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Discrepancies are likely due to my error in understanding & transcribing.) Opening Comments: Transcriptions of the Questions pertaining to David Sokol & Lubrizol are posted on the BRK website. Earnings (except housing related businesses) have been improving quarter by quarter. 2nd worst quarter for insurance: o $50B hit to Re‐insurance industry o BRK is typically 5% of industry o BRK re‐insurance unlikely to profit in 2011 GS preferred shares were called in GE preferred shares will likely be called in September Burlington Northern ‐ good year, and for rail in general Reinsurance estimated losses: o Australia 195B o New Zealand 412B o Japan 1,066B o Total 1,673B (20% from arrangements w/ Swiss Re) o (Based on population comparison, New Zealand situation 10x worse than Katrina) Geico ‐ April tornados will likely result in 25k auto claims o Significant policy increase: 2011‐Q1 (318k) vs. 2010‐Q1 (218k) o Goodwill (14B) significantly understated on balance sheet o Buffett estimates $1.5k goodwill for each policy holder Accounting comment regarding Wells Fargo ‐ based on time & original purchase price o 3,704k shares with gains not marked up o 337k shares with 'losses' marked down o Net 'loss' shown, but not an accurate reflection Warren Buffett (WB) discussion of David Sokol (DS) & Lubrizol (LZ) acquisition: o Events at Salomon Brothers 20 yrs ago were "Inexplicable & Inexcusable" o DS failed to say that he contacted Citigroup & had bought LZ shares o DS did not try to hide his purchases ‐ after a big deal occurs, they are usually required to submit a list of who knew what and when they knew it ‐ FINRA reviews o DS has a high net worth & made something like 24M last year o Mid American Energy ownership: 80% Berkshire 10% Walter Scott
Balance owned by Greg Abel & DS In the past, WB laid out a bonus plan for Greg Abel & DS based on 5 year performance factors with $50M to DS & $25M to Greg. DS changed it to be split 50/50, thus forgoing $12.5M (note: DS shares of LZ increased $3M after acquisition announcement) Charlie Munger commented that it is a mistake to assume that people will always make perfectly rational decisions.
Morning Q&A ‐ Warren (WB) unless noted otherwise & Charlie (CM) 1) Q) When you found out about the DS ‐ LZ situation, why were you not "ruthless"? ‐ (in reference to the statements in the Salomon Brothers video clip played at the meeting each year) A) (WB ran through the play by play of the events) Aware of potential deal on Jan. 14th March 14th ‐ John Freund of Citi called to congratulate & noted Citi's work with deal This triggered a 'yellow light' & prompted WB to call Mark Hamburg, who then contacted DS March 18th ‐ LZ submitted a draft proxy statement for WB outlining the history of the transaction ‐ noted Citi's involvement up front Ron Tolles traveling with WB at the time receiving/communicating info via Ron's phone ‐ planned BRK board meeting upon return ‐ received DS resignation Upon return, WB drafted the press release for DS review ‐ DS removed wording about hopes of succeeding WB dashed, saying never intended to succeed WB (WB commented that he could have been more careful with the 'not illegal' wording in the press release) Per the proxy statement, LZ was interested in the deal on Dec. 17th BRK notified SEC through Munger Tolles Olsen CM ‐ The press realease could have been better. ‐ It is better to not include anger in one's decisions ‐ Quoted Tom Murphy "You can always tell someone to go to hell tomorrow." 2) Q) What will be the effect on stock prices of the government ending permanent open market purchases? A) Although it is a huge force that will be gone, it is well known & likely factored in. 3) Q) How can you insure that there are no other DS's in line at BRK now? A) Commented that the likely person is 'straight as an arrow' CM‐ Comment "The meek shall inherit the Earth, but will they stay meek?" Safety measures including Howard Buffett as an independent chairman ‐ makes it easier to change a CEO if needed CM ‐ noted similarity to Rockefellers & one instance where they had to remove someone 4) Q) If you had an additional 50 years to go with your investment career, what additional area/sector would you add to your 'Circle of Competence'? A) Would want it to be a large sector ‐ Tech likely Large disparity between the winners & losers ‐ ability to pick winners is key ‐ many players CM ‐ Tech or Energy
