Nuggets gleaned from 2016 Berkshire Hathaway’s Annual Report and 2017 Annual Shareholder’s Meeting, Omaha, Nebraska.

Q&A Response by Warren Buffett (86) and Charlie Munger (94) of Berkshire Hathaway at the Annual Shareholder’s Meeting (those who think they are too old, think again!). BH’s market capitalization is $406B.

1. Berkshire Hathaway (BH)’s largest holding is Wells Fargo. Did the decentralized structure of WFC give autonomy to the senior management of its subsidiaries? It is very important to incentivize correctly. Incentivizing cross-selling brought down its reputation and it is a mistake says Buffett. At BH, principles and behavior are enforced rather than rules to preserve the reputation of BH. Buffett recalls Solomon incident where the CEO and the senior management did not act in a timely fashion that brought down Solomon when bad behavior happened
2. Will the autonomous vehicles hurt BH business? Yes, it will affect the Property and Casualty business in terms of premium received (less float), if less risk is perceived. If autonomous trucks take the high ways, the railroad business can be affected
3. Ted Williams (baseball), said that he would wait for the “fat” pitch for the big hit. Buffett says that BH culture is the same way that BH would wait until the competitively advantageous business (the one with a moat) shows up for acquisition. He recalls See’s Candy that was acquired in the year 1972, and ever since it turned out to be extremely profitable. On the lighter side, Buffett said that the guy who sold the business was more interested in girls and grapes than managing the business, that he sold the business when Charlie talked to him about girls and grapes for about an hour! You go to your wife or your girl friend, hope fully they are the same person, and say, “You know, here is a box of candy honey, I took the low-bid.” It doesn’t work very well. We made a judgment about See’s candy that it is something special, says Buffett
4. Asked about the largest holdings that BH has, namely AMEX, WFC (Wells Fargo), Coca-Cola (KO), United Airlines (UAL), Buffett said that he would watch the castle (oldest companies), the moat (metaphor for withstanding adversities and competition) and the knight standing guard, reviewing everyday. He recalls National Indemnity that was bought early on for $8M that turned out to be extremely profitable over the years
5. Talking about the “Power of the Brand,” Charlie recalls the See’s Candy acquisition. On the lighter side, he reminded us about the rules of fishing. Rule 1. Fish where the fishes are, Rule 2. Never forget rule 1
6. Buffett and Charlie admitted they are not tech savvy. Buying AAPL was a deviation from the norm. They also admitted that they failed the shareholders in not considering GOOG, AMZN and WMT (Walmart). Jeff Bezos, AMZN CEO was praised by Buffett for his execution on two fronts, retail and cloud space
7. The question by one of the analyst on why a sizable amount of shareholders money was invested in the four major airlines, instead of say FEDEX or UPS in which BH has smaller amounts invested was answered as follows: No doubt, the airline industry is a fiercely competitive industry. There were a lot of airline companies that went bankrupt over the past several years. Example, USAir, that went twice. The four left standing, not counting the small ones like Spirit or Jet Blue, have 80% capacity passenger-miles. The unions have gotten better. Five or ten years from now, and there is a very good chance passenger-miles capacity will have to increase and therefore the revenue. Even if the market cap remains unchanged over the next 5 or 10 years, due to stock buy-back (airline companies have a habit of buying back their own stock?), the value of the stock will have to go up. Therefore, it is a good investment than FEDEX or UPS. It has nothing to do with investing in railroads
8. Intrinsic Value: Its the cash to be generated from now to judgment day discounted by the average interest rate over that same period. If we go back to 2007 from now, the intrinsic value of BH shares grew by about 10%. Going forward it is going to be difficult because of the prevailing interest rate structure. The rational number would be 10%. It is better to be rational than brilliant in coming up with the interest rate because it is dangerous says Charlie
9. Capital light companies vs. capital intensive companies: BH has five companies that are capital light adding up to $2.1T in market cap. BNSF is a heavy capital intensive investment. BH is always looking for capital light companies to buy but they come around not so often
10. BH management style is benefit to the world at large. The philosophy of “delegation up to the point of abjugation” works very well at BH as demonstrated by GEICO. Hands of management delivers better value to the world than otherwise
11. Proven Capital Allocation is very important at BH. Some people are wired that way, money minded and these are the people BH seeks for managing money, large sums of it
12. Stock options are a cost and compensation consultants are a liability, meaning they are unwanted cost to the company
13. Hedge funds perform no better than the S&P 500 index fund. So an investor is better off investing for himself in an index fund (Vanguard 500 Index Fund) than lose money on high fees to hedge fund managers! Buffett actually challenged the fund mangers on this and won on record (see the annual report for the numbers)
14. BH culture is share holder friendly and employee friendly unlike leveraged buyout private equity companies that fire people upon acquisition of companies. However, for productivity reasons, reduction in work force is sought when it becomes inevitable, like when artificial intelligence and robots are used
15. Healthcare: Couple of decades ago, corporate taxes were 4% of the GDP and healthcare costs were 2% of the GDP. Now, they are 5% and 17% respectively! $3T+ expense on healthcare! Its a tapeworm on American competitiveness. Healthcare is out of whack with the rest of the world as well. The political parties hate each other so much, that neither of them can think rationally when it comes to healthcare
16. EBITDA: earnings before interest, taxes, depreciation and amortization : Buffett says it is a reverse float. In float, we get the money first and pay later, in EBITDA, we pay first and get the money later. Depreciation is an actual expense. GAAP accounting practice using EDITDA is a mass delusion in pernicious ways, says Buffett. That is an understatement of the horror on the subject says Charlie
17. Buffett’s Favorites: Cherry Coke (12 Oz can), Dairy Queen Vanilla-Orange bars, DQ Cheese Cake, DQ Triple Truffle Blizzard, Peanut Brittle, Brooks running shoes, Diet Coke (Charlie Munger’s)

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