Sorry I've been relatively quiet on the blog front lately, I got back on Sunday from a weekend trip to Omaha to attend the Berkshire Hathaway Shareholder's Meeting.  I've been busy over the last few days collecting my notes into a readable format.  What follows is some of the highlights from the 5 hour Q&A session with Warren Buffett and Charlie Munger during the meeting. 

For a complete transcript of my notes from the meeting you should go here.  Also you should check out Whitney Tilson's complete notes and his highlights article posted on Fool.com.

I should state that recording equipment wasn't allowed in the meeting so this is all from hastily hand written notes...none of this is a direct quotation and are my interpretation of what was said.  The ideas are Buffett and Munger's as filtered through my ears, brains (or lack thereof) and hands.  Don't be surprised if I didn't get their intent entirely and don't go lifting "quotes" from this.

On evaluating insurance companies and the benefits of "float"

Growth in float, while nice, is not our goal.  The goal at BH is "quality" of float. Ideally Berkshire would like to maintain its record of "cost-free float." 

While float provides equity-like qualities, it is not the equivalent of equity in the case of liquidation, so any investor evaluating using float as equity should be extremely careful.  (I took this to mean that it becomes worthwhile to look at float as potential equity when calculating compounding effects of investment growth but not useful when figuring out the value of the assets of the company.  In other words, don't count the float as yours because it's not, but you can safely count the effects of what the float can accomplish while you're borrowing it because those effects ARE yours.)

On derivative pricing models such as Black-Scholes

Black-Scholes is a "know nothing value system" since it uses market value to assess intrinsic value, and often the two have little, if any, correlation.  Black-Scholes depends on market volatility as an integral part of its pricing which is a poor judge of true value.

You have to understand the utility of options and the cost of issue to effectively price them.  All options have value.  You need to know what you're giving up in order to even begin to price them.

In any derivative transaction if someone posts a gain, the other party should post an appropriate loss.  This almost never happens due to the complexity of the transaction, both parties typically post a gain.  In the history of accounting no one ever made a deal and then immediately booked a loss even if they should have.

On stock options

The problem with stock options is that they are too much like a lottery ticket and much too random in their rewards.  They encourage a piggy-back effect where people who had little to do with the success of something are rewarded outrageously for it.  In addition, they don't align employee interest with shareholders' interest since option holders benefit from retained earnings (regardless of return on equity) and not from dividends, contrary to shareholders. 

The worst abuse of this system is the CEO pay.  Compensation negotiations dealing with CEO pay scales are almost always one-sided.  The Board, which has little or no vested interest in the company, views the money as "play money" which can be thrown around indiscriminately.

On synergy between Berkshire subsidiaries

Berkshire does not try and institute "synergies" between its operating units and many managers have never spoken to each other.  Occasionally you will get two or more managers who like dealing with each other who will team up to realize savings on supplies or something like that.  If any cost savings are recognized by multiple subsidiaries teaming up, they are done at the managers' instigation, not ours.

On the nature of GDP figures

One thing to watch out for is the nature of GDP figures.  You need to take into account per capita GDP.  That's a much more relevant figure.  If GDP rises 2% but the population rises 1% then GDP has essentially remained flat. 

Also, you must count in frictional GDP.  This is GDP growth that comes from the need to employ services and goods that add little real value to the economy but instead represent higher costs of doing business.  The heightened airport security, warfare, etc. that has occurred in the wake of 9/11 is mostly frictional GDP.  So while GDP has definitely risen, I wouldn't be surprised to learn that desirable GDP has probably fallen.

On educating yourself about business matters

I would say read business articles. Pay particular attention to articles about scandals and frauds and try and understand how the company did it.  You'll pick up a lot that way.

On the dangers of the insurance industry

If you are willing to do dumb things in insurance people will find you.  It doesn't matter if you are in the middle of the Atlantic Ocean on a rowboat and you just whisper out an inadequate price.  The agents will come swimming out to you with their fins showing.

It's very seductive to open up the envelopes every month and have the checks fall out.  And you'll probably do this for a few years before the roof collapses.

A few mistakes in this business will overcome a lifetime of successes.

On corporate accounting

Engineering as a discipline uses "big margins of safety."  This is definitely not the case in the financial world.

We typically don't meet with management much any more when making purchases.  If you want a good insight into management, look at their accounting.  If their accounting is sloppy, management is sloppy.  We get approached on deals from analysts every day.  I don't read analysts reports unless I want to laugh, and then only if the funny papers aren't available.  We don't have time to listen to rosy projections about the future or about how this or that company is turning around.

Most of our insight comes from publicly available documents: SEC filings, books, and magazines.

Stricter accounting enhances better business decision-making.

We are against using accounting to fix operational problems.  It's like heroin.  Once you start doing it you can't stop.  I felt much more comfortable with the financials in the 60's and 70's then I do today.

 

It's amazing what kinds of things people with high I.Q.s will do to justify their high salaries.

 

On the dividend tax cut proposal

 

The upper class gets a larger percentage of their income from dividends than the lower classes do.  Giving a tax break on dividends essentially gives us free income. 

To have the highest ranks of society paying effectively no taxes on income of any sort is grossly unfair.

 

8:15:42 PM  #