The Berkshire Hathaway annual meeting is an opportunity for shareholders and analysts to pose questions to Warren Buffett and Charlie Munger. They answered about 60 questions during the five-hour gathering. Thousands come to Omaha every May for the Berkshire Hathaway Annual Shareholders Meeting to hear the insights of Warren Buffett, chairman of Berkshire since 1965, and his longtime business partner Charles Munger, vice chairman of Berkshire. Rather than a transcript, these notes are filtered observations organized to group common themes from responses to related questions. They do not cover every question and answer, but that is available within a fabulous archive of Berkshire’s annual meetings at buffett.cnbc.com. The archive has complete audio/video and transcripts as well as highlights of past meetings from 1994 through the present. The format of the meeting is question and answer. Shareholders and investment analysts pose questions to Buffett and Munger in two 2.5-hour sessions covering about 60 questions. They answer in clear-thinking and entertaining ways that keep shareholders coming back year after year. Berkshire Hathaway is one of the larger holdings in the Brown Advisory Flexible Equity Strategy. Buffett and Munger are significant influences on our investment approach. Members of our investment team have attended these annual meetings for over 30 years. Berkshire Hathaway In the 53 years since Buffett took control, Berkshire Hathaway has grown from a small, competitively challenged New England textile company to one of the largest U.S. companies, with nearly 400,000 employees and an equity market capitalization of $475 billion. Berkshire is the sixth most valuable company in the U.S. after Apple, Amazon, Alphabet (Google), Microsoft and Facebook. Berkshire is extremely decentralized, with just 26 employees at its corporate offices and the rest at about 90 separate operating companies. Berkshire is unusual among public companies. It doesn’t manage for quarter-to-quarter earnings, provide earnings guidance, or have budgets and strategic plans at the parent company, though some of the subsidiaries do. Major capital allocation decisions are centralized with Buffett and a few others, while operating decisions are made at the subsidiary level by the managers of those businesses. Buffett is almost 88 years old and still going strong, though he has prepared for his succession by naming Ajit Jain to oversee insurance and Greg Abel to oversee the noninsurance businesses. The culture of Berkshire, particularly the attitude toward capital allocation, delegation of managerial authority to business units, fiscal conservatism and treating shareholders as business partners, should outlast Buffett. Buffett uses the increase in Berkshire’s share price and shareholders’ equity per share as proxies for its growth in intrinsic value. These have compounded at an amazing pace that is almost twice the 9.7% annual return of the Standard & Poor’s 500® Index since Buffett took control in 1965. Even after becoming a large company, Berkshire has continued to compound its value as fast as the U.S. equity market. In the last 10 years (2008 through 2017), Berkshire’s shareholders’ equity per share and share price grew at 10.5% and 7.7% annually, respectively, compared with 8.5% total return for the S&P 500 Index. Berkshire’s book value growth is after tax, while the S&P Index return is pretax. Given Berkshire’s size, it is no longer a stock that will make you rich, but it is a stock that should keep you rich while still providing a good return. Buffett and Munger celebrate good business and investment practices, the potential for human achievement, high ethics and decency to one’s fellow man. Listening to Buffett and Munger, you get a course in business, investing and decision-making drawn from their combined 182 years of life experience. Though Munger says he is running very hard just to stay in place, age does not appear to have slowed either of their intellects. The course is more about how to think than what to think, but whenever I’ve found myself disagreeing with their thinking, I have benefited from rethinking my views. The meeting also serves to ingrain the culture of Berkshire with shareholders and employees. Readers seeking to know more about their approach are encouraged to study Berkshire’s Owner’s Manual and Buffett’s letters to shareholders, available at www.berkshirehathaway.com; the book Poor Charlie’s Almanack, a collection of speeches and presentations by Munger; and the CNBC Buffett Archive. Berkshire’s largest business is property and casualty insurance, with GEICO being the most recognizable brand among several insurance businesses. Insurance operations in total contributed $60 billion, or about 25% of Berkshire’s $242 billion revenue in 2017. Though insurance produced an unusual underwriting loss in 2017, it provided $114 billion in investable float, which partially funds Berkshire’s $314 billion investment portfolio. Other large or recognized noninsurance businesses within Berkshire are Burlington Northern Railroad, Berkshire Hathaway Energy, Precision Castparts, Fruit of the Loom, Dairy Queen, See’s Candies, Duracell and Clayton Homes. Berkshire’s investment portfolio holds about $186 billion in equities and $118 billion in cash equivalents and bonds as of March 31, 2018. Among the larger equity holdings are Wells Fargo (Berkshire owns 9.9% of the shares outstanding), Kraft Heinz (26.7%), Coca-Cola (9.4%), American Express (17.6%), Bank of America (6.8%) and Apple (4.8%) Bullish on Investing in America Buffett opened the meeting with a discussion of investing illustrated with the details of his very first stock purchase in March 1942. He shared the New York Times headlines from the period showing how badly World War II was going for the U.S., just three months after the attack on Pearl Harbor that brought the U.S. into the war. Buffett, then age 11 and the precocious son of a stockbroker, put his life savings to that point into three shares of Cities Service preferred at $38.25. The stock had traded as high as $84 within the prior year, but by the end of the day, it was down to $37 and later sank to $27. Having seen Cities Service fall to $27, Buffett sold it as soon as it recovered to $41, only to see it climb to $200 in later years. In 1942, Buffett had not yet discovered Benjamin Graham’s teachings about the market existing to serve the intelligent investor rather than guide him. Buffett then stepped back from that personal experience and asked the audience to imagine if they had put $10,000 into U.S. stocks in March 1942, into the then-equivalent of an S&P 500 Index, how much that would be today? After a pause, he revealed the answer is $51 million, the result of $10,000 compounding at 11.9% annually over 76 years. As he explained, you didn’t have to understand accounting, finance, the Federal Reserve or watch the stock market every day; all you had to do was believe in America and that it would rise above its challenges. That compounding is the power of putting your money into the productive assets of businesses within the American system. He noted that the key question for long-term investors in the general market is how American business will do over an investment lifetime. In contrast, Buffett cited gold as the asset people often turn to when they are worried about the future, but gold is an unproductive asset, it just sits there doing nothing. Gold doesn’t pay dividends or interest, and doesn’t adapt and change to new developments and opportunities. If you had put $10,000 into gold in 1941, you would have bought 300 ounces of it. The 300 ounces today would be worth about $400,000. Gold, the unproductive asset, delivered less than 1 cent for every dollar delivered by U.S. stocks, the productive asset! A questioner, noting Buffett’s belief in the U.S. political and economic system, wondered if the divisions among people had grown in the last 50 years and if Buffett had any words of wisdom to help narrow the political divide. Buffett observed that multiple times in his life, people have felt the divisions were greater than ever. Since he bought his first stock, Buffett has lived under 14 presidents—seven Democrats and seven Republicans. One was assassinated, and one had to resign. In addition to World War II, there were the Cuban missile crisis, recessions, financial panic, and war in the streets in the late 1960s over Vietnam and civil rights. Through it all, America has moved ahead in fits and starts. The U.S. will always have disagreements, and some people will feel the world is coming to an end because one party or another is in power, but the system works. In Buffett’s lifetime, GDP per capita has increased sixfold. As a result, everyone in the room lives better than John D. Rockefeller, the richest man in the world when Buffett was born. Buffett would love to be a baby born in the U.S. today. Munger observed that we tend to view our present politicians as much worse than those in the past because we forget just how awful our past politicians were! When you buy a productive asset, you can figure what it is worth based on what it produces. With a nonproductive asset, you are counting on someone else to later pay more for it. A later question on gender equality prompted Buffett to say one of the reasons he is optimistic about the future is the improvement in opportunities for people to rise based on merit rather than gender, race or inheritance. Munger agreed there has been much improvement in that area and expects it to keep getting better. Succession, Decentralization of Management, Deals On the topic of succession, Buffett was asked if he is now semiretired since he had named Greg Abel and Ajit Jain as vice chairmen to oversee the business managers, and Ted Weschler and Todd Combs are helping him with capital allocation and the investment portfolios. Buffett joked that he had been semiretired for years, and that is catching him at his most active. Buffett added that Abel and Jain are smart, energetic, doing a great job and bring a lot to their jobs but not too much because Berkshire’s culture is to delegate the running of its subsidiaries to the individual managers of each subsidiary. Still, there is a lot to oversee. As for capital allocation, Weschler and Combs together manage about $25 billion for Berkshire, so that still leaves $290 billion in other equities, cash and bonds for Buffett. Weschler and Combs do other projects as well and do it all very well. Buffett sometimes copies their ideas. Munger joked that he has observed Buffett for a long time. Mostly he just sits, reads, thinks and occasionally talks to someone—Buffett is very good at doing nothing. A later question was whether his successors would be able to access the same sort of deals that Buffett has been able to get on distressed situations in the past. Buffett replied that the parties on the other side calling for money aren’t going to care much whether it is Buffett or someone else on the line—they need the