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To: Jim Bishop who wrote (45848)	5/4/2000 10:30:00 PM
From: CIMA	Respond to of 150070

Buffett and Munger Answer Questions in Omaha By Selena Maranjian (TMF Selena) May 4, 2000 I recently had the pleasure of attending the Berkshire Hathaway annual meeting in Omaha, Nebraska. For those who don't know, Berkshire Hathaway (NYSE: BRK.A, BRK.B) is the company run by Warren Buffett, arguably the world's most successful investor. Berkshire meetings are different from those of other companies. For starters, instead of lasting an hour or so, Buffett and Vice Chairman Charlie Munger answer shareholder questions for more than five hours. What follows is my best attempt to represent some of what was said at the meeting. It's not 100% accurate word-for-word, but it's pretty darn close. (Whitney Tilson has covered some of the same ground in his recent Boring Portfolio report.) Note that "WEB" stands for Warren E. Buffett and "CM" stands for Charlie Munger. Imagine the setting: a large civic center full of roughly 10,000 people. A modest dais up front, on which is a simple table and two chairs. On the table are two microphones, a box of See's candies, some water, and some cans of Coke. The meeting was interrupted briefly when a seven-foot-tall ice cream cone walked onto the dais and handed each of the gentlemen a Dairy Queen Dilly Bar. There was soon much crinkling and rustling as they unwrapped the bars and proceeded to tuck in with gusto. The shareholder asking a question at that point asked, "Are you guys listening [to me]?" (Buffett assured him that yes, he was.) On Risk: WEB: We're enormously risk-averse. If we're thinking of writing a $1 billion insurance policy, it doesn't bother us as long as the math is in our favor. We do so many transactions that we're almost sure to come out ahead. We don't intentionally go into a business that we think will change in a big way. We look for a moat. A business is like a castle. What kind of protective moat do you have? See's has widened its moat every year. Other businesses are trying to take your castle. We think our businesses have solid moats and they're widening them. On Role Models: WEB: It does pay to have the right role models/heroes. It takes you through a lot. Mine haven't let me down. You'll want to be a little or a lot more. I tell students to pick out the qualities they admire in people they admire and ask why they can't develop those qualities themselves. It's very simple. The person you'd really like to admire is yourself. CM: There's no reason to just look for living role models. Don't limit yourself to the living. On Public Office: [They were asked if Alan Greenspan retired and they were offered his job, would they take it.] WEB: No. CM: I'd say no more quickly. WEB: Notice we gave you unequivocal answers -- that would disqualify us. I don't think we would ever be tempted by a public job. We're just having too much fun with what we're doing. CM: I never wanted to have a job where lying was the required activity. On the Problem with General Re and Why It Wasn't Foreseen: WEB: Well, it looks like a $275 million mistake. It's a big one. But we've had worse. We made a $4 million mistake in the 1970s that cost us probably $8 billion today. You could say that we're 10% smaller today due to it. General Re has had a terrific record. Insurance is the best business I know where we can grow with scale. Nine out of ten surprises in insurance are negative. On Whether He Sees American Express as "Inevitable": WEB: Let me clarify that Coca-Cola (NYSE: KO) and Gillette (NYSE: G) aren't inevitable -- but the Coke and razor businesses are. There's always a risk that an inevitable company goes into a non-inevitable business. In the early years, American Express (NYSE: AXP) had a 60% to 70% market share, while still charging 1% to 2% more than its competitors. AmEx backed into the charge card business when Diner's Club was catching on. They saw traveler's checks shrinking. This shows the power of the brand name -- the cachet --it was a dominant name. That's why I bought 5% of the company in 1964. There are probably $300 billion in annual charges on American Express. We own 11% of the company, so we benefit from $33 billion of charges. AmEx's fee is about 2.7%, vs. about 1.7% for Mastercard and Visa. That difference gives you a lot of money with which to offer your customers more. Nourished properly, the AmEx name has huge value and is very likely to get stronger over the years. On Adversity: WEB: We look for how a company deals with adversity. A good example is America Online (NYSE: AOL) a few years ago. I had the impression that many customers were mad at AOL. But it was growing anyway. That's great -- it shows underlying strength. It helps when you're evaluating the depth and impenetrability of a moat. On Competitive Advantage: CM: Harvard is like a self-fulfilling prophecy. It would be hard to mess up Harvard. It's a great business -- the more they raise their prices, the more people want to get in. On Whether He Has Any Cutoff Levels for Price-to-Earnings (P/E) Ratios or Earnings Amounts: WEB: No, we don't. One of our best purchases was 50% of GEICO when it was losing a lot of money and was destined to lose more. We thought we saw a very different future. We look at all of these companies as businesses. We're losing money in Europe with Executive Jet now, but we expect that at first. You do want to have in mind a stream of cash you expect for the next 20 or so years. And once you're that far out, the terminal value becomes less important. On Investing in "Technology" Companies: A shareholder suggested that Buffett and Munger should receive "lashes with a wet noodle" not for their 1999 performance, but for spoiling investors so that they expect 20% returns. He queried: "Are we asking too much to ask you to put your brains to work and invest only 10% of our money into the only game in town? Isn't there enough left in your brainpower to look into technology? I made over 100% in technology mutual funds?" WEB replied: The only way we know how to make money is to evaluate