opportunity.

• You don't want to try to fix something that is unfixable.

• Buffett provided some history on the Sequoia Fund (some of Buffett's partners moved their investments over to Bill Ruane/Sequoia after the closing of Buffett Partnerships) and a discussion of the Valeant debacle.  Sequoia's investment manager made a large investment in Valeant even with objections from some board members.  The investment manager is no longer with Sequoia.  In Buffett's view, Valeant had a flawed business model.  Pattern recognition is extremely important in the investment field. 

• Update on Buffett's bet with Protégé Partners that an unmanaged S&P500 index fund would beat five hedge funds (hand-picked by Protégé) over 10 years.  After eight years (at December 31, 2015), the Vanguard S&P 500 Index Fund cumulatively gained 65.7% and the Hedge Funds gained 21.9%.  However, the hedge fund managers have likely been extremely well compensated, even though their collective efforts have led to significant underperformance compared to the S&P 500.  No one wants to believe that they can't beat the S&P500 index – so they spend a lot of time, money, and effort to try and beat the index -- but it is extremely difficult.  For the population as a whole, hiring professional investment management is a huge minus.  Only a very small group of investment managers have exceeded the equity indices over time.

• Berkshire Hathaway is significantly more valuable than 1.2 times book value per share.  Odds are extremely high that Berkshire Hathaway would buy back lots of stock at 1.2 times book value per share or less.  Money is worth a lot more at Berkshire Hathaway than being paid out as a dividend.  Buybacks need to be done at a demonstrable margin of safety. 

• Only swing at things in your particular strike zone.  You don't need a high IQ, but you do have to have emotional control.  Avoid self-destructive behaviors.  An investor's temperament should consist of patience and opportunism.  Berkshire is really trying to behave well.

• Assessing whether a selling owner/manager of a business is going to behave differently in the future (after the business is acquired) is extremely important.

• Really able people can handle a tremendous amount.  There is no limit to what talented people can accomplish.  Conversely, you can't fix people that are not able.

• Berkshire doesn't have some grand design in mind.  Berkshire simply tries to intelligently solve every problem that comes its way.

• Why doesn't Berkshire Hathaway have the highest credit rating from the rating agencies?  According to Charlie Munger, the rating agencies are wrong.  Berkshire doesn't fit the ratings agencies model.

• Tom Murphy had the best approach to hiring employees: just hire the people you need.  If you don't need people now, you didn't need them in the first place.  Lean staffing is the way to go.  However, there may be some cyclical hiring/firing in certain businesses. 

• You'll pay more for a business when interest rates are near zero.  Very cheap money makes you pay more for businesses.  Conversely, very expense money makes you pay less for businesses.  Buffett paid a little more for Precision Castparts because interest rates were low.

• Nobody knows much about negative interest rates.  We've never had them before.  Berkshire just tries to do the best it can in any environment.

• Berkshire reassesses its reasons for owning all its businesses all the time.  Buffett is happy to own American Express.  However, AMEX's position has been under attack lately.  According to Charlie Munger, a lot of great businesses nowadays are not quite as great as they used to be.  The world changes and you need to be thinking all the time about potential game changers.

• Charlie Munger doesn't think that owning cattle is a great business.  It's a tough niche in the economy.

• Berkshire tries to incentivize its managers to maximize business value.  Just focusing on maximizing current profits would adversely affect future profitability and business value.  Many bad examples of incentives come from banking and investment banking.  Incentives need to be simple and correct.

• Warren Buffett thinks the residential real estate market is not as attractive today as it was in 2012.  Some recent low cap rate transactions point to some froth, but interest rates are low.  Buffett, however, doesn't see a nationwide bubble in residential real estate right now.

• IBM is coping with a change in the computing world.  It's a field where a lot of intelligent people are competing.  Mr. Munger and Mr. Buffett opted not to provide an investment analysis for IBM, however, they did state that they don't know if IBM's strategy and efforts will succeed.