Warren Buffett in Omaha for Berkshires annual meeting 2016

Alex Crippen | 

Saturday, 30 Apr 2016

 

http://www.cnbc.com/2016/04/30/warren-buffett-in-omaha-for-berkshires-annual-meeting.html

 

Apr 30 2016 10:16 PM

The Q&A session with Buffett and Munger is scheduled to begin in about 15 minutes at 10:30am ET. It is expected to end six hours later (with a break for lunch.)

 

It's a chilly 46 degrees in Omaha with a light rain. It will be warmer inside the CenturyLink Center arena with an estimated 40,000 people attending.

 

Apr 30 2016 10:25 PM

The usual pattern is Warren tackles a question first, giving a detailed and thoughtful answer, followed by a sardonic punchline from Charlie.

 

Apr 30 2016 10:30 PM

Questions will come from shareholders and three journalists, Becky Quick and Andrew Ross Sorkin, co-anchors of CNBC's "Squawk Box" and Carol Loomis, who retired as Fortune's senior editor-at-large in 2014. She is a longtime friend of Buffett's and helps edit his widely read annual letter to shareholders.

 

Apr 30 2016 10:30 PM

The Q&A session is underway.

 

Warren Buffett ("I'm the young one") and Charlie Munger are seated at a table.

 

Buffett welcomes the people watching the Yahoo Finance live stream of the meeting and notes it's being translated into Mandarin, although he's not sure what they say will make sense after the translation. It's the first time the meeting has ever been streamed to the world.

 

Berkshire has just issued a news release with preliminary Q1 results.

 

 

Apr 30 2016 10:37 PM

Buffett is now discussing the numbers. He notes there were more catastrophe insurance payments than usual in the first quarter due to hailstorms.

 

Apr 30 2016 10:38 PM

Buffett says railroad earnings are down and will likely remain depressed for the rest of the year.

 

As always, Buffett recommends people not pay attention to the net earnings because they are affected by paper gains and losses from investments and derivatives. That measure bounces around from year to year.

 

Buffett is showing a chart that has earnings increasing over time, although not at a steady pace.

 

Buffett: "What we really want to focus on" is growth for operating businesses over time. Berkshire, he says, does not have quarterly targets. It concentrates on creating "sustaining" earnings power.

 

In response to a Carol Loomis question, Buffett says Berkshire would like to buy businesses that are not capital intensive, but they have become harder to find.

 

Question from analyst Jonathan Brandt of Ruane, Cunniff and Goldfarb on Berkshire's Precision Castparts acquisition. He calls CEO Mark Donegan as "one of a kind." He can concentrate on what's important for the businesses and doesn't have to come to Omaha and make a "show" for Buffett to justify a move. "We've made him even more valuable to the company."

 

Buffett:" Precision Castparts will do better under Berkshire than it would on its own and it would do very well on its own.

 

Buffett: We'd love to find another three or four companies like Precision Castparts where quality is very important.

 

Buffett tells a shareholder he couldn't be happier. "I decided pretty early in life that my favorite employer is myself."

 

On things he would do over in business: "I don't think I would have started with a textile company." (Berkshire)

 

Buffett: The reinsurance business, generally, will be less attractive over next ten years than it was in previous ten years.

 

Buffett: That's because low interest rates make the "float" in the insurance business less valuable.

 

Buffett: Selling Swiss Re and Munich Re investments was not reflection on the companies. It was a judgment about the future of the reinsurance business generally.

 

Question on why Berkshire's Geico was outperformed by Progressive Direct last year. Buffett says the number and severity of car accidents increased last year but he doesn't think the trend will continue.

 

Buffett says cars have gotten "far, far" safer over the years and that's a good thing because if death rates had remained constant since the 30s, the toll would have been enormous. But he says there's been more distracted driving recently and that's contributing to accidents.

 

German shareholder asks about shift from push marketing to pull marketing by companies like Amazon.com. How will it affect Berkshire companies?

 

Buffett says Amazon.com is doing remarkably well at satisfying customers amid "hugely powerful" trend toward push marketing.

 

Buffett: "We're not going to try to out- Bezos Bezos" but Berkshire is very aware of the trend.

 

Buffett: We're still trying to figure out how to deal with the growth of the internet.

 

Buffett: The internet has "already disrupted plenty of people and it will disrupt more" but Berkshire is well-situated.

 

Munger: On net, Berkshire has been helped by the Internet, especially Geico.

