2008 Berkshire Hathaway Shareholder Meeting: Detailed Notes

Reflections on Value Investing has posted some notes from the recent Berkshire Hathaway meeting. Below are some quotes that I noticed.

I started investing when I was 11. I believe in reading everything in sight. I wandered for 8 yrs with technical analysis. I read Intelligent Investor, chapters 8 and 20 I recommend, and if you absorb it you won’t be a lemming.

Our job is not to select great managers, our job is to retain them.

In business school the amount of time spent teaching option pricing is total nonsense. You only need 2 courses, how to value a business and how to think about stock market fluctuations.

We never want to trade reputation for money.

There is a lot I wouldn’t buy even if best management in world, as it doesn’t make much difference in a bad business.

We want a company with durable advantage, which we understand, can trust management, at a good price.

If I were working with small sums of money, it would open up thousands of possibilities. We found very mispriced bonds. We found them in Korea a few years ago. You made big returns but had to be small size. I wouldn’t be in currencies with small amount of money. I had a friend who used to buy tax liens. I’d look in small stocks or specialized bonds.

Several times I have had 75% of my non-Berkshire net worth in a situation. You will see things where it would be a mistake not to act. You won’t see them often, and the press and your friends won’t be talking about them.

We have lower due diligence expenses than anyone in America. I know of a place that pays over US$200m to its accountants every year, and I know we are safer because we think like engineers – we want margins of reliability.

A brand is a promise.

We waste a lot of time, but we waste it on things we want to waste it on.

Berkshire Hathaway

Few highlights from Berkshire Hathaway’s 2007 annual report.

Charlie and I look for companies that have:

• a business we understand
• favorable long-term economics
• able and trustworthy management; and
• a sensible price tag.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital.

But if a business requires a superstar to produce great results, the business itself cannot be deemed great.

There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so.

[Talking about investments in different types of companies] To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

[On buying Dexter, a shoe business with Berkshire stock] In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.

[On buying Amazon bonds at 57% of par] Yes, Virginia, you can occasionally find markets that are ridiculously inefficient – or at least you can find them anywhere except at the finance departments of some leading business schools.

Post Your Picks

If you fancy your self as the next Warren Buffett there are a number of places on the web to demonstrate your investing ability.

• Gurufocus - lets you post what you think a company is worth.
• Marketocracy - lets you run your own mutual fund.
• Seeking Alpha - publishing network focused around investing and financial news.
• The Motley Fool CAPS - lets you post what you think a company is worth.
• Value Investors Club - more exclusive, you have to post an idea which may, or may not get you membership (limited to 250 people).
• Sharetrader - NZ based forum for discussing NZX and ASX investments.
• Stockpickr - lets you post about which shares you like and compare your picks to other investors.

Whitney Tilson’s 2007 Wesco Annual Meeting Notes

Value Investing News has a link to Whitney Tilson’s 2007 Wesco annual meeting notes (pdf). They make for good reading. Charile Munger is Chairman of Wesco.

Some selected quotes from the meeting are below:

If you really want a lot of wisdom, it’s better to concentrate decisions and process in one person.

I talked to a leading person in the accounting field and said it didn’t make sense to let companies mark weird stuff to their own models – that it would lead to disaster. She looked at me like I was out of my mind and asked, “Aren’t you for the most current data in accounting? My system is more current and therefore should be better.” This mind would score highly on an IQ test, but is scarcely able to throw out the garbage.

If you’re really wise and fortunate, you get to be like Berkshire. We have high opportunity costs. We always have something we like and can buy more of, so that’s what we compare everything to.

Leithner & Co - 10 Investing Principles

Leithner & Co is a Graham-style “value” investor. Their investment philosophy implies ten principles, which they list on www.leithner.com.au.

1. Ignore ‘the market’ and ‘market gurus’.
2. Don’t try to predict ‘the economy’ and ignore those who do.
3. Analyse individual businesses and not ‘the market’.
4. Buy only when the price is right.
5. Ignore institutional and bureaucratic imperatives.
6. Buy and (wherever possible) hold indefinitely.
7. Diversify, but don’t over-diversify.
8. Remember that risk inheres in any investment.
9. Adopt a sensible criterion of success.
10. Explain yourself plainly and remember the people involved.

Important Variables

Interesting post at Gurufocus.com about important variables in valuation, including perhaps how Warren Buffett looked at his orginal investment in Coke.

