Mr. Buffett and Mr. Munger have just held forth in Omaha again. Thank God. I love these guys. I didn't get to go because I was hung up in a negotiation but in between contract readings and phone calls I read the notes as they posted. Its all good stuff and worth the read through. I have unashamedly stolen these posted notes from the Wall Street Journal and some other website and filted out the noise. Here's Warren and Charlie:
Question is about business school. It is "astounding" how schools have focused on "one fad after another in finance theory, usually very mathematically based," Mr. Buffett says in a comment that offers at every meeting and in many annual letters to shareholders. "Investing is not really that complicated," he adds.
"I don't think any solar or wind would be working without subsidies," says Mr. Buffett. Just because the wind isn't blowing "doesn't mean everybody wants to have their lights off," he adds, pointing to one of windpower's minuses, economics aside.
Question on sustainable energy policy. Mr. Buffett says MidAmerican Energy has been doing wind power for some time, and that the federal subsidy "makes wind projects work" where they otherwise wouldn't. "If there had been no subsidy, I don't think any of our projects would make sense," he says.
"The future is subsidizing oil and natural gas production right now, in a sense," Mr. Buffett adds, suggesting we aren't paying the full freight on fossil fuel use now given its side effects (pollution for one) and the high cost of replacement methods.
A 26-year-old who works in private equity asks what Mr. Buffett would do in his shoes if he were to start over. Mr. Buffett says he would do what he did in life but would have done it faster. Develop an audited record of performance as early as possible, he says.
Question is on Berkshire's hunt for a big acquisition to put its massive cash hoard to work. Mr. Buffett says the company, which had $33.5 billion in cash on hand at year-end, prefers not to go below $20 billion in cash on hand -- at that level he "starts squirming a little bit." But cash is going up as insurance premiums and other sources of flow come in, and he would gladly do "the right $20 billion deal."
Mr. Buffett says patience is the key virtue in investing, and that those who understand the market is a tool rather than an adviser will do well over time. The market is often wrong for a variety of reasons, he says, and those who bear that in mind can take advantage of the market's pluses, such as transparent prices and liquidity.
Carol Loomis presents a question from a shareholder who asks why Berkshire shares have been undervalued for so long. Mr. Buffett responds by taking an even longer view.
“We’ve run Berkshire for 47 years. There have been four or five times where we thought it was significantly undervalued,” he says. “The beauty of stocks is they do sell for silly prices from time to time. That’s how Charlie and I have gotten rich.”
Then he turns to his usual speech about investing in stocks, giving a shout-out to Ben Graham’s idea of Mr. Market, which he says investors should think of as their partner.
The beauty of having Mr. Market as a partner, he says, is that sometimes Mr. Market behaves like “a psychotic drunk.”
Valuing businesses based on Ebitda, a cash flow measure, "is nonsense," Mr. Buffett says. "I don't even like hearing the word," Mr. Munger adds.
I don't own your stock for the glamour, a questioner says, pointing to the outperfomance of gold in recent years. Mr. Buffett replies that Berkshire Hathaway stock has vastly outpaced gold, as have common stocks as a group, over longer time periods. He urges people not to give in to the urge to "caress" gold even though it has gone up for the past 12 years.
Asked why he bought J.P. Morgan Chase stock for his personal account but not for Berkshire Hathaway, Mr. Buffett explains that he prefers Wells Fargo -- of which the company owns 400 million shares worth $11 billion or so at year-end -- better. "My best ideas are all in Berkshire," he says. "That I can promise you." "I know Wells better and it's easier to understand," he says, adding that he bought Wells Fargo in the first quarter.
Questioner asks if Berkshire shouldn't be more aggressively buying back shares, paying dividends and using its richer stock for acquisitions. A run-up in the stock "is likely to occur in the future," Mr. Buffett says. But he doesn't "think the dividend would be a plus ... and might be just the opposite," unless the company finds it can't invest the funds profitably. "What you've suggested is a very conventional approach," Mr. Munger tells the questioner, making it clear that he views that approach as nonsensical.
"What you've suggested is a very conventional approach," Mr. Munger tells the questioner, making it clear that he views that approach as nonsensical.
That said, if all Mr. Buffett did was invest his own money, he'd own some Wells Fargo -- a simpler investment story that's more easily understandable -- but also JPMorgan.
“There could be circumstances under which we would buy a lot of stock but I don’t think they are highly likely,” he says. One thing the buyback price indicates, according to Mr. Buffett: “I do think it signals to a lot of people that don’t have a lot to lose” by investing at the current price.
Asked about investment managers Todd Combs and Ted Weschler, Mr. Buffett says they are "perfect" for Berkshire. Each makes $1 million in annual salary plus 10% of the sum by which their portfolios beat the S&P 500, on a three-year rolling basis. Each one gets paid 80% based on their performance and 20% on each other's. "I don't think you can have a better structure," Mr. Buffett says, likening it to the one he used to pay Geico's Lou Simpson, who recently retired after several decades of investing for the auto insurer. Each has $2.75 billion under management and little oversight from Mr. Buffett, he says, adding that when they buy a new stock he likes to know what stock it is.
Question on investing fads. "We try to stay away from things we don't understand," Mr. Buffett says, saying he needs to have "some notion" of what a business' earning power will be in five or 10 years. "You end up looking at a pretty small universe" when you rule out businesses that you don't understand, he adds.
Again, it comes down to the simplicity of the business and the investing story. Mr. Buffett says that "the chance of being way wrong about I.B.M. are probably less than being way wrong in Apple or Google."
The chances on being "way wrong" in IBM are "probably less" than the chances of being way wrong on Apple Inc., says Mr. Buffett. "We wouldn't have predicted" what happened at Apple, he said, and he didn't buy the stock -- which has been one of the market's strongest performers -- because he couldn't "get to a level of conviction" about the value of the business.
At the low current rates, "I would totally avoid buying" government bonds other than short-term bills, Mr. Buffett says.