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 Columbia Business School (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 Benjamin Graham (1894-1976) Graham was a proponent of value investing 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