Whitney Tilson’s 2007 Berkshire Hathaway Annual Meeting Notes
May 5, 2007
This is an advance copy intended only for subscribers of Value Investor Insight and tho who attended the recent Value Investing Congress. To subscribe to VII, plea go to /subscribe, and to sign up for the next Congress, which will take place in New York City on November 28-29, visit
Note: This is not a transcript. No recording devices were allowed at the meeting, so this is bad on many hours of rapid typing, combined with my memory. I have reorganized the content of the meeting by subject area. All quotes are Buffett’s, unless otherwi noted. Words in [brackets] are my comments/edits or, when I misd something, my best guess of what was said.
For my columns and notes on previous Berkshire and Wesco meetings, click here. OPENING REMARKS
There were 27,000 people at the meeting, which started, as always, with the movie. There was an opening cartoon with Buffett, Munger and Gates, excerpts from past movies (Buffett testifying in front of
Congress in the Salomon scandal, etc.), the usual new GEICO, Coke and Dairy Queen commercials, and a new gment in which Buffett and LeBron James play a one-on-one basketball game (Buffett won, of cour, with an over-the-shoulder half-court hook shot).
Then Jimmy Buffett sang “Margaritaville” with new words. The refrain was: “Wastin’ away again in Berkshire Hathaway-ville, archin’ for some good companies to buy.”
Then Buffett and Munger took the stage, equipped with their typical supplies of Coke and See’s Candies. Buffett quipped, “Charlie can hear quite well and I can e, so we work well together.”
Buffett did a beautiful tribute to Lorimer Davidson (“Davy”), who joined GEICO in 1948, was Chairman and/or CEO from 1958 to 1970, stayed on the board until 1978 and died in 1999 at the age of 97. He helped teach Buffett about the insurance business and was a clo personal friend. Buffett showed a video of Davidson, a year before he died, telling the famous story of when he first met Buffett. [Buffett recounts this story in his 1995 annual letter – e the excerpt at the end of this document. To read an article Buffett published later that year recommending GEICO, called “The Security I Like Best,” click here.]
Buffett was a business school student at Columbia, a student of Ben Graham’s, who was then the ch
airman of GEICO. Buffett took the train down to Washington D.C. one Saturday and found the doors to GEICO’s headquarters locked, but a janitor let him in, Davidson happened to be there and they ended up
talking for four hours. In the video, Davidson said he immediately knew Buffett was something special – he knew all about GEICO and asked exactly the right questions.
After the five-minute video ended, Buffett spoke with some emotion about what a great friend and great man Davidson was.
(I think the hardest part about getting older for Buffett is not his own advancing age – he looks great physically and his mind has never been sharper – but losing so many of the people clost to him: his wife Susie, Kay Graham, Davidson, etc.) Berkshire’s Q1 Results
[To read the Q1 earnings relea and 10Q, click here and here.]
It was a good first quarter. The insurance earnings are going to go down, there’s no question about that. How much will depend on mother nature and a few other factors. It’s been an extraordinary period, in which there have been no major disasters. This favorable outcome has caud [insurance]
prices to go down. There’s a lag effect, however, becau we realize the premiums and profits from policies written last year [when pricing was much stronger] over time. As this year progress, our insurance results will show the effect of lower prices.
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We had the most benign hurricane ason imaginable last year. When hurricanes occur, we’ll pay out a lot of money. We hope over time to more or less break even on our underwriting. When you e last year’s profit, look at it as an offt to future loss.
You’ll notice in our earnings report that accounts receivable went up by $7 billion, which was due to the Equitas transaction, which clod at the end of the quarter. A couple of days later, we received cash and curities, which we sold, so the $7 billion went from accounts receivable to cash early in April. [Here is Berkshire’s press relea regarding the deal and here is a blog post analyzing it.] Most of our non-insurance business did fine. Our residential construction-related business like Shaw, Johns Manville and Acme Brick were hit, and in some cas hit hard. My guess is that that continues for quite a while. But compared to other companies in the ctor, our managers continue to do an absolutely nsational job. We have the best managers – and shareholders – of any company.
Iscar
[Buffett talked about the trip he and Munger made to Israel to visit Iscar and they showed some photos of their visit to Iscar’s major plant, which is located only 10 miles or so from the Lebane border. They were incredibly impresd. Munger commented: “It was a great experience. I have never en anything as automated as that Iscar operation. I think they view it as a disgrace if any human hand has to do anything.”]
