http://www.omaha.com/article/20110430/NEWS01/110429328/4
Warren Buffett Q&A with Shareholders: April 30
(04/30/2011)
Saturday April 30, 2011
8:21
Ross Boettcher:
Hello, everyone. Thanks for joining the Omaha World-Herald's live coverage of what many are calling the most important Berkshire Hathaway annual meeting in history. With the drama swirling around the the abrupt departure of David Sokol last month, we'll keep you informed with minute-by-minute updates on Warren Buffett's response to questioning on that controversy and, of course, the smattering of other topics that are sure to follow.
8:24
Ross Boettcher:
Things here at the Qwest Center Omaha are electric and buzzing. The hour-long movie that plays each year before Warren Buffett and Charlie Munger start fielding questions is going to start in about 10 minutes.
8:30
Ross Boettcher:
Movie's about to get started here.
8:30
Ross Boettcher:
Before things get rolling here at the Qwest Center, I wanted to get a bit of housekeeping out of the way — I'll do my best to answer any and all questions you have that might come up during today's Q&A, but if I don't get to all of your queries, be sure to log-on to Omaha.com on Tuesday for an 11:30 a.m. chat with our ace Berkshire reporter, Steve Jordon. Steve is a walking, talking encyclopedia of knowledge on all things Berkshire, so make sure to check-in for that. Also, if you haven't already, be sure to take a glance at some of the special Berkshire content that the World-Herald published today. We've got everything from a list of Mr. Buffett's most-likely successors to the tales of a few "Berkies" — including a young hedge fund manager from the Netherlands and a family of five from Toronto — who wouldn't miss the annual trip to Omaha for anything.
8:33
Ross Boettcher:
Movie intro starts with a time lapse showing staffers prepping the Qwest Center Omaha for the Berkshire production. Theme song is U2's "It's a Beautiful Day." Folks filing in still looking for spots to sit in the dark.
8:40
Ross Boettcher:
OK, so we've got a cartoon playing that's already garnered a few good chuckels from the crowd. The plot goes like this: In the year 2085, trading machines Called "Moodies" take over the world and the leader, called "MBA" (a cyborg version of Warren) is sent back to destroy Warren Buffett. In a twist, the only one man that can protect Warren is "The Governator, California Governor ARnold Schwartznegger.
Of course, the cartoon ends with Arnold beating-down "MBA" and Arnold and Warren chiming-in..."Hasta la vista, Baby!"
8:41
Ross Boettcher:
Now it looks like we're going to get a sampling of advertisements from Berkshire Hathaway companies. First up: Coca-Cola.
8:42
Ross Boettcher:
In the meantime, before the Q&A gets underway, here's a link to the World-Herald's Berkshire special section: http://omaha.com/article/20110430/MONEY/110428846#berkshire-world-herald-special-section
8:42
Comment From paula
are you doing live coverage at this website
8:42
Ross Boettcher:
Sure am, Paula. Welcome!
8:42
Comment From Chris
Hi Ross !
8:43
Ross Boettcher:
Good morning, Chris. Thanks for dropping by.
8:44
Comment From paula
Are we going to see the actual meeting taking place or just hear you relating what's happening?
8:48
Ross Boettcher:
Paula, there's actually no video feeds allowed at the Qwest Center, so I'll do my best to file what I see and here. Hopefully that will give you all a good idea of what's going on here.
Still in the midst of the video, a special section about BNSF and trains. Speaking of which, World-Herald reporter Steve Jordon reported earlier from the convention hall that Warren made a lengthy stop at the BNSF booth and chatted it up with some folks who had a model train set up. He told them his train set at home didn't run nearly as well.
Warren also made the rounds to the Justin Boots booth, where four University of Nebraska cheerleaders welcomed him with a "Go Big Red" cheer. Steve says a shareholder followed that up with a big, loud "Go Buffett!"
8:48
Comment From Chris
Ross, have you or Steve Jordan noticed the mood being any different compared to year's past ?
8:49
Ross Boettcher:
Not yet, Chris. The atmosphere here still seems pretty jubilant. That was expected at first, but I have a feeling the mood might swing a bit when the questions regarding the David Sokol controversy start flowing.
8:50
Comment From Gloria
Ross: are you still there?
8:52
Ross Boettcher:
Sure am, Gloria.
More commercials now, this one from Dairy Queen on it's "Mini Blizzard." Pretty goofy stuff.
Now they're playing a recorded clip of Warren's talk with the Greater Omaha Chamber of Commerce.
"If money doesn't loosen up, this sucker is going to go bad." - Warren talking about the economic meltdown.
8:52
Comment From Lin
Ross: Is the attendance bigger this year than last year?
8:53
Ross Boettcher:
Attendance seems to be on-par with last year, Lin. I'll let you know when they announce an official attendance.
8:56
Ross Boettcher:
Showing a preview now of the upcoming film "Too Big to Fail" the movie based on the hit book from the New York Times' Andrew Ross Sorkin, who's one of the three journalist panelists who will be peppering Warren and Charlie Munger with questions.
8:58
Ross Boettcher:
Here's another bit on trains. Fitting for this year's theme: "Planes, trains and automobiles."
