Notes From Berkshire Hathaway Annual Meeting – May 5, 2018

Berkshire Hathaway Annual Meeting

May 5, 2018

 

(Notes taken by Professor David Kass, Department of Finance, Robert H. Smith School of Business,

University of Maryland)

 

A humorous film was shown in which Hindsight Advisors, a wealth management firm, shows potential clients all the money they could have made and the things they could have bought (an island, a house, a yacht , a car, etc.) if they had invested in Apple “before the iPhone” and Amazon “before it became the only place to shop”.  However, Hindsight Advisors does not provide any advice as to what their clients should buy now – “We don’t do that”.  Videos from previous meetings were also shown including Warren Buffett challenging LeBron James in basketball, Buffett pitching for the Red Sox striking out Alex Rodriguez of the Yankees with two out and the bases loaded in the bottom of the ninth inning, and Buffett fighting Floyd Mayweather.

Warren Buffett (87) and Charlie Munger (94) then walk on to the stage and sit down.  The format for asking questions was similar to the last nine annual meetings.  One-third of the questions were selected by three business journalists: Andrew Ross Sorkin (CNBC and the New York Times), Becky Quick (CNBC) and Carol Loomis (Retired, Fortune).  Shareholders had e-mailed over 2,000 questions to the journalists, who then selected 6 questions each relating to Berkshire and its operations.  The journalists who were seated on the stage, alternated with analysts Gregg Warren (Morningstar), Jonathan Brandt (Ruane, Cunniff, and Goldfarb), and Gary Ransom (Dowling & Partners) also seated on the stage, and with shareholders in the audience in the asking of questions.

Approximately 40,000 were in attendance.  This compared to 40,000 in 2017 and 2016, 45,000 – 50,000 in 2015 (celebrating Warren Buffett’s 50 years at Berkshire Hathaway), 40,000 in 2014, 36,000 – 38,000 in 2010-2013, 35,000 in 2009, 31,000 in 2008, 27,000 in 2007, and 24,000 in 2006.

Warren Buffett mentioned that at age 11 he bought his first shares of stock on March 11, 1942 (three shares of Cities Service Preferred at $38 per share) during World War II.  He then added that if someone had invested $10,000 in the S&P 500 Index on that date, it would now be worth $51,000,000 (compounded annual return of 12%).  By contrast, a $10,000 investment in gold (a nonproductive asset) would be worth only $400,000 (compounded annual rate of return of 5%).

Questions were asked in the following order:

Q1.  Loomis:  Are you semi-retired now that Ajit and Greg manage the operating businesses and Ted and Todd manage some of the investments?

Buffett: I’ve been semi-retired for decades.  Ajit and Greg have been doing a superb job.  Ted and Todd each manage $12 billion or $13 billion for a total of $25 billion of Berkshire’s $170 billion of equities.  Berkshire also has $20 billion of long term bonds and $100 billion of cash.  So, I still am responsible for the other $300 billion with float.  I sometimes steal their ideas.

Munger: Warren sits around reading and thinking, and every once in awhile talks to someone on the phone.  When you have nothing to do, Warren is very good at doing nothing.

Q2.  Brandt:  Precision Castparts

Buffett:  It’s a very good business.  In the aircraft parts supply industry, reliability in terms of quality and delivery times are very important.  Contracts extend out many years, well before a plane starts in production.  In the last year other suppliers have failed in deliveries. Our earnings were charged $400 million because of intangibles (goodwill from acquisition).  It is not a real cost in my opinion.  It is not an economic expense.  Mark Donegan is a great manager.

Munger: I would buy another one just like it tomorrow if I had the chance.

Q3.  Audience:  China and trade

Buffett:  The benefits from trade are huge and the world is dependent on trade for progress. These two intelligent countries will not do something extremely foolish.  In 1970, imports and exports were 5% of GDP.  Now exports are 11½% and imports 14½% of GDP.

Munger:  Both countries are getting along fine.  China is growing more rapidly from a lower base.

Q4.  Quick: Will Berkshire still be an attractive buyer for businesses in the future?

Buffett: The reputation of Berkshire as a very good home for companies is not dependent on Charlie or me.  If things get bad enough, people will be calling us.

