Interesting Topics from Berkshire Hathaway Annual Meetings (1994 - 2019)
Below are my notes from Berkshire Hathaway’s annual meetings from 1994-2019 (source: https://buffett.cnbc.com/annual-meetings/). I only noted items that I specifically found interesting, so they are mainly on topics Buffett does not often repeat.
1994 Annual Meeting
In a world of 7% long-term government bonds, would use a 10% discount rate for valuation purposes
Two yardsticks for judging management
How well they run the business (relative to competitors and the industry they exist in)
How well they treat shareholders versus how they treat themselves as management
WB has noticed that poor managers usually treat shareholders poorly as well and vice versa
WB & CM value simplicity
WB - “You don’t have to do expectational things in the investment business to get exceptional results”
WB and CM never have a short-term opinion on stocks
“You may have trouble believing this, but Charlie and I never have an opinion about the market because it wouldn’t be any good and it might interfere with the opinions we have that are good. If we’re right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do, or anything of that sort. Because we just don’t know. And to give up something that you do know and that is profitable for something that you don’t know and won’t know because of that, it just doesn’t make any sense to us, and it doesn’t really make any difference to us.”
Since Wesco was selling at a very high price and its intrinsic value is fairly easy to calculate within a reasonable range, Charlie decided to disclose the figure in the Wesco annual report
Don’t hold cash just to hold cash from an investment perspective - WB would love to be fully invested
Actually, when they hold much excess cash they tend to stupid things
And, when they have held little cash and they had to sell an investment to invest in something else it tended to be a very intelligent decision - cause it raises the bar when you have to trade an investment you like for an investment you like even more
1995 Annual Meeting
Charges subsidiaries to advance capital and credits them at same rate for withdrawing capital, which ties into the manager’s compensation plan
If business is seasonal, will only charge them LIBOR for seasonal capital but for any permanent capital will charge them a full cost of capital
[from later at annual meeting] If business does not employ a lot of capital, BRK does not charge them for capital
Interest rate range is between 14% and 20% on advanced capital
Charlie mentions that when they are looking at investments they judge by past records
“If the company has a lousy past record but a bright future, we’re likely to miss the opportunity”
When making new investments, WB and CM think in terms of opportunity costs
Will compare new investments to buying more of Coca-Cola - helps to screen-out a lot of things
On their Wells Fargo investment, they were essentially betting that WFC’s CRE portfolio would perform much better than the average bank’s. Charlie said that if the portfolio had performed like the average bank’s than WFC would have been wiped out by the CRE downturn
Mentioned they would not have been able to make the Wells Fargo investment based solely on the numbers. Mentioned that they had some insight into how the CEO thought
WB Delta Duck Club investment
Invested when it was earning $7k per share, with $20k per share in cash, and trading for $29k per share
Was a “long-lived” oil field
1996 Annual Meeting
WB and CM don’t use different discount rates for different companies - they may require larger margins of safety but they want to make everything comparable
WB has been thru “a half dozen times” (about every 7 years) where people didn’t think they won’t get a chance to buy securities at intelligent prices. But “it always changes”.