5) Q) You mentioned that you were initially unimpressed with LZ, and then quickly warmed to it. What changed? A) Knew nothing about the business initially ‐ Charlie smater about oil James Hambrick subsequently gave a good explanation of the business through DS Oil companies are big buyers from LZ ‐ it is hard to break in & compete with them due to existing customer connections & some patents. CM ‐ LZ & Iscar are 'sisters under the skin' ‐ in that there are barriers to entry for potential competitors 6) Q) With $95k book value per share + discounted value of future earnings, it seems that 180k/share is a fair value. (Basically this questioner was asking Buffett to verify his intrinsic value number) A) He and Charlie would come up with slightly differing 'ranges' of intrinsic value, not a precise number. Commented that they have given signals about attractiveness of BRK price in the past Currently not overpriced ‐ They have been looking at a large international acquisition. However, the large price tag would require issuing stock & they are not willing to do so. BNSF purchase was 30% stock and was painful CM ‐ questioner was looking at the two right factors & it won't always be as attractive 7) Q) you remain positive about America's economic future despite the current turmoil. Why do you see gold where others see salt? A) How can you not be positive... When he was born, there was the market crash, the depression, and so on... still the standard of living has increased 6 for 1 Doc Thompson (father in law) gave him a talk prior to marriage saying that "You'll fail, but it's not your fault b/c the Democrats are in office." In 1951, Ben Graham & his father told him not to get into selling stocks right now believing the results will be unattractive & people will blame him. Our potential is not used up ‐ It's just that the rest of the world is catching on CM ‐ Europe survived the Black Death 8) Q) (The question was about inflationary environments and the best businesses.) A) A business with a wonderful product that requires little capital reinvestment is better in an inflationary environment than a business that requires a lot of tangible capital ‐ Assuming that the business has pricing power Think Sees Candy vs. BNSF ‐ refer to his old Fortune article 'How Inflation Swindles the Equity Investor' CM ‐ They didn't always know this ‐ and they don't do as well with larger amounts of money to invest 9) Q) At what point can we expect to see BRK pay dividends? A) When BRK does it, should do 100% ‐ (I took this to mean that all dry powder formerly waiting for acquisitions should be distributed at once.) The basic question is whether or not they can turn $1 of earnings into more than $1 ‐ used comparison of a savings account where you can pull out 5% vs. selling it for 20% over the amount you put in.
10) Q) What are your thoughts on the revenue outlook for Wells Fargo & U.S. Bancorp? A) Different than 'Moneycenter' banks Both banks less attractive ‐ U.S. Bancorp will make less in the future b/c of less leverage use General rule ‐ keep out of trouble on the asset side & use cheap capital CM‐ Read the M&T Bank annual report ‐ Bob Wilmers is a smart guy ‐ 'Old Testament Prophet' Read JPMorgan (Jamie Dimon) letters as well The market tends to have money flow to the financial sector 11) Q) Commodities have done well and continue to appreciate, while BRK has been flat. (I think the underlying question was whether commodities are a better investment.) A) BRK has done well over time compared to gold He thinks of three categories for investment: o Currencies Performance tied to government behavior Almost all decline over time o Commodities (gold‐like) The asset doesn't do anything Hope that others will be willing to buy for more later (Bigger Fool) Read Keynes, Chapter 12 ‐ related to having to out‐guess what others are guessing Mentioned previous silver investment & rationalized based on industrial use o Producing Asset Farm example ‐ Does it production meet your expectations independent of just its sales price There are times when commodities move a lot. But over time, producing assets will do better. ‐ Rising prices create their own excitement SM ‐ Something silly about an asset that goes up if the world is going to hell 12) Q) When you were starting your first fund, how did you attract your first investors? ‐and subsequent ones? A) Initial money came from family and college roommate Put his own money in the fund It was a slow process ‐ stumbled along Spread by word of mouth CM ‐ Left the family business & was slow to do so CM ‐ Conduct yourself in a way that others trust you CM ‐ Current fee structures allow people to get rich without performance 13) Q) BRK is a conglomerate. How is it different than the 60's conglomerates? A) Conglomerate allows for the tax efficient transfer of excess cash from one business to another Other conglomerates became stock issuing machines ‐ Using their overpriced stock to purchase other companies (Gulf & Western, Litton, Teledyne) Teledyne bought back its own stock when under priced & benefitted shareholders