Q5. Ransom: Insuring against the risk of a cyber attack

Buffett:  I consider it as part of the 2% risk of a $400 billion super cat event happening each year. We can figure the probability of a quake or hurricane but we do not know much about a cyber attack.

Q6.  Audience: Can public entities be as successful at capital allocation as private enterprises?

Buffett:  State and Federal motivation is different.

Q7. Sorkin:  Wells Fargo scandal—When is it better to change vessels than patch leaks?

Buffett: Wells Fargo had the wrong incentives.  But the much greater error was ignoring the fact that they had a faulty incentive system.  Salomon also ignored its problem.  American Express in 1964 (salad oil scandal) and Geico in the 1970’s (didn’t have enough reserves) both emerged and came out much stronger.  Geico now has a 13% market share. Wells Fargo is not inferior to any of the other big banks. They made a big mistake and it cost them.  I like it as an investment and I like Tim Sloan (CEO).  Charlie always says. “an ounce of prevention is not worth a pound of cure, it is worth a ton of cure”.  Wells Fargo is likely to behave the best of all banks in the future.

Q8. Gregg Warren: Bailout deals in 2008 and the possibility of doing more in the future.

Buffett: We did get high rates on preferred shares from Goldman, GE and Bank of America.  There is no difference that it comes through Todd or Ted and not me.

Q9. Audience:  Are you still involved in pricing decisions at See’s and Buffalo News?

Buffett:  I was involved at one time, a long time ago.   Ajit and I talk frequently on very big risk coverages.  We each decide on a price in our heads and compare notes.

Q10. Loomis:  Mark-to-market rules for income statement.

Buffett: The market value of our securities is now being reflected each period on our income statement.  This is inconsistent. The $170 billion of partly owned companies we intend to own for decades and to grow have their value changes already on our balance sheet.  Is it fair to do this when our private company holdings are not accounted for in this way.

Q11. Brandt: Grocery Margins

Buffett:  Grocery margins are squeezed and very narrow (1% pretax and now less).  We will do our best to get margins up at McLane.

Q12. Audience: Health Care

Buffett: We do not plan to start any health care companies but work with Amazon and JP Morgan Chase to hold down health care costs.  Health care comprised 5% of GDP in 1960 (before Medicare) and is now 18% of GDP.  We will find a CEO for our joint effort within two months to provide better medical services at a lower cost for employees.

Q13. Quick: Performance of Todd Combs and Ted Weschler

Buffett: They beat the S&P 500 over the last 5 years, but I will not report individual performance.  They have been terrific. They have the intellect and the record and are also exceptional human beings.  Todd has done a tremendous amount of work on the medical project. Ted has done several things better than I could have.  Since they have arrived here they have almost identical records.  They have received some incentive compensation by beating the S&P 500. They have done better than I have done.  They were two very good choices.

Munger:  You did report their performance in previous years, but not this year.  It is harder to run $12-13 billion than $1 billion.

Q14. Ransom: Geico

Buffett:  We would have been slightly in the black without catastrophes.  Our underwriting margins are perfectly satisfactory now and we will gain market share this year. Tony (Nicely) took over at 2% market share, now we are at 13%.  It is saving customers $4-5 billion a year.  Geico contributed $2 billion to float last year.

Q15. Audience: Tariffs

Buffett:  I do not think either the U.S. or China will have a trade war.

Munger: Steel conditions were unbelievably adverse to the American steel industry.  Even Donald Trump can be right on some of this stuff.

Buffett:  The President needs to be educator-in-chief like FDR with his fireside chats communicating what needed to be done and what was happening.  Trade is difficult, since the benefits are not visible.  We do not know what the costs of products and services would be if things were different.  The negatives are apparent and painful such as the guy laid off from our shoe business in Maine.  Politics are tough when you have a hidden benefit but a visible cost. The President has to explain how trade hurts us in a real way and help us understand that is the price individuals pay for the collective good.  It has been a tough sell to the little guy who made shoes in Dexter, ME, or worked at the textile mill in New Bedford, MA, or the steel mill in Youngstown, OH.

Q16. Sorkin: Not taking a position on guns

Buffett:  I would not impose my values on others.  I have no business speaking for Berkshire and the company has never made any political contributions.