WB loves to see management teams that are focused on just a few important things
this is why he doesn’t want GEICO to expand internationally right now cause there is such a large opportunity in the USA - wouldn’t want them to lose focus
If someone were to offer WB $7bn for their insurance operations which have $7bn of float, he would easily pass. Reason being is he expects the $7bn in float to grow
“When you find a good CEO running a good business, you want to bet very heavily”
1997 Annual Meeting
It’s more important to be sure that the business is a wonderful business than that the price is a wonderful price
Says they stay away from things they don’t have the ability to understand and continue to learn about things they do understand
Says he could do his job each day in way less time but he enjoys it too much
Opportunity cost is powerful concept that allows you to screen out other opportunities quickly and will result in a concentrated portfolio
1998 Annual Meeting
Best reason to sell a stock is you found another investment that is even more attractive
Would not base their investment decisions on the fact that current ROE’s / ROTE’s in the banking industry are sustainable
Secret to success in life is weak competition
Trying to think about two things – things that are IMPORTANT and KNOWABLE
Would not give up their float for an equal amount of equity since the float creates profits for Berkshire
Steps to evaluating investment decisions:
1- figure out the key variables
2- evaluate how predictable they are
Silver commodity purchase explained by WB:
Silver aggregate demand per year, primarily photography/industrial/jewelry, is 800mm ounces
Silver aggregate production per year is 500mm per year (plus 150mm of “reclaimed sliver” per year – mostly from photography)
However, since most sliver is produced as a byproduct of mining gold/copper/lead zinc, silver production is not very responsive to changes in price
Creates a 150mm ounce per year excess demand over production, which has been filled by existing silver inventory over the last few years
This inventory, although exact number is not known, is now depleted significantly
Ultimately means price is not in equilibrium currently
Three ways to solve this: (1) reduced demand, (2) increased supply, or (3) a change in price
And since both supply and demand are pretty inelastic, they thought a change in price could be major
CM said when investing is taught correctly it is taught from “cases where the investment decision was easy” – basically saying you should ingrain the easy investment decisions into your brains
Mentioned National Cash Register and its CEO as a cinch investment and a case study he would use
Corporations/Boards don’t focus on post-mortems, but they should
like to spend a lot of time telling you how good an acquisition or a CapEx will be but don’t spend much time evaluating the actual results
“Scuttlebutt” research is for after you already like an investment and need to fill-in the final 10-20% of info / trying to kill your idea
“like being a basketball coach and finding a 7 footer on the street – you’d then check to see if you could keep him in school, if he’s coordinated, etc”
WB doesn’t do much scuttlebutt now but used to talk to competitors, customers, suppliers, ex-employees, current employees, etc.
1999 Annual Meeting
Both WB and CM said it is not easy to predict who will win/lose in internet retailing
On internet jeweler retailing, WB hypothesized two firms that would have an advantage:
1- Tiffany’s – “brand names are going to mean very, very much when you have thousands and thousands of choices. … I think Tiffany has a name that people would trust”
2- Borsheims – for price conscious people, the Borsheims brand could mean something
WB thinks that the expected rate of return would fall off dramatically from working with $1mm to $10mm as an investor
“If you start with “A” and you go through and you look at everything, you’ll find securities in your area of competence and occasionally find little arbitrage situations or little wrinkles in the market”
If WB and CM were designing option compensation they would:
(1) set the option price equal to the price the business could be sold at, since management has the choice to sell at anytime, and
(2) would incorporate a charge for the cost of capital, so that management wasn’t just getting the benefit of retaining earnings without intelligently deploying them
Winners in the insurance industry will be franchises based on specialized talents:
terrific distribution systems (e.g. GEICO) (i.e. minimizing the expense ratio)
managerial expertise (i.e., minimizing the loss ratio)
ability to invest float effectively (i.e., maximizing investment returns)
When WB ran his partnership, he would also evaluate how well his sale decisions were to his buy decisions
i.e., talking about when he was fully invested and sold one stock to buy another
CM said that they have “learned more from the great business magazines than we do anywhere else. It’s such an easy, shorthand way of getting a vast variety” of business experience
“And if you get the mental habit of relating what you’re reading to the basic structure of the underlying ideas being demonstrated, you gradually accumulate some wisdom about investing.”
