2014 Berkshire Hathaway Annual Shareholder Meeting The Berkshire Hathaway annual meeting is an opportunity for shareholders and analysts to pose questions to Warren Buffett and Charlie Munger in a five-hour session covering BY R. HUTCHINGS VERNON, CFA Co-Portfolio Manager, over 60 questions. Flexible Equity Strategy
MAY 3, 2014 MEETING
arren Buffett and Charlie for the company and Buffett will be 2 COMPENSATION PRACTICES AND BOARD Munger are still going understanding, but lose reputation and BEHAVIOR strong at 83 and 90 years he will be ruthless. H. J. HEINZ AND 3G CAPITAL; BOOK young. They tackle dif- These notes are highlights rather RECOMMENDATION W BERKSHIRE’S BENCHMARK OF PERFORMANCE ficult questions and communicate in a than a transcript. Related subjects are clear manner that leaves little doubt as to grouped together. My thoughts and 3 INTRINSIC VALUE their insight and accumulated wisdom. comments are within brackets to dis- INTRINSIC VALUE OF BERKSHIRE, SHARE Attendance has grown to an esti- tinguish them from what I heard at the REPURCHASE AND CAPITAL ALLOCATION mated 38,000 from several hundred KEEPING TRUST WITH MANAGERS; OPERATING ON DESERVED TRUST since I started attending these meetings OPPORTUNITY COST IS THE COST OF CAPITAL 29 years ago. Buffett and Munger are Buffett & Munger 4 BERKSHIRE STOCK VS. AN S&P INDEX FUND great thinkers and entertaining teachers. are still going FOR BUFFETT’S WIFE They celebrate good business and invest- SUCCESSION QUESTIONS; HAVING A PARTNER ment practices, the potential for human strong at 83 and CAPITAL ALLOCATION AND CASH achievement, high ethics and decency to SEE’S CANDIES one’s fellow man. Studying Buffett and 90 years young. Munger, you get a course in business, BANK OF AMERICA investing and decision-making, covering ACQUISITIONS material learned from eight decades of meeting, though they may reflect what 5 CLIMATE CHANGE experience. has been said at prior meetings. TED AND TODD The meeting ingrains the culture of Since Buffett took control of Berkshire FED POLICY Berkshire with shareholders and employ- Hathaway in 1965, he has built it from CONGLOMERATE MODEL AND BERKSHIRE ees. An entertaining movie is shown a small, competitively challenged tex- OIL SANDS each year that celebrates Berkshire’s tile business to a stock with a market MISTAKES AND CHANGE businesses, managers and employees. A capitalization of over $300 billion. 6 GEICO recurring part of the movie is Buffett’s Berkshire ranks as the fifth largest com- CIRCLE OF COMPETENCE testimony to Congress during the pany in the U.S. by market value after 7 DOING IT OVER AGAIN TODAY Salomon Brothers scandal in the 1990s. Apple, Exxon, Google and Microsoft, FRUGALITY Buffett, who stepped in as chairman and ahead of Johnson & Johnson and of Salomon Brothers after manage- General Electric. Notable businesses TAXES AND RELOCATION ment resigned, tells Congress that he within Berkshire are GEICO Insurance, COPYCATS AND COMPETITION FOR BERKSHIRE has instructed employees to behave as Burlington Northern Railroad and INFLATION though their actions will be reported by consumer-product companies such as PROSECUTION OF BAD ACTORS an informed and critical reporter on the Fruit of the Loom, Dairy Queen and S&P 500 INDEX VS. HEDGE FUNDS front page of the newspaper for all their See’s Candies. Berkshire also holds friends and family to read. Lose money multibillion dollar investments in
JUNE 2014 MAY 3, 2014 MEETING
Wells Fargo, Coca-Cola, American and would like to get more of them. [In for shareholders. [Buffett and Munger Express and H.J. Heinz, among oth- contrast, the members of Berkshire’s make only $100,000 per year in com- ers. Readers are encouraged to study board receive almost no compensation pensation. Though the amounts are Buffett’s annual letters to sharehold- for serving ($900 for each meeting in not disclosed, many other executives ers for their wealth of business and person, $300 for each telephonic meet- at Berkshire are highly compensated investment wisdom, which are available ing, and $1,000 per quarter for each based on their results and incentive at www.berkshirehathaway.com. member of the Audit Committee.) programs devised by Buffett.] Buffett They may be friends of Buffett, but promised to write about the appropri- COMPENSATION PRACTICES AND the Berkshire directors are financially ate compensation for Berkshire’s future BOARD BEHAVIOR independent.] leadership in the next annual report. The day’s first question was why Buffett has served on the compensa- Berkshire abstained from voting tion committee of a board only once. He H. J. HEINZ AND 3G CAPITAL; BOOK against the executive compensation explained that compensation commit- RECOMMENDATION plan at Coca-Cola. Buffett explained tees look for cocker spaniels with their In 2012, Berkshire partnered with that although he isn’t a fan of the tails wagging rather than Dobermans. 