money. Buffett said he probably could have gotten even better terms than he offered on some of them, but setting the terms is a balancing act between getting a great return for Berkshire and not sowing further panic around the seller. Some transactions are coming through Weschler and Combs already. To a deal-related question, Buffett said there is nothing fundamentally wrong with activist investing or making hostile offers for businesses, but Berkshire doesn’t do it. Buffett and Munger enjoy being liked by the managers of the businesses Berkshire buys. These managers are the people Berkshire is counting on to run these businesses! Munger said he doesn’t envy the people who go around making hostile offers. Imagine doing that after you’re rich already—it’s insane. Another question related to succession was how involved Buffett is in subsidiary decisions, noting that Buffett used to be personally involved in setting prices for See’s Candies. Buffett confirmed that was once the case but has not been for a long while. Buffett speaks often with Ajit Jain about insurance pricing for specialized contracts, but other managers less so. He cited a manager of one of their most successful subsidiaries that he talked with probably three times in 10 years. Asked to provide examples of compensation agreements with subsidiary managers, Buffett said that Berkshire has kept nearly 100% of the managers it wanted to keep over the years. Managers like making their own decisions, doing a good job and getting recognized for it. Compensation is part but not the whole part of keeping them. There isn’t a single precise formula given all the differences in Berkshire’s businesses. Buffett makes all these decisions personally, and Berkshire doesn’t use compensation consultants. Munger interjected, perhaps to cut Buffett off, that it is to Berkshire’s advantage to keep their compensation arrangements private. Buffett then joked that they do publish what their directors are paid (which is practically nothing). When asked what Berkshire will look like in 50 years, Buffett said that he doesn’t know, and he didn’t know 50 years ago what it would look like now. (Berkshire doesn’t do strategic plans.) The people and the world will be different then. He hopes Berkshire will be shareholder oriented—that is, managers treating shareholders as partners, doing with shareholder money exactly what the managers would be doing with their own money and not seeking an edge on the shareholders. Munger, speaking to the younger shareholders in attendance, advised them to keep the faith and suggested they would likely do worse if they trade their Berkshire stock for something else. Questions Related to Investing and Investments Asked about interest rates and investing in bonds given inflation, Federal Reserve actions, and the likelihood of more U.S. Treasury bonds coming to auction, Buffett said he doesn’t know where interest rates are going. No one does, including the Fed, given all the factors involved, but Buffett thinks long-term bonds at current rates are a terrible investment. The Fed says it wants inflation to be 2%, and the long bond yields a little over 3%. That doesn’t deliver much real return, especially if you pay taxes. Munger explained that what the Fed did in lowering interest rates in the recession wasn’t fair to older people with savings accounts, but it had to be done. He has only seen interest rates drop and stay low for so long this one time in his lifetime. Equity investors benefited from low rates driving asset prices up. Buffett said bonds had pretty much been unattractive ever since the 1940s, with the exception of the early 1980s, when they offered a 14% return that you could lock in for 30 years. Every now and then, something strange happens in markets to present opportunities like that. The trick is to be prepared when it happens and take action when it does. Noting Berkshire’s increased investment in Apple, Buffett was asked why he never bought Microsoft, given his close relationship with Bill Gates. Buffett blamed his stupidity in earlier years of getting to know Gates and then later, once Gates had come on Berkshire’s board, Buffett didn’t think it was appropriate, as he worried about appearances. The opportunity for others to think Buffett had gained some inside insight from knowing Gates was too great. (Buffett values his and Berkshire’s reputation highly. He often notes that what can take a lifetime to build can be lost in five minutes of reckless behavior.) Asked to describe a formula approach for how to look for mispriced investments, Buffett replied he can’t give a formula approach because he doesn’t use one. He looks at the facts, and if there isn’t a meaningful difference between the price and the value, he moves on. Munger added that when he looked at Costco at 13 times earnings, it seemed too cheap given its competitive strengths and other advantages. If you want formulas and theories, go to graduate school, and they will give you a lot of formulas that don’t work in practice. Buffet doesn't think either China or the U.S. would dig itself into a real trade war. He thinks we've learned the lessons of the past on those. Elements of U.S. policy will irritate others just as elements of other irritate the U.S. All presidents need to be the educators-in-chief to explain to the people what is happening and why. Observing that Berkshire has made a lot of money investing in low capital-intensive businesses, like See’s Candies, American Express and GEICO, a questioner wondered