 

Munger: Our retailers are so strong they are not particularly vulnerable to web retailers like Amazon.

 

CNBC's Andrew Ross Sorkin asks about studies showing adverse health effects of sugared beverages like Coca-Cola. (BRK has a big stake)

 

Apr 30 2016 11:20 PM

Buffett says most of the calories in Coke come from sugar. He personally chooses to get a portion of his daily calories from Coke.

 

Buffett: I find it "spurious" when people say it's bad to get a substantial portion of our daily calories from Coca-Cola. It's a "marvelous" product."

 

Buffett: I eat things that make me happy, and I think if you're happier you're likely to live longer.

 

Buffett says key is to limit your daily calorie intake from all sources.

 

Buffett: If you really want to improve your longevity "you should get a sex change" because women, on average, live longer than men.

 

Munger: Big mistake to measure the detriment of something without considering the benefit. He says its good to add some "flavor" to the water you need to drink to stay alive.

 

Munger: It's "immature and stupid" to consider only the negative effects of anything without looking at the benefits.

 

Buffett: The degree to which renewables replace coal will depend on governmental policy. Makes sense to have the costs and benefits of the shift spread throughout society by government actions like tax breaks.

 

@CNBC

Buffett responds to critics who say Coca-Cola has adverse health effects:cnb.cx/1pSfbfi 

11:35 PM - 30 Apr 2016

 

Buffett: A major attack on the country that severely disrupts the financial system would reveal "dangerous" derivative positions.

 

Buffett: Derivatives remain a big danger to the financial system.

 

Buffett: Some derivatives become some complicated they're hard to evaluate, but they also generate the most profit, increasing their danger

 

Buffett: "Derivatives are still dangerous on a large basis."

 

Buffett: Berkshire will never engage in dangerous derivative positions involving collateral.

 

Buffett: Large derivatives remains a "potential time bomb" that can go off if there's a discontinuity in the financial markets.

 

Buffett says he's not worried at all about Berkshire's Bank of America and Wells Fargo positions.

 

Munger notes that Berkshire will make $20 billion in profits from some derivatives but it would have been better for the country if they had been illegal.

 

Buffett: Berkshire's BNSF freight railroad company is being hurt by a "secular" decline in coal shipments. Recent warm weather doesn't help.

 

Buffett: We "love the fact" we own BNSF. We bought it at an "attractive" price and would be happy to buy another railroad like it.

 

Buffett: "We consider BNSF as a very good business to hold forever."

 

When shareholder says Buffett is like Dumbledore, Buffett says he hasn't read Harry Potter but he'll "take it as a compliment."

 

For anyone else who hasn't read the Potter books, Professor Albus Dumbledore was headmaster of Hogwarts, the school for wizards.

 

Munger says children shouldn't "listen to their elders" when it comes to stocks and bonds because so much advice is so bad.

 

Buffett: Problem with Nevada solar situation is that people with solar units could sell back power to the utility at a price higher than what it would cost to generate the power or buy it elsewhere.

 

May 1 2016 12:01 AM

Buffett says that Nevada regulation meant people with solar systems were been subsidized by all the other customers. He says it's "not right" for over a million customers to be buying power from 17,000 customers at an artificially high price.

 

Buffett: If society is benefiting from the reduction in greenhouse gases than society should be picking up the tab.

 

Here's a recent newspaper article on the Nevada controversy:

 

Nevadaís rooftop solar battle heats up with referendum

Las Vegas Review-Journal The future of a November ballot referendum seeking to return Nevadaís rooftop solar program to its original, more favorable rates for homeowners remains uncertain, but that hasnít stopped the opposition from starting its campaign.

 

On question about Berkshire's bets on oil companies, Buffett says they're not based on any prediction for the price of oil.

 

Buffett: We can't predict commodity prices. "Anything you have seen in our investment transactions ... weren't based on" price predictions.

 

Munger: If you expect financial efficiency in higher education then you're "howling in the wind."

 

Munger says universities aren't exempted from bureaucracy or inefficiency but if people want to contribute to them they should.

 

Buffett recalls he was a trustee of a college that saw its endowment go from $8 million to over a billion but the tuition didn't go down and the number of students didn't go up.

 

Buffett asked about financial effects on Berkshire companies if Donald Trump is elected president says, "That won't be the main problem."

 

Buffett: Berkshire will "continue to do fine" whether Hillary Clinton or Donald Trump is elected president.

