Q&A Notes from the 2015 Berkshire Hathaway Shareholder Meeting

These are not direct quotes, but our best effort at taking notes during the Q&A portion of the annual meeting we attended. 

1. Questioner wondered why Berkshire Hathaway original business was kept as long as possible to balance capitalism and ethics, but 3G Capital has a more aggressive approach to layoffs.  Also, Clayton Homes has recently been accused of unfair lending practices.  Why do business with these 2 entities:

•  Most home builders don’t retain mortgages so no “skin in the game” for who issuing loans to since almost all are resold.
•  70% of US houses sold at $150K or less are manufactured homes
•  97% of Clayton home loans remain solvent. Only 3% are currently behind.
•  Clayton 20% profit mentioned in article is actually GROSS margin. In reality the net profit margin is 3% throughout the year, I receive various complaints from subsidiaries, but never received one complaint  phone call regarding Clayton loans
•  Have restricted home loans to less than 30 years other than ones that go through FHA at lower rate
•  Regarding 3G – Never made statement that businesses should run with more than -the people needed to operate.  Burger King, after reducing headcount, has been performing much better with fewer people
•  3G gets companies to the level of people needed to operate.

2. Van Tuyl acquisition. With the changing dynamics in the car industry…direct to consumer and such, does expanding in this area make sense?

• Essentially, large ticket items like to be negotiated for purchase…house, cars, etc.  Don’t see that process changing in the future…been this this way our whole lifetime, but if it does change, the return on capital deployed will still likely be decent

3. Five items to look for when considering earnings out 10 years

• Warren said we don’t have 5 items or at least if so, Charlie has kept it from me

4.  Whether Charlie tried to talk Warren out of buying IBM

• Charlie thought IBM has done a great job recreating itself and remains a tremendous enterprise which was purchased at a reasonable price.
• Warren said when we bought it, it was a 2 to nothing vote.
• Warren also added that people often wonder whether he is “talking his book” on his investments. Said he had no interest in talking up the stocks they own. Would rather they go down so he could purchase more.
•  “If people weren’t wrong so often, we wouldn’t be so rich” – Charlie Munger

5.  Whether Warren could recreate his success in insurance if he started over

• Warren said there were many lucky moments.  But said he said the whole idea in business is to be ready.  Probably wouldn’t have the same luck, but if starting over again, likely wouldn’t be in insurance…but “would find something to do”

6.  Regarding culture and integrity, how can we as outside investors keep the culture in place after Warren and Charlie have left the company?

• Warren said culture runs as deep at Berkshire as the culture runs in any other company.  It will be clear when we are gone it’s not the 2 of us that the culture now emanates from, it’s institutionalized within the company.
• Charlie said there are worse tragedies in life than having BRK get much larger and have its growth rates slow down a bit…warren responded with “name one”

7.  What is the impact on changing preferences regarding consumption of sugar within our businesses such as Coca Cola, See’s Candies, Dairy Queen, Heinz, etc.  Are these company’s economic moats narrowing?​

• Warren said these businesses have tremendously wide moats, but trends and preferences are changing 
• All food and beverage companies will adjust to expressed preferences of consumers as they go along
• Predicts in 20 years there will still be more cases of coke sold than today
• In last 30 years ¼ of all calories he has consumed have been from coca cola.  If all I ate were Brussels sprouts I don’t think I would live as long…it would be like going to jail
• Charlie said sugar helps…it prevents premature softening of the arteries.  Maybe consuming sugar would have me live a few months longer, but those would be in a nursing home
• Warren says I don’t see smiles on the faces of people at Whole Foods.

8.  Another question on car dealerships and why that area of business for expansion

• No real scale advantage and banks can borrow at a lower rate so not much there
• But there the reason does lie in the local market dynamics.  Locally the dealership brands can be quite strong.  Not all dealerships are good deals, but the right ones do prosper.

9.  What values and culture did you consider about 50 years ago when starting Berkshire?

• Had goals written down, but it’s easier when a good culture already exists in the businesses you acquire...reinforced daily.  Just like at home, your child sees what you do versus what you say.  This matters.  340,000 employees at Berkshire…we can’t guarantee there are some working doing the wrong thing.  When found out, you have to do something about it.
• We always try to act as though we were on the other side of the transaction.  We’re not perfect, but we keep working at it.

10.  U.S. GNP versus total market cap.  Indicator is currently at 125%. Was about what it was in 1999. The 2nd indicator is corporate profits as % of GNP. Usually runs 4.5% to 6%.  As of Friday it’s about 10.5%. Are these current stock market valuation levels a concern for the general investing public?