Shareholder Resolution for Berkshire to Divest its PetroChina Position
[Buffett mentioned the shareholder resolution calling for Berkshire to divest its stake in PetroChina due to the genocide in Darfur. Buffett said this would be discusd in detail during the formal meeting, which took place in the afternoon after the Q&A ssion. He noted that only 1.8% of shareholders voted in favor of the resolution, both among A and B shareholders, and said, “Even if you leave out my personal vote, it’s about a 25-1 margin that voted in opposition.”
The meeting then turned to the Q&A, which went from 9:30 am to noon and then from 1-3 pm.]
哈利波特电影全集
COMMENTS ON BERKSHIRE HATHAWAY
大耳朵英语在线翻译
What explains the extraordinary success of Berkshire Hathaway?
Munger: You won’t have anything like the past to look forward to. Berkshire’s results have been so extreme that it’s hard to think of a precedent in the history of the world. The balance sheet is gross considering the small beginnings of the place.
What has caud this extreme record to go on for such a long time? I would argue that it started with a young man reading everything when he was 10 years old, becoming a learning machine. He started this long run early. Had he not been learning all this time, our record would be a mere shadow of what it is. And he’s actually improved since he pasd the age at which most other people retire. Most people don’t even try this – it takes practice.
中华美德颂读后感So it’s been a long run, with extraordinarily concentrated power by a man who is a ferocious learner. Our system ought to be more copied than it is. The system of passing power from one old codger to another is not necessarily the right system at all.
Berkshire has a very strong culture that will continue after we are gone. We have the talent here to do a lot of wonderful things over time, but they won’t be brilliant things – except once in a blue moon – becau we have too much money. The key is to avoid making mistakes. We have the right vehicle with the right standards. This is a very rational place.
Berkshire’s Next Chief Investment Officer
Buffett: I mentioned in the annual report that in looking for an investment manager to succeed me, we’re looking for someone who doesn’t only learn from things that have happened, but can also envision things that have never happened. This is our job in insurance and investments. Many people are very smart, but are not wired to think about things that haven’t happened before.
眼线笔颜色[In respon to another question on the same topic:] We’re looking for one or more people – it’s entirely possible that it could be three or four people. We’re
not looking for someone to teach – we’re looking for someone who knows how to do it.
We received about 600-700 applications, including one guy who recommended his four-year-old son. We’re heard from lots of good people, but the key is whether they could do it running $100 billion. We want to find someone who can run large sums of money mildly better than the market – and I emphasize mildly becau there’s no way anyone can beat the S&P 500 by 10 percentage points per year [running such a large amount of money]. It isn’t going to happen. But a few percentage points per year is possible.
Anything times zero is zero and I don’t care how good the record is in every other year if one year there’s a zero. We’re looking for someone who is wired in such a way as to e risks that haven’t occurred and be cognizant of risks that have occurred. Charlie and I have en guys go broke or clo to it becau 99 of 100 of their decisions were good, but the 100th did them in.
We want to give them each a chunk of about $5 billion and have them manage it for a period of time, as if they were managing $100 billion. Then [after watching them and evaluating them for a while], we’d turn over the entire portfolio to one or more of them.
Munger: It reminds me of the young guy who went up to Mozart and said, “I’d like to write symphonies.” When Mozart said, “You’re too young,” the young man replied, “But you were young when you started.” Mozart pointed out, “Yes, but I wasn’t asking anyone el for advice on how to do it.”
Buffett: We’ll find some people. I had to do this years ago when I decided to clo the Buffett Partnership in 1969 and had to recommend to my investors where they should put 100% of their money. There were many, many investors with great records, but I cho Charlie, Sandy Gottesman, and Bill Ruane. Charlie wasn’t interested in more partners, but Sandy Gottesman took s
ome individual accounts and tho investors have been very happy. Bill Ruane t up a parate mutual fund [the Sequoia Fund], which has also done very well.
So, I identified three people who were conrvative, where there was no chance at all that they’d blow up, who were not only terrific investors, but also terrific stewards of capital who would treat investors right. They were my age, which helped – I now have to look at people in a generation where I don’t know many people.