“There are an infinite number of facts that you can learn about a company, but there are usually two or three very important variables that make the company succeed or fail. A lot of Wall Street gets so bogged down in the minutiae and details that it misses these two or three big things that make or break the investment. Part of what worked for me over the years is being able to distinguish what matters from what doesn’t. That’s one of Buffett’s great gifts. He focuses on the critical issues involved in analyzing. I don’t pretend to be able to do it like he does but it’s one of the most important things you can do.” – Wallace Weitz

When Buffett looked at Coca-Cola he was probably looking at the total servings sold per annum and the profit per serving of each Coke. Those are Coke’s key variables, the number of servings people consume and the profit per serving for Coke products. Buffett was certain that consumption would increase through taking share of other liquids consumed. As well, he figured they could squeeze more than a penny per serving, which they were earning out of the product over time.

USG - Discount to Intrinsic Value ?

USG is a manufacture and distributor of building materials. I came across the company when reading about how Berkshire Hathaway owns almost 20%. 

USG entered bankruptcy in June 2001 due in part to Asbestos claims. The company emerged from Chapter 11 in June 2006 and by December 2006 had settled all Asbestos claims by paying US$3bn into a separate fund. 

One way to look at USG is using the framework from Equity Private regarding how to frame a problem. 

1.         Present the current state of affairs. 

USG is currently undervalued (based on some high level analysis) by the market as it has recently emerged from bankruptcy and the current concern about a weak US housing market impacting earnings.

2.         Present the inefficiency embedded in the state. 

All asbestos claims have been settled. The company has spent it’s time in bankruptcy building new more efficient manufacturing operations.

3.         Explain the problem that has thus far prevented a correction of the inefficiency. 

Other investors may not be willing to look at a company with a history of bankruptcy. Perhaps lack of analyst coverage.

4.         Present the new development that now permits the correction.

The company is currently under appreciated. And over time the market will begin to look more favourably on USG.

There are a number of blog posts talking about what a good investment USG is, here are some of the better posts I have come across.

Burger’s Business, Investing and Politics

• USG Write Up from Timothy Burger
• Blog post
• Valuation (pdf)
• Research note (pdf)

The Texas Hedge Report

• Research note and valuation (pdf)

Blogging Stocks

• Article about USG

Guru focus

• Visitors poll thinks the intrinsic value of USG is US$82 a share vs the current (9 Jul 07) share price of US$50.

I plan to post some more material about USG in the future.

Charlie Munger’s Nuggets Of Wisdom

Morningstar has an article from 2006 about Wesco Financial’s annual meeting and a “few nuggets of wisdom” from Charlie Munger.

Opportunity cost

• When you are evaluating any investment, you must compare it to every other available investment, including ones you may already own.
• So when you hear about the new hot stock in the next can’t-miss sector, ask yourself two questions:

1. Do I understand the investment as well or better than one I already own?
2. Is the risk and reward profile of the investment superior to all other alternatives?

Rationality

• To succeed as an investor, one has to make good decisions that are anchored in reality and free from emotional and cognitive distractions.

Envy

• When a group of people make money, others are compelled by an irresistible force to get a piece of the action, even though prices have risen so far above fair value as to guarantee disappointing returns.

Learning

• After you compile all the reasons you should buy a stock, invert the question and state the reasons why you should not buy the stock.

Mistakes

• Forgetting your mistakes is a terrible error if you are trying to improve your cognition.

Risk

• There is a lot to be said that when the world is going crazy, to put yourself in a position where you take risk off the table (talking about the use of leverage).
• Taking on risk only makes sense when it is sufficiently outweighed by the potential reward, which is why we only buy stocks when there is a margin of safety.

 

Follow The Leader

If you are interested in where famous investors are putting their money check out www.gurufocus.com. The site tracks investments from the likes of Warren Buffett, Wallace Weitz, Martin Whitman, Carl Icahn etc.

Ben Graham’s Principles

Summary of Ben Graham’s principles from Oak Value shareholder letter (pdf).

• Investing is most intelligent when it is business-like. Very simply, we view this principle as suggesting that one should view investments in public companies in the same manner that they could if they were going to buy the entire business.
• Always require a “margin of safety”. We define “margin of safety” as a discount to our
  estimate of a company’s intrinsic value sufficient to compensate us as investors for the risks and uncertainties assumed and the capital allocated.
• Maintain the appropriate perspective. Recognize that the market is a mechanism; a vehicle there to facilitate what we might wish to do as investors, but it does not require that we do anything.