9:00
Ross Boettcher:
Clips turns out to be Warren playing with his model train set at home. After speeding the toy locomotive up, it finally crashes. Whoops.
"That's why nobody let's me run real trains," Warren says.
9:00
Comment From Eleanor
Hi Ross, great of you folks to provide this real-time feed to those of us who were unable to make it to Omaha this year. Much appreciated.
9:00
Ross Boettcher:
It's our pleasure, Elanor. Thanks for dropping-by!
9:04
Ross Boettcher:
Closing-in on the second half of the video with a Borsheims commercial featuring figure skater Dorothy Hamill.
We've got a hilarious GEICO commercial rolling now. Just imagine a hip-hop or R&B video with insurance salesmen and sales women. And Warren singing in auto-tune and doing some funky hip-hop dance moves. Hilarious!
9:06
Ross Boettcher:
Finishes with Warren strumming-away on his ukelele. Turns out the whole hip-hop bit was one of his managers dreaming (or a nightmare, depending on how you look at it!)
9:07
Ross Boettcher:
These commercials are getting some good laughs from the crowd.
9:07
Comment From Matt
Just wanted to say thank you for the info today!
9:08
Ross Boettcher:
Absolutely, Matt.
We're getting into the Solomon Bros. testimony now. A tense silence just fell over the crowd. No more laughing.
9:11
Ross Boettcher:
"As to the future, the submission to this subcommittee details actions that I believe will make Salomon the leader within the financial services industry in controls and compliance procedures. But in the end, the spirit about compliance is as important or more so than words about compliance. I want the right words and I want the full range of internal controls. But I also have asked every Salomon employee to be his or her own compliance officer. After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter. If they follow this test, they need not fear my other message to them: Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless."
Moving stuff there from Warren's solomon bros testimony to congress.
9:15
Ross Boettcher:
The laughs are rolling again. We've got a clip playing from Warren's appearance on "The Office."
"Your resume stinks. You're trying to tell me you've worked at the same place for the last 50 years?" -- From Kevin of the Office.
"Yeah, you could say that," Buffett said.
9:16
Comment From J
Here's the link to the CSPAN Archive Testimony http://www.c-spanarchives.org/program/ID/138035&start=3025&end=3180
9:17
Ross Boettcher:
Good stuff, thanks J.
9:18
Ross Boettcher:
Only lights on here in the arena are the TV monitors and a small desk light aglow by the panel of journalists. Making final tweaks to their questions, most likely.
9:20
Ross Boettcher:
For those of you who are familiar with how everything is structured today, go ahead and ignore this.
For others, here's a primer for what to expect: There is a small panel of well-known financial journalists — Carol Loomis of Fortune Magazine, Andrew Ross Sorkin of the New York Times and Becky Quick of CNBC — that will lob questions at Warren and Charlie Munger throughout the Q&A session. Most of the questions are submitted by readers or shareholders, and the many of them will be hard-hitting and to the point. For an idea of what kind of questions you can expect from Sorkin, I would encourage you to take a look at one of his recent columns: http://dealbook.nytimes.com/2011/04/04/buffetts-ruthlessness-is-oddly-absent/
9:21
Ross Boettcher:
Warren and Charlie on stage now.
"Good morning, I'm Warren, he's Charlie. He can hear, that's why we work together."
Starting with an intro of directors and a statement on David Sokol.
9:22
Ross Boettcher:
Regarding the transcript coming later on the questions related to the David Sokol Lubrizol matter said: "We want to be sure all shareholders get to read every word of what's said here about the matter."
9:25
Ross Boettcher:
Buffett now talking about preliminary, 1Q earnings. "I would tell you that, basically, pretty much all of our businesses, with the exception of those that are related to res housing are getting better, quarter by quarter."
9:26
Ross Boettcher:
Second-worst quarter for insurance industry in terms of catastrophes around the globe. Typically, it's the second quarter with more hurricanes and other natural disasters, Buffett said.
"We had some major catastrophes in the Pacific Asian areas and that hit the re-insuracne industry particularly hard."
Says the catastrophes cost reinsurance industry $50 billion.
9:28
Ross Boettcher:
"Unlikely" that we would have an underwriting profit for 2011. Unless it's "remarkably" catastrophe-free, they won't make a profit. First time in 9 years, Berkshire will take an insurance underwriting loss.
Even if they do make a profit, it'll be tiny Buffett says.
9:29
Ross Boettcher:
At the end of the quarter Berkshire had $38 billion in cash, that's not including $5.5 billion received in April from Goldman Sachs.
9:31
Ross Boettcher:
"Overall, we got very hit very hard in the insurance business, but had gains in most of our other businesses," said Buffett.
9:33
Ross Boettcher:
About 25,000 cars will get automobile insurance claims, hitting GEICO, Buffett says. Many of those are also tied to natural disasters.
"That's a lot of automobile claims when you think about it."
9:35
Ross Boettcher:
With the hardest part (see: worst months for tornadoes and hurricanes) still coming for the reinsurance business, Warren says: "This may be a year that the re-insurers remember."
9:38
Ross Boettcher:
We are gaining marketshare everyday in GEICO, Buffett says.
