Notes from Omaha

Reflections from Berkshire Hathaway & the 8th Annual Value Investor Conference

Omaha, Nebraska 28 – 30 April 2011 Quotes

It is not what happens to people that is significant but what they think happens to them Robert Hagstrom Legg Mason Growth Trust

Everyday I am lucky if I have learnt something – I am doubly lucky if it hasn’t cost me anything Chuck Akre CEO Akre Capital

The meek shall inherit the earth – but will they stay that way? Warren Buffett CEO Berkshire Hathaway

Why do we look for new ways to lose money when the old ones were working pretty well John Stumpf CEO Wells Fargo 8th Annual Value Investor Conference 2011

University of Nebraska at Omaha, College of Business Thursday, 28 April and Friday 29 April Tom Gayner President and CIO, Markel Corporation Charles Brandes Brandes Investment Partners Bill Child Chairman, R C Wiley Home Furnishings Robert Hagstrom Portfolio Manager, Legg Mason Trust Chuck Akre CEO Akre Capital Pat Dorsey Director of Research, Sanibel Captiva Trust Tom Russo Partner, Gardner Russo and Gardner Robert Cialdini New York Times best selling author Berkshire Hathaway Annual Shareholders’ Meeting

Qwest Center, Omaha, Nebraska Saturday 30 April 2011

“We’re the perfect pair, I can see and Charlie can hear”

Warren Buffett Charlie Munger CEO Director Berkshire Hathaway Berkshire Hathaway Warren Buffett

80 year old CEO of Berkshire Hathaway (b 30 Aug 1930) Investor, businessman and philanthropist Estimated net worth around $50bn – currently third wealthiest man in the world In 2006 made commitment to give away 85% of his fortune to 5 foundations in annual gifts of stock - the main one being the Bill and Melissa Gates Foundation Famous for his unpretentious and frugal lifestyle – lives in same house in Omaha that he purchased in 1957 for $31500 – now valued at $750000 As Chairman and CEO of Berkshire Hathaway he pays himself an annual salary of $100000 Began his interest in investment at age 11 – up until then he says he was wasting his time Attended University of Pennsylvania (1947-9), University of Nebraska - Lincoln (1950) (B SC – Economics) and then (MS – Economics) Established his first investment partnership in 1956 Became a millionaire in 1962 through his partnerships Influences

Investment style initially based on the teachings of (1894-1976) Graham was a proponent of and was adamant stocks should provide a wide margin of safety between the price of a stock &its intrinsic value – more interested in intellectual challenge than building a fortune Phil Fisher (1907-2004) was also a big influence, Buffett says he’s 15% Fisher, 85% Graham Fisher was a pioneer in growth investing and always said the best time to sell a stock was never – taught Buffett to talk to competitors, suppliers and customers to find out about a company Buffett advises - “Read Benjamin Graham, read Phil Fisher, read annual reports but don’t do equations with Greek letters in them,” Under influence of long term friend and partner, Charlie Munger, Buffett has modified his approach focusing on high-quality businesses with enduring competitive advantages (moats) rather than quantitative bargains Investment approach

Does the company have a consumer monopoly or brand name that commands loyalty? Are earnings on an upward trend with good consistent margins? Is debt/equity ratio low? Can company repay debt even in years where earnings are lower than average Does company have high or consistent return on invested capital? The company must not have high maintenance cost of operations, high capital expenditure or large investment cash outflows Does company retain earnings for growth? Does company have a good track record investing in opportunities? Is company free to adjust prices for inflation? Berkshire Hathaway Annual Shareholders’ Meeting

Qwest Center, Omaha, Nebraska – 30 April 2011 - drew 40000 shareholders Opened with a humorous video highlighting companies in which BH is invested, paying tribute to the management teams Also included a witty sequence with the cast of “The Office” in which he is introduced to the staff as the replacement for Michael Scott (Steve Carell) who is retiring In another animated sequence, an artificially-intelligent cyborg, named MBA, was systematically destroying Buffett’s empire by altering the algorithms on his computer system. Buffett summons the help of The Terminator (Arnold Schwarzenegger) to eliminate the pesky robot Takes questions from floor and three designated journalists for about 6 hours – followed by the formal AGM at 15h30 – over in a few minutes Media briefing following day Convention centre features stands from companies in which BH invested Hi-frequency Trading

