Wesco Financial - 2007 Meeting

CM started with a short speech on the confluence of factors in WB that contributed to Berkshire's success.
1. Mental aptitude
2. Extreme interest in the subject - there is no substitute
3. Early start
4. "Learning Machine" - avid learner. Lucky to be in a subject where he can learn effectively. It is more about learning the method of learning.
5. Decision making concentrated in one mind. Vs. Committees CM compared Singapore to USA in the pace of success.
6. Not being naive relates to mental attitude - by avoiding negatives like self-pity, envy, overspending income, being an extreme idealogue. This is maximisation of objectivity.
7. Reinforcement through rewards for good decision.
Some Mungerisms:
Quoting Will Rogers - There should be a better way to learn not to pee on an electric fence than actually doing it.
Irish Alzheimer's is when you forget everything except the grudges.
Quoting a German proverb - Man is old too soon, and too late smart
Sit on your ass and read
Academics & Learning:
Fatal disconnect of academics
pick up main ideas of each subject - for instance opportunity cost from economics
Checklist method of learning
Always invert
Sell yourself the best hour of the day
Accounting for derivatives
Marked to model and marked to market are different
Being rational
wonderful feeling to be right
even better to be trusted by others
Why Berky is not repeated
1.Simple - no advantage in being simple
2. Institutional reward system and hierarchy make it difficult
Investing in Commodities
POSCO is not, it is technology from Nippon Steel
Commodity business can be attractive at a price
Nature Vs Nurture
In a non-pathological environment, mostly pre-ordained by nature than people give credit for
Know your strengths
Don't be a prisoner to your talents
Inefficient Markets
1. Small Markets, or
2. Crazy People doing crazy things
Motivation
Wanted to be independent to make 'a man of himself'
Best from his list of human misjudgements in Poor Charlie's Almanack
Self serving bias - 'Little me wants it, why can't little me have it'
Opportunity cost
Best measure to look at life

Berkshire Hathaway – 2007 Meeting – Part Two

Views on:-

Right Margin of Safety:

WB - If we don’t understand something, we don’t try to compensate with a higher Margin of Safety. If you cannot see out what the business is going to be like for 5-10 years, do not invest in it.

Healthcare:-

WB – Berky would be interested in investing in a business with low frictional costs of distribution.

Intrinisic Value of Berky:-

WB – Should not be judged solely based on Book Value, but on use of retained earnings as well.

Derivatives:-

WB – There are valuation issues. Both sides of the same trade can value the same instrument differently and come up with different values. This is unusual.

Comments:- Usually, when a liability or a receivable is valued, the debtor and creditor always assign the same currency value to the transaction.

WB – Leverage and various forms of program trading are prevalent

Trade Vs. Buy & Hold:-

WB – Constant trading of assets can be an unhealthy practice. You have to understand human behavior to understand trading better.

CM – Bad results cannot be predicted with Gaussian distributions. The use of Beta and other statistical tools are prevalent because it is easy to teach and easy to compute.

Intrinsic Value: –

WB – Refers to Aesop’s fable – “A bird in hand is worth two in the bush”.

Global Warming:-

WB – Catastrophe exposures in insurance companies. Suggests that the US Govt. should err on the side of the planet.

CM – The effects of global warming can be tackled with capital.

Stocks Vs. Bonds:-

WB – Stocks are still a better investment than bonds

Small Funds:-

WB – High returns are possible for smaller funds compared to large

Sub-primes:-

WB - As long as the unemployment does not rise and inflation does not rise, its effects on the housing market will not affect the economy.

Volatility:-

WB - Volatility is not a good measure of risk. Use of Beta is not appropriate. Risk comes from not knowing what you are doing.

Management Quality and Integrity:-

WB – Look for direct and honest reporting

Filter of trust:-

WB – People give themselves away with the things they talk, the things they think are important

CM – Be especially suspicious when the proposals are too good to be true.

Discount Rates:-

CM – Just because you can measure something doesn’t mean it is the controlling variable.

Inflation Protection:-

WB – First level of protection, earning power

Second, owning good business with pricing power defined as the customers willingness to give up current income for use of its products

Railroads:-

WB – Vs Trucking – cost of fuel affects trucking 4X more than railroads and there is not much capacity addition in railroads.

Self-Development:-

In response to the question of a 10 year old girl who wants to earn money

CM – Sell yourself the best hour of the day and sell only the rest to others.

Investments:-

WB – Do not own a business with a weakening competitive edge.

Dollar:-

WB – Bearish without any significant policy changes on the part of US.

Cm – Weakening dollar not resulting in higher inflation is a surprise.

Good Board of Directors:-

WB –

1. Have the right CEO
2. The CEO does not over-reach.
3. Independent judgement on big acquisitions.

Berkshire Hathaway - Meeting Notes Part I

The meeting opened with the cousin Jimmy Buffett playing the Berkshirehathawayville version of his song.
WB announced his plan for a cartoon series for children to impart financial education in an enjoyable manner.
The Q1 2007 results were posted with WB explaining that insurance rates have come down recently, but the effect will start showing up in a couple of quarters or so due to a lag effect in rates ratcheting down. He offerd caution on cat. insurance and mentioned that over a long term berky would be expect to break-even in tnis business and still come ahead because of its ability to manage float and generate float income.
He brought up the issue of a high accounts receivable by 7 billion than normal due to the Equitas deal closing in April.
Views on:-
Private Equity
* Funds invested are locked in. It's hard to get out for the investor.
* Fund Managers are compelled to invest since it is in their interest to earn more fees by generating more funds. They cannot go back to investors with surplus funds in hand.
* Trigger for the slow down could be junk bond yield spreads going up higher hampering leverage.
Overseas investments
WB has no bias against. Low holdings not reported in annual report. Reporting limit threshold of 3% in Europe a deterrent.
Executive Compensation
* Ratcheting and envy at play
* Non-independent comp committees.
* Compensation should be based on controllable factors. For instance, extraction cost based comp for an oil executive, not oil prices. Factor should be relevant as well.
Interest rates
* Credit contraction as a result of higher rates.
Contraction as was historical is not probable. Fed not likely to orchestrate a credit crunch. Follies of excess liquidity may bring about unhealthy legislation.
High Corporate profits
WB - Share in GDP getting higher, labor's share down It is not likely to persist.
CM - Share of financials is higher is the causw. Investment banks etc earning abnormal profits. Historically high consumer credit is also the reason.
Naked Shorting
WB welcomes shorters, sees it as a money making opportunity by lending stocks.
It is a hard position to take.
Gambling
* Excitement seeking is the underlying.
* Tax on ignorance - making it easier to gamble is preying on ignorance, not the job of a govt that serves people.
How to become a good investor
* Read everything you can
* Fill your minds with ideas, sort out the good ones
* Jump into investing. Reading about investing and actually doing it is as different as reading a romance novel and actually doing "something else".
* WB has same thought pattern as when he was 19 abt investments
CM - Rationalise - "What do you own and why do you own it?"
WB - Write an essay on why you would buy the company at the price