why Buffett abandoned this approach for more highly capital-intensive businesses, like Burlington Northern Railroad. Buffett answered that he always prefers buying businesses with high returns on investment that require little reinvestment at the right prices, but Berkshire has moved into capital-intensive businesses that are nevertheless good businesses because Berkshire generates more cash than it can reinvest otherwise. It gets a good return despite the capital intensity. Buffett was asked what factors lead him to call cryptocurrency a bubble. In answering, Buffett referenced his earlier discussion of productive versus nonproductive assets. When you buy a productive asset, you can figure what it is worth based on what it produces. With a nonproductive asset, you are counting on someone else to later pay more for it. That can work for a while and sometimes climbs to extraordinary numbers, but it comes to a bad ending. It was tried before with tulip bulbs. On top of nothing being produced, cryptocurrency attracts a lot of charlatans with less-than-stellar character. Buffett also cited checks as an example. Being able to write checks or wire money is a wonderful idea, but it doesn’t make the check itself intrinsically worth a lot of money. Asked for his thoughts, Munger said he likes cryptocurrency even less than Buffett does. He likened professional traders and investment houses jumping into trading crypto to seeing somebody else making a lot of money trading “turds” and deciding you can’t be left out! Buffett was asked for his reassessment of an article he contributed to in 1999 for Fortune magazine predicting lower future investment returns based in part on after-tax corporate profits not staying above 6% of GDP, given that profits had run consistently higher in recent years. Buffett commented that American business in aggregate has become incredibly more profitable in the last 20 years because of the new companies and industries that developed. Many of the newer companies are higher margined and asset light, whereas the older companies are more asset intensive. The margins on the older companies haven’t risen all that much, but he didn’t anticipate the developments in the newer companies in 1999. Munger added that Buffett got the margin prediction wrong then, but he invested correctly and was accurate in his performance prediction for the stock market. That shows how hard it is to make these sort of predictions. Noting Buffett and Munger have been critical of what business schools teach about investing, they were asked if good investing just comes back to chapter 8 of Benjamin Graham’s book The Intelligent Investor, which deals with market fluctuations. Buffett said he went to three different business schools—Wharton, University of Nebraska and Columbia—and he found a teacher or two at each from whom he learned a lot, Ben Graham in particular at Columbia. But business schools strayed from the reality of investing with the efficient market theory about 40 years ago. Buffett credited Munger as being an amazing teacher. Anytime you find someone who challenges you and gives you insights into things you didn’t understand before, it makes you better. Munger added that if you don’t keep learning and revising earlier thoughts with better ones, you will end up like “a one-legged man in an ass-kicking contest.” You have to keep learning; what you formerly knew is never enough. Munger said he often uses that metaphor but asked anyone with a better one to pass it along. (Even at 94, Munger is looking for a better way to express himself!) Investing well doesn’t require a superior IQ or an MBA from a top school. Investing is not super complicated, but does require discipline. A few aspects are very important: innately understanding the lessons of chapter eight in The Intelligent Investor and understanding accounting. It also helps if you have a consumer mindset toward the products of businesses. A consumer mindset helps in seeing the business differences between Coca-Cola and RC Cola, American Express and Diners Club in the early days of credit cards, or See’s Candies and a no-name competitor. Quoting an Elon Musk comment that moats are lame and nice in a quaint, vestigial way, but what matters is the pace of innovation, a shareholder asked Buffett if business moats are still relevant in the face of so much technological change. Buffett explained that he isn’t talking about a literal body of water but the business advantages that protect the profitability of an economic castle from competitive invaders. Moats come in many forms, but competitors are always trying to cross them. The pace of attack has accelerated, and some moats have become more susceptible to attack, but the idea is to build and maintain strong defenses to protect the economic castle. He cited being the low-cost provider in an essential service like GEICO or the brand recognition of See’s Candies as effective moats. Munger answered a question on the use of machine intelligence in capital allocation, saying machines can do some things better than humans, like the game of Go, but there is a lot of hype in the field. Though machine intelligence will have business uses, individual investors should not expect to gain much from it in their investing. In capital allocation, you’re trying to get the best of what’s worth getting over time. People try to reduce investing to a formula that a machine can apply. He calls this physics envy, but the world isn’t like physics outside of physics itself. Master