MAY 2, 2015 MEETING 2 Lending Practices At Clayton Homes; Business Practices At 3G Capital 3 Berkshire Automotive 2015 Berkshire Hathaway Predicting Earnings IBM Annual Shareholder Insurance Businesses 4 Culture, Integrity and Future Returns at Meeting Berkshire Post Buffett And Munger The Berkshire Hathaway annual Changing Consumer Preferences meeting is an opportunity for Stock Market Levels shareholders and analysts to pose BY R. HUTCHINGS VERNON, CFA 5 Railroad Safety questions to Warren Buffett and Co-Portfolio Manager, U.S. Dollar and The Euro Charlie Munger in a five-hour Flexible Equity Strategy Using The Berkshire Name At Subsidiary session covering over 60 questions. Companies Utility Business and Renewable Power Sources Mistakes, Inflation, and Predictions 6 Incentives and Messages he 2015 annual meeting past decade compared to 7.7% for the S&P celebrated the 50th anniversary 500 Index as of Dec. 31, 2014. Too Big To Fail of Warren Buffett taking The format of the meeting was question Value Investing Outside The U.S. control of Berkshire Hathaway and answer, with shareholders and Optimism Despite Bad Things Sometimes T Happening and it drew a record crowd of over investment analysts posing questions to 7 Management Succession 40,000. In 50 years, Berkshire has grown Warren Buffett and his long-time business from an economically challenged New partner, Charlie Munger, in two, 2 ½-hour Ted Weschler and Todd Combs England textile company to one of the S&P 500 Index vs. Hedge Funds largest U.S. companies, with 340,000 The increase in 8 Good Businesses for Inflationary Times employees and the fifth-largest stock Berkshire Hathaway’s Global Warming Effect on Insurance market value after only Apple, Microsoft, Energy Investments Google and Exxon. Notable businesses share price has outpaced Investment Reading within Berkshire are GEICO Insurance, the market averages Geico Rates Burlington Northern Railroad and with gains of roughly Outlook For Reinsurance Businesses consumer products companies such as 9 Netjets Pickets Fruit of the Loom, Dairy Queen and 10% annualized in the Duracell Purchase From P&G See’s Candies. Berkshire also holds Activists, Spin Offs and Berkshire investments exceeding $10 billion in past decade compared Berkshire’s Housing-Related Businesses each of Wells Fargo (Berkshire owns to 7.7% for the S&P 500 Philanthropy 9.4% of the shares outstanding), Coca- Index. Cola (9.2%), American Express (14.8%), 10 American Express International Business Machines (7.8%) sessions covering 60 questions. Buffett and Use of Cash and H.J. Heinz (50%), among others. Munger are going strong at 84 and 91 years Minimum Wage Berkshire’s share price and young. They communicate in clear-thinking “How To?” Questions shareholders’ equity per share have ways that leave little doubt of their insight How To Become A Good Investor? compounded at more than twice the and accumulated wisdom. How To Attract Money To Manage? 9.9% annual rate of the S&P 500 I was fortunate to attend my first Berkshire How To Build A Network Of Business Contacts stock market index since Buffett took Hathaway meeting in 1986. I was a tyke in If You Haven’t Gone To Business School? control in 1965. Even after Berkshire investing, hoping to learn from the masters. How To Get People To Like You (From A Seven- Year-Old)? became a large enterprise, its growth in I have returned with the same idea to all 11 How To Encourage Thrift In Young People shareholders’ equity and share price has but one meeting since then. Thirty years on outpaced the market averages with gains and roughly the same age now as they were What Matters Most To Buffett and Munger? of roughly 10% annualized during the then, I have as much admiration for the pace 2016 Annual Shareholders Meeting JUNE 2015 MAY 2, 2015 MEETING they continue to keep as the wisdom there room for compassion within scores for its borrowers because they they impart. For further information, capitalism and at Berkshire? [Clayton were in homes with loans they could readers are encouraged to study is the largest builder of manufactured afford. Buffett’s annual letters to shareholders homes in the U.S. and finances many On 3G’s employment cuts, Buffett available at www.berkshirehathaway. of the homes it sells. 3G Capital is said he had never seen a policy at any com and the book, Poor Charlie’s the investment firm that Berkshire company that it should run with more Almanack, a collection of Munger partnered with in acquiring its interest employees than it needs, but many speeches and presentations. The latest in Heinz. 3G’s partners have also been companies do so anyway. 