This is part 2 of a 3 part series about my weekend at the Berkshire Hathaway annual meeting. Part 1 was an overview of the meeting while part 3 will be about what I feel was the big lesson. Today’s post is about the Question and Answer session that is the real meat of the meeting.
The upcoming duck giveaway has generated excitement and I’m going to change things up just a little bit. The ducks will get their own post on Wednesday, 5/22. At that time, I’ll give away 2 sets of ducks. One set will go to a random commenter while the other set will be given away in a contest. Johnny Moneyseed will serve as the guest judge and will pick the winner.
Questions and Answers
The Question and Answer session is the most famous part of the Berkshire Hathaway meeting. Journalists, analysts and the public are allowed to ask anything they like. Buffett and Munger do not know the questions ahead of time. Most questions are submitted prior to meeting day, however attendees can also drop their name in a box. If your name is picked, you get to ask a question at one of 10 microphones set up around the facility. It was really neat to hear Buffett and Munger talk. Their answers were little windows into their minds. Despite their advanced ages, both were sharp and funny.
One unusual thing about this year’s meeting was that Buffett chose to invite a prominent Berkshire critic to ask questions. Doug Kass, a hedge fund manager and long time Berkshire naysayer, was chosen as the challenger.
The questions were all over the place. One guy asked for book recommendations. Another used his question to beg Buffett and Munger to ‘stop eating so many hamburgers so they can live a bit longer.’ However, most of the questions revolved around certain topics and that is what I’d like to talk about today. Those topics were:
- US government bond buying program
- Berkshire Hathaway after Warren Buffett and Charlie Munger
- Berkshire Hathaway’s ability to grow
- How Buffett and Munger choose investments
- Future of the US economy
US government bond buying program
The feds have been buying treasury bonds to keep interest rates low and spur investment. This program can’t go on forever though. The feds have hinted that they’ll start pulling on the reins when unemployment dips below 6.5%. Many folks expressed concern that the US economy and stock market is artificially propped up by this program and are worried what will happen when it ends. Buffett had a lot to say about the program:
- We are in uncharted territory. It is a huge experiment and unwinding the program is going to be very difficult, but I have faith in Bernanke.
- When the feds announces the end of the program, it will be the shot heard around the world.
- The markets may take a hit, but it will be a blip and is best ignored.
Berkshire after Buffett and Munger
Buffett and Munger are no spring chickens (ducks?). Buffett is 82 and Munger is 89. Their time time is limited and this is a great concern to shareholders.
- Buffett stated over and over again that the ‘culture is in place to ensure future success.’ Anyone who contradicted the culture would not last at Berkshire Hathaway.
- Doug Kass asked why Buffett would make his son, a farmer with no investing experience, an executive chairman. Buffett stated that his son would have no decision making ability regarding investments. The actual purpose of his son is to ensure that Buffett’s successor (successors?) continue to run Berkshire how Buffett expects it to be run. His son has the power to pull the cord on a successor that runs afoul of Berkshire’s ideals. Munger chipped in with, “The meek will inherit the earth, but will they stay meek after it happens?”
Berkshire’s ability to grow
Berkshire is a massive company and many expressed concern about Berkshire’s ability to continue to be successful. Berkshire is worth hundreds of billions and growth is harder when you’re bigger.
- Buffett acknowledged that if the economy continues on its torrid pace, the 5 year period ending in 2013 will be the first that Berkshire fails to beat the S&P 500. Buffett acknowledged that if ‘they can’t beat index funds, they are not earning their pay.’
- He went on to say the Berkshire does better in times of economic distress. He gave examples of how Berkshire was one of the few organizations loaning money in 2008 and they were able to put together some deals that were mutually beneficial. He specifically mentioned Harley Davidson and GE. One of my favorite quotes was, “In times of economic distress, we have the money and the willingness to act immediately.”
- Munger added, “We don’t care about 3 or 5 years, we are building momentum for the long term.”
- Munger also acknowledged that the ‘competition is much stronger than it was in the past’ and that ‘it’s harder to move the needle now.’ He said though that he believes that ‘Berkshire’s system is better.’ Finally, he said that their ‘acquisitions in just the past 5 years have been great.’
How Buffett and Munger pick investments
Someone asked what the ‘top 5 quantitative measures are’ that Buffett and Munger consider when making an investment. Buffett had some interesting thoughts:
- We don’t know how to buy stocks just by looking at financial figures. Instead, we ask ourselves, ‘What is this company going to look like in 5 to 10 years and how sure are we of it.’
- I wouldn’t know how to pick companies if I had to do it just by the numbers. Competitive advantage isn’t disclosed by the math.
I thought that this was pretty neat and goes a long way in explaining many of Berkshire’s holdings. For example, Berkshire owns the BNSF railroad. Starting up a new railroad would require billions of dollars. Property rights have to be acquired. Track has to be laid (millions per mile) and equipment must be purchased. No one is going to give BNSF a run for its money any time soon.
Future of the US economy (cliffhanger alert)
The most common questions revolved around the future of the US economy. Over and over, people asked Buffett and Munger to ‘read the tea leaves’ and tell them the future. I loved Buffett/Mungers’ responses to this one, but that is the topic of next Tuesday’s post where I discuss the big lesson.