Q17: Gregg Warren: Would Berkshire issue a dividend if they had over $150 billion in cash and nothing to buy?

Buffett: We would figure out the most effective way to return capital at that time.  It would be a repurchase if the price of our shares was not over intrinsic value.  Our B shareholders voted 47:1 against a dividend.  Our directors own significant stock, and management does too, and we all think like owners.  We will not always be in a world of low interest rates and high private market prices, so some acquisitions will come about.  It is very unlikely that we would pay a large special dividend.

Munger: As long as the existing system continues to work as well as it has, why change it?

Q18. Audience: What would they do differently if they had only $1 billion to invest? More emerging markets?

Buffett: I would look first in the U.S. market and maybe a few other places. I would not get into very small markets. Size, not geography is our problem.

Munger: I already have more stocks in China than you do as a percentage of assets.  China is a better hunting ground.  It is a younger market but still large.

Buffett: The markets work toward efficiency as they age.

Q19. Loomis: 50 year outlook

Buffett: Berkshire in 2068 – I hope and believe we will be as shareholder oriented as any large company and look at shareholders as partners and that we would do with the money what we would do with our own and not seek an edge over our shareholders.

Munger: I want to talk to younger shareholders who inherited our stock. If you sell the stock, you are going to do worse, so I would advise you to keep the faith.

Q20. Brandt: Duracell declining margins

Buffett:  It should be earning more and is on its way there.  The brand and product line are strong. I still like the deal.

Munger:  I like it better than you do. It’s our kind of business.

Q21.  Audience: Increase in number of Treasury Bonds

Buffett: No one knows the impact of the increased volume of Treasury Bonds.  Berkshire’s money waiting to be invested is in Treasury Bills (4-month maturity) and the rates on those have gone up lately so we have made at least $500 million more in pretax income on them this year than last year.  Long term bonds are taxed, so they are a 2.5% net return (3% pre-tax). Since inflation is at 2%, that results in a real rate of return of 0.5% after tax.

Munger: It was unfair (Federal Reserve) to reduce interest rates to savers as much as they did, but they had to fight the Great Recession.  It benefitted all of the people in this room with the rise in asset prices including Berkshire stock.  We are all a bunch of undeserving people and hope we continue to be so.

Buffett: 1942 war bonds cost $18.75 and paid out $25 in ten years – that’s a 2.9% compounded return.  Even an 11 year old could understand that’s not a good investment.  The government knew significant inflation was coming.  The war forced a huge deficit where debt was 120% of GDP.  It was the greatest Keynesian experiment of all time and we accidentally backed into it.  It set us on a path of growth.  But T-Bonds have never been attractive except for the early 1980’s when the 30 year bond had a 14% yield to maturity.

Munger: I never had any war bonds since I did not have any money during the war.

Q22. Quick: Zero Based Budgeting

Buffett: 3G Capital has applied this to Kraft Heinz.  We hope managers take the Geico way and add people only if it is productive. Geico has grown from 8,000 to 35,000 and they increased productivity. Our managers do not submit budgets to me. We do not have a company budget. and do not even consolidate monthly figures. We are the only company in the Fortune 500 who does this.

Munger: We have 30 people at headquarters, and half are internal auditors. This is not normal. We lose the huge disadvantages of meetings after meetings and bureaucracies. This makes us more attractive to company leaders.  Our methods have worked so well that we are unlikely to change.  I would say we have subzero based budgeting at headquarters.  Bureaucracy is sort of like a cancer and functions like one.  Our headquarters sets the example for our companies.

Q23. Ransom: Going direct in the small commercial insurance market

Buffett:  We will find out if we can be as successful as Geico in going direct. There is no question that anything that takes cost out of the system is going to work over time.

Munger: If it was easy, it would have happened faster.  It wasn’t easy in auto.  It will take a long time.

Q24. Audience: Healthcare

Buffett: The healthcare system has a moat against intruders. If we succeed we are attacking the industry’s moat and not sacrificing care.

Munger: When Democrats control both houses and the White House, we will get single payer healthcare and it will not be friendly to PBM’s, and I will not miss them.