2000 Annual Meeting
CM talks about how some businesses will naturally die and there is no answer in how to prevent it – “except to wring the money out and go elsewhere”
Berkshire float can be invested in anything (fixed-income equities, operating businesses)
Not all insurance companies can do that – BRK’s high capital levels, little debt, and diverse earnings streams allow this
BRK could have 100% invested in equities (and did in the past)
2001 Annual Meeting
Hopes to make 2-3 acquisition per year on average
Discusses important variables in analyzing an airline
Start with CASM (cost per average seat mile) and then use capacity utilization to calculate Cost per Occupied Seat Mile
Labor costs are the most important variable “in a relative sense”
Don’t know if growth is good for the business or not until you know the economics of that growth (i.e., the incremental returns on capital)
On capping insurance losses:
There’s a few things you can’t cap as a primary insurer: (1) workers compensation losses, and (2) Auto in the UK
In reinsurance they are almost always capping the potential losses
Doesn’t worry about the dumbest competitor’s actions in a service-focused business – only in a price-focused business
2002 Annual Meeting
BRK holds just under 10% of all U.S. float in the property casualty business
Thinks BRK float would have less natural run-off than the average P/C insurer
After September 11th, 2001, insurers realized they either had exposures they weren’t charging for and so they now are either excluding those exposures or charging for them
Most important characteristics of an investor are (1) realism and (2) discipline – WB/CM think these are their distinguishing characteristics as investors
Also need a good sense of probabilities
Same characteristics are important in underwriting insurance
Investing requires “extraordinary discipline” (from the 2004 meeting)
For a two to three year period in the 60’s WB and CM hunted around for a bank before buying the Rockford bank
Found some “oddball banks they liked’ that were characterized by “very little risk on the asset side and very cheap money on the deposit side”
Explained how they make quick decisions by focusing on the important variables using customer-framer Larson-Juhl as example
WB had never thought about the custom-frame business in his life before the phone call
18,000 framers in the country so you aren’t dealing with buyer concentration power
Largely a service business – call on the framers 5-6 times per year and 85% of orders are delivered the next day
“I know that you can’t crack our custom picture frame business. I mean, you cannot figure out a way to call on those 18,000 people that are in that business and figure out a way to divert their business to you when you can’t offer a frame as good as ours and you can’t offer service remotely like ours. So it’s a good business.”
Most business that are difficult to understand, you’ll never be able to fully understand no matter how much research you do
Mentions trying to figure out which auto manufacturer will be the best 10 years from now – “it would be impossible”
CM – “if you have endless due diligence and no horse sense, you just described a corporate hell”
On understanding failure in investing:
“If you study the people who die financially, you know, with high IQs and say why do they die, you know, you’ll see certain overwhelming characteristics that are present in most of the cases.”
“And you’ve just got to make sure that either you don’t possess them, or if you do possess them, that you can get rid of them or control them in some manner.”
On avoiding thinking incorrectly
“There’s no question, the human mind — what the human being is best at doing is interpreting all new information so that their prior conclusions remain intact. I mean, that is a talent everyone seems to have mastered.”
“I would say a partner, who is not subservient, and who himself is extremely logical, you know, is probably the best mechanism you can have.”
On the bottling business
Capital intensive – spend 5-6% of revenue on maintenance capex
Says with the bottling industry making 15% EBITD, that maintenance capex is a large number (~1/3)
Option plans
Stock options are for most employees would just be a “lottery ticket and also a royalty on the passage of time”
Says the future BRK CEO could have an option plan since he is in charge of capital allocation, but would need a cost of capital built-in so they didn’t get paid just to retain dollars
Says most normal employees shouldn’t be paid via options since their aren’t allocating capital / making corporate investments – their incentives structure should be more specific
Should not grant options below intrinsic value, just because stock price is below intrinsic value or vice versa
WB says his expected rate of return on bonds is equal to whatever bond market is saying – even if prices are “swinging around a lot”
Post-bubble periods produce fallout that is tough to predict
Cites as an example, Japan and their stagnation despite running huge deficits
CM - Black-Scholes model is good for pricing very short term options (mentions 90 days as an example at the 2003 meeting)
2003
Intrinsic value is a range, not a specific number
Looking to buy at a clear discount to the lower levels of intrinsic value
Thinking about low probability events all the time and how they effect BRK
Clayton Homes purchase
When he bought Clayton Homes he had never met the people - Read Jim Clayton book and their 10K’s
“I knew every company in the industry. I look at competitors”
Not interested in talking to management since they’ll just tell you what you want to hear
Interested in management’s track record though and that can be gleaned from public docs
CM – “The more basic knowledge you have, I think the less new knowledge you have to get”
“But, you know, I’ve always said that the way to get a reputation for being a good businessman is to buy a good business. It’s much easier than taking a lousy business, you know, and showing how wonderful you are at it, because I haven’t seen that done very often
CM – Mostly Berkshire has bought stocks that practically couldn’t fail. But occasionally BRK makes a gamble when there is a chance of failure but enough chance of success that the gamble is worth taking
2004 Annual Meeting
“We think the best way to minimize risk is to think”
“People tend to underestimate low-probability events when they haven’t happened recently and overestimate them when they have happened recently”
National Indemnity had a record unlike any other when WB bought them despite having nothing special that distinguished it, EXCEPT for exceptional underwriting discipline
PetroChina investment
Bought because it was cheap in relation to earnings, reserves, daily oil production, and refining capacity – “whatever metric you wanted to use, it was far cheaper than Exxon, BP, or Shell, etc.”