"We have some people in the adjacent room that can sign you up for GEICO. That might help cover some of the expenses of this meeting" -- Buffett, referring to the Qwest Center's convention hall with all of the Berkshire exhibits.
Note: Munger hasn't said a whole lot yet. Warren asked him how many people live in New Zealand. Munger gave him a prompt answer, but that's about it so far.
9:39
Comment From James Benson
How is Warren's health?
9:39
Ross Boettcher:
Can't be sure James, but if a question comes up regarding Warren's health today (I'm sure one will) I'll be sure to post his responses here.
9:42
Ross Boettcher:
Sokol statement coming now.
9:47
Ross Boettcher:
"I'd like to comment for just a few minutes on the matter of david sokol n the purchase of lubrizol stock. You saw in the movie a clip from the solomon situation. That occured almost 20 years ago this August. I went down to address a press group and almost the first question somebody asked me what happened a) I had just gotten to solomon brothers and the phrase that came out of my mouth was that it was inexplicable and inexcusable. Now, it's twenty years later and looking back at solomon i still find it inexplicable and inexcusable to some extent. And looking back at what happened a few months ago with dave sokol's failure to notify me of his contact with Citigroup."
9:49
Ross Boettcher:
He never said a word about the purchase of the stock prior to recommending it to berkshire. For reasons that are laid out in the audit committee report i don't think there's any questions about the inexcusable part. (Sokol) violated insider trading rules and code of ethics -- you can read the audit committee report. The inexplicable part...well, it's inexplicable...and I'll tell you what goes through my mind on it. Dave to my knowledge at least made no attempt to disguise his buying of the stock. Other insider traders use various ways of trying to buy the stock."
9:56
Ross Boettcher:
Ok, trying to catch up here.
Warren just went into a long story about a compensation package that he once proposed for Sokol and Greg Abel. Berkshire was going to offer Sokol $50 million and Abel $25 million if they hit a certain guidance with MidAmerican Energy, which Berkshire purchased in 1999, Buffett said.
Buffett pulled Sokol into a meeting to discuss the compensation and Sokol voluntarily said that the difference between his compensation and Abel's compensation should be split.
"I think 20 years from now I will not know what causes a man to turn over $12.5 million to an associate then ten years later, buy stock before talking to me about lubrizol," said Buffett.
9:59
Ross Boettcher:
Q&A starting now. First up, Carol Loomis from Fortune.
Loomis asking a question about Sokol and Warren knowing about Sokol's Lubrizol holdings. This question is on from a shareholder and calls Warren's initial statement inadequate compared to what actually happened. "Why did you handle this manner in the inadequate way you did?"
10:01
Ross Boettcher:
Buffett: In between Jan 14 and March 14 Dave gave no indication that he had any contact with Citigroup. On March 14 Warren got a call from Citi and has handled a "great majority" of business.
His words were: Citi's team had worked with Dave on this acquisition and they were proud to be part of it. It was news to Warren so it "set off some yellow lights, at least."
10:03
Ross Boettcher:
Dave literally gave the information regarding the Lubrizol trades to Marc Hamburg, Berkshire's CFO, on March 15, when Warren told Hamburg to call Sokol.
The Lubrizol legal team went to work to start preparing the proxy statement. "We were eager to see a draft of that because I was leaving for Asia the next day."
Buffett wanted to read the history of the transaction. The most interesting part of the Proxy statement, he says.
10:03
Ross Boettcher:
The first part of that last post is a direct quote from Buffett, FYI.
10:03
Comment From T
Did he mean to say "Berkshire insider trading rules" or Federal insider trader rules?
10:04
Ross Boettcher:
Berkshire insider trading rules, T.
10:05
Ross Boettcher:
Buffett is now glossing over much of the information that's available in Berkshire's Audit Committee report.
10:05
Ross Boettcher:
Audit Committee report on Sokol
10:07
Ross Boettcher:
"(Sokol) felt he was retiring on a high point. That resignation may have saved us some money. If we had fired him, the question would have been whether it was with cause. That would have led to litigation," Buffett said.
10:08
Ross Boettcher:
Note: Charlie munching on what looks like See's Candies. Go figure.
10:09
Ross Boettcher:
"(Sokol) said he had no hopes of ever succeeding me, so I took that part out" of the original statement on Sokol's resignation from Berkshire.
I'll post a link to that document, as well.
10:09
Ross Boettcher:
Buffett statement on Sokol resignation
10:14
Ross Boettcher:
"I think we acted very promptly with the SEC and the top enforcement divisions to what had taken place," Buffett said.
From Warren's standpoint: Dave was gone. There was minimum severance and no lawsuits. Plus, Berkshire turned over damning evidence on Sokol's Lubrizol trades to the public, media and to the SEC.
"What I think bothers people is that there wasn't a big sense of outrage in the release. I plead guilty to that," said Buffett.
10:20
Ross Boettcher:
Warren talking about succession now:
Good idea if son Howard Buffett got paid nothing to be the chairman "after i’m not around."
"You can make a mistake in selecting a CEO," Buffett said.
He added: The top candidate, a "he," is a "very straight arrow."
10:22
Ross Boettcher:
Quality of person as human being just as important as managerial skills becuase it's vital that you have someone at berkshire that cares more about berkshire that we do about himself.