3G on the annual report includes special sections the driving force behind AB Inbev, the other hand has been very good at from both Buffett and Munger on the owner of Anheuser-Busch Brewing.] getting employment down to what is past and future of Berkshire Hathaway. Buffett, who must have anticipated actually needed. Efficiency is required Buffett and Munger are great this question, responded with a over time in capitalism. Buffett cited thinkers and entertaining teachers. rebuttal of several material inaccuracies the railroad industry, which had 1.6 They celebrate good business and in the Seattle Times report and praised million employees after World War II investment practices, the potential for both Clayton’s lending practices and and now carries far more freight with human achievement, high ethics and its business results. Buffett explained less than 200,000 workers. Munger decency to one’s fellow man. Listening that Clayton retains the mortgages cited the Russian system under to Buffett and Munger, you get a course it writes so that both the borrower communism as an opposite example. in business, investing and decision and Clayton lose when a loan gets in Everyone had a job but there was no making with material reaching across trouble resulting in a foreclosure. Most productivity, resulting in a system eight decades of experience. The course Clayton borrowers have low incomes where the government pretended to is more how to think than what to and low credit scores, but only about pay the employees and the employees think, but in my experience, if you 3% of the loans Clayton makes default pretended to work. disagree strongly with Buffett or each year. The other 97% enable Later, there was a question about Munger, you’ll likely come around to customers to purchase their homes over the leanness with which 3G operates their views if you think about it more. time. Seventy percent of homes that compared with Berkshire, citing that The meeting also serves to ingrain the sell for less than $150,000 in the U.S. it took Berkshire over a decade to exit culture of Berkshire with shareholders are manufactured homes. its textile mills. Buffett explained that and employees. Home lending is regulated in every there was no incongruence. Berkshire These are my notes and recollections state where Clayton lends. In 91 had cut well back in textiles before it rather than a transcript, as recording inspections over the last three years, eventually closed the operations when isn’t allowed. Related subjects are Clayton had an exemplary record, it could no longer make any profit. It grouped together. My thoughts and having paid a total of only $5,500 is not in its economic principles to lose comments are bracketed to distinguish in fines and refunded $110,000 of money even if it is not maximizing them from the comments by Buffett loans made. Munger added that return in every operation. There are and Munger. Clayton has about a 50% share of the some businesses at Berkshire that likely manufactured housing industry. It have some extra people employed. They LENDING PRACTICES AT CLAYTON would not be running its business right tolerate this rather than encourage HOMES; BUSINESS PRACTICES AT 3G at a zero-percent foreclosure rate and it. If 3G ran these operations, there CAPITAL it wouldn’t have survived and earned would probably be some tightening. The first question of the day, a two- a 50% share with a high foreclosure However, Berkshire keeps its promises parter, inquired about a report in the rate either. In the 2008-09 recession, when it acquires companies and Seattle Times of predatory lending at mortgage defaults soared for all types doesn’t force that decision centrally. Clayton Homes and steep reductions in of borrowers on securitized loans. [Decentralization has other benefits employment at Heinz once Berkshire Clayton’s loans performed far better partner 3G Capital took control. Is despite lower incomes and lower credit 2 BROWN ADVISORY BERKSHIRE HATHAWAY ANNUAL SHAREHOLDER MEETING NOTES MAY 2, 2015 MEETING to Berkshire that don’t show up in the employee count and IBM employment costs.] Noting that Munger helped break Buffett of the habit of Buffett cited GEICO and Berkshire’s corporate offices as buying “cigar butt” businesses like the original Berkshire examples of highly efficient operations. Munger added that textile operation, a questioner asked if IBM is a modern-day a job is an important part of people’s lives that requires some equivalent of the textile business and do they agree on the sensitivity, but asked rhetorically where we’d be if we had investment in it. Munger answered that he didn’t try to stop all stayed on the farm 100 years ago. We’d all be pitching Buffett and said IBM is a very creditable company. Berkshire hay by hand instead of sitting at the Berkshire Hathaway has invested in a lot of companies that have had temporary meeting. problems or that were once mightier than they are today.