businesses. Did you bring business cards? It's a free world. Lots of people say they know how to invest in technology. Why would you have us invest in technology for you? [He went on to suggest that anyone interested in investing in technology should see this questioner.] CM: There are worse things in life than being left behind by a pile of money. WEB: [to Munger] Would you care to name a few? [later] WEB: We understand technology products and what they do for people. But we don't understand the economics ten years out -- the predictability of it. Is it comprehensible? We do think about it, but we don't get anyplace. We would be skeptical of anyone who says they can. Even my friend Bill Gates would agree. On Stock Prices: WEB: We don't even look at stock prices that much. We look at companies and private businesses. We had a bad year this year, but our stock price didn't correlate closely to that. On the Economy: A 15-year-old female shareholder from New York said, "It was very nice meeting you yesterday. I really appreciated the Internet stock tips. [laughter] Coca-Cola, Gillette and other companies seem to do well in certain interest rate/economic environments. How is Berkshire positioning itself for coming economic climates?" WEB: If we thought we knew what the dollar and interest rates were going to do, we'd know what to do. But we don't. In the end, we're really more interested in predicting whether more people will buy Coke around the world than dollar or interest rate changes. Currency does make a difference on earnings reports. But we focus on what's knowable and important. Currency may be important, but it's not knowable. With Coca-Cola, what's important is that more and more people will be drinking it. The best time to buy stocks in recent years was when interest rates were sky high. CM: We have a willful agnosticism on some things. [later] WEB: I don't make guesses [regarding the economy] and when I do, I don't pay attention to myself. Charlie and I never talk about macroeconomics. It's fashionable for banks to have economists making forecasts. So they say that GDP will grow by 4.3% instead of 4.6%. So what? On Expectations for the Stock Market: CM: I urge everyone to read the Fortune Magazine article. We're in for a time of reduced expectations. If you have unreasonable expectations, it makes life miserable.

To: Jim Bishop who wrote (45848)	5/4/2000 10:34:00 PM
From: CIMA	Respond to of 150070

Warren Buffett and Charlie Munger: Questions and Answers Part 2 By Selena Maranjian (TMF Selena) May 4, 2000 On Dividends: WEB: We paid a dividend in 1969 -- 10 cents per share, I think. If we can keep a dollar and use it to buy businesses, to make more with it, it becomes worth more. We have retained our earnings and will continue to do so as long as we think we can earn more with it. There's no reason to keep a dollar in the business if it becomes 90 cents. We would never have a conventional dividend policy [one that, say, routinely pays a certain amount per year] -- the idea strikes us as nuts. There's no logic to it -- except that some people have these expectations. CM: What's interesting about what Warren just said is that if you go to all the business schools, academia, etc., they'd never say it. We love saying academia is wrong. On Selling and the Berkshire Culture: A shareholder asked, "What are your criteria for selling a company you bought? Would you agree with Phil Fisher, who advises selling when a) you erred and the company isn't what you thought it was or b) the company has changed?" WEB: I'm glad you brought up Phil Fisher. I recommend his books highly, especially the early ones. We don't break off the relationships we've formed with companies we own when we're offered a higher price. That actually helps us buy companies. A lot of companies have been built with love. The seller wants the company to be in a good home. We're just about the only ones who'll commit to care for it forever. I commit to the seller that the only one who would betray them would be me. There won't be a takeover of Berkshire. With stocks, we're not 100% with Phil Fisher. We love buying stocks that we can stick with forever. We used to think that newspapers, TV, were the most solid things around. But things change. In my first 20 years, I'd sell when I found something better. Now I have lots of money and no ideas. The opposite of the earlier days. CM: We almost never sell. When we do it's because there's something we can't fix. [later] WEB: We're the Metropolitan Museum of Businesses. We promise we'll take care of the paintings and we'll let the painters keep painting them. We won't tell them to use more reds and less yellows. To some people, this doesn't mean anything. But if someone loves their business, it means something to them. It has to be enormously important what happens to it. They don't want it auctioned off. CM: I think our culture is very old-fashioned. Ben Franklin, Andrew Carnegie-- their ideas still work. Can you imagine Carnegie hiring a compensation consultant or an advisor to tell him whether to buy a mill? A lot of our businesses are old-fashioned like us. They have standards. See's has standards. WEB: It strikes us as idiocy to hire an investment banker to tell you what your company is worth. And he gets a big paycheck if you buy it. On Compensation: WEB: Our compensation plans vary, but they're all rational. It's been a huge advantage at GEICO to have an improved compensation plan. Its says what we think a rational measure of productivity over time is. [WEB then likened stock options issued to executives/employees as lottery tickets.] There's a lot of repricing of options going on. When you're compensating with options, the stock market determines an employee's value, not their own efforts and work. I hope our competitors do all kinds of crazy things with compensation. CM: We're out of step with the conventions of the world. WEB: If an executive said that to work for a company he'd want options on S&P 500 futures, that would be crazy. But if he gets options on his company stock and it goes up due largely to the S&P 500 going up, that's okay? [later] WEB: Options are calculated based on what they're worth on the market. That's the opportunity cost for the company. I think you'll see a lot of repricing going on. Companies say they won't do it -- until they do it. I doubt companies will choose to bankrupt their managers. Giving options changes the value of the property. It's like selling a house but keeping 10% of it. Options reduce the value of a company as soon as they're issued. [later] [A shareholder asked what they thought about CEOs who get enormous severance packages.] CM: Generally, I think it's a mistake for corporate America to have created so much hostility toward management. Stupid little details [in executive contracts] make a terrible impression on people. They're advised to [go for these stupid little details] by these damn consultants. WEB: I agree. We've done very well without consultants. It's maddening when CEOs show up with lawyers and 20 page contracts. People look around and see what others are doing and do the same. It's escalating and won't stop. It doesn't seem to bother shareholders. CM: It does madden them, but what can they do? WEB: Well, institutional shareholders could do something. We've yet to hire a consultant and we've never lost a key executive. [later] WEB: We look for a great castle and a great knight to protect it. How much does the knight get paid? We try to pay fairly. No one wants to be in the lower half, so the median rises. Compensation committees meet once a year or more often. It's a fact of life and will continue? I don't think it's the money as much as the ego -- they don't want someone else making more. I've been on 19 boards besides Berkshire subsidiaries. But I've only been on one compensation committee -- at Salomon. You can only belch so many times at the dinner table and get invited back. CM: I think we can confidently be sure that [this trend toward sky-high executive compensation] will get worse and that it's bad for Berkshire. But with our culture being so different, we do attract some of these wonderful old-fashioned businesses. On the State of the Market: WEB: It's amazing what you'll see on the markets. We've seen companies valued at tens of billions of dollars that are worth nothing. The trick is to occasionally take advantage of wild things happening. We don't see any cases of dramatic undervaluation in any areas. There's a lot of money sloshing around. We'd love to find companies trading for half their intrinsic value, but we're not seeing them. CM: This is a very unusual period. WEB: Right now you're seeing companies valued at $1 billion that couldn't borrow $100 million if they were private. But since they're public, they can borrow easily with scraps of paper [i.e. by issuing more stock]. CM: Zero unemployment, rampant speculation? a very amazing time. WEB: We don't know how it will end. On the Internet and Competition: They were asked about the future of the Buffalo News newspaper in the face of the Internet. WEB: I think the Buffalo News will do as well as the top 50 papers in the U.S., but how well those 50 papers will do is an open question. The Internet democratizes capitalism. The fluidity is incredible, in terms of moving resources around. The newspaper industry has to try a lot of things. It would be crazy to sit on the sidelines. CM: It's in the nature of things that some businesses die. WEB: It's very tough for managers to acknowledge that, and public managers can't always afford to. Competitive advantage is vital. It's more important to deepen it than to increase the profit and loss statement. We like to ask questions such as why has State Farm been so successful. It defied the norms. No stock. It was socialistic. Yet it thrives. There have to be lessons. Look at Mrs. B[lumkin], turning $500 into Nebraska Furniture Mart. [later] WEB: The Internet will change the insurance industry in many ways. I'm not yet sure how, but there's no question it will have an impact. I don't think our float will change. The industry economics net won't change. On balance, for society the Internet is good for consumers, but for capitalists it's a net negative. It's more likely it will improve efficiency of American business and reduce profitability. On Books About Them: WEB: The most representative book on my thinking is what Larry Cunningham put together. [The Essays of Warren Buffett: Lessons for Corporate America, an edited compilation of Buffett's writings.] We've got more than two decades of shareholder letters on the Web. We've said exactly what we do in our own words. People are looking for mechanistic systems [a likely reference to the Buffettology book] -- but this is all we do. On Mistakes: WEB: The original purchase of the Berkshire Hathaway textile mill was a terrible mistake -- and mine alone. It was a cigar butt investment -- free, with a puff left. CM: You can't avoid the wrong decisions in life, but if you recognize them and do something about them, you can wring some lemonade out of them. We've scrambled our way out of many mistakes. On Gold: WEB: I don't believe in investing in gold -- that's dug up out of the ground in South Africa and put back in the ground at Fort Knox. On Globalism: WEB: We talk about a global society, but consider that Dr. Pepper has a much bigger market share in Dallas than Boston. How can we have such discrepancies? Some things travel well and some don't. It's not always easy to predict. Razors travel well. Soda generally does. Chocolate bars don't. Cadbury sells well in the U.K., and Hershey sells well in the U.S., but not vice versa. We sell a lot of See's candy in California and we ought to be able to sell at least some in New York, but we've not yet figured out how -- and we've tried. We will continue to look at things internationally. We may be more likely to find a big opportunity internationally. We missed a good opportunity in Japan recently. Related Links: Selena's Annual Meeting Travelogue Resources For Learning More Whitney Tilson's Notes From the Meeting The Berkshire Hathaway Meeting (5/99) Warren's World -- The man and his company Berkshire Hathaway Message Board Berkshire Hathaway's Website