The Berkshire Archive - Part 2

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Once a year, investors from all over the world flock to Omaha, Nebraska, for one primary reason: to learn. And the crowd that gathers ranges from beginners who are just just starting out to many of the Investment Masters themselves.

Prior to this year's meeting I was fortunate to chat to Chuck Akre, a true Investment Master. Chuck told me he'd been attending the meetings for over 30 years.

"The reason I come to Omaha is to learn. Warren and Charlie remind us to keep it simple. It's unusual for a CEO to sit for six hours and answer questions. It's unique; it will never be repeated."  Chuck Akre

The recently published book, 'The Warren Buffett Shareholder - Stories from inside the Berkshire Hathaway Annual Meeting', contains lots of anecdotes from great investors and business people on their annual pilgrimage to Omaha.

"Over the last 20 Annual Meetings, I have learned so much about investing from Buffett and Munger, who are truly gifted teachers, able to make even complex topics understandable. There is no doubt in my mind I wouldn't have achieved anything close to the success I did  had I not attended every Annual Meeting and absorbed their investing lessons." Whitney Tilson

"Going to the 1999 Berkshire meeting has been the best investment of my life... Nothing is more important in our business than going to the Meeting." Francois Rochon, Giverny Capital

"As a Berkshire shareholder since 1982, annual visits to Omaha have assume religious proportions... I have come to learn from Messrs. Buffett and Munger's official remarks as well as from scores of Berkshire's operating company CEO's and other executives." Thomas Russo

"The Meetings remain as valuable as a university education." Daniel Pecaut, Pecaut & Company

"The Berkshire Meeting provides a unique opportunity in corporate America for managers and shareholders to learn from each other." Bruce N Whitman, Chairman & CEO Flight Safety International

"There is nothing like this weekend in the world and I hope it will continue for many years to come." Olza (Tony) Nicely, Chairman & CEO, GEICO

The Annual Meeting is an integral part of Berkshire's culture. While it provides a platform for Warren and Charlie to get across all the information and answer shareholder questions, it also helps them find like minded-investors.

"I really think if we spend six hours here answering your questions about the business and we do a half-way decent job of writing the annual report, we should get across the essential information." Warren Buffett

"We’re not trying to talk to an audience that is trying to get some special insight into what next quarter or next year is going to look like. We’re really looking for owners who join us in what we regard as kind of a lifelong investment." Warren Buffett

"Warren and Charlie understand that companies, over time, largely get the shareholders they deserve, and by communicating as honestly and clearly as they do at the Annual Meeting, they contribute to Berkshire's attracting an extraordinary group of shareholders." Robert E Denham, Partner Munger Tolles & Olson, LLP.

The book is full of anecdotes and quotes that are both enjoyable and enlightening. Its clear to see that many Investment Masters journey to Omaha regularly and have both enjoyed and profited from the learning. And with the recent release of the annual Berkshire meeting videos, a veritable gold mine of investing nuggets, that wisdom is available to all of us.

In my last post I outlined a number of important and enlightening themes that had been conveyed in those videos. As a follow on from Part One I've put together a further collection of themes that I enjoyed, and those of which expanded upon or challenged my own way of thinking.

Teaching Finance

"If I were teaching a course on investments, there would be simply one valuation study after another with the students trying to identify the key variables in that particular business, and evaluating how predictable they were first because that is the first step." Warren Buffett

More Than One Way To Succeed

I don’t think there’s only one way to succeed in life, and our successors, in due time, may be different in many ways. And they may do better.” Charlie Munger

  Source: CNBC Warren Buffett Archive

Source: CNBC Warren Buffett Archive

Understand Human Nature

“The better you understand human nature and are able to distinguish between different types of individuals, the better the investor you are going to be.” Warren Buffett

Make you Own Judgement

“You really shouldn’t ask other people their opinion about stocks. Let’s say I give an opinion on the XYZ company. I could change my opinion a week from now and [you won’t know]. You ought to have your own reasons for buying a stock. If you don’t you're going to get shaken out by some event, the stock market goes down a lot or you read some negative comments. You should make you own judgements in stocks.” Warren Buffett

Use Filters

"We do have filters, and sometimes those filters are very irritating to people who check in with us about businesses, because we really can say in ten seconds or so “no” to 90 percent-plus of all the things that come in, simply because we have these filters. We have some filters in regard to people, too."Warren Buffett

“[Our] filters haven’t changed much over the years.” Warren Buffett

"We have a bunch of filters we’ve developed in our minds over time. We don’t say they’re perfect filters. We don’t say that those filters don’t occasionally leave things out that should get through. But they’re very — they’re efficient." Warren Buffett

Book Value Is Not A Consideration

“We’ve tried to put in the annual report pretty much how we approach securities. And book value is not a consideration — virtually not a consideration at all.” Warren Buffett

