Berkshire Hathaway (BRK-A) Annual Meeting Notes

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Shareholder question was something to the effect of: “Why isn’t Berkshire Hathaway a Triple AAA credit rating?”

Munger: I’m going to take that one. The rating agencies are wrong and set in their ways.

 
Buffett:  We don’t fit their models very well. I mean, we don’t look like anything exactly, they see otherwise. I’ll say this though. When they come in the door to our office I always say, “Let’s talk quadruple A.” I believe in starting the negotiation from that angle. It never seems to get me any place.
 
“If Donald Trump becomes the President of the United States and recognising your public criticism of him and your public support for Hillary Clinton, what specific risks, regulatory, policy, or otherwise do you foresee for Berkshire?”
 
Buffett: Government is a very, big factor in our business and in all businesses. There’s the very broad policies that affect practically everybody and sometimes there can be some pretty, specific policies but I will predict that if either Donald Trump or Hillary Clinton becomes president, and one of them is very likely to be. I think Berkshire will continue to do fine.  We’ve operated under price controls. We’ve had 52% federal taxes applied to our earnings for many years. I mean they were higher at other times but we’ve had regulations come along and in the end business in this country has done extraordinarily well for a couple of hundred years, and it has adapted to the society and the society has adapted to business. This is a remarkably attractive place, in which to conduct a business. Imagine in a world of practically zero interest rates American business is earning terrific returns on tangible equity. Those are the assets that were actually employed in the business. The system works very well, in terms of aggregate output. In terms of distribution of that output sometimes, it can fall very short, in my view, but it will keep working. You don’t have to worry about that. Twenty years from now there’ll be far more output per capita in the United States in real terms, than there is now. In 50 years, it will be far more and the quality will get better and no presidential candidate or president is going to end that. They can shape it in ways that are good or bad but they can’t end it. 
 
 
 
Shareholder question was: “I think the 3G Capital team are truly skilled operators but how can you tell when an organization takes cost cutting too far?”  
 
Buffett: “Well, the answer is yes that sometimes you can cut costs that are a mistake to cut; and sometimes you can keep costs that are a mistake to keep. Tom Murphy had the best approach. He never hired a person they didn’t need, and therefore they never had layoffs. You might say that at headquarters at Berkshire, we followed a similar approach. We just don’t take on anybody. Now, I think it is totally crazy when companies are in a cyclical business – you may have to cut a workforce because there aren’t as many carloads of freight moving or something like that, so you cut back on crane crew and all that. The idea that you give up your staff or whatever it maybe an economist or something like that because business has slowed down, if you don’t need them now then you didn’t need them in the first place. People that are there just because somebody started a department and they hired more people and so on, I would argue that since we’ve forgotten to insult this group so far, I would suggest that happens in investor relations departments perhaps, or something of the sort. You get a department going and they are always going to want to expand.  The ideal method is not to do it in the first place but there are all kinds of American companies that are loaded with people that aren’t really doing anything or doing the wrong thing, and if you cut that out it should not really have any significant effect on volume. On the other hand if you cut out the wrong things, it can have a big effect. It can be done in dumb or a smart way. My impression with everything I’ve seen, and I’ve seen a fair amount so far, is that 3G, in terms of the cost cuts that they’ve made, they’ve been extremely intelligent about it and have not done things that will cut volume. It is true that in the package goods industry, volume trends for everybody, whether there are fat or lean in their operation, volume trends are not good.”
 
 
 
Shareholder question was: “When interest rates go from zero to negative, how does that affect the way you value a company or stock?”  
 
Buffett: Going from zero to minus a half is really, no different from going from four to three and a half. It has a different feel to it obviously, if you have to pay a half a point to somebody. If you have your yield or your base rate reduced by half a point, it’s of some significance but it isn’t dramatic. What’s dramatic is interest rates being where they are, generally. I mean whether it’s zero plus a quarter or minus a quarter, or plus a half or minus a half, we’re dealing with a situation that’s essentially very close to zero interest rates and we  have been for a long time, longer than I would have anticipated. The nature of it is that you’ll pay more for a business when interest rates are zero, than if they were like 15 percent when Volker was around and you can take that up and down the line.  We don’t get too exact about it because it isn’t that exact to science. But very cheap money makes me pay a little more for businesses than when money was at what we previously thought was normal rates, and very tight money would cause me to pay somewhat less. We had a rule for 2600 years that Aesop lived around 600BC but he didn’t happen to know what was BC – he can’t know everything – and it was that a bird in the hand is worth two in the bush. But a bird in the hand now is worth about nine-tenths of a bird in the bush in Europe. It depends on how far out of the bush it is, but it keeps getting a little less as you go along. These are very unusual times. If you ask me whether I paid a little more for Precision Castparts because interest rates were zero, than if they had been six percent. The answer is yes. I try not to pay too much more but it has an effect. If interest rates continue at this rate for a long time, if people ever really start thinking this is normal that will have an enormous effect on asset values. It already has had some effect.
 