Factored in the fact they are 90% controlled by China but such a wide discount to other oil majors should not have existed, even after considering that fact
Thought about other reasons why you might lose in the investment outside of low oil prices, such as if US-China relations deteriorated and something occurred because of that
Told story about how scientists studied world-class chess players and the way their mind works is by almost instantly dismissing 99.9% of all moves first and then they naturally focus on the sensible moves – very similar to investing in that you should dismiss the bad/mediocre ideas very quickly
2005 Annual Meeting
Can learn a lot about the durability of a business’ economics by observing pricing behavior by companies
Meaning what happens when they raise/lower prices
Pick management that has a demonstrated track record of success (“looking for people that have batted 0.400 historically”)
Would not have any special ability at picking managers with no track record
2006 Annual Meeting
Compensation managers based on the variables they control
At GEICO – (1) unit growth, and (2) profitability of seasoned business
For an oil company would be based on finding & development costs
WB made interesting comment about adjustable rate mortgages
“And if you look at the 10-Qs that are getting filed for the first quarter of some lending institutions, and 10-Ks that were last year, and you look at the balances increasing on loans for interest that’s accrued but was not paid because people had adjustable mortgages, but they’re only adjustable so far, but the lending institutions are taking in the income as if it were paid, you’ll see some very interesting statistics.”
Were a $250bn insured loss to happen (about 4x Katrina, which was $60bn), BRK would pay about 4% of that or $10bn
At that time in 2006, $10bn was the amount of cash WB wanted on-hand at all times
2007
Doesn’t think BRK has ever had a permanent loss in marketable securities of 1% of net worth (mentioned maybe 0.5% of net worth though)
Dexter Shoe acquisition cost BRK more than 1% of net worth when WB bought entire business
Management should create annual reports so the relevant figures are discussed
Annual letters, or lack thereof, are an indication of management’s feelings towards shareholders
WB has still bought extremely good businesses where they did not like management
Rail Industry developments
Lot of progress on labor front
Competitive position versus trucking goes up as oil goes up
Reregulation threats temper pricing power
Don’t want to buy into a business that has both a high labor component and can be shipped easily from abroad (e.g., Dexter Shoe)
People’s habits don’t change immediately even when new, obviously better product or service arises
2008
Would be happy to buy common stocks with an expectation of 10% total returns, and might settle for a little less than that
Many business WB wouldn’t buy even if it had the best management team, if they were in the wrong business
The business and industry economics are what counts
Noted how the Board has four names for who will manage Berkshire’s investments after WB is gone
Up to future CEO and Board if they hire all four, just one, etc.
Multiple times over the past 50 years where WB or CM would have had 75% of their net worth in one position
Uses the example of in 1974, Cap Cities was (1) trading at a third or fourth of what their properties were worth, (2) you had the best manager in the world running it in Tom Murphy, and (3) it was in one of the best businesses even if the manager wasn’t that good
Coca Cola before or around the time BRK bought it, you could put 100% of net worth in and not worry
On the over-under of world production of oil per day being up or down 25 years from now (~2033), both WB and CM bet down
WB and CM said they have never made an investment mistake that would have been avoided by traditional due diligence
Said yes to the Mars deal with no Materia Adverse Change clause or financing contingency
2009
After Ajit Jain is gone, his successor will not have the broad authority to write reinsurance as Ajit does now
Only gave Ajit that authority after seeing that he deserved it over a long period of time
GEICO business saw improvement during financial crisis due to their price advantage
CM/WB both agree that Financial Crisis stimulus money should use Great Depression stimulus investments as a model (e.g., Tennessee Valley Authority, Hoover Dam, etc.)