Q25: Sorkin:  On Moats and Elon Musk

Munger:  What Elon Musk said about the conventional moat is ridiculous. Elon said a conventional moat is quaint.

Buffett: The pace of innovation accelerated in recent years. There are more moats susceptible to innovation than earlier.  You have to always work to improve and defend your moat.  Elon may turn things upside down in some areas, but I do not think he would want to take us on in candy (See’s). There are some pretty good moats around.  Being the low cost producer is a terribly important moat.  Technology does not always translate to the lowest cost.

Q26. Gregg Warren: Energy capital expenditures declining over time

Buffett: Expenditures on energy capital projects will get lower over time. Tax credits are phasing out and could be extended again. We do not know what the government position will be on incentivizing alternatives. Berkshire (90%), Greg Abel and Walter Scott (10%) are the only shareholders in Berkshire Hathaway Energy and have an interest in deploying as much capital as they can at good rates of return.

Munger: I think there are huge opportunities as far ahead as you can see to deploy capital intelligently in energy.

Q27.  Audience: Tax cut impact

Buffett: We expect our normalized earnings power to increase over time.  We expect substantial capital gains coming from our marketable securities.

Munger: We like Apple and the airline stocks better than their dividends.

Q28. Loomis: Ethics related to real estate commissions

Buffett: A realtor can show a lot of houses before they sell one.  Most of our 50,000 agents make a decent living, but money managers make a lot more money with less contribution to the welfare of the client.  There are no unusual profits to real estate brokers. We are 3% of all transactions in the US and earning $200 million a year.  The average price in most places is $250,000 per house and the realtor has to show a lot of houses to make a sale and then splits the commission. It’s not excessive and doesn’t strike us as a place where online is making a dent.

Q29. Brandt: Kraft Heinz

Buffett: There are a number of items enjoying growing demand, and some vary by geography. This is a  good business in terms of ROI, but the population grows slowly. It is not a business with terrific organic growth and never has been.  The returns on tangible net assets are very good.

Q30. Audience:  Why didn’t Berkshire ever buy shares in Microsoft?

Buffett: In earlier years, the very clear answer is stupidity.  But since Bill (Gates) joined our board, and earlier because of our friendship, it would have been a mistake. If something happened, we would be targets of suggestions and accusations of having insider knowledge.  I told Ted and Todd that a few things are off the list.  As for Microsoft, both that and my stupidity have cost us a lot of money.

Q31. Quick: Are political divides worse now than ever?

Buffett:  There were many times in my life that seemed we were more divided than ever.  Since 1942, there have been 14 Presidents – 7 Republicans and 7 Democrats.  One was assassinated, and one resigned under pressure.  We had recessions, panics, wars and crises, and through it all America moved ahead.  In less than three of my lifetimes, back when Jefferson was 12, there was nothing here.  This country really works.  We will have people saying the world is ending after every election.  This country has seen a six-fold increase in GDP per capita in my lifetime.  I would love to be a baby born today.

Munger: There’s a tendency to think present politicians are much worse than past, but we tend to forget how awful they were in the past.

Q32. Ransom: General Re

Buffett:  The reinsurance business is tougher than it was 40-50 years ago.  Then it wasn’t brutally competitive.  We will see P&C reinsurance grow a fair amount, and life insurance will grow substantially, particularly internationally.  We will be in the business in the future and will have the talent.

Munger:  It has gone from “any idiot can get in” to “has gotten way tougher”, and why wouldn’t it?

Q33. Audience: How do you calculate intrinsic value?

Munger: I do not use a formula.  I mix all of the factors, and if the gap between value and price is not attractive, I go onto something else.  Costco at 13x earnings was ridiculously low value because of the brand. I liked cheap real estate and the good competitive position.  Even though it traded at 3x book, it was worth more. If you want a formula, go back to graduate school.  Formulas do not work.

Buffett: This is the longest we have gone in a meeting before Charlie says he prefers Costco to Berkshire.