3G Capital to acquire H. J. Heinz. recent compensation plan at Coke, he Objecting to everything that differs Asked if Berkshire would adopt the expressed his displeasure through an from one’s own opinion would not be cost-cutting practices of 3G or do abstention and a private communica- effective within the board structure (or future deals with 3G, Buffett offered tion with Coke CEO Muhtar Kent society). Reflecting on the social nature that 3G does a magnificent job of run- rather than voting no or going to war of boards, Buffett asked how often you ning businesses in a very lean style and with the company. would invite someone to dinner who that he expected to see more opportu- A later questioner wanted to know belched loudly at each occasion. nities to partner with them. Berkshire why Buffett’s son Howard, who now As for Howard Buffett’s position has a somewhat different style in run- serves on the Coke board, had not on the Berkshire board and his even- ning businesses and wouldn’t try to pushed to alter Coke’s compensation tual role as Chairman, Warren Buffett combine its approach with that of 3G, plan. Buffett, an experienced board explained that Howard would not be but Berkshire doesn’t love overstaffing member having served on 19 corporate there to run Berkshire as CEO, but to either. Buffett recommended “Dream boards including the Coca-Cola board facilitate a change in CEO should that Big,” a book that chronicles the rise of at one time, explained that boards are ever be needed. Munger agreed that the Brazilian trio behind 3G Capital. partly business and partly social orga- Howard Buffett is an excellent choice Buffett cited the 3G team as being nizations. Only rarely can a board in that role. Howard is knowledge- smart, determined, never satisfied, hard member vote against the flow of board able about business, Berkshire and its working, very good at removing unnec- opinion or the recommendation of a unique culture, and his father’s ways of essary costs, and not over-promising or subcommittee charged with a particu- thinking. over-reaching. Buffett said that Heinz lar responsibility. To a later question, Buffett com- will file 10-Qs so its financial reports Despite appearances to the contrary, mented that proxy statement disclosure will soon show the improved cost struc- many board members aren’t really inde- of compensation for top executives at ture under 3G. pendent at all, as they receive $200,000 corporations had the opposite of its to $300,000 per year for serving. Most intended effect. No board wants to BERKSHIRE’S BENCHMARK OF directors enjoy their current positions admit its officers are mediocre, and PERFORMANCE no CEO benchmarks himself against Buffett uses the growth in Berkshire’s Without the the lowest paid CEO, so compensa- per-share book value as a rough mea- tion plans constantly escalate with the sure of its increase in intrinsic value. public disclosure, help of public disclosure and the com- His goal is for this measure to exceed parisons that ensue. Without the public the return of the S&P 500 Index over corporate CEOs disclosure, corporate CEOs would be time, but it failed to do so over the last would be making making a lot less money. five years, as the stock market return Berkshire gives the minimum disclo- was very high from the bottom of the a lot less money. sure of its executive comp and doesn’t bear market. From the market peak in intend to change, as it wouldn’t be good late 2007, Berkshire has done quite well
2 BROWN ADVISORY BERKSHIRE HATHAWAY ANNUAL SHAREHOLDER MEETING NOTES MAY 3, 2014 MEETING
