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.