Warren Buffet makes some chilling comments at Berkshire Hathway's annual meeting on Sunday!!
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Berkshire Wrap-Up: Buffett Makes a Hero's Exit
By Christopher Edmonds
Special to TheStreet.com
05/06/2002 10:32 AM EDT
OMAHA, Neb. -- Like parishioners after Sunday services, Berkshire Hathaway (BRK.A:NYSE - news - commentary - research - analysis) shareholders left the annual meeting Sunday with renewed faith in the Warren Buffett way.
For many, Buffett is an investing deity. "He represents a role model," said Neil Murdoch, a Toronto portfolio manager attending his seventh meeting. "He rekindles the passion for value investing. We try to follow him as a role model in everything we do as investors."
Indeed, Buffett and his partner, Berkshire Vice-Chairman Charlie Munger, are among the most idolized men in finance. "People look to him for direction, for inspiration in investing and in life," said Andy Kilpatrick, a stockbroker and author of Of Permanent Value: The Story of Warren Buffett.
Yet Buffett isn't as worried about what people think of him as he is about making sure that shareholders manage their expectations of Berkshire's performance.
"The big fear is that expectations get too high about what can happen at Berkshire," Buffett said. But he added that he thinks the annual meeting continues to serve a valuable purpose for Berkshire shareholders. "They come to learn," he explained, "but they also seem to have fun."
Growing the Stable
In recent years, Berkshire's involvement in equity markets and Buffett's interest in talking about the stocks have slowly waned. Instead, Buffett and Munger seem quite content to build Berkshire's stable of operating companies -- from Acme Bricks to See's Candy -- and a wide variety of insurance companies.
Although the Sept. 11 attacks had a profound impact on Berkshire's insurance business, Buffett predicted investors would see "terrific results" from Berkshire companies like General Re and GEICO in upcoming quarters.
Buffett and Munger suggested the focus on operating business serves shareholders well. "I don't think this is a great period for us as common stock investors," said Munger. "But it's proven to be a pretty good market to buy business, and I regard that as a miracle."
But if you're looking for a sign that Buffett thinks it's time to jump back into the market, don't hold your breath. If the lack of market talk at this year's annual meeting is any indication, Buffett's public interest in the markets and their direction will keep ebbing.
This transition from holding marketable securities to buying operating companies partly stems from Buffett's desire to have more control over his holdings. It's also a practical decision based on Berkshire's incredible growth, making positions in common stocks much less meaningful. "They either have to be very big companies, or we have to buy a lot of them to move the needle at Berkshire," Buffett said of the company's securities purchases.
Earnings, Please
Another reason why Buffett and Munger are increasingly focused on acquisitions is the change and complexity in public company accounting. Call them old-fashioned, but they steadfastly eye earnings potential -- earnings per share, plain and simple.
"I would say the number of times we are going to buy into a [company] or [invest] in a company through stocks where people are talking about EBITDA will be about zero," Buffett said. "It just amazes me how widespread the usage of EBITDA has become, and I would say that is a way for people to dress up financial statements for people who are impressed by such a number."
Neither Buffett nor Munger are impressed, however. "If you take the group of people in the world who have talked about EBITDA and those that haven't, there are more frauds in the first group," said Munger.
Buffett notes that companies with "real" earnings, such as Wal-Mart (WMT:NYSE - news - commentary - research - analysis), General Electric (GE:NYSE - news - commentary - research - analysis) and Microsoft (MSFT:Nasdaq - news - commentary - research - analysis), have probably never talked about EBITDA or other alternative forms of profits in their annual reports. "When people talk about those things, they are either trying to con you or trying to con themselves," Buffett quipped.
Munger gave the Securities and Exchange Commission mixed reviews in its policing of public accounting. "It's fair to say that the SEC has slept at the switch for some time," Munger quipped. "But as bureaucracies go, they are better than most. It works fairly well given limited resources."
Sunday Highlights: Terror, SEC and Power
As has become tradition, Buffett met with the press Sunday afternoon, a task he avoids most of the year.
His most chilling comment came when asked about the lingering impact of the Sept. 11 attacks on Berkshire's insurance business. Buffett said he expects the U.S. to be the victim of a nuclear or biological terrorist attack.
"It will happen -- in the next 10 minutes or the next 50 years," Buffett said of an attack that would make the World Trade Center "loss look like nothing."
Buffett said that before Sept. 11, the company wasn't charging appropriate premiums for assuming terrorism risk. Berkshire's insurance subsidiaries have recently started excluding nuclear, chemical and biological events in terrorism insurance, although Buffett says Berkshire will provide nuclear coverage if "we get paid for it."
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Regarding Berkshire's investment in energy through its Mid-American Energy subsidiary, Buffett noted he was pleased with the recent purchase of Williams' (WMB:NYSE - news - commentary - research - analysis) Kern River Pipeline and $275 million in preferred stock from the Tulsa energy concern. "We could act fast," Buffett said of Berkshire's ability to purchase the 900-plus-mile pipeline that moves gas from the Rocky Mountains to West Coast markets.
While Buffett was tight-lipped about additional energy acquisitions, Munger left the door open for significant deals in the future. "I've said we would look at opportunities from time to time, and we just did," Munger noted. "It's a big business, and we'll keep looking."
The Public Utility Holding Company Act has limited Mid-American's investments in additional utilities, although Munger suggested that Berkshire will be flexible if it finds the right deal. "We can find ways to work around that," he said. |