against the market. Berkshire’s business progress in any intrinsic value. Buying back stock at more than intrinsic one year will tend to underperform a strong stock market, value hurts shareholders. match a moderate stock market and outperform a weak At some point in the future, Berkshire will generate market. Over longer periods, Buffett expects Berkshire to more cash than it can deploy to create value for sharehold- outperform the equity market. ers. Berkshire’s test for retaining capital is whether a dollar of capital retained creates more than a dollar of value for Berkshire stands ready to shareholders. Whatever Berkshire decides to do then will be in the shareholders’ interest. buy back stock at up to KEEPING TRUST WITH MANAGERS; OPERATING ON 120% of its book value. DESERVED TRUST Asked how he keeps the trust of the managers of the Munger thinks this is a ridiculous yardstick, but Buffett businesses that Berkshire acquires, Buffett answered that likes to climb high mountains. Book value growth for Berkshire keeps the promises it makes. As long as a busi- Berkshire is after a full tax rate on earnings where there are ness makes money and doesn’t have labor problems, even no taxes assumed on the S&P 500 Index return. Berkshire if it doesn’t live up to original expectations, Berkshire will has increased profits dramatically. If failing to beat the keep a business that it bought. People who sell a business to market over the last five years is a bad thing, he’ll take more Berkshire care where the business goes and how it and its of it. people are treated by the new owner. They choose to sell to Berkshire rather than to others for this reason. [Berkshire is INTRINSIC VALUE in the business of buying for keeps rather than buying for Intrinsic value equates to private business value. It the purposes of dressing something up to sell it again later.] is the present value of all the money that comes out of a Asked about the weak points within Berkshire, Munger business in the future. It is an estimate. Legendary investor commented that Berkshire is quite disciplined in some ways Ben Graham emphasized the quantitative factors in his but sloppy by ordinary standards in others. For example, estimates; and Phil Fisher, the qualitative. they don’t sweep the cash up out of their businesses everyday Aesop explained intrinsic value well when he said a bird into a central account. In periods of high interest rates, they in the hand is worth two in the bush. If you’re going to could earn a bit more by doing that. But sweeping the cash exchange birds in the hand for birds in the bush, you need changes the tone of the relationship with the managers. to know how many are in the bush, when you are going to There will be times when they miss something through get them and what you could have done with your birds in the lack of close attention to details like this, but giving the hand in the meantime. Graham would count the birds Berkshire’s managers the freedom to run their businesses he could see in the bush and wanted to see at least two birds gets greatness from them too. Berkshire gets positives from for each one he exchanged. Fisher would use qualitative fac- the leeway it allows that are hard to measure relative to the tors to estimate how many birds were in the bush, those he occasional downside. could see and others that might be there too. Berkshire operates on a system of deserved trust. By the standards of the rest of the world, Buffett and Munger over- INTRINSIC VALUE OF BERKSHIRE, SHARE REPURCHASE trust, but a great good comes from that. AND CAPITAL ALLOCATION Though Buffett benchmarks Berkshire’s performance to OPPORTUNITY COST IS THE COST OF CAPITAL the increase in book value, Berkshire’s intrinsic value far Berkshire measures cost of capital by its opportunity exceeds its book value. In recent years as Berkshire has cost, that is, what it can earn with its next best idea [as grown and the capital it generates annually has become opposed to any number derived through arcane financial harder to deploy due to its size, Berkshire has begun to buy calculations]. Berkshire generates huge amounts of capital back its own shares when they are undervalued. Berkshire to invest each year. The test of retaining capital to invest is stands ready to buy back stock at up to 120% of its book whether it produces more in market value than the dollars value, a level that indicates Buffett’s belief that Berkshire’s retained. Berkshire’s size is an anchor to its future perfor- intrinsic value is substantially higher. Buying back stock is mance, but it intends to retain capital as long as it can add at only shareholder friendly when it is done for less than its least a dollar to market value for every dollar that it retains.