Update on reasonable worst case insurance loss scenario - If a $100bn loss occurred for the insurance industry, 3-4% of that for Berkshire
In Katrina, which was around $60bn, they were 4-5% of the industry’s loss
Absolute worst case that WB can come up with would be in highly inflationary environment where people in auto insurance especially became outraged at the price increases, and so the government chose to nationalize the industry
2010
WB believes close to absolute worst case insurance event at $250bn
If BRK accounts for 4% or $10bn, so would still be profitable that year, while most other insurers were wiped out
2011
Insurance industry $50bn insurance loss from major Asian catastrophes
BRK portion of the loss will be 3-5% of that
Always thinks about ease of entry into an industry when evaluating a business
In 1972 before buying See’s he asked himself if he had $100mm could he take on See’s
If the answer had been yes, he wouldn’t have bought it
Asked this of Lubrizol CEO before making an offer
Answer was it’s not impossible for people to enter the industry BUT (1) the overall market was small (only $10bn) and the product sold is relatively low cost, so hard to undercut them
Also Lubrizol is deeply connected with customers and work with customers when new engines come along to develop the right type of additives
Also have patents
WB thought Berkshire’s normalized earning power = ~$12bn
“But I think, generally, we have followed the right government policies [during the 2008 financial crisis]. I think they’re less important than most people think they are. I think if you did the wrong policies it would really screw things up. But I … I think the natural resuscitative powers of capitalism are — will be the biggest factor in taking us out [of the 2008-2009 recession].”
To evaluate a business want to looks at Return on Tangible Assets
Used Lubrizol as an example and said BRK is paying $9bn for $1bn of pre-tax earnings – BRK should be judged on that $9bn figure (meaning inclusive of goodwill) but to evaluate the Lubrizol CEO’s managerial performance, should judge based on the $2.5bn of TANGIBLE equity in the business)
CM says that getting 10% on invested assets isn’t bad if the funding source is 0% float
CM said he would teach investing based on a hundred-ish companies that did something very right or wrong
Would have Value Line type figures showing entire history of a company and would detail out why the changes in the data/business occurred
Example he would use - Costco – intensity on accumulating and passing on cost advantages to customers – which created huge customer loyalty
Example he would use - GM – heavy unions, tough competition from Asia, hubris based on past success
All the 2008 investments had different interest rates on the preferred since WB was assessing changing opportunity costs
Each investment was made at a different time – also, some of the terms are different as well
PetroChina investment
Liked Petrochina since it was cheap relative to reserves / refining capacity / cash flow / “pretty much any metric”
Also liked that they said they were going to payout 45% of earnings as dividends
2012 Annual Meeting
WB estimates 80% of utilities do not pay federal taxes and therefore cannot reap the full benefit of tax credits for renewable energy
Most utilities are not federal tax payers because they get bonus depreciation at 100% of cost - which wipes most of their income
“Charlie and I probably think about worst cases more than any two managers you’ll ever find, and we are never going to expose ourselves to a worst case”
Capital in BRK’s life insurance companies is worth less to BRK than its P&C companies cause they are more restricted in what they can do with that capital
Best place to have the cash is at the HoldCo where there are no restrictions – have $10bn currently
Berkshire P&C biz has so much more capital in relation to insurance premiums than competitors
It also has assets like BNSF in that capital which makes the company so much stronger/durable
Regulators wouldn’t let Berkshire do things like BNSF if they weren’t so strong
WB says they are happy if they can earn 12% on equity going forward, particularly when some of the capital consumed by capital-hungry businesses is from insurance float (since the float costs them nothing)
Float could shrink due mainly to the natural run-off of retroactive contracts
“If you really think a business is declining, most of the time you should avoid it”
WB said they tried a lot of these whether it was textiles, department stores, trading stamp companies, US made shoes (Dexter)
(MJS) subsequent to this meeting, BRK bought up a bunch of declining newspapers at “cheap” prices which turned out to be a mistake (although immaterial to the scale of BRK) -> just reinforces this principle on avoiding declining businesses
Railroads are three times more fuel efficient than trucking
“probably why the railroads move 42% of all inter-city traffic”