BRK ‐ not the same game ‐ rationale is for running the business ‐ the efficient transfer of excess cash for efficient use Q) What do you want your legacy to be? ‐or how do you want to be remembered? A) 'Old age' ...... Teacher CM ‐ His fortune was fairly won & wisely used Q) Regarding the decline of the dollar, BRK has previously had a short position. What are you doing now? A) Not active in that currently & not likely to do The dollar will decline over time ‐ but all currencies will decline ‐ shorting has to predict which ones will decline The 1930 dollar is worth 6 cents ‐ yet inflation did not destroy us CM ‐ Greece is extremely dysfunctional, but surviving Q) (This question effectively asks to compare BRK to a no load fund, presumably an index fund) A) Agrees that for the non‐active investor, an index fund is good CM ‐ For managed funds, the next 50 years will be harder than the last 50 years Q) Why are outside investments by BRK employees not screened? A) BRK is not an advisor or a fund Rules are in place for BRK managers Past V.P. of BRK subsidiary ‐ BRK provided the evidence that sent him to jail Johns Manville recently issued its own internal letter about the DS‐LZ issue & guidance for internal behavior CM ‐ Wall street entities with big compliance departments still have big scandals Q) What are your thoughts on helpful changes concerning the Fed, the economy, and economic policy? A) Huge stimulus ‐ taking in 15% GDP and spending 25% ‐ not sustainable Natural capitalism is the biggest factor When residential construction picks up, there will be much more employment ‐ there is an indirect reservoir of jobs associated with housing industry We have come back well based on the hit we took TTI (electric components) and Iscar, consistent increases CM ‐ Not enough financial industry remediation CM ‐ Need a tax system that discourages 'trading' ‐ high frequency trading is basically legalized 'front running' CM ‐ 25% of engineers going to the financial sector CM ‐ Other things that go on make DS look like a hero Note: S&P futures contract that is held for ‐ say 10 seconds ‐ gains taxed as 60% long term/40% short term (Wow)
Update on Protege Fund of Funds vs. S&P 500 Index Fund contest (3 year mark): Fund of Funds (‐4.24%) S&P Index Fund (‐8.18%)
Afternoon Q&A ‐ Warren (WB) unless noted otherwise & Charlie (CM) 19) Q) You've been positive on BYD. Is it still attractive today? Where is your confidence level? A) CM ‐ The investment has still made money Delays & glitches are to be expected in a company growing at that rate ‐ goal was to double sales each year & did it for 5 years 20) Q) What are your thoughts on commodities & commodity equities? Is there an oil bubble ‐ peak? A) BRK had a position a long time ago when oil was $10/barrel It is a finite resource with 88M barrels being produced each day It will sell for more... someday... Exploration deals are more expensive now than in the past ‐ players are more sophisticated The dollar will decline over time ‐ Inflation will increase costs CM ‐ Over time, BRK would have done worse in commodities CM ‐ It works best for those who bribe Nigeria... 21) Q) What is the most important thing you've learned this year? A) CM ‐ Reading Google's Book ‐ referring to their engineering culture Have Charlie do the press releases... 22) Q) What are your thoughts on the path ahead ‐ Is there more 'Too Big to Fail' in the future? A) Freddie/Fannie have not re‐constituted Was on the fence regarding the auto manufacturers ‐ ends up thing it was right to do Problem will stay with us Regarding 'Too Big to Fail' Companies ‐ CEO & spouse should lose everything if bailouts are required ‐ Board should have to at least repay prior 5 years compensation Leverage limits should be reduced CM ‐ Context of past failures & excesses ‐ Current situation should have seen change like the 30's Finance & Economics in academia ‐ Teaching the wrong things adds to the problem 23) Q) WB & Melinda Gates resigned from Washington Post Board. Will there be future share sales? A) No Post shares will be sold ‐ related to being 80 and most effective use of time ‐ still happy to advise anytime he is needed CM ‐ On the Costco Board & really likes what they've done ‐ in general, being on lots of boards is for the birds 24) Q) Will a weak dollar erode BRK ‐ discuss BRK's pricing power? (The questioner had an Australian accent, so the answers relate to US/Australia.) A) Australia/US could move ‐ no specific knowledge CM ‐ Australia's open pit mines ‐ alluded to being a powerful positive ‐ but can't compare 25) Q) Relative importance of BRK equity portfolio (Compared to purchasing whole companies)‐ Where will it go in the next 5‐10 years? A) Still spend more time thinking about the portfolio & stocks ‐ acquisitions just don't occur that often CM ‐ Will always have portfolio with securities because of insurance operations