BROWN ADVISORY BERKSHIRE HATHAWAY ANNUAL SHAREHOLDER MEETING NOTES 3 MAY 3, 2014 MEETING
BERKSHIRE STOCK VS. AN S&P private letters from all of the CEOs of snacks. Different areas have different INDEX FUND FOR BUFFETT’S WIFE Berkshire’s businesses telling him what tastes in chocolate. The East likes dark In discussing investments in his to do and who the replacement should chocolate better, and the West likes annual letter to shareholders, Buffett be if needed. Munger added that he milk chocolate. See’s has done better mentions that his will directs the cash doesn’t worry in the least about succes- than others, but it can’t do much to delivered to the trustee for his wife’s sion planning at Berkshire. increase the size of the market. benefit be invested mostly in an S&P See’s opened Buffett and Munger’s 500 Index fund. Asked why this choice CAPITAL ALLOCATION AND CASH eyes to the power of consumer brands rather than investment in Berkshire To a question about drawing cash with pricing power. Munger com- shares, Buffett explained that all his out of Burlington Northern versus mented that See’s biggest contribution Berkshire shares will go to five dif- leaving cash at MidAmerican Energy was the removal of their ignorance ferent charities that the charities will Holdings, Buffett explained that both about this, saying they were pretty stu- retain until they need money for dis- companies make big investments in pid back then, just barely smart enough bursements. This will take about 12 their businesses and would continue to to buy it. He added that the good news years, so Buffett is bullish on Berkshire do so. The difference is that Burlington about Berkshire is that they still have a for a long time to come. For his wife, Northern generates more capital lot of ignorance to remove! Buffett believes that stocks as repre- than it needs for reinvestment, while sented by the S&P 500 Index will do MidAmerican has acquisition oppor- BANK OF AMERICA quite well over time. There is no way tunities as well as internal investment Bank of America’s miscalculation for the trustee to get a bad result in the opportunities to soak up the capital it of capital doesn’t change Buffett’s S&P 500 Index, as he might by trying generates. Further, MidAmerican is thoughts on its business or the job that to invest otherwise. only 90% owned, while Burlington management is doing there. Mistakes Northern is 100% owned. The dif- happen. Berkshire has a 20,000-page SUCCESSION QUESTIONS; HAVING A ference in ownership combined with tax return. You do the best you can. PARTNER the greater reinvestment possibili- Bank of America’s error didn’t change Asked if there would be an eventual ties makes it easier to leave cash at its net income. successor to Charlie Munger, Buffett MidAmerican. Munger cited the abil- Recently Bank of America asked to joked that Munger is his canary in ity to deploy large amounts of capital change the terms of the preferred stock the coal mine and that he has been through MidAmerican at predictable that Berkshire owns to improve its encouraged by how well Munger is rates of return as being a great advan- standing in calculating capital ratios. handling middle age. More seriously, tage for Berkshire. Berkshire agreed to change the terms Buffett commented that Berkshire Berkshire Hathaway always keeps to noncumulative from cumulative is far better off because the two have about $20 billion of cash on hand, giv- in exchange for making the security worked together over the years. Buffett ing it the ability to pay large insurance noncallable for five years. Converting expected that a partnership could claims or invest opportunistically with- to noncumulative would normally develop with their successors in leading out “having to depend on the kindness not be a good trade except for the 6% Berkshire, though it might not take the of strangers.” Buffett explained that rate amid very low interest rates else- exact same form. cash or credit is to business like oxygen where. The preferred can still be used To a later question on their relation- is to people. You normally don’t notice as payment for the conversion of the $7 ship, they acknowledged that they have it, but in the absence of it, it is the only warrants that came with it. disagreed on a lot of things but have thing you notice. never had an argument. Years ago, they ACQUISITIONS might talk every day; now they talk SEE’S CANDIES Asked if Berkshire’s large holdings about once every two weeks. On most Asked why See’s has trouble growing, in Wells Fargo, Coke or IBM might things they think alike, so they don’t Buffett explained that the boxed-choc- be sold to pay for a very large acqui- waste a lot of time talking. Buffett is olate business isn’t growing. Years ago, sition, Buffett responded that it was more inclined to action than Munger. every city had its own boxed-chocolate possible but unlikely. Selling those Asked about succession planning stores—Pepsi grew out of the Loft’s stakes would not be the first option at Berkshire’s individual businesses, candy business in New York—but they would consider if it needed to Buffett explained that he hasboxed chocolate has lost share to other raise cash. Berkshire wants to buy
