This weekend, I attended the Berkshire Hathaway meeting in Omaha Nebraska. I was able to go thanks to my friend Dave, who is a shareholder in Berkshire. I am not a Buffett-ologist, but I am a big admirer and fan, not only because he is perhaps the greatest investor on the planet, but also because he, from what I understand, is a genuinely decent human being. In an industry where ethics is an option for too many, there may be no better role model than Warren Buffett.
I met Dave at our hotel, and after our free drinks supplied to us at check-in, we called a cab and headed to the first event of the night at Borsheims, Berkshire’s jeweler. Our cabbie – who looked like he hadn’t been to a barber in well over a year and gave the outwardly impression that perhaps education wasn’t a high priority – was very knowledgeable about “Warren”, as everyone calls him in Omaha it seems. He had a bet with other cabbies about what would happen to Berkshire’s stock after Warren dies and wanted our opinion. Our cabbie turned out to be a pretty bright guy and we talked about a wide-range of financial topics. By the end of our trip, he had me considering a position in wheat futures.
At Borsheims, the food was free, the booze was free and the lines were long, reeeeaaaal long. There were thousands of people, as the mall and a large tent outside were required to accommodate everyone. Our friend Peter had yet to arrive, so I finagled a glass of wine and David and I sat outside enjoying the milieu, which included watching an Asian camera crew record a segment for TV back home. However, I was getting hungry, and unwilling to stand in line for an hour for food, I purchased a serving of Bang Bang shrimp from a table set up by the Bonefish Grill. When Pete finally arrived – an hour and a half late! – we hailed a cab and headed to Gorat’s, one of Warren Buffett’s haunts, where we had reservations.
A few weeks prior, Peter had suggested we have dinner Friday evening at Gorat’s. I suggested that since there would be thousands of Buffett-worshipers thinking the same thing, perhaps it would be best if we made a reservation. So David called and, no problem, we were able to make a reservation for 7:30pm. However, a few days before the meeting, Peter’s travel plans changed and we had to push the reservation back to 8:30. Not a problem again, the restaurant said. This puzzled us since the weekend was one of the busiest times of the year and Gorat's was one of the best-known restaurant in Omaha, yet we were able to change reservations with ease.
When we arrived at 8:20, we found out why. There was a tent outside the restaurant, packed with visitors. The girl at the front told us we'd have to wait 20 minutes so we ordered a few drinks and sat at a table. After a couple glasses of wine, they called us upstairs, and up we went, eagerly anticipating our meal. However, at the top of the stairs, we ran into another mob of people. They too had been called up for their meal. We had made it through one line only to wait in another! Thus, wait we did before being seated at around 9:40. It had become apparent that the reason why we had no problem changing reservations was because time is optional at Gorat’s!
The sign outside Gorat’s proclaimed “World’s Greatest Steaks” in bright neon so I expected to see prices similar to Ruth’s Chris Steak House or Morton’s. Instead, a filet mignon was $20, similar to The Outback Steakhouse. "What a deal!" I thought. Instead, what a disappointment. I guess for $20, I should have expected such, though you get a pretty decent steak for $20 at Outback. But my steak was not of the highest quality, and the beans and pasta sides may have come out of a can. Oh well, we had to eat there because it was, after all, the Warren Buffett thing to do!
My friend Peter was traveling with a colleague, whom we will call “James”. James had been to the Berkshire annual meeting the past ten years. Earlier in the day, Dave and I had been wondering what time in the morning we should head to the Qwest Center, the location of the meeting. The movie that kicked off the AGM began at 8:30 so we figured 7:00 or 7:30 was early enough to get a good seat. “Bad idea,” said James. He told us people start lining up outside the arena at 1:00 or 2:00am, and if we wanted a good seat, we would have to be there by 5:00 at the latest. To David – who lives on the west coast – this was especially unappealing as he would be awakening at 1:00am PST, and there was no way he was getting up that early. Frankly, neither was I. So James graciously offered to save Peter, David and I seats. A generous and magnanimous man is James. And for his generosity, I am grateful, especially considering where we sat.
As an aside, if you do decide to attend the meeting, book your rooms well in advance, perhaps even months. James and his colleagues wound up staying at a place with mirrors on the walls and ceilings since nothing else was available. We stayed at the Comfort Inn on Grover Street. It was fine, but at $200 a night - surely a deal for this weekend - I figured hot water would have been available at 6:00am. It was not. Thus, I had a cold shower and skipped shaving, opting for the scruffy look. Who was going to see me anyways?
Saturday morning, Dave, Pete and I headed down to the Qwest Center, arriving at 7:00am sharp, beating everyone except the 10,000 other people already there. James was holding our seats at center ice, telling Peter on his cell phone to hurry because he wasn’t sure he could hold them much longer.