High Price To Book May Be Better

"If anything, we are less likely to look at something that sells at a low relationship to book than something that sells at a high relationship to book, because the chances are we’re looking at a poor business in the first case and a good business in the second case.” Warren Buffett

Stay Away From Low Return On Equity

"We like to think when we buy a stock we’re going to own it for a very long time, and therefore we have to stay away from businesses that have low returns on equity." Warren Buffett

"If you have a business that’s earning 5 or 6 percent on equity and you hold it for a long time, you are not going to do well in investing. Even if you buy it cheap to start with." Warren Buffett

Price And Value 

"We don’t pay any attention to beta or any of that sort of thing. It just doesn’t mean anything to us. We’re only interested in price and value. And that’s what we’re focusing on all the time, and any kind of market movements or anything don’t mean anything." Warren Buffett

Think Of Value Not Price

“I think it’s almost impossible if you’re to do well in equities over a period of time if you go to bed every night thinking about the price of them. I mean, Charlie and I, we think about the value of them.”  Warren Buffett

Market Won't Do What You Want

“I’d say it’s in the nature of things that the market is not going to do exactly what you want when you want it.” Charlie Munger

Buffett Dropped Technical Indicators

"We don’t think anything that relates either to volume, price action, relative strength, any of that sort of thing — and bear in mind, when I was in my teens I used to eat that stuff up. I mean, I was making calculations based on it all the time, and kept charts on it, even wrote an article or two on it. But it just — it just has no place in the operation now." Warren Buffett

"The chart of the price action doesn’t mean a thing to us, although it may catch our eye, just in terms of businesses that have done very well over time. But we — price action has nothing to do with any decision we make. Price itself is all-important, but whether a stock has gone up or down, or what the volume is, or any of that sort of thing, that is — as far as we’re concerned, you know, those are chicken tracks, and we pay no attention to them.” Warren Buffett

Look At Risk As A Go/No Go Valve

"We look at riskiness, essentially, as being sort of a go/no-go valve in terms of looking at the future businesses. In other words, if we think we simply don’t know what’s going to happen in the future, that doesn’t mean it’s necessarily risky, it just means we don’t know. It means it’s risky for us. It might not be risky for someone else who understands the business. In that case, we just give up. We don’t try to predict those things." Warren Buffett

Buffett Doesn't Use Discount Rate To Compensate For Risk

"And we don’t say, 'Well, we don’t know what’s going to happen, so therefore we’ll discount it at 9 percent instead of 7 percent,' some number that we don’t even know. That is not our way to approach it. We feel that once it passes a threshold test of being something about which we feel quite certain, that the same discount factor tends to apply to everything. And we try to do only things about which we are quite certain when we buy into the businesses. So we think all the capital asset pricing model-type reasoning with different rates of risk-adjusted return and all that, we tend to think it is — well, we don’t tend to — we think it is nonsense." Warren Buffett

"I don’t think you can stick something — numbers on a highly speculative business, where the whole industry’s going to change in five years, and have it mean anything when you get through. If you say I’m going to stick an extra 6 percent in on the interest rate to allow for the fact — I tend to think that’s kind of nonsense. I mean, it may look mathematical. But it’s mathematical gibberish in my view." Warren Buffett

Earnings Power

"By and large, the depreciation charge is not inappropriate in most companies to use as a proxy for required capital expenditures. Which is why we think that reported earnings plus amortization of intangibles usually gives a pretty good indication of earning power." Warren Buffett

Annual Reports

"I don’t think we’ve ever gotten an idea, you know in 40 years, from a Wall Street report. But we’ve gotten a lot of ideas from annual reports." Warren Buffett

Know Who Is Running The Business

"The main thing that they can’t mandate in annual reports: I really to know as much as I can about the person that’s running it and how they think about the business and what’s really going on in the business." Warren Buffett

You Can Learn A Lot From Annual Reports

"We’ve learned a lot from annual reports. For example, I would say that the Coca-Cola annual report over the last good many years is an enormously informative document. I mean, I can’t think of any way if I’d have a conversation with Roberto Goizueta, or now Doug Ivester, and they were telling me about the business, they would not be telling me more than I get from reading that annual report.