4 BROWN ADVISORY BERKSHIRE HATHAWAY ANNUAL SHAREHOLDER MEETING NOTES MAY 3, 2014 MEETING whole businesses more than it does will happen from climate change are well if you consider the companies in parts of businesses through buying over-claiming their ability to know. the Dow Jones Average together as a stocks. With its cash on hand and cash There’s clearly warming going on, but conglomerate. Capitalism is capital it generates each year, Berkshire can some people are overly attracted to the allocation, and Berkshire can move buy quite large businesses without sell- idea of catastrophic changes. Berkshire money around within the company ing down its portfolio. Borrowing $30 is well positioned regardless. without tax consequences, which or $40 billion wouldn’t cost Berkshire argues against breaking Berkshire up much at today’s interest rates, but it TED AND TODD into smaller units. Owning a group of would be reluctant to do that [see oxy- Ted Weschler and Todd Combs, good businesses isn’t a terrible business gen and cash comparison above]. But the two investment managers whom plan. Some conglomerates in the past if a good $50 billion acquisition came Buffett selected a few years ago, are were stock-promotion vehicles where along, Buffett and Munger would fig- each managing investment portfolios management liked to get the stock up ure out how to do it. of about $7 billion for Berkshire. These so they could exchange over-valued To a later question on acquisitions, amounts will grow as time goes by, and stock for businesses. Munger added Munger offered that the sum total of that’s good. [They bring new ideas and that Berkshire feels no compulsion to those done by American businesses can look at smaller companies than buy companies, and they can invest have been lousy–they haven’t created Buffett focuses on.] They have been through their insurance portfolio if wealth. Most have been bad ideas and a helpful in doing things for Berkshire there are no companies around to buy few mediocre. Bad acquisitions destroy beyond their investment duties as well. [desirable whole businesses at reason- value for shareholders. able prices]. People who get to be CEOs aren’t FED POLICY shrinking violets. They want to do Buffett wouldn’t do much differently OIL SANDS something, and forces push them than the Fed has done in managing Berkshire has exposure to the oil toward deals, which is why so many the monetary system. Their policies sands, but it is not overly exposed. are bad. Acquisitions have been a path worked well in stemming the finan- Berkshire has a business that sells a lot to success at Berkshire, but Berkshire cial crisis. Ben Bernanke was a hero of cranes there, MidAmerican owns does not do them the same way as oth- in how he handled the crash and the power transmission lines in Alberta, ers. Berkshire tries hard not to be eager aftermath. It is fascinating to read the Berkshire has an investment in Exxon to do deals–just to be ready to do good Fed transcripts of meetings during the that owns some oil sands, Burlington deals when they come along. crisis and see that not everyone at the Northern transports about 600,000 Most but not all of Berkshire’s Fed realized what was going on and barrels a day of oil, and Berkshire acquisitions have been in the U.S., as how serious things were. just bought a business that makes an Berkshire has had better luck getting Cash was king in the crisis, but only additive that improves the speed of on the radar screen of business own- if you used it and you were dumb if oil flowing through pipelines. The oil ers seeking to sell in the U.S. than you didn’t. People tend to cling to cash sands are huge and will be an impor- elsewhere. at the wrong times. Low interest rates tant source of oil for a long time, but have had a huge effect on the economy they won’t change anything much at CLIMATE CHANGE and asset prices. This isn’t a bubble, Berkshire. Responding to a question about the but it’s unusual. No one has seen this effect of climate change on Berkshire, movie before, and we don’t know how MISTAKES AND CHANGE Buffett noted that Berkshire can be it ends. Buffett took full blame for the $1 affected in many ways, some positive billion loss realized in the bonds of and some negative. They’ll carry less CONGLOMERATE MODEL AND Energy Future Holdings, the company coal on the railroad at some point in BERKSHIRE that bought Texas Utilities in a lever- the future, but MidAmerican Energy A questioner worried that the con- aged buyout a few years ago. Buffett’s Holdings will also install a lot more glomerate model would not work as key assumption that natural gas prices wind power. It can affect insurance well for Berkshire in the future given would not collapse was wrong. The through casualty losses, but most of the the record of other conglomerates technology for finding and producing effects are very gradual. Munger added in the past. Buffett disagreed and natural gas changed, which caused its that people who think they know what argued that the model had worked price to drop.
BROWN ADVISORY BERKSHIRE HATHAWAY ANNUAL SHAREHOLDER MEETING NOTES 5 MAY 3, 2014 MEETING
All businesses are subject to change and must adapt. buying whole businesses more than stocks. They are looking GEICO is an interesting example. It started in 1936 offering to buy big businesses, good businesses run by good managers auto insurance to government employees by mail [govern- at reasonable prices without issuing shares of stock. When ment employees were a better driving risk than the general they had less money to invest, maybe they could get some population of drivers]. Distribution moved to the phone, money in at the bottom tick. Today, they are forced by their then to the Internet and now possibly to social media. Along past success to buy whole businesses. the way, in the 1970s, GEICO broadened its target market Buffett continued that they have bought a fair amount of beyond government employees, and it almost went broke Wells Fargo over the last few years, but bigger gains in share due to bad underwriting in some lines it didn’t understand. price were made by banks of lesser quality. Buffett was 100% Business managers have to think about change. Berkshire’s comfortable buying Wells but only 50% going somewhere businesses generally deal from strength and typically aren’t else, so he went where he was most comfortable. The weaker subject to rapid change, though sometimes slow change can institutions needed a better economy to recover, whereas lull you to sleep. Berkshire makes mistakes occasionally [and Wells was going to recover regardless.