Technology has changed our business, there are more digital touches than personal ones, the speed of information flow is greater and the magnitude of investor response has increased, one has to change your responses accordingly Charles Brandes The big worry is that the money is still out the market, it did not follow the trend upward. Money remains sidelined, it seems that the trust in Wall Street is not there Robert Hagstrom The system makes heroes of people who make a success of trading one computer algorithm versus another Charlie Munger Mr Market has myopia. The market is abysmal at incorporating the longer-term into market prices. Hedge funds now have massive influence over the sell side – research is produced for the guys who pay them Pat Dorsey Hi-frequency Trading

Use of computers to look for microscopic price differences in stocks on different exchanges Computer based trading has exploded moving into all markets, but algorithm trading causes mini-flashes Firms employing more computer and mathematic specialists to find and exploit variations Regulations are outmoded – not updated to keep pace with changes in technology Average investor believes that stocks are valued not on basis of a company’s future earnings but on the machinations of computers trading against other computers for speed and advantage turning stock markets into a casino Markets no longer performing their main function, helping companies grow by raising capital and assisting long- term investors contribute to the economy while building a retirement nest egg - instead markets are becoming a lawless high-speed maze where prices can spiral out of control spooking investors and start-up entrepreneurs US Economy

Buffett always positive about future despite US decline, sees nuggets where everyone else sees salt

In 1930, when he was born, if someone had visited him in his mother’s womb and told him what was happening in the market and the economy he would not have come out

Yet standard of living has increased 6 fold since the 1930s

US has a capitalistic system that works extraordinarily

Buffett’s father was negative and his father-in-law warned him that he was going to fail – it would not be his fault – but the fault of the newly elected Democrats were leading the country down the road to communism

In 1951 Benjamin Graham and his father recognized that the future looked good but not at that point, discouraging him from buying anything “don’t do it now” they were always negative Paul Krugman

Worries that economy may be sputtering - key indicators slipping and unemployment insurance claims creeping up, not creating jobs fast enough to absorb new entrants

Washington doesn’t care about jobs - Instead it’s focusing on scare stories that are in the politicians’ minds - fear of debt crisis, runaway inflation - plunge of the dollar

But nothing likely to happen – threats are imaginary - but the fears could have real consequences, fears that these are not being addressed

Real problem is that no one is addressing the suffering of the jobless in America - more than 6m out of work for 6 months or longer - 4m have been jobless for more than a year

Washington worried that the budget deficit will cause a financial crisis and unless it is tackled within 2 years terrible things will happen - yet interest rates are relatively low and the US continues to raise money selling debt - investors are supporting the US regardless of these fears Paul Krugman

But mention raising taxes to get deficit down and you get an even larger reaction from the politicians - debt is destroying the US but don’t raise taxes to address it!

Fear of the plunging dollar - far from hurting the economy it’s helping US manufacturers compete

Time to stop focusing on the invisible monsters and tackle the real monsters that are undermining the future – unemployment - dangers are that those who have been out of work for a long time will find it impossible to return - also youngsters can’t find a decent starting job

Washington is obsessed with phantom menaces - the political classes must deal with the real crisis - too early to slash spending and stop Fed expansion US markets are cheap

S&P is due for a pretty good decade, look for global companies, efficient with the right balance sheets, expect 50% growth in next two years Tom Gayner

Quality global stocks are now trading 20% below their historical average – pretty good value around the world Charles Brandes

Top names in the S&P trading at half their value, paying nothing today for the future value of earnings, the relative valuations of these large companies are well below their historical norms Robert Hagstrom Where are the experts investing?

Tom Gayner Wal-Mart, profits have been increasing but rating has decreased

Charles Brandes Banks, very cheap. Will normalize in 3-5 years Not as attractive as they were in 2009 Pharmaceuticals, cheapest they have ever been Telefonica, great potential, low P/E, high dividend & good growth prospects

Robert Hagstrom Big margins of safety in tech shares: Microsoft, Google, Apple Tech hardware, health, hotels, financials and big pharmaceuticals - Telefonica

Dislikes – capital equipment, industrial commodities Where are the experts investing?