Center ice is not usually the place one would think of being in high demand. However, it is when Warren Buffett sits at center ice! We sat one row behind Warren and his family for the movie. When the Buffetts sat down at 8:30, a swarm of people descended holding all sorts of cameras, wishing him well, telling him he was their inspiration, etc. Accompanying Mr. Buffett was his daughter, who sat to his left, his son who sat to his right, and either his son’s girlfriend or wife, I’m not sure. Dave was able to snap a picture of the back of the Oracle's head. If he sends it to me, I’ll post it.
Before the Oracle arrived, however, I made my way to the exhibits where many of the Berkshire companies were hocking their wares. A line that snaked all the way to Iowa greeted me when I entered. I thought perhaps Warren himself was signing books or healing the sick, so I asked someone what was going on. “Warren Buffett stamps,” she said. Apparently, there are Warren Buffett stamps. Since my interest in all things philatelic waned when I was 12, I took her word for it and moved on. I wondered what the Great One himself thought about his deification on a payment process for a service in secular decline.
Ginsu, the knife company, is owned by Berkshire, a fact I did not know. I didn’t even know that company still existed. As a boy, I used to see the spots for Ginsu knives on Hockey Night in Canada. The ads featured a chef using a Ginsu knife to cut through a beer can then a tomato. I didn’t really know why this was an accomplishment since cutting tomatoes did not seem particularly difficult and I had no idea why anyone would cut a beer can. (I figured that one out in college.)
People lined up to tour a mobile home built by Berkshire’s Clayton Homes. Perhaps they were curious how the other half lives since one share of Berkshire A stock is worth two manufactured homes.
Geico, of course, was there. They were selling insurance. And people were buying insurance! Quite the raucous crowd at 8:00am, I tell you! The Geico lizard was out and about and was a big hit. To me, there is something a little odd to me about a 45 year-old man lining up to have his photo taken with a guy in a corporate lizard costume.
There was a book store about all things Buffett, and I picked up The Essays of Warren Buffett. However, I have 60 books on my shelf to read, so I figure I’ll have my book review posted on Running of the Bulls in September 2011.
If bags were any indicator, the most popular exhibit was See’s Candy. I had to buy my wife something, so I figured candy was easier on the bank account than the Borsheims kiosk next door. I selected a small box of fudge, plopped it down on the counter, pulled out my money clip and noticed a CNN camera crew had developed an intense interest in my purchase of a box of fudge. As the camera rolled, I envisioned me being beamed around the world, with God knows how many people looking at this groggy, unshaven, half hung-over guy who the previous night had gorged himself on Bang Bang shrimp, a large filet mignon, and copious amounts of wine and beer buying a box of fudge. I had never purchased a box of fudge before in my life! I sure hope that segment was left in the cutting room. I headed back to the area floor. The movie would be starting soon.
Once the fracas over Warren’s entrance subsided, the movie began. It was a compilation of humourous clips, sage advice from The Oracle, advertisements for Berkshire companies and testaments to people Buffett respected. The movie made me laugh, hard. The funniest vignette was when Warren went one-on-one with LeBron James. Buffett has a great sense of humour, as does Charlie Munger. It helps that both are self-deprecating. It is too bad the movie won’t be shown to the public. People would pay to see it.
When the movie finished and the lights went up, Buffett left his seat and headed for the stage. We all made sure to touch his seat! My IQ went up 10 points! (You mean it doubled? - ed.)
The arena was packed. The announcer informed us that 27,000 people were in attendance, 17,000 inside the arena and another 10,000 in the overflow rooms. Most everyone wore jeans. You could tell whom the investment professionals and hedgies were, (notice I make the distinction!) as they wore expensive suits and shirts. The pros looked out of place. Also in attendance were 600 people from outside North America. During the Q&A session, they were invited by Buffett to a private reception. He said the least he could do was to meet each of them since they had come so far to hear him speak. What class. I’m also pretty sure all 600 asked a question, since I'm sure half of those at the microphones spoke with accents.
Then, the announcer began the introduction that went something like this; “Ladies and gentlemen. I am pleased to introduce the intelligent, articulate, urbane, witty, handsome, articulate, modest, humble…” etc., etc., etc. … “friendly, charitable Mr. Buffett.”
And out strode Jimmy Buffett (who is, apparently, a distant cousin to Warren)! “Mr. Buffett” proceeded to serenade us with “Berkshire Hathaway-aville,” as in “Wasting away at Berkshire Hathaway-aville.” At 9:30 in the morning, that was pretty cool. After the song, Jimmy Buffett introduced Warren Buffett, and out he came along with Charlie Munger.