MidAmerican may have the opportunity in the next 10-15 years to invest $100bn
2013 Annual Meeting
Each new GEICO policy probably adds $1,500 of intrinsic value
WB believes most of their edge lies in that they do not get caught up with what other people are doing
2014 Annual Meeting
Coca Cola excess compensation discussion (as outlined by WB)
KO plan involved 500mm shares to be issued over approximately 4 years
KO currently trades at $40 per share, so if stock at $60 when exercised that represents a $10bn transfer of value ($20/share excess value x 500mm shares)
BUT, the company gets a tax deduction at 35% or $3.5bn in this scenario, so nets to $6.5bn in value transferred via options compensation plan
Then WB walks thru Treasury Method
$20bn of proceeds from options exercised + $3.5bn of tax savings = $23.5bn of total proceeds to KO
If they all buyback stock at $60/share then would be able to buy 391,666,666
This means the net issuance is ~108mm shares (on a base of 4.4bn shares, equating to ~2.5% dilution)
(MJS) could also do the calculation by saying that there will be $6.5bn of value transferred away from shareholders in four years when the stock is valued at $264bn ($60/share * 4.4bn shares outstanding), equating to the same ~2.5% dilution figure
WB says in Annual Report he explicitly stated his belief that GEICO, which is carried at ~1bn over tangible assets, is probably worth ~$20bn over tangible assets – and wouldn’t be surprised if this number increased a lot in the future
Cost of capital = next best idea (i.e., opportunity cost)
Paid somewhere between 11-13x (implies 8-9% earnings yield) after-tax earnings for Nebraska Furniture Mart in 1983
LT interest rates were around 11% on average in 1983
Wife’s inheritance will be in 10% ST bonds / 90% S&P500 index fund
Rail versus pipeline
Rail is about 2x as fast as pipelines
Allows for more flexibility in which refineries you can take the oil to
Economics of oil sands usually only works if (1) oil price is high and (2) spread between oil and natural gas is unusually high, since a lot of natural gas is used to produce the heavy oil from the oil sands
CM stated there is a lot to learn from scrambling out of mistakes (in the football sense)
“Imagine Berkshire, a textile mill sure to go broke because power costs in New England were about twice as high as they were in TVA country, a sure-to-fail department store, and a trading stamp company sure to be forced out of business by change... Out of that comes Berkshire Hathaway. Talk about scrambling out of mistakes, I think of what we might have done if we’d had a better start.”
CM on change:
“I think we’ve adapted pretty well to changes in our circumstances [at BRK]. And that, again, is part of life. I mean, since change is inevitable, how well you adapt to it is terribly important. And I would say the changes that many of you have watched in Berkshire over the years have been very much in our interest, and then there may be future changes that are just as desirable.”
CM on success:
“What I needed to get ahead was to compete against idiots.”
WB/CM says the largest deterrent from people copying BRK’s methods is that it’s a slow way to get rich
In Iowa, BHE has significantly lower rates than their competitors (both stock-owned and municipal-owned)
Thinks that’s important for them since regulators are the ones that guarantee the returns they get on capital
Greg Abel says across they regions BHE operates, they are either the low-cost provider or in the lowest quartile
Tech companies building data centers in Iowa due to BRK’s low costs and since they also want to receive electricity from a renewable energy source, which BRK provides
Just did first rate increase in Iowa since 1998
Cited example they did in 2013 of 1k MW projection that will cost $1.9bn but will earn 11.6% percent
WB says generally, maintenance capex = depreciation BUT their utilities business also earn a return on that maintenance capex
2015
CM says he watched both WB and Henry Singleton invest, and WB a better investor than Henry Singleton cause he put more work in
“Henry was thinking about inertial guidance, and Warren was thinking about securities. And the extra work enabled Warren to get by with his horrible deficit of IQ, compared to Henry.”
CM said Teledyne’s incentives were too strong and caused them to get in trouble with defense department a few times
(MJS) Similar to incentive problems with WFC
WB mentioned story of Jack Ringwalt’s Head of Claims hiding claims since he didn’t want to be berated by Jack (his point was, you need to be careful of hidden incentives especially when you are CEO and setting a tone)
Berkshire’s “float is very close to permanent”. “It can decline a couple percent in a year, but it can also increase a few percent”
“…all Berkshire does is copy the right people.”
“[On WB’s early success]…I had a great teacher, I had exceptional focus, and I had the right sort of emotional qualities that would help me as an investor. [And] I enjoyed the game.”