We have multiple candidates that fufill that, Warren said.
What we do know now is that Sokol WAS the top candidate in line to be CEO of Berkshire.
Buffett responding to a question, said he had made an assumption about Sokol being the next in line that "I'm not sure was warranted."
10:28
Ross Boettcher:
Question from Andrew Ross Sorkin, from a shareholder, about Warren's reaction to Lubrizol. At first Warren wasn't wild about Lubrizol, then warmed to it later on.
Here's Warren's response:
"It struck me as a business I didn't know anything about. I never would understand the chemistry of it. What is important is that I understand the economic dynamics of the industry. As a matter of fact, I suggested to Dave to call Charlie because I just don't know anything about that business. Talked to Charlie a few days later and (Charlie) said "I don't understand it either."
What Dave passed-along to me after having dinner with Lubrizol CEO James Hambrick was that I thought I got a good understanding of industry dynamics and what the role of oil companies would be compared to additive companies like Lubrizol.
10:30
Ross Boettcher:
I had come to the conclusion that the Lubrizol position is the No. 1 company in terms of market share in that business and that it's sustainable over time. They're helping engines run longer and smoother. Lubricants are important and they're always going to be around. I did not have a fix on that, nor did Charlie, prior to Dave relaying what he had learned at that dinner.
10:31
Ross Boettcher:
That's direct from Buffett, continuing to answer Ross Sorkin's question.
10:33
Ross Boettcher:
Have to be honest, the attitude of the crowd still seems very positive. I was expecting the atmosphere to be a bit more tense than this. Should be interesting to see if the journalist panel ramps-up it questions going forward.
10:36
Ross Boettcher:
Warren said he thinks Lubrizol is a solid addition to Berkshire. He met with CEO James Hambrick yesterday. Hambrick said he's still happy to call Berkshire home even despite all the turmoil from the Sokol trades.
10:38
Ross Boettcher:
Overall, Warren seems sharp. He hasn't stumbled or made any gaffes or anything like that. Munger still hasn't said much, other than a couple jokes here and there. It's been totally the Warren show so far.
10:42
Ross Boettcher:
Back to Carol Loomis: Question from Dick Holland about America's economic future and the personal and public debt situation and how Warren always seems so bullish on the economy.
Warren: "I don't know how anyone can be anything but enthused about this country. I was born in Aug 30,1930. If somebody had come to me in the womb and told me about what it was like outside (the Great Depression)...it would've been like the Woody Allen Movie, 'Go back, go back!"
"We have a system that works magnificently. It just gets numbed-up periodically."
10:45
Ross Boettcher:
"(The economy) doesn't do it in a straight line, but the power of capitalism is incredible. That is what's bringing us out of this recession."
10:47
Comment From Jan
How will the relationship between Warren & David go forth? Seemed close at one time, strained now?
10:49
Ross Boettcher:
Jan, there's no way to be sure. Based on what we know, and what we've heard today, it would seem there's definitely strained compared to where their relationship was at one point. Sokol was a trusted lieutenant for Buffett. His deal-maker and Mr. Fix it, if you will.
10:55
Ross Boettcher:
Interesting factoid on See's Candies in response to a question about investments and tangible asset infusions for growth:
When Berkshire bought See's, the company was doing about $25 million in sales on 16 million pounds of candy. Now the company produces about 30 million pounds and earns $300 million. At first, it took $9 million in tangible assets to run See's, now it takes $40 million. Not much of an increase for 10 times the sales, Buffet said.
10:55
Ross Boettcher:
Question on dividends now.
10:58
Ross Boettcher:
"It's much more intelligent for people to leave the money in and sell off a little bit if they need the cash. There will come a time, who knows how soon, when we do not think we can lay out $15-20 billion a year and not get something that's worth that for our shareholders."
Buffett guaranteed that when a dividend is announced, the stock price will go down.
11:00
Ross Boettcher:
An "awwwww" moment: Buffett's niece got engaged at the Borsheims cocktail party last night. And, to nobody's surprise, her fiancee bought a ring there.
11:06
Ross Boettcher:
OK, so for those of you who have never been to one of these before, let me set the scene for you a bit:
Warren and Charlie are sitting on a raised stage with a giant spotlight shining on them. At the table they're sitting at they've got a table filled with papers (presumably notes) and microphones.
Warren just took a long pull from a can of Coke. It may have been Cherry Coke, his favorite, but I didn't catch it for sure.
The duo is flanked on their right by the panel of journalists. They've been relatively quiet, to be honest. They're asking questions that were sent to them by shareholders and readers, and you just get the sense that they want to take the gloves off and ask tougher questions than the ones Warren and Charlie have fielded so far.
Finally, just in front of the stage, are three rows of Berkshire executives who were introduced earlier. The rest of the Qwest Center is virtually full. There are empty seats peppered around in the higher "nosebleed" areas, but the floor is packed and the lower bowl doesn't have many vacancies.
11:06
Ross Boettcher:
Question now from Ross Sorkin on Berkshire's performance compared to the rate of inflation.
11:12
Ross Boettcher:
"If you reach in your pocket and pull out your wallet, if you look at this (dollar) on the back of it, it says "In God we Trust." That's really false advertising. If Elizabeth Warren were here, she'd say "In government we trust." God's not going to do anything about that dollar bill if the government does the wrong thing."