Q34. Sorkin: Apple’s buybacks

Buffett: Apple has an incredible consumer product and they should not be buying their shares unless they are selling at less than what they are worth and they have the money.  I don’t see many attractive acquisitions for them.  Deals are very hard to find that are accretive to them at the $50-200 billion range and we are delighted to see them buy back shares.  We own 5% of Apple and may get to 6-7% from repurchases.  This is an extraordinary product and ecosystem. I love the idea of growing our ownership without laying out dime.  I would love to see Apple go down in price so we can buy more.

Munger:  Generally speaking, when companies go all out to buy other companies, they are worth less later.  Plenty of companies have no better use of their cash than to buy back stock, but I don’t approve of every buyback.  Some people do it just to keep the share price up, which is insane and immoral, and other than that, it’s fine.

Q35. Gregg Warren: Success of Visa and Mastercard (small holdings of Berkshire)

Buffett: Ted and Todd both bought these shares. We also own 17% of American Express, up from our 12% stake as a result of stock buybacks. The company is doing better than ever.  The main reasons are international growth and small business penetration.  Amex’s loan portfolio has done very well.

Q36. Audience:  Question from an 8 year old girl about capital allocation

Buffett: I’m certainly glad she’s not nine years old.  We like efficient businesses that earn a terrific return on capital.  We cannot get more money deployed in capital light businesses at prices that make sense to us.  We still love a business that takes very little capital and earns high returns, but the second-best choice is still a good choice.

Munger: Returns on utilities and the railroad are quite satisfactory.

Q37. Loomis:  Newspapers

Buffett: Circulation is down.  The problem has been that no one except the Wall Street Journal, The New York Times, and now The Washington Post has come up with a digital product that will replace revenue lost as print loses circulation and advertising.  The communities in which we operate can be prospering and all are losing daily and Sunday circulation, street sales, and home delivery.  We bought at great prices so we are not worried at Berkshire.  It is difficult to see how the print product survives over time.

Munger: The decline has been faster than we thought.

Buffett: For news and sports scores and stock quotes and ads, print newspapers are no longer the primary source, and the business has changed in a very material way.

Q38. Brandt: TTI

Buffett: TTI doubled its pretax earnings.  Paul Andrews has done a sensational job.  He has quadrupled the business. They distribute little electronic components. It’s a billion dollar business off an item that’s less than a nickel.

Munger: The business is wonderful.  Because it is so difficult to do, others don’t try.

Q39. Audience: On selling Phillips 66 shares

Buffett: We sold at $93 and it’s $115 now.  We hit 9.9% ownership there. Overwhelmingly we will stop below 10% because of the regulatory requirements of being a larger owner.

Munger: We like the subsidiary we traded the stock for.  It isn’t like the stock went away for nothing.

Q40. Quick:  Cryptocurrencies

Buffett: Nonproductive assets remain that way.  Gold from the time of Christ has a compound rate of 0.2 percent.  People hope someone will buy it later at a higher price. In the end you make money on productive assets.  Cryptocurrencies will come to bad endings.

Munger: I like cryptocurrencies less than you do. To me, it’s just dementia.  It’s like somebody else is trading turds and you decide you cannot be left out.

Buffett: To the extent we are being broadcast around the world, I hope your comment doesn’t translate.

Q41. Ransom: Tax cut benefits being passed on to customers

Buffett:  The benefits go to the customer in the case of public utilities since utilities are not entitled to earn excess returns due to tax rate changes.  The tax rate change was good for shareholders generally which was the intent of Congress.  Some tax benefits will go to shareholders and some will be competed away.

Munger: I have nothing to add.

Q42. Audience: Benefits of being multicultural

Buffett:  It is a great advantage over time to understand the cultures of other societies.

Munger: It would not do good to be fluent in both Chinese and English if you are a proctologist. If you are going to use it you have to work in some interface between the two countries and can raise money in one country and invest it in another like Li Lu or be some kind of importer or trade specialist.

Buffett:  Generally speaking, when being multicultural, you can be multidisciplinary, but you usually make more money in a single discipline, so maybe be a proctologist.

Q43. Sorkin: Why do some of Berkshire’s subsidiaries have high cost employee retirement plans?

Buffett: Our managers run their businesses and know what we think in terms of index funds. We let our managers make their own decisions. A high percentage of people will have an index fund option. The only thing we ask is to place a limit on the percentage they can put in Berkshire stock.  We don’t want jobs tied to Berkshire to also have retirement and savings invested in Berkshire.  If employees want different options, they should make their views known to the managers.