2016
Repeats goal is to increase normalized earnings every year
Says he would rank Mark Donegan as “one of a kind” even versus all the managers they’ve seen over the years
No limits on the acquisitions PCP can do – “canvas has been broadened” with the acquisition by Berkshire
CM thinks they’ve gotten “almost as good at picking superior managers as were in the old days at picking the no-brainer businesses”
Precision Castparts has good attributes besides management
(from 2017 and 2018 meetings) Reliability is important in terms of quality and delivery time
Quality is important – so customers don’t just take the low bid
Contracts extend over time
Customers depend heavily on them
Sold Swiss Re and Munich Re since he thinks reinsurance biz will be tougher in next 10 years than previous 10 years
(1) In part due to interest rates being low, so low return on float
Also other reinsurance companies are limited in what they can do with float, vs. BRK, since (1) they do not have the capital in relation to underwriting that BRK has, and (2) they do not have the earnings from unrelated businesses
(2) A lot of new capacity in reinsurance, which has resulted in heavy competition
Matt Rose (BNSF CEO, at the time) thinks that railroad mergers will eventually occur as the population continues to grow and “transportation becomes more scarce and the railroads will need to do more”
Thinks great efficiencies will be created for shippers and communities due to these mergers
On aircraft leasing business
Offered various aircraft businesses over the years but regard it as a “scary business” that does not interest WB “in the least”
ST money financing LT assets with big residual risks – “not for us”
Only likes leasing business where it’s not purely a financial transaction – needs to be something else like a servicing aspect
“Recognizing reality is … important. You do not want to try and fix something that’s unfixable”
“cash flow [for Berkshire is]… net income plus increase in float”
Says the ~$17bn of operating earnings + increase in float is the “net new available cash”
WB says they have done well by simply avoiding self-destructive behavior
CM says it was because they had the appropriate balance between patience and opportunism
Van Tuyl auto dealer acquisition
Paid $4.1bn but purchase included about $1bn of securities earnings 0.25%
(MJS) net paid ~$3bn and Van Tuyl had ~$8bn in 2013 revenue (0.375x revenue)
(MJS) probably $10bn in “peak” revenue, so, 0.30x “peak” revenue
2017
Driverless technology would hurt both GEICO and BNSF
When evaluating business they simply want to know:
(1) if a competitive advantage will exist 5,10,20 years in the future, (2) if they have a management team they like, and (3) if the price is sensible
See’s Candy purchase – Knew manager was competent, so simply needed to ask the question would people still want to both eat and give away See’s in preference to other candies? Meaning, would people still be willing to pay up for See’s
Figured it would be a yes, 10-20 years down the road -> couldn’t see further but didn’t necessarily need to
Discussion of AIG retroactive reinsurance deal with BRK covering $20bn of exposure for $10bn premium
AIG has to pay first $25bn, then next $25bn BRK pays 80% (meaning, up to $20bn)
Applied to their losses in many different products written before 12/31/15
AIG did transaction since many thought they were under-reserved
Berkshire was only insurance company in the world willing/able to write that contract
Could extend out 50 years for final dollar of payouts
CM quote:
“The first rule of fishing is to fish where the fish are. And the second rule of fishing is to never forget the first rule. And we’ve gotten good at fishing where the fish are”
Airline purchase
Thinks the industry is still tough but a few favorable things going for it now
Did say that even if the market caps are the same size as they are today, the price per share will be much higher since the companies are doing significant buybacks at cheap multiples – so, they “don’t need heroics to do OK”
AAPL purchase vs. IBM purchase
Thinks they understand consumer behavior better than the dynamics impacting IBM’s future
CM says a lot of other investors are trying to be brilliant and they’re simply trying to stay rational
Said this is a advantage for them
Said his wife will do fine after he dies holding the 90%/10% index fund/cash
Only reason for cash is in case the stock exchange closes down for some period of time, she doesn’t feel she’s in a cash crunch
A good test for management on whether they have a good “money mind” (good capital allocator), is whether they repurchase stock when their stock is cheap or just have sound opinions on the subject
WB says the math is so clear for repurchases when a stock is cheap that if management teams give odd opinions on this it probably indicates they don’t have a great money mind