"Any currency-related investment is a bet on how government would behave. If you live in Zimbabwe and decide to make currency investments, your family would have left you by now. The Japanese may reaffirm that here with their experience. Currency related investments don't make much sense."
"Classic case of that is gold. if you take all of the gold in the world and put it into a cube, it will be a cube that's about 67 feet on a side and 170,000 metric tons. You could get a ladder and get up on top of it and think you're king of the world. You could fondle it, polish it...you could do all these things with it...but it doesn't do anything. You're hoping someone else in a year or five years will pay you for the thing...that doesn't do anything. You're betting on how much people will be scared two years from now."
11:14
Ross Boettcher:
Here's a clip of Warren entering the Qwest Center this morning: http://www.omaha.com/article/20110430/NEWS01/110439990#buffet-comments-on-sokol
11:17
Ross Boettcher:
The value of that gold cube, by the way, is worth about $8 trillion, Buffett says.
11:18
Ross Boettcher:
Warren's joking-around now, talking about the choice between the gold cube "that you can fondle" and other investments of equal value. Good stuff from him.
11:19
Ross Boettcher:
Question from a guy who Warren says "sounds like is ready to start a hedge fund": What advice would he give from his beginnings in investing?
11:20
Ross Boettcher:
Warren first invested for his family, did with their money what he did with his own money, and said he stumbled-along for almost 6 years, operating out of his own house, keeping his own books.
11:23
Ross Boettcher:
Munger said it helps to attract capital to a fund if you conduct your life in a way where people trust you. The formula is quite simple (to attract money to a fund), Munger said.
Just attracting money can be a huge skill, said Warren, especially today in the short -term because of broker charges.the skill may be in the short term may be a more important quality but neither one of us charged any fixed fee of any kind.
11:24
Ross Boettcher:
Shoot, last part of that is a quote from Warren: "The skill may be in the short-term may be a more important quality (compared to actually picking stocks that perform), but neither one of us (Buffett or Munger) charged any fixed fee of any kind."
11:25
Comment From T
Any indication that Buffett is going to go after the $3 million profit that Sokol made from his Lubrizol trade?
11:25
Ross Boettcher:
That hasn't been discussed yet, T. We're nearing the halfway point here in the Q&A, so maybe that's something that gets addressed in the second half of the session.
11:29
Ross Boettcher:
Question now from John Norwood from West Des Moines: 100 years from now what would each of you like to be remembered for?
Warren: "Old age."
"A teacher. I enjoy teaching a lot. I really enjoy having students come in. I would say that."
11:33
Ross Boettcher:
Question now from CNBC's Becky Quick about the weakness of the US Dollar
Warren: "We have not been really active in the foreign exchange market, but there's no question that the power of the US Dollar is going to decline over time. The short position is which one is going to decline at a faster rate and I don't have any strong convictions on that. We do own some businesses – CocaCola – where 80 percent of earnings are non-dollar. We are unlikely to make another big currency bet, although I do think the US Dollar is going to decrease.
He's had some unwarranted fears about the rapid decline of the dollar. The dollar from when Buffet was born is worth 6 cents now. That could be discouraging now, looking back...but:
"Inflation has not destroyed us...overall we've still done pretty well," Buffett said. "I hate inflation, but we've adapted to it pretty well over the years. It's something you always have to guard against."
11:37
Ross Boettcher:
What factors would you consider when deciding between putting money in an Index Fund or creating your own diversified portfolio?
Buffett: "If I personally had a choice between an index fund and berkshire, I would pick berkshire. But I wouldn't be unhappy if I had to stick my money in an Index Fund. I like Berkshire better."
Munger: "I would be very unhappy (if he had to put all his money in an index fund.) I think Berkshire's a pretty good bet."
11:39
Ross Boettcher:
Question now about Berkshires personal investment policies. Why aren't all personal investments made through a compliance office, or something similar? This is a Sokol-related question, obviously.
"We are not an investment advisory firm or a mutual fund or anything of the sort. We have some pretty clear rules that are going to be looked at again by the Audit Committee."
Buffett doesn't think there's anything ambiguous in Berkshire's company investment policies for employees.
11:43
Ross Boettcher:
Buffett said there was a case some time back where we had an employee "that was a friend of mine" and we supplied the evidence (about insider trading) that sent him to jail.
"We hope to get some value out of this experience (with Sokol) that will reinforce that we do mean business on this (insider trading). We can have all the records in the world and if somebody trades outside...they're not going to tell us they're trading in their cousin's name...people do wrong things. Usually it's handled at the subsidiary level with kickbacks from a vendor or stealing, but if there's anything we can do in the rules that can make it even more explicit...that rules are not made to be danced-around...we want to make sure we do it."
11:43
Ross Boettcher:
That's direct from Buffett.
11:48
Ross Boettcher:
There's a comment I posted earlier that I'd like to clarify. When Buffett was talking about succession, and noted that he made "assumptions" about David Sokol being next in line for the CEO post, he was actually referring to the person that asked him the question "assuming" that the questioner considered Sokol the leading candidate.