Buffett and Munger sat at a table onstage. It quickly became apparent that much of their presentation was a comedic act. The gregarious, talkative Buffett oscillated between imparting sage wisdom and cracking jokes while Munger usually just sat there, with a deadpan stare, until Buffett asked for his opinion. Most of the time Munger would respond with a sharp, concise, poignant answer, usually laced with wit, cutting humour and insight.
The two took questions from 9:30am to 3:00pm, breaking at noon for an hour lunch. The following are Buffett’s and Munger’s thoughts about the subjects asked by the crowd. The opinions are Buffett’s unless specifically ascribed to Charlie Munger.
Residential construction
It will struggle for awhile.
Private equity
It will be some time before disillusionment with returns from private equity sets in. But it will happen.
Investing abroad
They have nothing against investing abroad. However, in Germany and the UK, one must report to the regulatory authorities when one accumulates a 3% position in a company. To move the needle, Berkshire must take significant stakes, and the 3% threshold makes their moves more transparent which works against Berkshire. The 1997 collapse in Korea saw valuations in that country similar to the US in 1932.
Management compensation
CEOs are overpaid. However, more problems arise having the wrong manager than having the wrong compensation system. Unlike negotiations with unions, the lack of intensity in the negotiating process for executive pay drives up executive compensation. Most managements want tail-waging cocker spaniels on the compensation committee, not Dobermans. Compensation is driven by envy. Envy is the “dumbest” of the seven sins because, unlike the other seven sins such as gluttony and lust, there is no upside to envy. Charlie Munger noted that all this excess was causing envy and resentment.
Derivatives
We will have something like 1998. They don’t know when or what it will look like, but it could be bigger than the collapse of Long Term Capital Management. Derivatives make margin regulations a joke. Derivatives will bring chaos.
Accounting for derivatives
According to Charlie Munger, most of the accounting profession doesn’t know how stupidly it is behaving, especially regarding accounting for derivatives. By marking to market derivative positions, traders are being paid for profits that may or may not materialize while increasing risk in the financial system as returns relative to risk are asymmetric for the trader. The aggregate balance sheet for all derivatives almost certainly doesn’t balance. In some cases, profits on different sides of the same trade are being accounted for differently, creating the illusion that profits are higher than they actually are. Traders will game the system to make their trade benefit themselves at the expense of an accurate portrayal of economic reality.
Corporate Profits
Corporate profits today are extraordinary and not sustainable. Over time, corporate profits have averaged 4%-6% of GDP. Today it is 8%. That will come down. Much of today’s profits are being derived from the financial sector.
Human fallibility
People have a hard time thinking about what hasn’t happened in the past. Thus, they tend to incorrectly discount events in the future. On desired hurdle rates, it is amazing how gullible big investors, i.e. institutions, are. They are willing to believe and invest with people who will tell them what they want to hear, even if those people cannot deliver the hurdle rate.
Shorting
They have no problem with shorting. People will pay you money to borrow your stock, which is “found” money. Then, you have a constituency that must eventually buy back your stock. They even offered to have a special meeting just for the shorts! Shorts generally have a much harder time operating than other investors.
Gambling
Gambling is a tax on ignorance. It is disgusting that governments prey on the weaknesses of their citizens. Charlie Munger stated that casinos use egregious tricks to harm people. You will never find a gambling stock owned by Berkshire.
Valuation
There is no one easy method of determining intrinsic value, stated Charlie Munger. You need to use several methods. Experience plays a big part. The correct theoretical valuation metric is discounted cash flow.
Global warming
There is enough evidence to suggest global warming is occurring. General Re is taking it seriously. Charlie Munger chimed in, however, that “you’d have to be a pot-smoking journalism student to believe global warming is a threat to the existence of mankind.” What matters are the dislocations that will occur due to global warming, not global warming itself. People generally like it warmer. People aren’t moving from Southern California to North Dakota, after all.
Asset allocation
If he were head of a $10 billion endowment and his time frame was 20 years, Buffett would be 100% in stocks and nothing in bonds or cash. They do not have high expectations for equities over the next 20 years but equities will earn more than the 4.75% you will receive from bonds. There will be a severe market dislocation at some time. They do not believe in traditional asset allocation, i.e. 60% equities, 30% bonds and 10% cash. You should invest entirely in stocks, bonds or cash. According to Charlie, opportunity cost is what you want to base your investment decisions on.
Their silver trade
“I bought it too early, I sold it too early. Other than that, it was a perfect trade." "That shows you how much we know about silver." "I’m flattered you asked because no one asks us our opinion on silver anymore.” Commodity prices are determined by supply and demand, not conspiracy theories.