WB says that this doesn’t mean they aren’t a great business operator, just that their lacking in understanding capital allocation
BRK does not want a manager that does not have a “money mind”
WB said there were 12 or so people throughout his life that he would have predicted generating market-beating returns
WB said he would have also predicted that probably none of them would have beat the market with >$100bn
On Berkshire’s ability to handle stresses
CM: “In every way, Berkshire is structured to handle stresses”
WB: “It’s the kind of thing we think about all the time. We’ve thought about it ever since we started. But I really don’t know any company that can take more general adversity or even some specific adversities”
2018 Annual Meeting
Normalized earnings power per share is close to 1Q18 performance of $5.25bn
Said (1) they do have a lot of cash earning 0% that should be considered “untapped firepower”, (2) insurance is seasonally stronger in Q1 but other biz weaker in Q1
Then said, $21bn normalized (1Q18 annualized) + $xbn retained earnings of equities (since only dividends reflected in the $21bn)
(MJS) maybe 30% payout ratio (was 31% for top 10 investments in 2019 according to Letter to Shareholders) on $1bn of dividends in Q1, so another $2bn pre-tax or $1.5bn AT for Q1
(MJS) implies $7bn for Q1 or $28bn for year // at 20x = $550bn on 1.6mm shares or $350k per share (traded around $290k at time of meeting)
Breaks down how he thinks of cash coming into BRK (Net income +/- CapEx over Depreciation +/- float)
“to make it very simple, in the first quarter we earned five and — from operations we earned a little over $5 billion. Now, we only spent about our depreciation. Normally we would spend somewhat more than that. But that’s 5-and-a-fraction billion. Two billion came, in net, from float. So that’s $7 billion that — basically in the first quarter — that would have been added to our cash if we hadn’t done something with it”
Likes Apple since it’s “an exceptional product with a strong ecosystem [that creates a very sticky customer]”
TTI (electronics distributor)
Billion dollar sales business with average product cost of $0.05
Great growth business with not much competition
ticker ARW is a public competitor
CM says it’s a bit of the “dead horse business” – not too many people want to get into this business
TTI holds more inventory than competitors which makes them more valuable to customers
WB said business is all about having the right millions of the right products and quickly getting those electronic parts to customers worldwide
When evaluating a consumer product want to see how consumer behavior changes on it in a lot of different environments
Says they would not have been able to invest in Coca-Cola when it was first started [and no track record]
WB said you then want to do scuttlebutt research, to see if you can get more in-depth insights on the products (“some you can, some you can’t”)
2019
Says his estimate of intrinsic value is a range with a probably 10% band
Property insurance and reinsurance are bad standalone businesses, since if you truly hold enough capital to withstand worst-case scenarios, you would hold too much capital to make the business attractive
However, since BRK holds a lot of capital in other businesses, that are importantly, not very correlated with natural disasters, they are able to deploy this extra required capital in a efficient way
Mentioned that in last 30 years, all three large reinsurers have been on the brink of BK, even though it’s been a pretty good last 30 years with Katrina as the worst disaster
Wouldn’t sell BRK insurance business for float value
Thinks 10 or 20 years from now people will look back at the record of BHE and see that no other energy company comes close to achieving the record that it achieved
Competitive advantages:
they retain 100% of capital whereas most utilities payout 100% of earnings
there are three owners, one of which is the CEO – aligns incentives
BRK is able to use excess renewable tax benefits to offset income in other parts of its business [whereas, many other utilities are unable to use renewable tax credit since 100% bonus depreciation wipes out taxable income - as stated at 2012 meeting]
Rates in Iowa are half of their largest competitor
Says the finer details on most of BRK’s subsidiaries are not important
[WB on what is important in evaluating businesses is how the future capital will be deployed] “Wouldn’t have mattered in 1965 if you knew what percentage of [Berkshire] linings went towards this or that – what was important was what would be done with the capital going forward”
Wouldn’t have mattered in the 1980s to know more about the See’s Candy expansion eastward that failed – again, what mattered was what was done with the capital generated
I have listened to the BRK annual meetings multiple times. It's the best educational material I have encountered.