Buffett never said that Sokol was the leading candidate, nor has he said who the leading candidate is.
Sorry for the confusion on that. Feel free to send me any questions on that and I'll do my best to tackle them.
11:56
Ross Boettcher:
Warren's is talking now about his "competition" with Protege partners. Here's an article that Carol Loomis, one of the panelists, wrote on the topic recently: http://finance.fortune.cnn.com/2011/04/26/the-warren-buffett-hedge-fund-bet-tightens/
11:57
Ross Boettcher:
OK, Warren and Charlie are breaking for the next hour for lunch. So stop-on-back around 1 p.m. and we'll pick up with the Q&A.
Thanks for following-along with the World-Herald's coverage of the 2011 Berkshire Hathaway Meeting.
12:15
Comment From Barry OBrien
When Buffett said the "leading candidate" was a straight arrow and you can bet on that, do you think most people take that to mean Ajit Jain?
12:17
Ross Boettcher:
Really, Barry, you could consider a number of the candidates "straight arrows" couldn't you?
I'd encourage you to read Steve Jordon's breakdown of the potential candidates. Steve's been covering Berkshire, and this event, for the World-Herald for the last 25 years and has some great insights on the succession topic: http://omaha.com/article/20110429/MONEY/704309876
1:00
Ross Boettcher:
Folks starting to fill-in for the second half of Buffett and Munger's Q&A. It doesn't look like many people have left.
1:01
Ross Boettcher:
Still haven't seen any sign of Buffett, Munger or the panel of journalists. Should be on shortly though.
1:05
Ross Boettcher:
And here we go. The lights dim. Buffett and Munger appear from behind a curtain and we're into round two.
"Ok, you can all be seated," Buffett says.
They're clarifying dates now on some dates that we're discussed during the conversation of David Sokols trading of Lubrizol shares. They're going out of their way to get everything on the record on that topic.
1:06
Ross Boettcher:
First question from Loomis: Does BYD remain an attractive long term investment despite product launch delays?
1:08
Ross Boettcher:
Buffett defers to Munger, the "BYD expert."
Munger: Any company that moves as fast and as many fronts as BYD is going to have delays. Munger says he's encouraged by BYD. They try to double auto sales for first six years, and they did that successfully for five years, he says.
Buffett: "I have nothing to add," he says with a chuckle.
1:13
Ross Boettcher:
Now, a shareholder asking about sentiments about investing in oil.
"We actually did take a position in oil a long time ago," Buffett says. "We really don't know. Obviously, you're dealing with a finite resource...new frontiers have been found, but we've stuck a lot of straws into the earth.
"If we could make money sitting in a room trading oil, we would do that. There are few commodities where I could tell what direction they were heading in over the next six months or year."
"I really think an intelligent person can make more money over time thinking about productive assets rather than speculating on commodities or fixed-dollar investments."
1:15
Ross Boettcher:
Now they're clarifying the clarification on the Sokol issue. Berkshire has a restricted list of securities that company officials can't trade because of its relationship with the company. Lubrizol wasn't on that list when Sokol made his trades.
1:17
Ross Boettcher:
Brilliant stuff here: Shareholder asks about what Warren and Charlie have learned in the last year.
Buffett, to a heavy applause: "What I've learned is that I'm going to let Charlie write the next press release."
Munger shoots back: "Warren, I approved that damn press release with no objections!"
1:24
Ross Boettcher:
Warren is responding now to a query about corporations and financial institutions being too big to fail.
"I was really on the fence about saving the auto companies, but I think the administration did the right thing. They made the right decision."
He says companies need to "reduce the propencity to fail" by making sure there are rules in place so that the CEO and any directors of a company needing to be bailed out by taxpayers. If, in fact, a company needs bailing-out, the CEO and his or her spouse should be left "dead broke" and officers and directors should face severe consequences.
1:25
Ross Boettcher:
Warren says he's not selling any shares in the Washington Post even though he left the company's board. Says he wanted to spend more time focusing on Berkshire and less time traveling.
Buffett is 100 percent behind the Post's management, he says.
1:28
Ross Boettcher:
Warren says bets on the Australian dollar helped profits last year.
1:32
Ross Boettcher:
Question on the equity investment as an afterthought. "Where do you see equity portfolio going over next ten years?"
Warren says equity investments are not an afterthought, but that he much prefers large acquisitions to equity. He wants to add significant companies to the portfolio, especially companies that were acquired in recent years that will have higher earnings potential five to ten years from now.
He didn't give any specific examples.
"We are buying securities where we have to put billions of dollars in them in most cases."
1:37
Ross Boettcher:
Answering a question on Berkshire's estimation for insurance underwriting profits in his annual report, Buffett says It's "very hard to estimate what the normal underwriting profit might be over the next 20 years." It's conservative to assume a breakeven in underwriting, but at the same time, Berkshire could lose significant money if there were to be another Hurricane Katrina-type catastrophe.
"It's not inappropriate to include a normalized underwriting profit to the calculation we make," Buffett said.
1:40
Ross Boettcher:
Which Berkshire businesses will do best and worst because of inflation?
Best: Ones that need as little money. See's Candy, for example, sells 75 percent more pounds of candy at much higher revenues even though the dollar is worth much less than it was when Berkshire bought it.