In 1979, I picked Lou Simpson for GEICO. I’d never met him but once I did, it was clear that he’d get an above-average result and there was no chance of a bad result. [Buffett published Simpson’s spectacular record on page 18 of his 2004 annual report, showing that Simpson had compounded at 20.3% annually from 1980-2004 vs. 13.5% for the S&P 500.]
I have a job to do and I’ll do it.
Berkshire’s Intrinsic Value
Intrinsic value is simply the sum of all future cash flows a business generates between now and judgment day, discounted back at the proper rate. But that’s pretty nebulous. To value the business
bitch是什么意思es we own prently, we try to give you information to make a reasonable judgment about that. We own curities, which are easy to value, and operating business. We try to give you the information we u to value them.
Since Berkshire retains all of its earnings, it becomes very important to evaluate what we’ll do with earnings over time.
If you’d looked at the intrinsic value of Berkshire in 1965, we had a textile business worth $12 [per share], but that wasn’t all. You had to evaluate not only the business, but also the skill with which retained earnings would be ud.
It’s the same situation today: we will put to work billions of dollars this year and in the future. If we do this effectively, each dollar has a value of more than $1. We have $80,000 [per share] in marketable curities. If our insurance business breaks even, that’s free to us. We’re trying to add to our collection of operating business and they’ll add to earnings.
If Charlie and I wrote down our estimates of Berkshire’s intrinsic value, they wouldn’t be exactly the same, but they would be clo.
Overas Investing
We have a bias toward investing in the U.S., but I bought my first stock outside the United States at least 50 years ago and we’ve looked at plenty of marketable curities overas. It would make no difference to us if Coke was headquartered in Amsterdam.
But nobody outside the U.S. has heard of us. Eitan Wertheimer found us. The Iscar acquisition has contributed to our becoming better known. Eitan is going through a procedure to get us better known abroad. [Buffett did not give any details about this “procedure”.]
I haven’t done a good lling job abroad. We could be fairly criticized for not doing enough to become better known [overas].
We own stocks in Germany and 4% of POSCO, which is bad in South Korea – it’s now worth over $1 billion. I can think of a half dozen investments [we currently have] outside the U.S. We don’t have to report them in our [SEC Form] 13F, so they don’t get picked up like our domestic investments.
We have to report our holdings in Germany once we reach 3% ownership. So if we buy a $10 billion [market-cap] company, that means once we buy $300 million worth we have to tell the world, and Charlie and I don’t like doing that. It screws up our future buying, so the 3% rule is a real minus.
stomach
I can assure you that the entire world is on our radar screen and we hope to be on its radar screen.elin
Munger: John Templeton made a fortune being in Japan very early and stocks there went to 30-40x earnings. It was an admirable piece of investment, but you know, we did alright during the same period. [Laughter]
Does the big increa in Q1 equity purchas indicate a lowering of your threshold for investment?
chela clinton
[My partner Glenn Tongue asked this question, referring to Berkshire’s purcha of $5.3 billion in equities in the first quarter of 2007, vs. $1.5 billion in last year’s Q1.]
Did we change our standards? You know, I don’t think so, but you can’t be 100% sure. If you haven’t had a date for a month, you might say you wouldn’t have dated that girl on the first day – but I think we would have.
It does not reflect our giving up on finding an elephant of a business to acquire. We have plenty of cash and could ll stocks if we really needed to. We’re well prepared to acquire a very large business.
We acquired TTI in the first quarter [here is Berkshire’s press relea], which is a terrific business.
We wish it were five times bigger, but maybe some day it will be.
Munger: The one thing I think we can promi you is that we won’t make the kinds of returns buying the things we are now that we earned on the stuff we bought 10-15 years ago. There’s just too much money floating around.
oz国历险记Buffett: We won’t come clo.
Munger: It’s a different world with more modest expectations.
Buffett: We hope you share them.
Where is best place to invest going forward, with tight credit spreads, large trade deficits, etc.?
We think we’re in a pretty good group of business for the world we face. We don’t know which will be super-winners, but we think a significant number will do okay. We don’t buy business with much thought of world trends, but we do think about business subject to foreign competition, with high labor content and a product that can be shipped in.
I bought into an airline [US Air] with high at-mile costs of 12 cents. It was protected, but that was before Southwest showed up with 8-cent costs.