Chuck Akre MasterCard and Visa

Tom Russo Nestle (more promising than ever before), SAB Miller (building capacity at the expense of margins), Pernod Ricard, L’Oreal (34% owned by Nestle), BAT (value trapped – won’t invest in US because of fear of any form of litigation), Philip Morris, Richemont, Altria, Unilever, Diageo, AnBev, MasterCard

Charlie Munger Costco - considers one of the best companies in the world, takes all the advantages it receives and passes them on to its customers Commodities

Charles Brandes Commodities, are a cost to producing goods and services Invest in companies that produce goods and services, things people need Commodities are an input cost to the things people need

Robert Hagstrom Doesn’t like commodities – simply that they’re at highs while S&P at multi-year low, avoid being overweight even if it is trending up

Warren Buffett Commodities, buy in hope price will rise – asset doesn’t do anything Would rather have a company that produces something over an asset that doesn’t produce anything

Gold All gold produced would fit into small warehouse Same value could buy all listed energy companies and half the farmland in the US Gold is peculiar – buy something that only goes up if the world sinks Assets for Inflationary Times

Buffet suggest assets that don’t require capital, like a doctor – doesn’t need capital – in times of inflation he just raises fees

Do not buy businesses that need heavy capital to increase earnings or companies that need large investments in the business to support it

See Candies Ideal business – little capital needed but they continually increase turnover

Probably the best asset is to get a royalty on other peoples’ assets

Bonds don’t do well in inflationary times The Sokol Affair

What happened was inexplicable and inexcusable, inexplicable because WB will never understand why he did it

One point though is that Sokol did not try disguise his position through deceptive account Also puzzling is that he earned $24m last year – he made a lot of money

Also he wasn’t greedy

1999 when BH bought Mid-American it was agreed to provide large cash payments to DS ($50m) and Greg Abel ($25m) upon achieving certain objectives – Sokol said it should be equal – effectively giving up $12.5m Buffett pleaded guilty to the criticism – he was not outraged at Sokol – he had done a lot of good things for BH – but accepts that his press release wasn’t the cleverest thing in the world

Recurring themes - management

“I look for businesses in which I think I can predict what they are going to look like in ten to fifteen year’s time. Take Wrigley’s chewing gum. I don’t think the Internet is going to change how people chew gum.”

Buffett generally buys businesses with good management, where they have existing proof of management capabilities through performance

They never sign management contracts so it is their job to ensure management stays on, remains enthusiastic and feels wanted after selling out

Age is not an issue – Rose Blumkin (Mrs B) the founder of Nebraska Furniture Mart worked until she was 103, she died the next year, Buffett uses that as a threat to other managers who consider retiring Rose Blumkin

Died in August 1998 at the age of 104 – but Buffett still talks of her with great affection – she had all the qualities he looked for in management – energy and passion even though she was only 4feet 10 inches tall She had no formal education – could not even read or write – but her mental agility and merchandizing skills could run circles around top business graduates Born in 1893 near Minsk in Russia – one of 8 children – to Rabbi Solomon and Chasia Gorelick - started working in her mother’s grocery store when she was six - by 13 she was running a store with 6 men working for her In 1913 married Isadore Blumkin who fled to US to avoid being drafted into Russian army – she followed 3 years later with $66 in her pocket Moved to Nebraska in 1919 from Fort Dodge – started selling discounted furniture from basement shop outsmarting competitors – sourcing low-cost stock in bulk and selling at reduced prices - “Sell cheap but tell the truth” was her motto In 1984 Buffett persuaded Mrs B to sell 90% of her company to him for $55m without due diligence – when inventory was taken it was worth $85m - would not go back on her word – transaction was a one page document that cost $1400 in legal and accounting fees In 1989 at 96 years old she fell out with her grandchildren whom she believed were undercutting her authority – she opened a competing store that Buffett eventually incorporated into the business for $5m – “They paid cash, no credit. I love my kids” she bragged - This time though Buffett made her sign a non-compete contract! Recurring themes – management ethics

“In looking for someone to hire, you look for three qualities; integrity, intelligence and energy. But the most important is integrity, because if you don’t have that, the other two qualities, intelligence and energy, are going to kill you.”

Buffett lets management run businesses – he’s very happy turning over the keys to management

Questions were asked why he didn’t intervene in Moody’s management, responded that it’s his policy to let management get on with it

He doesn’t mind management losing money but they must not lose reputation

He is very choosy about whom his firms do business with, no matter how profitable - quotes Salomon’s involvement with Marc Rich Recurring themes – doing deals

Seldom need to do due diligence Make up their minds in 5 minutes whether or not they want to do a deal They know early in a conversation if there is a chance of a deal – if there is no chance they don’t waste anyone’s time If the idea gets through the filter, there is a good chance they will act Once they commit to a deal they do not attach conditions – they do not break their promise because of some event Where deals have gone wrong, they reckon they would have gone bad even if they would have conducted due diligence Recurring themes – selecting investments

“The business schools reward difficult complex behaviour more than simple behaviour, but simple behaviour is more effective.”

During the boom the country became enamoured with the idea that the best and brightest could predict the future. Investors became too dependent on complicated financial models developed by quant jocks and too reactive to every uptick or slight drop in the market.

