Warren Buffett in Omaha for
Berkshires annual meeting 2016
Alex Crippen |
Saturday, 30 Apr 2016
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.
The usual pattern is Warren tackles a
question first, giving a detailed and thoughtful answer, followed by a
sardonic punchline from Charlie.
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.
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
Berkshire has just issued a news release
with preliminary Q1 results.
Buffett is now discussing the numbers. He
notes there were more catastrophe insurance payments than usual in the
first quarter due to hailstorms.
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"
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
Buffett:" Precision Castparts will do
better under Berkshire than it would on its own and it would do very well on
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
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
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
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
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
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)
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.
11:35 PM - 30 Apr 2016
Buffett: A major attack on the country
that severely disrupts the financial system would reveal "dangerous"
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
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
For anyone else who hasn't read the Potter
books, Professor Albus Dumbledore was headmaster of Hogwarts, the school for
Munger says children shouldn't "listen
to their elders" when it comes to stocks and bonds because so much advice is
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.
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
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
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
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
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
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
Munger: We're not targeting competitors
anywhere. We're just doing the best we can. Buffett: "Spoken like a true
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
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
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
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
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
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
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
CNBC's Becky Quick asks Buffett to stop
using CNBC as an acronym for mass destruction. That gets a laugh from the
Buffett: Because Berkshire can only make
large investments due to its size, I can make personal investments in
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
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
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
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
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
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:
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
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
And with that, the Q&A session ends six
hours after it began.
See you next year!