If past history was all GEICO There were several questions about GEICO: the threat there was to the game, the from self-driving cars, a competitor’s use of a system to cap- richest people would be ture driving habits (Snapshot from Progressive), and whether GEICO can catch State Farm to become the largest auto librarians. insurer. Cars that drive themselves would be good for society but some businesses go to zero], but there are no bet-the-com- are a real threat to the auto insurance business. It could take pany situations at Berkshire. a while to get there though, and Berkshire will keep GEICO Munger added that scrambling out of your mistakes is regardless. Munger suggested that the questioner was young enormously important. Berkshire could have stuck with enough to figure it out, but that he is old enough to go away the textile, trading-stamp or department-store businesses peacefully without knowing how long that will take. they owned that all went to zero. Instead, they took cash Insurance is all about figuring the propensity for loss to be out and went on to better things. The $6 million that they able to establish the right price for the insurance. Progressive salvaged from their department store adventure turned into thinks Snapshot gives it valuable input for doing this, but $45 billion because they got out of a mistake and moved on GEICO has a pretty good system for estimating and pricing to better things. Change is inevitable, so how well you adapt risk too. to it is very important. Buffett said he had calculated that at the current rate of Another question was whether Berkshire should have done growth, GEICO could catch State Farm by the time he better with the opportunities presented during the financial turns 100. GEICO started in 1936 and had reached a 2% crisis. Buffett said that looking back, he spent a consider- share prior to 1993. Since 1993 when Tony Nicely took able amount of cash too early (in September and October over the leadership at GEICO, its share has grown to 10%. of 2008) relative to the timing and prices at which the mar- GEICO will continue to gain share as long as it takes care ket bottomed (in March of 2009). Buying Harley Davidson of its customers and prices risk well. Munger added that bonds with a 15% yield was a good investment, but buying what GEICO does, improving the quality while constantly the stock would have been better. Looking back, you can looking to lower its prices, goes almost against nature. He always do better, but he doesn’t know how to pick the bot- compared GEICO’s approach to that of Costco’s, and said tom. The game is played forward, not back. [A favorite quote that offering more for less is a powerful business model that from Buffett is “If past history was all there was to the game, is extremely hard to compete with. the richest people would be librarians.”] Munger added that you can’t put much money into any CIRCLE OF COMPETENCE stock on the bottom tick. Off the bottom, the worst com- Buffett attributes much of his investment success to know- panies had the greatest recovery because they had dropped ing his circle of competence. Asked how to define your circle the most. [At the turn, the biggest short-term gains are often of competence, Buffett said it is about being realistic in made on the most marginal players, but what if the turn assessing your talents and shortcomings. Buffett admitted doesn’t come?] At Berkshire’s size, they are interested in that he has gone out of it sometimes and joked that Munger
6 BROWN ADVISORY BERKSHIRE HATHAWAY ANNUAL SHAREHOLDER MEETING NOTES MAY 3, 2014 MEETING has periodically given him guidance on since 1958. Buffett said he had every- would likely do better than most his limits. Buffett cited Rose Blumkin thing in life that he wanted, noting under inflation.] Inflation doesn’t cre- and her sale of the Nebraska Furniture that standard of living doesn’t equate ate wealth, but it can move it around. Mart to Berkshire as an example of cir- with cost of living. If he had six or Under inflation, Berkshire’s earnings cle of competence. Buffett would have eight houses, his life would be worse, and value would go up, but not in real paid stock for the acquisition, but Mrs. not better. Munger continued that fru- purchasing power. Debtors might like B. didn’t know stock. She said, “Pay me gality has helped Berkshire. Berkshire inflation–if you have big mortgage and in cash. I know cash.” attracts frugal, understated people. lots of inflation, the mortgage becomes Munger added that competency is a Buffett interjected that shareholders worthless and you still own the house. relative game. Berkshire has benefited should forget frugality this weekend Munger added that people who owned from a large supply of idiots to compete and shop at Borsheims Jewelry and businesses like Berkshire’s survived against. Buffett had earlier observed Nebraska Furniture Mart. The more Weimar Germany, while