26) Q) With $17B profit/8 yrs isn't it fair to place some intrinsic value on the underwriting operations? Are break even assumptions too conservative? A) Hard to give guidance, but yes, there is likely to be underwriting profit over time CM ‐ Asked another way, would Warren trade BRK insurance operation for any other in the world? ‐ No Gen Re had to have some things 'shaken out', but pleased with operation now First purchase was National Indemnity for $7M. Now has more net worth than any other. 27) Q) In high inflation, what are the best and worst businesses for BRK? A) Pricing power & market position are key See's is better ‐ Utilities are worse, making a bond‐like return CM ‐ In California, proposed high speed rail project with 800 miles of track has a budget of $43B ‐ For same price, BNSF has 22,000 miles of track + engines & bridges ‐ so based on replacement cost, is a good deal 28) Q) Will BRK split the 'A' shares ‐ Effects ‐ Pros& Cons? A) No ‐ Already have with the former 'B' shares and then the subsequent 'B' split related to the BNSF acquisition CM ‐ Warren used to tell people "May you live till the 'A' shares split." 29) Q) Can you give us a policy example of Ajit in the reinsurance business ‐ to help understand his thinking? A) Willing to discuss big transactions ‐ always thinkg & being creative ‐ willing to look at new areas CM ‐ Secret of success ‐ being very interested in what you do Ajit thinks of BRK first ‐ could get more money elsewhere CM ‐ prompted WB to follow up on worst businesses ‐ retailing 30) Q) (The question had to do with goodwill amortization & return on capital) A) Do not include in return on capital calcs ‐ Use return on tangible assets Goodwill should either be kept (has a durable competitive advantage)or written off (no advantage) ‐ but not amortized CM ‐ Much cheaper to purchase businesses with insurance float ‐ helps when thinking through return on capital (i.e. LZ) 31) Q) In the book 'Damn Right', Cm mentions that he would teach finance through case studies of 100 good & bad businesses. What are some examples of those? A) CM ‐ Costco is an example of 'right' ‐ Has fostered a culture of extreme meritocracy and honesty ‐ This is rare GM is an example of 'wrong' ‐ Very successful at one time ‐ focus on short term and continual eroding & obligations by unions ended up wiping out shareholders 32) Q) In a rich society, how can you incentivize kids to work hard & be successful? A) WB was rich as kids were in high school ‐ tried to not live so differently from others Don't push to out‐do parents in exact same thing CM ‐ "Lose the fight as gracefully as you can." (meaning try, but it's tough) CM ‐ Get them interested in something...
33) Q) (This question related to the BRK succession plan and compensation of future managers.) A) Likely see a base salary supplemented by options (base price at time of issuance and increase annually) CM ‐ Not unthinkable that someone could continue in the current scenario 34) Q) How does renewable energy (clean water & food) affect BRK decisions? (related to investments) A) Likely see a base salary supplemented by options (base price at time of issuance and increase annually) CM ‐ With enough energy available, the clean water problem goes away CM ‐ Smart to buy other's hydrocarbons and save what we've got 35) Q) Did LZ violate its duty to shareholders in negotiating a transaction with BRK & not shopping for the best price? A) CM ‐ No, BRK would not have participated otherwise With BRK, you have significant size & certain amount of money 36) Q) How do you determine if BRK is allocating capital well going forward? A) Compare price to amount spent on businesses over time 37) Q) Explain why there were different terms for GS, GE, Dow, Wrigley/Mars, Swiss Re deals. A) Each one occurred at different times ‐ Thus, there are different opportunity costs given the environment at the time BRK was early on the GS & GE deals The deals mentioned are not related ‐ Cannot measure each decision against the best past deal CM ‐ No other way to do it 38) Q) What is your advice regarding being able read faster ‐ speed reading? A) WB does not read fast & is slower now than he used to be May help if you can do it ‐ but may not get details & insights out of the material CM ‐ it's over rated 39) Q) What are your thoughts on Congress and politics related to the debt ceiling? A) Past example of Indiana voting to change PI to an even 3.0 to make it easier for kids is comparable to this debate The country has a different debt capacity at different times ‐ The ceiling just allows