Q44. Gregg Warren: Culture at Berkshire

Buffett:  Our culture is strong and reinforced by shareholders. We want shareholders who are partners. It also goes to directors.  I have been on 19 boards and have never seen one like ours. They didn’t get special deals and own lots of shares. They are owner-oriented, Berkshire-conscious and business savvy.  They run businesses well for themselves and their partners. Our managers are owners too. Some are even second, third, or fourth generation. We are not like those companies whose boards vote themselves huge options. Our culture grows stronger all of the time.

Munger: The culture and values will go on for a long time after all of the present managers are gone.  It will work well enough that it will last and it is not that easy to duplicate. Think of how little the Berkshire model has been recreated.  It will last a long time because it deserves to, but it will go on without the returns of the past.

Q45. Audience: Cash needs for insurance

Buffett: We do not correlate or measure float and decide how much to leave in cash and fixed income. Float keeps growing, and cash has grown because competition for acquisitions has been much stronger.   There is no way float can shrink in a short period.  Float will grow for a while. Our cash has gone up a lot recently, $400 million a week, absent float.  We want to put more cash into productive assets.

Q46. Loomis:  In a 1999 Fortune article Buffett predicted that corporate profits would not exceed 6% of GDP, but since 2008 profits have increased to 8-10% of GDP.

Buffett: The four largest companies today by market value do not need any net tangible assets. They are not like AT&T, GM, or ExxonMobil requiring lots of capital to produce earnings.  American industry has become much more profitable in the aggregate over the past 20 years. We have become an asset-light economy.  We will earn even more with lower taxes.  It hasn’t changed the profitability of other, capital intensive industries.

Q47. Brandt: AIG insurance deal

Buffett:  AIG wanted to give Berkshire all of the losses incurred in its domestic business before December 31, 2015, and AIG agreed to pay the first $25 billion and then 80% of the next $25 billion. If we are right in how much we will be paying and when, we will come out ahead. We have done 10-12 deals like this in the past and so far have done some well and others a little less.  There has been $15 billion paid out by AIG so far, and we still feel good about it.  We will be wrong one way or another, but everyone is when estimated losses will not be settled for 20-30 years.

Q48. Audience: Ability to forecast success of one product versus another

Buffett:  American Express went into the credit card business because of worries about what would happen to traveler’s checks.  When they entered competition with Diners Club and Carte Blanche, they came in at a higher price with a centurion on the card.  They had more value. When someone would use the card, he looks like he’s JP Morgan versus the guy living paycheck to paycheck.  All kinds of colas (soda) came out over the years, but Coke sold for a nickel in 1900 and now is not much more.  In 1942, a newspaper was 3 cents.  Coke is a real bargain product.  Just like with See’s – if a boy gave a box to a girl, and she kissed him, you lose all price sensitivity at that point.  We like products where people feel like kissing you instead of slapping you.  We are betting on the ecosystem of Apple products led by the iPhone but see characteristics that make me think this is extraordinary.  After the Amex scandal in 1963, we worried about survival, but no one quit using the product. You can get feel for a product through channel checks. (Ben Graham’s book). Ted and Todd use them a lot.  Charlie does it with Costco. They surprise and delight their customers, and there is nothing like that in business.

Q49. Quick: Kraft Heinz and Unilever

Buffett: We will not do hostile takeovers.  It’s not evil to conduct a hostile offer. We do not wish to do that since we want to be liked by managements as we are counting on them to continue running their business if we buy them.  We seldom take a position opposite management on proxy issues.  We have voted against a couple of propositions managements have made such as with Coke when we withheld our vote to express our opinion on stock options.  It is not evil to have a difference of opinion.  The stockholders still own the company.  The 3G folks are great managers and partners.

Q50. Ransom: Looking abroad for acquisitions

Buffett:  We see some outside the US, and thank goodness we saw Iscar in Israel when Eitan wrote us. But we are still not as far along as we would like around the world in terms of expansion. In the U.S. all of the potential large deals think about Berkshire, but elsewhere we are not as embedded.  They know about us and know we have a lot of money, but the results haven’t been great. Our experience in Israel has been terrific.