savers were that he knew some CEOs with no idea they spend, the more they save at these wiped out. where their circles begin and end. prices! PROSECUTION OF BAD ACTORS DOING IT OVER AGAIN TODAY? TAXES AND RELOCATION To a question noting the recurring Asked what business he’d go into There was a question about relocat- settlements paid by banks for bad if he were 23 today, Buffett answered ing Berkshire from the United States to behaviors, Munger thought the behav- that he probably would do exactly what another country to save on taxes. [This ior on Wall Street had improved due he did when he was 23. He’d go into is topical because Pfizer might look to to the trauma of the financial crisis. the investment business and he’d study do this if it is successful in its bid for However, it will always be difficult to companies, talk to people and learn the British company Astra Zeneca.] get good behavior when surrounded by how industries work. If he got inter- Munger answered that it would be a miasma of easy money. Munger and ested in the coal business, he’d study 10 crazy for a company as prosperous as Buffett both favored prosecuting indi- coal companies and talk to their man- Berkshire to try to get its taxes to zero. viduals rather than the institutions as agers. He’d ask them if they had to put Berkshire follows the rules regarding the way to change behaviors. It’s way all their money in one coal company, taxes, taking the credits and deduc- easier for a prosecutor to go after corpo- not their own, who would they choose tions allowed. They don’t pay extra, rations. Corporations settle; they write and why. He’d also reverse the ques- but they don’t begrudge what they pay, a check and go on about their business. tion: Who would you avoid or short? either. Put a few individuals behind bars and You can learn a lot by reading and per- behaviors change! It’s a tougher job for sonal contact. Just keep learning and COPYCATS AND COMPETITION FOR the prosecutors to go after individuals, something will come along that will be BERKSHIRE but it would do more good. very useful. Buffett noted that Berkshire has Munger cited the example of Larry some competition for buying busi- S&P 500 INDEX VS. HEDGE FUNDS Bird picking an agent. He asked all nesses but no big competitors. Private Buffett has a wager with Protégé the agents who wanted to represent equity buys businesses, but isn’t really Partners, a hedge fund-of-funds man- him why he should pick them. Then he going after the same things. Munger ager that the return of the S&P 500 asked, if he didn’t pick them, who else added that Berkshire’s model has legs Index will exceed that of the hedge he should pick. When the same name and can go a long time. The momentum funds selected by Protégé over a 10-year kept coming up as number 2, Larry and ethos in place will last. Berkshire’s period. [Buffett, who began his career went there and got a great contract. model is not widely copied because it as a hedge fund manager, sees two dis- Buffett did much the same thing when takes a long time. The slowness deters advantages with modern hedge funds: he had to pick a new management at many people–you’re dead before you’re 1) the typical high fees of 2% of assets Salomon Brothers on very short notice. finished. plus 20% of profits, and 2) hedge funds producing superior returns attract so FRUGALITY INFLATION much money that size becomes a drag Munger offered that Buffett is the High inflation would hurton performance.] more frugal of the two. Why? Because Berkshire but would hurt others more. The progress of the bet is reported Buffett has lived in the same house [Berkshire’s collection of businesses at each annual meeting. After falling
BROWN ADVISORY BERKSHIRE HATHAWAY ANNUAL SHAREHOLDER MEETING NOTES 7 behind in the bear market during the first year of the wager CALENDAR S&P 500 PROTEGE in 2008, Buffett’s S&P 500 Index side of the bet surged ahead YEAR INDEX HEDGE FUNDS through 2013 as shown in the table to the left. 2008 -37% -24% 2009 +26% +16% 2015 ANNUAL SHAREHOLDERS MEETING 2010 +15% +8% The 2015 meeting will occur on Saturday, May 2, 2015, in 2011 +2% -2% Omaha, Nebraska. Omaha makes a nice weekend getaway, 2012 +16% +6% with a number of attractions in addition to the annual meet- 2013 +32% +12% ing events. Make your plans now if you would like to attend. Hotels and planes fill up early. Cumulative 43.8% 12.5%
R. Hutchings Vernon, CFA Source: Berkshire Hathaway
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The S&P 500 Index represents the large-cap segment of the U.S. equity markets and consists of approximately 500 leading companies in leading industries of the U.S. economy. Criteria evaluated include market capitalization, financial viability, liquidity, public float, sector representation and corporate structure. An index constituent must also be considered a U.S. company. An investor cannot invest directly into an index.