Sunday, May 2, 2010

Omaha Highlights

There are legions of books written about Warren Buffett, Charlie Munger and their performance at the Berkshire Hathaway* (NYSE:BRK-A) annual meeting. While I have been following them since the early 1980s, and had the distinct honor to introduce Mr. Buffett to the New York Society of Security Analysts, this was my first visit to the annual meeting. (I plan to return again.) There was not much written in the Sunday paper about the meeting except their support for the Goldman Sachs CEO, but I suspect that coverage will be extensive beginning with Monday. As an exercise for myself as well as the members of this blog community, the following 38 briefs come from my five pages of notes, which I hope share some of the wisdom of these two remarkable men.


One of the first steps in the Buffett/Munger intuitive capital allocation process is to develop their thinking on the potential and likely return on invested capital generated by the businesses being examined.

At this point for Berkshire, capital-intensive investing is a bigger drive than intrinsic (value) investing.


In terms of the ABACUS-2007 deal, based on the SEC complaint, Goldman Sachs* (NYSE: GS) did nothing wrong. The motivation of the other side is not relevant when trading. Berkshire may even benefit from the complaint, as it will probably delay the calling of Berkshire’s preferred stock, currently earning 10% annually.

A new version of Glass Steagall is likely. If Berkshire was forced to put up collateral for its derivative position, it would probably put up its stock holding of Coke (NYSE: KO). At the same time it would demand some additional payments from its counterparties, as they paid for uncollateralized derivatives.


In terms of currency exposure, they have exposure on both their assets and liabilities sides. They are bearish on all currencies, particularly those who have to borrow using other currencies.

Each July, Warren Buffett will give 1.5% of the stock to five foundations. The current turnover in the stock on the NYSE is over 100%.

Over the next 50 years there is a high risk of a nuclear, chemical, or biological attack on the US. The risk is low in any given year. (This statement which is not new, it may be a plea for some sort of federal guaranty.)

The list of four candidates to replace Buffett on the investment side changes periodically. The directors are familiar with the candidates, They did well in 2009 without leverage.

It is easier to build a new culture than to change an old one. They failed in an attempt to change the culture at Salomon Brothers.

They think that despite the worldwide size of McDonald’s (NYSE: MCD), the company does a better job of educating its employees than universities do their students.

Munger was the one that discovered Chinese auto parts maker BYD and drove the acquisition of its position.

The various CEOs are paid on the basis of the economics of their business. There is not a Berkshire standard and there is no compensation consultant. Managers are paid to widen their “moats.” Headquarter fees for the 21 employees are not charged to the various operations, but there are capital charges.

The major railroads have been rebuilt over the last 30 or 40 years. The big 4 railroads are allowed to earn 10.5% on their invested capital.

In terms of insurance risks, the company will accept volatile returns while others want to have their earnings smoothed.

Read chapter 12 of John Maynard Keynes’s The General Theory of Employment, Interest and Money, written in 1935.

In 1982 Buffett submitted to John Dingell the only letter in opposition to permitting futures on the S&P 500.

Employees should think and act like owners.

Generally they hope a dollar of increase in equity to be equal to more than a dollar increase in market value.

Warren Buffett, Charlie Munger and some of the board members are visiting China in September.

Thomson (NYSE:TRI) always seems to want a 40% return on capital, a habit held over from its newspaper days.

Munger is converting his IRAs to a Roth IRA.

The federal government will have difficulty in not bailing out the failing states. Due to too-low rates, they are no longer writing new municipal bond insurance policies.

For the next 10-20 years one should want to own equity and not bonds and cash.

Moody’s* (NYSE: MCO) is a wonderful business, but they made a bad mistake on residential housing, They, like others (particularly graduates of business schools), relied too much on models.

Berkshire does not have an annual budget for a fear that various managers would “game” the system.

“We can get along without oil if we must.”

“If scared when others are fearful, you won’t make money in securities.”

In practice they are much more comfortable averaging down than up.

Advice to a new investor: “Get your feet wet with a little failure.”

“Solar panels will get cheaper.”

There will be a truly national electrical grid system.

Their portfolio is often undervalued, they do not own any major future winners.

“There is no better way to get happy than to lower expectations.”

They are blessed by not having an investor relations department.

“One should know the perimeter of one’s circle of competence.”

“One should always keep learning as the competitors are surely doing."

“Very few people fail totally.”

“Follow one’s passions.”

Many of these notes might be cryptic. I would be happy to discuss them to the extent of my understanding of what was said and what was meant.

*indicates securities owned by me or by my financial services hedge fund.

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