for periodic fights It is important to be able to borrow in your own currency vs. another ‐ night & day difference Example of wanting to buy a Chicago bank in the 1950's, but could only get financing from Kuwait ‐ Did not do it b/c no idea of what that currency might do 40) Q) Discuss BRK exposure limits regarding Mid American Energy and its proposed nuclear plant. Is the risk/reward safe/acceptable? A) The U.S. is 20% nuclear Nuclear is safe ‐ The reaction to the incident in Tokyo makes it unpopular, but that does not change his view CM ‐ You cannot be completely risk averse ‐ also newer plants will be safer than the current ones operating right now This does not pose a risk that threatens BRK's existence
41) Q) Will you ever consider reinstating BRK's shareholder direct giving program? A) It was tax efficient to donate to 501c3's No other business copied it ‐ some dissention about it After Pampered Chef acquisition, there was a campaign to boycott the independent people who sold Pampered Chef products b/c other, unrelated BRK shareholders chose to direct their giving to organizations like Planned Parenthood. Since it had an effect on the livelihood of the independent contractors, it was discontinued. 42) Q) Discuss long term cash flows and how you weigh future projections vs. past reliability. A) Some products travel better ‐ Sees Candy has a strong position out west, but travels to other areas less well. LZ ‐ can expect some growth but not big CM ‐ Business schools emphasize projections ‐ effect is more harm than good ‐ Think about false projections & the significance of that on decisions CM ‐ Example of Scott Fetzer being shopped by First Boston & could not get a deal ‐ BRK did the deal w/o First Boston & Charlie's comment was that he'd 'pay them to keep their report'. (meaning he was better off not even seeing & being influenced by it) CM ‐ mentioned not ever seeing WB do a formal 'model' but they both have mental models that they run through (A good reference is Alice Schroeder's lecture video at the Darden School in '08) 43) Q) In recent 13‐F filings, there are (3) stocks that are listed under Warren E. Buffett with no other reference. What do these relate to? A) Defer to Mark Hamburg ‐ Likely related to pension benefit plans inside of BRK 44) Q) When looking at China, what do you do different ‐ What else do you look for? A) Generally the same investment process ‐ Less sure ‐ Less clear information CM ‐ So few that it's hard to glean a pattern 45) Q) Discuss BRK's cash and where its held. A) Does not play the short term game in paper & money markets Mostly in treasuries, even though unattractive CM ‐ Stupid to maximize short term money ‐ Example buying pipelines in '08 happened in less than a week ‐ Have to be sure the money is ready 46) Q) Mid American Energy has invested $1B in wind power. Can you explain how to look at that? A) Cannot count on the wind ‐ only blows 35% of the time Only makes sense with government credits It is an asset to BRK b/c they pay a lot of taxes, thus the tax benefit can be used 47) Q) How close to bankruptcy was Netjets when Santuli left? A) Would have failed if independent from BRK, but not inside BRK 48) Q) What is your advice for young people ‐ startups/entrepreneurs? A) WB's Dale Carnegie diploma hangs on his wall ‐ Communication skills are the first area to improve to increase value CM ‐ Economy is tough‐ Micro is easy ‐ Macro is hard & even the experts disagree on it 49) Q) How do the Munich Re & Swiss Re relationships affect BRK? A) Not of a magnitude that would affect BRK's own insurance business
CM ‐ Re‐insurance is not easy. First 15 yrs, BRK did not succeed (Looks easy, but it's not) Derivatives at investment banks led to horrendous losses for business owners Q) How did your relationship with Todd Combs begin? A) He sent a letter to Charlie, and subsequently met for dinner. Charlie then talked to WB Q) Thoughts on the recent J&J acquisition of Sythes? A) No Specific knowledge being done with 2/3 stock ‐ better if all cash deal (still feels pain from Kraft deal last year) Q) Regarding BRK's European acquisition being too big for a cash deal, What can be done to help? A) LZ is $9B ‐ Couple of others currently looking at ‐ no elephants right now Comment about overpriced dot‐com businesses being able issue 'confetti' for real assets (meaning trade overpriced pieces of paper for good business producing real things) Insight into housing & Real Estate Market in the next 10 years? ? A) Bought Alabama brick business b/c Alabama uses more brick than any other state ‐ Over time, houses will be built in keeping with household growth No movement since annual report CM ‐ Lumpy earning are ok ‐ WB noted that Sees Candy has losses 8 mos. of the year.