 

Buffett: We've operated under all kinds of government leadership. Businesses are able to adapt to circumstances.

 

Buffett: Even with very low interest rates, American businesses have continued to find ways to be profitable.

 

Buffett: In my lifetime, real output has increased by six times. "The system works very well with aggregate output."

 

Buffett: The distribution of that increased real output is more of a problem.

 

Munger: The GDP figures understate the "real advantage the system has given our citizens."

 

Munger: I don't think the future is going to be quite as good as the past, but it doesn't have to be.

 

Buffett: Since 2009 the rules for banks have been tilted against them due to capital requirements.

 

Buffett: Wells Fargo has an "investment banking aspect" from Wachovia but it's not that big a deal and it's not what "attracts us."

 

Buffett: Widening spreads between loan and deposit rates will probably work to advantage of Wells Fargo over time.

 

Buffett: I'm less worried about activists breaking up Berkshire than I used to be because the company will always have ability to buy back lots of stock.

 

Buffett: Berkshire would be worth less if it was broken up than if it is kept together. Our 
shareholders recognize that.

 

Buffett: Even with my distribution of Berkshire shares to charity, my estate will continue to have a very large position in the company.

 

Buffett: "Aircraft leasing does not interest me in the least." It's a "scary" business.

 

Buffett is asked which competitor he would take out with a "silver bullet." He says we have tough competitors and we're also tough.

 

Munger: We're not targeting competitors anywhere. We're just doing the best we can. Buffett: "Spoken like a true antitrust lawyer."

 

Buffett: Even though the Sequoia Fund has been hurt by large investment in Valeant, it has a good long-term record.

 

Lunch is over. Warren Buffett and Charlie Munger will be resuming the Q&A shortly. Typically, some audience members don't return, going instead to do some buying on the exhibition floor, something that Buffett strongly encourages.

 

Buffett: Berkshire is going to try doing some commercial insurance directly over the Internet, as it already does with consumers with Geico.

 

Buffett: It amazed me how fast inquiries on auto insurance migrated from phones to the Internet, even with older customers.

 

Buffett: By far, the main factor in keeping Berkshire's culture is having managers, a board and shareholders that embrace it.

 

Buffett: The chances of us "going off the rails" on culture are "very, very slight." The main problem will be its large size. "Size is the enemy of performance."

 

Buffett and Munger are stressing cultural continuity is response to long-time concerns that Berkshire won't be the same when Buffett is no longer running the place.

 

Andrew Ross Sorkin asks whether Berkshire is doing enough to increase its workplace diversity.

 

Buffett responds that board members will be selected who have business savvy, are shareholder oriented, and have a special feeling for Berkshire.

 

Buffett: We're not interested in people who want to be on the board to make a lot of money for not much work or for prestige.

 

Buffett: "We want our directors to walk in the shoes of shareholders."

 

The message from Buffett and Munger appears to be they bring in people who will do a good job and not just because they would fulfill a diversity goal. "We've got the best board we could have."

 

Buffett says Berkshire shares didn't fall enough recently to justify a buyback.

 

Berkshire, says Buffett, would likely buy a lot of stock if the price falls below 1.2 times book value, but it won't "prop up" the price.

 

Buffett: Anytime you can buy stock for less than its worth it benefits the shareholders, but it has to be by a large margin.

 

Buffett: Many companies do stock buybacks because it's "fashionable" and that what the consultants recommend. Munger says buybacks have gotten a "life of their own."

 

Buffett says he's seen lots of time when companies have bought back stock at prices that are too high. Valuation needs to be considered.

 

Buffett: There's no danger bigger than "what I call CNBC," chemical, nuclear, biological and cyber attacks.

 

Buffett: The only real economic threat to Berkshire's well-being over time is some kind of catastrophic attack on the country.

 

Buffett: As technology has improved, the ability of madmen to do great damage has increased and I worry about it.

 

Buffett: "Some day somebody will pull off something on a very big scale" and the US is a likely target.

 

Buffett praises the Hungarian-American physicist Leo Szilard for helping to get Albert Einstein to urge FDR to start nuclear bomb program.

 

Buffett: If I could figure out how philanthropy could help reduce the chance of a catastrophic attack on the country, I would do it.

 

Munger: "Micro-economics is what we do and macro-economics is what we put up with."

 

Buffett: We like looking at the detail of businesses the same way many people like looking at the details of a baseball game.