 
 
Shareholder question was: “The moat with American Express seems to be shrinking, under what circumstances would you sell American Express?” 
 
Buffett: I personally feel okay about American Express. I’m happy to own it but their position has been under attack for decades, more intensively lately and it will continue to be under attack. It’s too big a business and it’s too interesting a business and too attractive a business for people to ignore it and it plays to the talents of some very smart people. I mean it’s a natural that a great many organisations that are really quite able think about it. And it’s big.
 
Munger: A lot of great businesses aren’t quite so great as they used to be. The package goods business for the Procter & Gambles and so forth, of the world, the General Mills. They are all weaker than they used to be at their peak. The auto companies, oh my God. When I think the power of General Motors, when I was young, and what happened. They wiped out all the shareholders. I would no more have predicted that. When I was young, General Motors loomed over the economy like a colossus. It looked totally invincible. Torrents of cash and torrents of everything.
 
 
Shareholder question was: How do you feel about the real estate markets?”
 
Buffett: It’s not as attractive as it was in 2012. We’re not better at predicting real estate markets than we are stock markets or interest rate markets but there’s certainly – and it’s driven to some extent by these low interest rates – there is certainly properties that are being sold at very low cap-rates that strike me as having more potential for loss than gain. Again, if you can borrow money for very little and you think you’re getting it at a very, safe asset, at 100 bases points or 150 bases points higher, there’s a great temptation to do it. I think it’s a mistake to do that but I could be wrong. I don’t see a nationwide bubble in residential real estate now, at all. I think in a place like Omaha and most of the country you are not paying bubble prices for residential real estate. But it’s quite different than it was in 2012, and I don’t think the next time around the problem is going to be a real estate bubble. I think that it certainly was the cause, in a very large part of what happened in 2008 and 2009, but I don’t think it will be a replica of that.  
 
 
Shareholder question was: Have you ever calculated how much higher operating earnings on average would be if Berkshire separated out plant closing costs, product line exits, severance pay?”
 

Munger: Let me take that one. That’s a question like asking, “Why don’t you kill your mother to get the insurance money?” We don’t do it. We’re not interested in manipulating those numbers. We haven’t had a restructuring charge ever, and I don’t think we’re about to start.

Buffett: We don’t do that. The numbers would not be huge. There could be a year, I suppose when they might be for some reason, but there are more conservatively stated at most companies and I think they have higher quality, but I pointed out also that I think our depreciation expense at the railroad, which is standard, and which all the other railroads use, is inadequate as a measure of true, operating earnings.

 

Shareholder question was: “Portfolio managers Todd Combs and Ted Weschler have now been at Berkshire for several years – what have been their biggest hits and failures, specifically? What are the biggest differences between you and them?”

Buffett: Each has a $9bn portfolio and one of them has, perhaps seven or eight positions and the other one has maybe 13 or 14. They have a very, similar approach to investing. They’ve both been enormously helpful in doing several things, including important things, for which they don’t get paid a dime and which they’re just as happy working on as working on the things as they are when they’re working on things that do pay off for them financially. They’ve got perfect cultural fits for Berkshire. They’re smart at what they do and they’re a big addition to Berkshire.

 

Shareholder question was: “During this year, Berkshire invested in Phillips 66, Kinder Morgan and even PCP has revenues associated with the oil and gas industries. Is Berkshire making a statement about the long-term outlook for oil?”

Buffett: No, we haven’t the faintest idea what the long-term price of oil will be. You can buy oil, as you know, for delivery a year from now or two years from now.  We are not two fellows who think we can predict the price of soya beans or corn or oil or anything else. Some of the securities you mentioned were bought by Todd Combsor Ted Weschler and one was bought by me. But neither they nor I bought those based on commodity price predictions. We don’t know how to do it and we’re thinking about other things when we make those decisions.