*** Berkshire Hathaway Annual Meeting 5/3/99 Monday ***
Following are some of my observations and notes from this year's meeting.
· RE: KO. Warren mentions, (for the bizzillionth time), that the key to KO is unit cases sold and fewer shares outstanding over the long term. In the short term KO may be affected by current international issues. The P/E may even stay the same over time. Depending on market conditions he may buy more AXP, G, and KO. He is especially aware of KO. He and Charlie hope to get a wonderful opportunity to buy KO in the near future. Warren believes that in 10 years KO will be stronger than today and the current ST challenges will be long forgotten. Warren stated, "Coca-Cola is fine. It is the best business in the world."
· Berkshire has 3 "unconventional" investments currently. Warren and Charlie wouldn't elaborate other than to say one of the three is still silver.
· Re: Japan. Shareholder asked if the US should be concerned over current turmoil in Japan. (This question occurs every year.) Warren response was Japan has had severe problems for some time, why would it have more impact now. The US has done well and will continue to do well. Charlie mentioned that the Keynesians may have to revisit this one. Japan is a major industrial country where the recession keeps going, interest rates are near 0% and they are running a deficit to stimulate the country. Warren then commented that "0% to 2% interest rates would stimulate me". Virtually no one would have theorized that Japan would still be struggling and floundering. Charlie attributed the mess in Japan to three causes: land booms, accounting corruption and stock market boom. The key to success for an economy is "no slop". Charlie mentioned that he and Warren have serious concerns about the current shenanigans with accounting by companies in the US. They then discussed the history of interest rates in the US since the 30s. Warren stated, "the current prosperity in America is probably more related to the stock market" than people currently realize.
· Re: Flight Safety and Executive Jet. Shareholder asked how these "capital intensive" businesses will affect BRK long term. Warren explained that, yes, they are capital intensive but it is "reasonable" to extrapolate out future earnings based on history of companies and the industry. ROE has always been good for these companies and there has been constant growth in the top line. Executive Jet is poised for serious growth. EJ is massively accelerating its growth in Europe. EJ and Geico are going to super charge earnings for BRK IMHO over the coming years. This is why. Warren commented that EJ currently does approximately $1 Billion and has 140 jets. Due to growth EJ has $7 Billion of jets on order. Warren said, "do the math." EJ is poised for phenomenal growth.
The second most exciting event of the weekend was touring the 737 Boeing Business Jet mock-up outside Aksarben. Incredible! Interesting bit of history, Jimmy Stewart was one of two original founders who put up capital to start EJ. I was concerned about EJ's competition so I asked the EJ executives. Supposedly, EJ's competition has 26% market share and 60 planes. They also claim EJ has only 55% market share. There are also plans to aggressively attack EJ market share. EJ executives responded that their competitor has less than 20% market share and that EJ has approx. 82%. Also, the competitor supposedly has about 14 of its 60 jets sitting on a tarmac. EJ appears to have a huge moat. I am confident they will dominate the market.
· Re: General Re float. Warren said the float will grow slowly for the first few years. There was actually a small decline in Q1 but it WILL grow over the long term. There is significant opportunity to grow float and there are possible tax advantages associated with it. 1999 and 2000 may not show growth. Charlie responded, "if we do 1/3 as well as we have with the regular float we will do very well over time." This was probably Charlie's longest and most animated comment of the day.
· Re: threat of the internet. BRK has businesses that for the most part provide basic products and the businesses will not be affected as most companies. They commented that for the type of businesses BRK buys that they view massive change as a threat; thus, they only buy businesses with predictability of earnings. Warren commented that KO isn't susceptible. If you were to do an analysis on KO 50 years ago it would be similar to an analysis done today. Charlie comments (Referencing See's Candy. Everyone should try See's Candy. It is incredible! sees.com), "Peanut brittle doesn't have much technological change either." Warren replies while munching on candy, "They better not change it."
· Re: inheritance. Shareholder asked how she should invest an inheritance she recently received. Warren said that if your horizon is for the long term that the best alternative for the money, in terms of equities, would be to put the money over time into an S&P 500 index fund. Warren continued to comment on the market and investing. He said there are very few times when equities scream buy me. He cited 1974 when equities were attractive. Currently, he believes they are unattractive. Most importantly, he said people need to have their expectations reduced dramatically in terms of the returns they expect on equities. Again, he cited the numbers. When you have 1% inflation and 4% GDP you can't have equity returns like we have had in perpetuity. If so, corporate profits as a percentage of GDP would eventually exceed GDP in the end. He referenced the old saying, "New York has more lawyers than people."
The following concept was one of my favorites at the meeting. Warren: In aggregate 15% per annum is impossible. Last year the stock market earned approximately $334 Billion EPS and it had an approximate market cap of $10.5 Trillion. In general, this is a bad buy (looking at it as if it were one business). Basically, this can't double in five years with GDP growing at 4%- 5%. If you own a farm, what you produce is what you get.
Charlie then gave two quotes:
"If a thing can't go up forever, it will stop."
"People who expect perpetual growth on finite earth are either madmen or economists."