Munger: Even the LBO firms are getting nosebleeds from the valuations.

Q51. Audience: Business schools

Buffett:  I went to three business schools and at each I found a teacher or two that I learned a lot from.  I think that the priesthood of 30-40 years ago for efficient market theory strayed far from the reality of investing. We would rather have a person who is bright and had chapter 8 of Intelligent Investor in his bones.  We would take that person who is disciplined and it does not require a high IQ.  It is not complicated.  The fundamentals are important, and so is understanding accounting and talking to and thinking like a consumer.  But being a good investor doesn’t require advanced learning.  A good teacher gives you insights and makes you a better person.  The utility of chapter 8 looking at stocks as a business and chapter 20 about the margin of safety are of enormous value and not complicated. Whenever you hear something described as elegant, watch out.

Q52. Sorkin: Women in the workforce

Buffett:  I have two sisters as smart as I am and with better personalities, and they did not remotely have the same opportunities. They could be nurses or teachers or retail clerks or stenographers, which was to my advantage. I have named only 6-7 CEO’s (at Berkshire) in the last few years, and half have been women.  I am bullish about this country. More selection by merit than by gender or race or inheritance will be good.  All businesses passed on to the eldest son will create a lot less progress.

Munger: I have never seen overt discrimination anywhere within Berkshire.

Q53. Gregg Warren: Insurance cash restrictions and buybacks

Buffett: If share repurchases are attractive, we would do it in a very big way and have all kinds of ways to arrange it.  We can use cash for an acquisition or a repurchase.  A share repurchase would be difficult based on the way our stock trades.  We could have a lot more cash if we needed it.  We could workout how any deal gets done.

Q54. Audience: Artificial intelligence

Buffett:  The world won’t change much from machine intelligence.  I don’t think machines bring much to the table regarding capital allocation or investing.

Q55. Audience:  Investing abroad

Buffett:  American investors are missing China. It is far away, it is different, it is complicated.  It is tougher in markets that we are unfamiliar working in. In much of Europe we have to report when we own less that 3%, and that is tough when we get followers. We have problems by nature of size. It would be a lot easier if we were a small fund. In Petrochina we could get a large position because the Chinese government owned much of it and we bought 14.9%

Munger: Warren did so poorly the first time in China. He put in $200 million and got $2 billion out, which was not encouraging enough.

Q56. Audience: Tech investing

Buffett: Tech or not, we base our decisions on the durability of competitive advantage and if we think we are better at assessing the probability of improving the durability.  Amazon doing what they did I thought would be something close to a miracle, and I tend not to bet when I think something takes a miracle.  Bill gates told me early on to switch from Altavista to Google, but I wondered who would then skip past Google. We saw at Geico that we were paying Google a lot of money for services costing Google nothing.  We made a mistake.  We went into Apple because of the intelligence of the capital deployed and the value of the ecosystem. It was the nature of consumer behavior.  We miss a lot of things we don’t understand well enough. But there is no penalty for not swinging at something as long as you swing at something.  Stay in your circle of competence where you might have an edge because of experience or reason. When Google went public, the mystery was what competition would come along?  Would it be four or five player slugging it out or one dominant player? The airlines are better now than they used to be, but it used to be suicide. There are now 4 or 5 carriers with 85% capacity vs. 8 carriers at 70% capacity. Amazon is a miracle doing Amazon Web Services and changing the world of retail at the same time and without much capital;  and at that speed.  We underestimated Jeff. We had a very high opinion and still underestimated him.

Munger: Some of our age and stupidity is ameliorated by Ted and Todd. We are lucky to have them as a lot of ignorance of the older generation needs removal.

Q57. Audience: Do you have a family office?

Buffett: We already have one – sitting right here.  We are the last people in the world to have one.  It’s not something that fits the Buffett and Munger families.

Q58. Audience: Compensation for managers

Buffett:  It is a good and tough question. We have kept a very high percentage of managers who we wanted to keep. There are no precise formulas.

Munger: There is an advantage to keeping individual deals private.  Warren makes them all personally and has every formula in the book and keeps them all private and disclosed only whatever he has to disclose.

 

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