Asset size and investment strategy
If he were working with a small fund, he would be investing totally differently. From Charlie Munger, when you are young, you should be investing in inefficient markets.
Subprime mortgages
If unemployment does not rise significantly and if interest rates do not go up dramatically, the subprime melt-down will not have a broad effect on the economy.
Real estate
In some parts of the country, it will take a few years for the real estate market to right itself.
Managed futures
Berkshire would not limit itself to such a narrow product, or any such narrow products. Products like this are created to be sold to the public. Charlie Munger stated that the annual return would be from lousy to negative. Warren agreed.
I did not see the man who asked the question, but he had a German accent, and I believe he was from Superfund. Perhaps it was that guy who has his mug all over those ads on CNBC. Personally, I find those ads annoying. I have no idea who this guy is, yet he is featured front and center in the ads. This comes across as an exercise in narcissism. Perhaps I am being unfair since the idea may have come from an ad agency, or perhaps the guy is a famous investing genius of whom I am unaware. However, the marketing literature claims a 19% per annum return since 1996, a fabulous performance that I would be promoting instead of my face. (You’d have to. – ed.)
Volatility as a measure of risk
Volatility is not a measure of risk. The people who teach risk in Universities do not understand risk. Beta does not measure risk. Buffett cited his purchase of Nebraska farmland at $600 an acre in the early 1980s, which had fallen from $2000 an acre two years earlier. When farmland was selling at $2000 an acre, its beta was lower. Thus according to financial theory, farmland was less risky at $2000 an acre than it was at $600 an acre. Volatility as a measure of risk is nonsense. Volatility arises from certain types of businesses and not knowing what you are doing. Using volatility as a measure of risk is useful for people who want a career teaching. According to Charlie, 50% of financial theory taught in Universities is “twaddle.” Very smart people do very dumb things. They want to know who those people are and avoid them. People who say volatility is an accurate reflection of risk are crazy. You would have to believe in the tooth fairy to believe that Gaussian equations are a measure of risk in capital markets. (My favourite)
Investing and meeting management
When buying marketable securities, they will invest without meeting management. They read a lot, particularly annual reports, industry reports, etc. When they receive dishonest messages in corporate literature, i.e. annual reports, they avoid those companies. If consultants or PR firms write the message, why invest with someone who is responsible with your capital but won’t talk to you once a year? They will meet with management before they buy a whole company. A good business can override bad management.
Hedge fund fees
They are very suspicious of people who overcharge their clients simply because they can.
Heroes
“You are not restricted to picking living people as your heroes. Some of the best people are dead.” – Charlie Munger.
Ethanol
Charlie Munger – “I think the idea of running cars on ethanol in one of the dumbest ideas I’ve ever heard.” “I’m a Nebraskan to the core, but this isn’t my state’s finest moment.”
Railroads
The competitive position of the railroads has improved over the past 20-25 years. Rising fuel prices hurt the truckers four times more than the rails. There is little capacity expansion. Railroads were a terrible business 30 years ago when it was regulated but is now getting better. It will never be a great business, however, returns on capital are improving. The industry requires a great of maintenance capital expenditure.
At 3:15, Berkshire had put aside time to deal with a proxy issue regarding Petro-China’s involvement in Sudan. Even though the SEC did not require the proxy be tabled, Buffett chose to put it on the agenda so the dissidents could express their concerns, again demonstrating Buffett’s class. Could you imagine Bob Nardelli doing the same at Home Depot's annual meeting? I wanted to stay and listen to the debate, but I had a plane to catch.
At the meeting, members of the Yurok and Karuk tribes pleaded with Warren Buffett to remove dams owned by PacifiCorp along the Klamath River. They argued that the damns are destroying their communities as 95% of the salmon in the river that provided their livelihood has disappeared. I thought Buffett responded the best he could, saying that public utilities are a highly regulated business, subject to a political process with diverse and widespread interests, and as public trusts, the utility would respond exactly in line with the regulators decisions. I usually avoid politics on this blog, but the issue was brought up at the meeting, and I believe the tribes should have their arguments heard.
EDIT - Here are two sites, the Ultimate site and Motley Fool's transcript of the Q&A session.
Thanks for taking the time to share what sounds like a fun experience in Omaha.
I thought CM's answer about global warming (nobody moves from ND to SoCal) a little dumb since there would be no SoCal left if the icecap melts.
Also, the bit about volatility was weird. Volatility, expressed as VIX, is actually a very good indicator of risk but it's the other way around. A very low VIX is indicative of HIGHER risk.
Everything else was excellent.
Posted by: musingsofatrader | May 09, 2007 at 05:58 PM