Random quotes that I thought were cool
- The day of the meeting was cold and rainy, so they opened the doors early (people line up very early to get a good seat) and someone thanked Buffett for it. Buffett’s reply was, “If we sold coats, we would have left you out there.”
- Munger on Twitter: I’m avoiding it like the plague!
- Buffett on Bitcoin: I have no confidence in it whatsoever.
- Buffett on stock market gyrations: We stay sane when others are going crazy.
- Munger on derivatives: All of these derivative investments devised by MIT math and physics majors are very dangerous. I find them revolting.
Please tune in next Tuesday for part 3 and also don’t forget to check out the duck giveaway on Wednesday. Until next week, quack quack!
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JC @ Passive Income Pursuit says
I love it! Both of them are always on their A game with their wit. I really liked Buffet’s response to how they pick investments. I’m trying to do more picturing of the company in 5-10 years but my mind is nowhere near where theirs’ are at. Looking forward to next weeks post.
JC @ Passive Income Pursuit recently posted…Income Update – April 2013
I’m interested to see how they do verse the index funds in the next 5 years. They say it’s getting harder to pick winners, so that’ll be interest to watch. And based on statistics, one of them is likely to kick the bucket during the next 5, let’s hope they beat the odds!
I’m not sure at all about the comment that they believe in the Fed or it’s ability to unwind the neverending QE program. But of course they can’t say it could be a disaster either.
Jacob@CashCowCouple recently posted…How to Become a Financial Advisor
Mrs. Herb says
I have been pondering what will happen post-Buffett. Hopefully his ideals and sharp thinking are being soaked up by his successors.
I chuckled out loud to, “If we sold coats, we would have left you out there!”
Mrs. Herb recently posted…20 Questions with Mrs. Herb
Zach @ Dividend Ladder says
This is my favorite point from your summary:
“We don’t know how to buy stocks just by looking at financial figures. Instead, we ask ourselves, ‘What is this company going to look like in 5 to 10 years and how sure are we of it.’”
Half of my investment strategy is based on the numbers. The other half is based on where the company is headed. Great points from the best investor of our time.
Zach @ Dividend Ladder recently posted…New Ratings For A Few Income Stocks
Yes, i loved that one too! It reminded me a lot of myself. I’ve bought some stocks like Google that didn’t look so hot if you ran the numbers, but are not doing great because of competitive advantage.
John S @ Frugal Rules says
I LOVE the Q & A time of the meeting. You’re right in that they are little windows into how they’re thinking. I always love sitting there and just soaking up their wisdom and banter.
The Geico lizard, on the other hand, scared the sh!t out of our daughter last year.
John S @ Frugal Rules recently posted…After the Swipe: How Do Credit Cards Work?
John, your lizard comment made me laugh out loud! Probably because I can picture my daughters reacting the same way!
I’d give just about anything to chat with Charlie and Warren for a day…
Savvy Financial Latina says
They are so awesome!!! Dynamic Duo!
Lindsey @ Cents & Sensibility says
I don’t know a lot about Warrenn Buffett beyond his Wikipedia biography but I like what I see. I like the way Buffett described how he chose who to invest with – stating that you don’t just look at financials, you look at where the company is going to be in five years. Much bigger picture! I like it a lot.
Lindsey @ Cents & Sensibility recently posted…Weekly Spending Update: May 6 – 12
I would have loved to be there listening to the wisdom of these guys. They’ve probably forgotten more about investing than most of us will ever know. Thanks for sharing your experiences.
Kim@Eyesonthedollar recently posted…You Don’t Need to Predict The Future
The amazing thing is that they are so sharp at such an advanced age. I hope my mind works like that when I’m up in the years!
The end of the bond buying program will be very interesting! I can’t wait to see what happens. Buffett mentioned that it’s like ‘watching a good movie.’
We may be in for a big correction, but like every time, it will recover and the markets will move on.
Level-headed is a perfect description. They don’t get emotional. This was a point that came up again and again.
Johnny Moneyseed says
Even though there is a ton of good information in this post I think the most interesting thing is Warren Buffet’s take on Bitcoin. I feel the exact same way that they’re a passing craze. It’s a concept that will have young trendy investors throwing tons of money away. I don’t believe in riding waves like that.
Johnny Moneyseed recently posted…A small setback in our Real Estate plans
Bit coin fascinates me actually. I don’t own any and probably never will.
I think it is really similar to gold actually. It has zero intrinsic value. You just buy it because you think someone else will want to pay more for it in the future. At least gold has a long history…
On a related note, Buffett hates gold too.
The First Million is the Hardest says
It’s really amazing how sharp these guys are even though they’re both into their 80’s. I love reading all the quips and quotes that come from this meeting every year. I think my favorite thing about Buffett is how he can so easily summarize this stuff in language that anyone can understand.
The First Million is the Hardest recently posted…How To Invest In A Bull Market
Yeah, that is great quote. I personally can’t stand articles about a stock that have some deep technical analysis, but pay no attention to the company itself.
Laurie @thefrugalfarmer says
More great wisdom here. I love their strategy for picking investments. Not very many people think that way these days.
Laurie @thefrugalfarmer recently posted…Why You Should Choose to Start Your Journey to Debt Free TODAY
Ironically, Buffett spoke out against Herbalife (he doesn’t like MLMs)…