We bought that stock based on an annual report. We did not buy it based on any conversation of any kind with the top management of Coca-Cola before we bought our interest. We simply bought it based on reading the annual report, plus our knowledge of how the business worked." Warren Buffett

Weak Competition

“The secret of life is weak competition, you know." Warren Buffett

“We have found in a long life that one competitor is frequently enough to ruin a business.” Charlie Munger

Never Made A Big Sector Play

“We have never made a big sector play on a country. In fact, we’ve almost never made a big sector play." Warren Buffett

No Asset Allocation Theories

“We don’t have any sector allocation theories whatsoever.” Warren Buffett

Wonderful Companies Can Buyback Stock At High Prices

“When we own stock in a wonderful business, we like the idea of repurchases, even at prices that may give you nose bleeds. It generally turns out to be a pretty good policy.” Warren Buffett

Cash Is Cash

“If we could see the future of every business perfectly, it wouldn’t make any difference whether the money came from running streetcars or from selling software, because all the cash that came out, which is all we’re measuring between now and judgment day, would spend the same to us.” Warren Buffett

What Investing Is

"You may have an insight into very few businesses. I mean, if we left here and walked by a McDonald’s stand, you know, and you decided, would you pay a million dollars for that McDonald’s stand, or a million-three, or 900,000, you’d think about how likely it was there would be more competition, whether McDonald’s could change the franchise arrangement on you, whether people are going to keep eating hamburgers, you know, all kinds of things. And you actually would say to yourself this McDonald’s stand will make X — X plus 5 percent — maybe in a couple years because over time prices will increase a little. And that’s all investing is. But you have to know when you know what you’re doing, and you have to know when you’re getting outside of what I call your circle of competency, you don’t have the faintest idea.” Warren Buffett

Good Businesses Invest Now For The Future

"I think almost all good businesses have occasions where they’re making today look a little worse than today would otherwise be, to help tomorrow." Charlie Munger

Call It Value Or Growth

"[Berkshires] trying to put out capital now to get more capital — or money — we’re trying to put out cash now to get more cash back later on. And if you do that, the business grows, obviously. And you can call that value or you can call it growth. But they’re not two different categories." Warren Buffett

Ask For Past Projections

“I was recently involved in a situation where projections were a part of the presentation. And I asked that the record of the people who made the projections, their past projections also be presented at the same time. It was a very rude act.”  Warren Buffett

The Future P/E Is What Counts

"It isn’t a multiple of today’s earnings that is the primary determinate of things. We bought our Coca-Cola, for example, in 1988 and ’89, on this stock, at a price of $11 a share. Which — as low as 9, as high as 13, but it averaged about $11. And it’ll earn, we’ll say, most estimates are between 230 and 240 this year. So, that’s under five times this year’s earnings, but it was a pretty good size multiple back when we bought it." Warren Buffett

Businesses Losing money

“It would not bother us in the least to buy into a business that currently was losing money for some reason that we understood, and where we thought that the future was going to be significantly different. Similarly, if a business is making some money — there’s no P/E ratio that we have in mind as being a cutoff point at all. There are businesses — I mean, you could have some business making a sliver of money on which you would pay a very, very high P/E ratio.” Warren Buffett

Don't Care About Who is Buying or Selling

"We care how much Coca-Cola has sold five years from now, and what percentage of the world market they have, and what they’re charging for it, and how many shares are outstanding, and that sort of thing. But we just — we don’t care who’s buying or selling it in the least, except we like it when the company’s buying it. The same way with Gillette. We care about whether people are trading up in the shaving experience. So capital flows and all of those macro factors that people like to write about a lot just have nothing to do with what we do. We’re buying businesses." Warren Buffett

Listen to Your Customer

“One of our directors said very simply, ‘We should make a list of everything that irritates the customer, and then we should eliminate those defects one by one.’ That is the way to compete in a service business.” Charlie Munger

“I don’t worry about the dumbest competitor in a business that’s service. The customer will figure that out over time.” Warren Buffett

“There’re these fads in management — I mean, obviously, listening to your customer and things like that, I mean, that is — nothing makes more sense. But it’s hard to write a 300-page book that just says, “Listen to your customer.” Warren Buffett

Indexing

"The very nature of index funds is that you are saying, I think America’s business is going to do well over a — reasonably well — over a long period of time, but I don’t know enough to pick the winners and I don’t know enough to pick the winning times." Warren Buffett

“Really  the idea of buying an index fund over time is not to buy stocks at the right time or the right stocks. It’s to avoid buying them at the wrong time, the wrong stocks.” Warren Buffett

Summary

The true value in these meetings, and in all the learning you can take from them, is that if you go just once, don't expect to learn everything there is to know. Many of the Investment Masters that I have met and that I read about in the book above, have continued to attend even though they are incredibly successful in the investment field by their own right. And why is that? Because they have continued to learn every single time they went.

The Berkshire videos that have been released go back to 1994; that's over twenty years of history that allows all of us who haven't been privileged enough to attend to learn as if we were there. And that's gold to me.

So if you've been thinking about attending the Berkshire Meeting, I've got one suggestion .. 'Just Do It'. 

 

 

 

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TERMS OF USE: DISCLAIMER

 

 

Sources:
Warren Buffett Archive, CNBC
The Warren Buffett Shareholder -  Lawrence Cunningham & Stephanie Cuba
 

Further Suggested Reading:

Investment Masters Class - The Berkshire Archive - Part 1
Investment Masters Class - The Buffett Series
Investment Masters Class - Evolution of a Value Manager