Worst: Utilities, like MidAmerican Energy, are "not going to do so well because it has certain aspects of a bond-like investment," Buffett says.
1:43
Ross Boettcher:
Question: Berkshire consider splitting its A shares? If so, what are the pros and cons?
Buffett: "In effect, we've already split it by having the B Shares available. Any transaction involving the A Shares, the B Shares will be treated exactly the same. Calls them the same instrument. We already have done a split "
"Don't count on the A Stock being split."
1:48
Ross Boettcher:
Buffett on Ajit Jain, who runs Berkshire's reinsurance businesses:
"He's as rational a thinker as Charlie is. He loves what he does. He's creative. Ajit's mind works like a machine, day after day. I don't know what his best deal was. But I know what mine was, and that was hiring him.
"He thinks of Berkshire first. He's just a remarkable human being."
1:51
Ross Boettcher:
Aside from Nebraska Furniture Mart, Buffett says, retail entities have been the weakest part of Berkshire's empire. Even though the Furniture Mart is wildly successful, the other retail businesses (not including See's) haven't recorded the kind of earnings Buffett would like to see, even though retailers are just a small percentage of Berkshires operation.
2:02
Ross Boettcher:
Charlie, asked by Carol Loomis to give a couple examples of businesses he thinks are well-run and one that's just average.
Picking a personal favorite, Munger went on for a bit about Costco.
"Costco of course is a business that became the best in the world in its category. With self-imposed ethics...It's been a wonderful business to watch. Costco has one store in Korea that will do more than $400 million in business this year."
He says Costco represents a balance of the right management and right ethics. and right diligence. "That is quite rare," he said.
The more "normal" company Munger chose? General Motors
The mix of competition from Asia, the company's years of successes mixed with the government bailout "make it a "very interesting story."
2:06
Ross Boettcher:
Buffett and Munger really need to do a comedy tour. They've had the crowd rolling a few times already in this last hour.
The last question started: “Warren and Charlie, if you decide to have a child in the next 5 years...” Buffett cuts in: “It will take more than a decision!”
2:09
Ross Boettcher:
Talking now on financial structure for compensation to next CEO, Buffett says there should be structured options, but that the next head of Berkshire should make a lot of money.
"The present compensation system has no relevance at all to what my successor should earn," he said.
2:12
Ross Boettcher:
Question from shareholder on renewable energy, asking Warren and Charlie to share thoughts on dwindling water supplies and how that impacts investment strategy.
Buffett: "There are a number of societal issues that do not enter into our investment decisions." Water is one of those.
Munger: "If there's enough energy, you can always get clean water."
2:16
Ross Boettcher:
Question from the crowd, read by Ross Sorkin, about Lubrizol on whether the Lubrizol board breached it's fiduciary duty by not opening-up the Berkshire acquisition to an auction process.
Munger quickly put that one to bed with a stern "no."
Buffett: "We don't participate in auctions. We would have said good luck, we'll find something else."
Munger: "Anyone else have an easy question?"
2:20
Ross Boettcher:
Warren hashing-out the different acquisition strategies of deals over the last few years. (Swiss-reinsurance, Dow Chemical, Mars-Wrigley, etc.)
Market conditions and opportunity costs were different in every single one of those, Buffett says. Past deals we've made don't really make any difference. Errors people make in business is measuring deals against each other.
"The goal is to make a satisfactory deal, that is the best deal at the time."
2:23
Ross Boettcher:
Shareholder getting real emotional here talking about the ethics of Berkshire and how Buffett and Munger "make the world a better place."
And now he transitions into asking Buffett about his newspaper reading practices (5 a day)..and, get this....how he is able to read so fast.
2:25
Ross Boettcher:
Buffett: "I actually am not a fast reader. Charlie (Who is 87, by the way) is a faster reader than I am."
"There's hardly anything more pleasurable than reading."
Munger, dry as ever: "I think speed reading is overrated. Just go a little slower, what the hell difference does it make."
2:28
Ross Boettcher:
Debt ceiling question coming in now.
Buffett tackles it head-on: If the ceiling isn't raised it would be the "most asinine act Congress has ever performed. It's extraordinary, that with our deficit running well over $100 billion a month...having a debt ceiling to start with is a mistake. The US of 2011 has a different debt capacity then the US in 1911."
"The amount and number of silly statements you hear (from Congress) seems like such a waste of time. In my view, there's no chance they don't increase the debt ceiling."
2:30
Ross Boettcher:
Munger still chomping away on peanut brittle, by the way.
Make a joke. Audience laughs. Take another bite of peanut brittle. That's the Munger routine today. Hilarious to watch.
2:36
Ross Boettcher:
Power plant question being asked. I'll have responses in a minute, but it's related to this story by my talented World-Herald colleague Andrew Nelson: http://omaha.com/article/20110429/NEWS01/704299899
"I think nuclear power is an important part of the world's equation in dealing with its problems," Buffett said. "I think it's safe and I don't think it's going anyplace in the United States because of the action with Tokyo Electric Power." He's referring here to the crippled power plant in Japan that's been billowing nuclear radiation into the atmosphere and leaking steadily into the Pacific Ocean.