· Shareholder has question regarding donations and charitable giving to family and society. This is one of the most misunderstood areas when people speak of BRK and Warren. Massive amounts of money have been given to society already and 99%+ will be given back eventually. Warren said it best in an interview recently. He asked the interviewer, "Do you think it would have been better 10 years ago for Bill Gates to give his money away (not sure but around $1 Billion) or would it be better to do it a little now with more in the future (currently around $70 Billion?
Warren also responded that he and Charlie quite voluntarily gave $2.6 Billion to the Federal government last year. In fact, BRK may have paid more than any other company last year. Warren also explained how at BRK the shareholders name the charities for annual giving. The CEO doesn't have a pet charity in this case. Charlie and Warren agreed that the best service a company can provide to society is to produce better goods and services over the long term.
Charlie responded to the question with a quote people will say about him when he leaves, "How much did old Charlie Munger leave? I believe he left it all." He then said, "This is likely to be a pretty good run."
· Re: oil. Charlie said, "...eventually oil will go way up BUT you won't make money buying it now."
· Re: cable. Shareholder question regarding cable rates for Washington Post Company. Warren said it is not good news when cable prices go up for WPC. Warren then cautioned people to not believe all the press releases. Recently, someone said he bought TCA. Warren said he had never read their annual report. Most likely, Lou Simpson at Geico may have bought the company. Also, there was a press release recently that said Warren purchased a REIT called Omega. Warren said he had never heard it. Again, another part of BRK may have purchased it.
Re: bandwidth via cable. Warren and Charlie are unsure of the effect of greater bandwidth into households. It is outside their circle of competence. Some companies will win big and others will lose big. It is nearly impossible to pick the right ones. Charlie points out for example that maybe 400 companies in the US make over $220 million post tax. In the next five years maybe 20 companies will join this group from nowhere but many will fail.
Warren then referenced the biotech rage in the early 90s. Warren then said, "You want to do the math here."
· Re: inheritance. Charlie revisited this issue. Unlike Warren, Charlie plans to leave more money to his family. Not that Warren isn't leaving substantial money. In terms of leaving money to his family, Charlie said, "I'm a little more willing to let the world take 'em down." I think he means he will help them but if they screw it up they will have problems since the world doesn't show mercy to fools.
· Re: KO and G. Shareholder question concerning how much farther would these two have to fall before he and Charlie would buy more. Obviously, there was no direct answer. It is obviously much lower than today's prices. Last summer I was watching KO very closely during the correction. In fact I even had my pal, Justa the internut, looking at it. Ouch, thinking back is painful. There were some damn nice companies at great prices. Oh well, maybe this summer. Seriously, we were looking at KO. My criteria for buying is based on what Warren said at the meeting last year. The comment that no one that I know of has reported but is extremely significant. We didn't hit that range but we came close. BTW, based on Warren's AXP purchase last summer, you can do the math and figure when it might be a good time to pick up AXP in the future.
· Re: threat of deflation. Warren said the threat of deflation is "very unlikely but I have been wrong on inflation for 10 years." Deflation is hard to envision at this time.
· Re: efficient markets. Warren said that the markets are fairly efficient but not totally efficient as the theorists argue. This theory hit its peak 20 years ago. Thank goodness the total efficiency argument has been discredited over the past 15 years. Lars: My personal experience has demonstrated that none of the millionaires I know got that way via efficient market theory. Warren said it is good that business schools are more open to new ideas. Charlie commented on how theories are held to for way too long. There is too much to lose for a PhD to admit what he has spent years studying is wrong. Charlie cited Max Planck. Warren said it is like realizing that one of the Ten Commandments is wrong and needs to be changed.
Warren then said, "I've never known what you talk about the 2nd day of class when studying efficient market theory."
· Personal comment: I also met someone at the meeting who has owned MSFT since 1987. He recently started selling. Prior to this I only knew of people who owned MSFT via Da Brink's stellar recommendation in 1990.
As for stock recommendations, it was a weak year. Usually there are more suggestions. I have one boring company that might be of interest, WSC. This is a company owned by BRK that Charlie runs. Not a high flyer but solid. Charlie calls out what he thinks the stock is worth approximately in the Annual Report each year. IMHO, Charlie is conservative. I believe this year the estimate is around $380 and the stock sells for around $329 right now. The ironic part is that if you take into account the equity positions of the company, which he will never sell, the value of the company reaches the $430 range IMHO. A friend of mine started buying this one at $6 per share (he carries the brokerage confirmations in his pocket for the disbelievers during the annual meeting weekend). If only I would have known him then in the late 70s/early 80s.
I also like BRK...whoa that's a surprise. I don't own them right now but I would watch LVLT and QWST if we get a correction.
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If anyone is interested I have a friend who types up detailed reports of the BRK and WSC annual meetings. Send me a private message if you are interested. But even if you aren't interested in this make sure you do try some See's Candy, sees.com .
Now back to justabid.com . I hear that damn microchip in my head again. At least it is profitable, I was worried Justa's latest idea would hurt our beeper business.
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