the general ideas and don’t get caught up in false precision. Referencing Buffett’s admonition that energy devoted to patching a chronically leaking boat is often better spent changing boats, a questioner asked if Wells Fargo is a chronic leaker and if Buffett would switch. Buffett explained that corporations make mistakes, and sometimes those mistakes create investment opportunities. He cited Berkshire’s original investment in GEICO in the 1970s and the Buffett Partnership’s investment in American Express in the 1960s as examples of bargains created by fixable business mistakes. It’s important for companies to have systems to alert them to wrong behavior and to fix them when they become aware of them. Wells Fargo’s incentives encouraged some bad behavior, but then Wells compounded the problem by not immediately addressing it. Buffett likes Tim Sloan, who became CEO at Wells after the sales incentive revelations in 2016, and his efforts to fix those past mistakes. He felt Wells would be a well-run bank going forward, and Munger agreed, saying Wells was likely to be the best-behaved bank in the future. Stock Buybacks Asked whether Apple should be buying back $100 billion of its stock or making acquisitions with the money, Buffett said he was delighted with buybacks as long as the company is doing it below its intrinsic value. With Apple’s ongoing buyback, Berkshire’s nearly 5% stake in it could grow to 6% or 7% in a few years without Berkshire investing another dime. He doubted Apple could create the same value with $100 billion of acquisitions, as the prices wouldn’t be remotely as sensible for acquired companies as for Apple’s own shares, plus Apple knows its own business better than any it might buy. Buffett noted that the math of the buyback would get even better if Apple’s shares went down (but not its intrinsic value), something people often misunderstand. Munger added that most companies don’t create shareholder value with acquisitions, so buybacks can be advantageous, but they don’t approve of buybacks that are just trying to hold a share price up or that are at prices above intrinsic value. To a question about the growth in Berkshire’s cash balances, Buffett explained that if cash grew beyond what they thought they could invest well, they would look for the most tax-efficient way to return it to shareholders. A buyback would be more tax efficient than a dividend, but they wouldn’t do a buyback above intrinsic value, as that would hurt continuing shareholders while paying a premium to those leaving. Trade Wars and China Asked if there is a win-win outcome for both China and the U.S. in trade and other rivalries, Buffett explained that China and the U.S. are going to be the superpowers of the world economically and otherwise for a long time to come. We have common interests, but there will be tension too. Trade is a win-win situation for both sides, but both sides may do some mildly foolish things also. But the benefits of trade are too big and obvious for two intelligent countries to do something extremely foolish. The world has done very well with trade. The problem happens when one side wants to win a little too much and then tensions arise. Munger added that both countries have been advancing, with China advancing more quickly because it started from a much lower base. Of course, a country like China, mired in poverty, that adopts the technology of the world and has a high savings rate is going to advance faster than a far more developed economy. He is optimistic that the two countries will be smart enough to realize the last thing they should do is have ill will for the other. Asked how trade tariffs affect Berkshire, Buffett cited the steel it uses in manufacturing as a cost that has risen. He continued that he didn’t think either China or the U.S. would dig itself into a real trade war. He thinks we’ve learned the lessons of the past on those. Elements of U.S. policy will irritate others just as elements of others irritate the U.S., but it will settle down in the end. Buffett thinks the U.S. president—every president—needs to be an educator-in-chief, to explain to the people what is happening and why. Trade is hard to explain because the benefits of it, though large in aggregate, are small individually and hard to see. For example, if the U.S. had a rule that only TV sets made here could be sold here, we’d pay a lot more for TVs, but without that rule, it’s hard to see clearly how much we are benefiting from importing those made elsewhere. However, the costs of trade are easier to see individually when it’s your factory or job that goes away. The good part of trade is shared collectively, but the bad part is focused on smaller groups. Some of those hurt can move on to other things, but many can’t, and society has to take care of those who can’t. 2019 Annual Shareholder Meeting The next meeting will occur on Saturday, May 4, 2019, in Omaha, Nebraska. Omaha is a nice weekend getaway with a number of attractions in addition to the annual meeting events. Make your plans early if you would like to attend, as hotels and planes fill up. Alternatively, the meeting will be webcast. The views expressed are those of Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested. The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities or asset classes mentioned. It should not be assumed that investments in such securities or asset classes have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. 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