Munger says any nuclear plant built in Iowa is going to be "a hell of a lot safer" than a plant built anywhere else in the US. "If a tsunami gets to Iowa, that will be one hell of a tsunami."
2:47
Ross Boettcher:
Question on estimating growth in companies like CocaCola or Burlington Northern.
Buffett said they are always investigating new ways to make companies, and products more profitable.
He uses See's Candies, again as an example, saying that if there was a way to distribute See's all over the world, they would. But it just hasn't worked out.
"Some products just travel better than others," Buffett said.
Munger, dryly of course, said that making predictions on profit growth can do more harm than good.
2:50
Ross Boettcher:
Example of how much Buffett and Munger don't give a rip about projections:
When Berkshire aquired Lubrizol, the company had already made projections publicly out to 2013. Dave Sokol, who was obviously jockeying the deal, asked Buffett if he wanted to see the internal projections that Lubrizol had made out to 2015.
Buffett declined the offer.
2:55
Ross Boettcher:
When looking at an investment in china, where the business culture is different than in the US, what do you look for in that company and how is it different from the principles you look at companies in the US?
"To varying degrees, we weigh-in that uncertainty (Chinese tax law, etc.)"
Warren talking now about making the decision of investing in Petro China versus a Russian petroleum company some years ago and he said he was more impressed with Petro China, "even though I'm no geopolitical expert," he said.
2:56
Ross Boettcher:
Buffett: "I love the idea of looking at various...I find it a fascinating game to learn about companies that are new to me...we often get calls from a lot of countries."
2:59
Comment From T
Based on what you have seen and heard so far, do you sense that there has been any shred of damage from the past few weeks to the Berkshire reputation?
3:02
Ross Boettcher:
T, I think it depends on who we're talking about. I think those that are naturally skeptical think there's more to the Sokol issues, but folks that are here, the shareholders and Berkshire devotees, I get the sense that they don't think there's a huge concern about damages to Berkshire's reputation.
3:03
Ross Boettcher:
But that opinion is based solely on what I've seen and the questions that have been asked here today. I think your question, really, will be answered over time.
3:04
Comment From S
Has there been any more questions re Sokol since the break?
3:06
Ross Boettcher:
There have been a few times where Buffett or Munger have touched on topics related to Sokol or Lubrizol. But no, there haven't been any direct questions about him in the last couple hours. I didn't bring a stopwatch, but I would say there was only about an hour, or less, spent on addressing that issue.
3:09
Ross Boettcher:
Check that. Question now about Sokol "resurrecting" NetJets from the brink of bankruptcy. Shareholder felt deceived that Buffett never disclosed that NetJets was close to bankruptcy. In short: How close was it to bankruptcy?
In short: Buffett says that if NetJets wasn't owned by Berkshire, it would've been bankrupt. He didn't answer directly about the deception part.
Munger: "No comment."
3:13
Ross Boettcher:
What advice can you give young people in terms of investments that would allow them to chart their own course?
Buffett: Read. Also: Anything you can do to improve your own skills.
"I have one diploma hanging in my office, I have a couple others, but the one I have hanging was from a Dale Carnegie course that cost me 100 bucks."
There's nothing like improving your own skills, especially communication skills, he says.
3:14
Ross Boettcher:
Munger still mowing down the peanut brittle. The man is a candy-eating machine.
3:19
Ross Boettcher:
Munger and Buffett are going on about Berkshire's reinsurance business. Meanwhile, Ross Sorkin is fishing for questions on Twitter regarding Buffett's answers to Sokol questions.
From Sorkin: "Any #brk2011 shareholders have a follow-up question on sokol? are you satisfied with (Buffett's) answers?"
3:24
Ross Boettcher:
Answering a question on Johnson and Johnson (which Berkshire has significant holdings) making a recent acquisition in which J&J paid a significant chunk of the purchase price in company stock. Buffett doesn't like using stock in purchases and said : "If it was all for cash, I would like it a lot better."
Said he supports the deal and hasn't been as vocal about it, as he was with Kraft's acquisition of Cadbury.
"You can draw the inference that J&J is not valuing its own businesses as much as you think they should be valuated."
3:31
Ross Boettcher:
Question wanting insight on the current commercial real estate gets some pretty sour color from Buffett.
"It's terrible. It's been flat-lining for a long time now. There has been no bounce at all, and you see that in the housing figures."
However, the Oracle remains bullish long-term: "I think we're going to see plenty of household growth in future decades."
3:32
Ross Boettcher:
Buffett said he thinks the housing market could pick-up by year's end.
3:36
Ross Boettcher:
And that, ladies and gentlemen, is the end of the 2011 Q&A session.
We're taking five minutes before getting into the business portion of the meeting, but I just wanted to thank all of you for taking time out of your day for following along here on Omaha.com.
Again, like I said at the top of the live blog, ace Berkshire Hathaway reporter Steve Jordon will host his weekly Warren Watch chat on Tuesday at 11:30 a.m. So, if you had additional questions I didn't get to, please join Steve this week for a great follow-up to everything that was discussed today.
3:37
Ross Boettcher:
If you have any questions for me about today's meeting, feel free to send me an email at ross.boettcher@owh.com.
Thanks again!
3:38
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