If you need a computer or calculator to decide whether to invest then don’t do it – invest in something that shouts at you – if it is not obvious, walk away – nor do they do calculations to the decimal point .

“Some of the worst decisions I’ve ever seen are those made with future projections and then discounted back. They teach that at business schools, because, well they’ve got to do something.” Charlie Munger Recurring themes – selecting investments

If you have a very high IQ, say 150, you feel you have to use it. You don’t need more than 120 to enable you to identify a good investment. Sell the extra 30 points. When you run a huge company, like a large bank, spread sheets are not going to help you raise money. Before looking at the financials you have to understand the business – that enables you to look for answers in the numbers. If you don’t know the business, the financials won’t help at all – can’t review them in isolation. Don’t need to talk to management – look for companies that are financially fat . Recurring themes – selecting investments

Sustainable advantages that protect a company against its competitors – the way a moat protects a castle

Companies with wide moats earn excess returns for extended periods

Look for: A company with an intangible asset like a brand, patent or license that allows it to sell products or services that can’t be matched by competition - Tiffany

Products or services that are hard for customers to give – switching costs too expensive – IT service providers, banks

Network economics lock customers up for a long time – Visa, MasterCard (try start a new credit card), Windows

Cost advantages stemming from process, location, scale or access to a unique asset which allows offering goods and services at a lower cost than competitors Advice to youngsters

You have to do something you love – don’t live your parents’ biography – develop a passion where you have the aptitude – when you love what you do there is no heavy lifting

Your best investment is in yourself – take control of your own education

To be successful you need to develop your communication skills, communicating orally and through the written word is under, taught at colleges

Learn as much as you can about the things around you – read newspapers, journals and so on – the more you learn about things around you the more you will want to learn

Go to bed at night with a little more knowledge than when you woke up Investment guidelines for youngsters

Live within your income and you’ll have a whole lot of income later on, avoid the temptation to keep up with your neighbours

Imagine you have the choice of a free car that has to last you a life, time, what would you choose and how would you treat it? You would read the manual carefully and treat it caringly – that is how you should treat your body and mind – with respect – because it is the only body and mind you will have

Find the right partner – you behave better when you are happy

Make your own way in life (Buffett doesn’t believe in inheritance – you should give your children enough so that they can feel they could do anything, but not so much that they could do nothing) Perennial Favourites

On gold – it gets dug out of the ground in Africa, or someplace. Then we melt it down. Dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from mars would be scratching their heads.

On the cigarette business – it costs a penny to make it, gets sold for a dollar. It’s addictive and there’s fantastic brand loyalty.

When management with a reputation for brilliance tackles a business with a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.

The great personal fortunes in this country weren’t built on a portfolio of fifty companies. They were built by someone who identified one wonderful business. Perennial Favourites

Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway

On derivatives - when you combine ignorance with leverage you get some pretty interesting results

On spreading investments too wide – if you have a harem of forty women you never get to know any of them very well I buy expensive suits - they just look cheap on me

On returns - I don’t jump over 7-foot bars, I look around for 1-foot bars that I can step over

On dips in the economy - Only when the tide goes out do you discover who’s been swimming naked

In the business world, the rear view mirror is always clearer than the windshield Perennial Favourites

I can’t be involved in fifty or seventy-five things. That’s a Noah’s ark way of investing – you end up with a zoo in that way. I put meaningful amounts of money in a few things.

If calculus or algebra were required to be a great investor, I’d have to go back to delivering newspapers

Accounting is the language of business When the chief executive officer is encouraged by his advisors to make deals, he responds much as would a teenage boy, encouraged by his father, to have a normal sex life. It’s not a push he needs.

In a difficult business, no sooner is one problem solved than another surfaces – never is there just one cockroach in the kitchen

You can’t make a good deal with a bad person Perennial Favourites

A friend spent 20 years looking for the perfect woman – unfortunately when he found her, he discovered she was looking for the perfect man

No matter how great the talent or effort, some things just take time – you can’t produce a baby in one month by getting nine women pregnant

I made my first investment at age eleven. I was wasting my life until then I want to give my kids enough so that they could feel they could do anything, but not so much that they could do nothing

You should invest in a business that even a fool can run, because some day a fool will

It’s easier to stay out of trouble than it is to get out of trouble

The most important thing to do if you find yourself in a hole is to stop digging Thank You Contact Details

David Shapiro +27 11 445 8025 [email protected]

Kavita Patel +27 11 809 7739 [email protected]

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