 

CNBC's Becky Quick asks Buffett to stop using CNBC as an acronym for mass destruction. That gets a laugh from the audience.

 

Buffett: Because Berkshire can only make large investments due to its size, I can make personal investments in smaller companies.

 

Buffett: I tend to stay away from anything that could have a conflict with Berkshire.

 

More Munger words of wisdom: You have to stay away from the "standard stupidities." If you can avoid those, you've got it made.

 

Buffett words of wisdom: It's important to know what you can't do. We try to take swings in our own strike zone.

 

Buffett: "It doesn't take a genius to do it, but we've generally managed to avoid self-destructive behavior."

 

Munger: Berkshire has done as well as it has because we've "tried to behave well."

 

Munger: We don't make money from casinos and we turned down a tobacco business. We want people to think well of us.

 

Buffett on why Berkshire doesn't do more due diligence: What counts is the basic economics for the business in the future, not the kind of things that are uncovered by due diligence. "It just isn't the things that are on the checklist that count." If we thought there were things we were missing, we would "drill down on those."

 

Munger: Business quality usually depends more on something than "whether you crossed the 't' on some old lease."

 

Buffett: Documents won't tell you how someone you're giving a lot of cash to in an acquisition will act in the future.

 

Munger: How many people here carefully checked the birth certificates of their spouses. I think our methods (of not using extensive due diligence) are more common than they appear.

 

Buffett: "There's no limit to what talented people can accomplish."

 

Buffett: No succession "tea leaves" to read in the fact Ajit Jain is now overseeing all of Gen Re.

 

Munger on why Berkshire doesn't have a higher credit rating: "The credit agencies are wrong."

 

Buffett: We don't fit their models.

 

Buffett: Our partner 3G has done a good job of making cuts at Berkshire's Kraft Heinz that won't hurt its future volume. He hasn't seen any signs of underperformance due to management.

 

Munger: Over-staffing is not a plus. Buffett: "Sloppy thinking" in one area is a sign of sloppiness elsewhere.

 

Buffett: We could be wasting billions at Berkshire and maybe you wouldn't notice it. Munger's tart reply: "I would."

 

Buffett: We haven't been able to buy a lot more car dealerships because people think we paid more for Van Tuyl than we really did.

 

Buffett defends American Express stake: No question payments business is changing but "happy to own it."

 

Asked about the cattle business, Buffett says he knows people who own cattle but they usually also have some banks on the side.

 

Munger: We like steaks but we don't like owning cattle.

 

Buffett on incentives: Dumb to compensate by profits alone because there would be no incentive to put money into growing the business.

 

Buffett: One size does not fit all when it comes to incentive plans. It depends on the business.

 

Munger: Some of worst incentive plans are in banking and investment banking. Giving someone a share of profits encourages the creation of "paper" profits using accounting methods that can harm the company.

 

Buffett: Compensation isn't as complicated as consultants would want you to think.

 

Buffett: "We have excess cash everywhere at Berkshire" and it doesn't matter "which pocket it is in." He again promises to always have at least $20B in cash to avoid making the company vulnerable.

 

Buffett: We could pay our suppliers more slowly to increase working capital but "the pressure for cash at Berkshire is not that high" and the desire to have good relations with suppliers is important.

 

Munger: We're not interested in manipulating numbers. "We've never had a restructuring charge and we're not about to start."

 

See how Buffett and Munger totally ripped into Valeant Pharmaceuticals in this Yahoo Finance clip:

         blob:http%3A//finance.yahoo.com/bc4eb785-f270-4750-a4f9-96b1630364fa

 

Buffett: It would be "very significant" if we lost Ajit Jain for reinsurance. "There's not another Ajit in the house."

 

But, Buffett adds, there are other Berkshire executives who are also important and "really outstanding managers are invaluable."

 

Buffett says real estate isn't as attractive as it was four years ago. He doesn't see a "nationwide bubble" for residential real estate.

 

Take a look at Warren Buffett competing in his "newspaper toss" contest before the Q&A with shareholders begins.

 

Buffett says main difference between him and Berkshire portfolio managers Todd Combs & Ted Weschler if he's looking for bigger deals.

 

Warren just sneaked a glace at his watch. The Q&A is scheduled to end a few minutes from now.

 

Where does Charlie Munger get his sense of humor, which Buffett says is greater than his own? Munger says if you look at the world accurately you can't help but laugh because it is so ridiculous.

 

And with that, the Q&A session ends six hours after it began.

 

See you next year!