• American business has done wonderfully well due to US tax rates and a host of other things.  1st factor is heavily influenced by an interest rate environment we would have never predicted.  Opportunity costs suggest investing in bonds offers a little bit of nothing. Also ratio in 1999 was in a very different interest rate environment.  If rates go up stocks will look expensive, if they stay low they will look cheap.  Now that I told you the 2 options you can take your pick.
• Charlie - Since we failed to predict what happened last time, why would you think we could predict where we’re going?
• Warren – Any company that employs an economist has one employee too many
• Warren – Can you add anything else rude to say? 
• Charlie – Well, it would be hard to top that one

11.  Railroad regulations are changing, how is that going to affect BRK? 

•  Lots changing.  No real nuggets to document here.

12.  What advice to be given to someone without top tiered business school contacts to gain access to influential people?

• Charlie – “Do the best you can”
• Charlie - Modern law school – “like a pie eating contest and if you win you get to eat a lot more pie”

13.  Any concerns regarding Asian Investment Bank?

• Warren - I know nothing about that
• Charlie – And I know less

14.  Will the US be the reserve currency 50 years from now?

• Warren – I believe US will be the world currency in 50 years
• Charlie - I have concerns when instead of using money for something constructive we spread it around with a helicopter

15.  A question around using the Berkshire brand more for various lines of business

• Charlie – We’d be crazy to rebrand many of our businesses – rebranding to Berkshire peanut brittle would be crazy.  There’s a lot of value in brand names such as Sees (Sees Candies)

16.  Next question regarding Elon Musk and stored energy

• Charlie – Stored energy isn’t a threat…it’s a huge benefit for humanity
• Charlie – What the hell would we do if we didn’t have wind and sun when we run out of fossil fuels?
• 58% of Iowa energy to be from renewables

17.  What was your most memorable failure and how you dealt with it?

• Dexter shoes. $400M to go to $0 in a few years.  Paid for in stock which would now be worth $6 or $7B.
• Almost any time we’ve issued shares it’s been a mistake.  Because we managed most of our families’ wealth, we’ve been more conservative than many of our peers. We could be much larger, but I’m not willing to take even a 1% chance of losing it all for that reason.
• "It’s crazy to sweat at night."  Warren said over financial things.  

18.  Any concerns regarding printing of money?

• We’re operating in a world that Charlie and I don’t understand very well.
• We think Berkshire will perform better than most big companies.  We’re prepared for everything and will always be.  We’re sitting on $60B in cash right now.  Most companies won’t be prepared.  When bad things happen we’ll be ok and be able buy companies at discounts.
• Charlie – The problem with people making all these economic pronouncements is you will begin believing them at some point instead of just thinking you don’t know.

19.  About $37B in deferred taxes on balance sheet.

• That is largely a factor of accelerated depreciation.
• I wouldn’t look at that as a hidden form of equity

20.  Next question on Teledyne and Henry Singleton

• Charlie – Henry was smarter than both of us.  But Warren worked much harder at it than Henry, thereby, overcoming his horrible IQ deficit to which the crowd laughed.
• If I were to say BRK would earn X percent next year…I’ve seen a lot of misbehavior because employees don’t want to make a CEOs forecasts look bad.  We try to eliminate incentives for people to do bad things.

21.  If reinsurance for BRK is deemed too big to fail what would be the impact?

• We’re only about 20% financial related income so not close to being named “too big to fail”
• During last crisis, we were about the only ones who were providing assistance to others.
• Charlie – Dodd Frank hasn’t removed financial risk from the economy
• Charlie – There is still danger in the financial system

22.  Investor from China…can value investing work?

• Investment principles do not stop at borders
• Charlie – Chinese have a habit of being aggressive and gambling.  As such the Chinese stock market has been a bit volatile.  I think the Chinese would be more successful if they operate in ways similar to how we manage BRK.
• Charlie and I have benefited tremendously from being able to buy stocks very cheap.  Even more so than in 2008 and 2009.  If you are a young investor and you can value stocks as businesses and you can buy things when things are cheap.  And sell when things get very expensive. Investing is an easy game when you can control your emotions.
• Charlie – I don’t think value investing will ever go out of style.  Who the hell doesn’t want to buy something at a good value?  People want investing to be easy, but investing is hard.

23.  You have often said that the US has a better economic model and hence your optimism

• We have and will have a wonderful economic system.  Your children will live better than you will and their grandchildren better than that.  If you could fly over the US in 1776, think about how much everything has changed…that’s all profit.
• There are an increasing number of people that wish harm on the US and they won’t go away.  Now there is chemical, biological, cyber, in addition to nuclear.  If we successfully ward off those threats, I still argue the luckiest baby ever born is one born in the US today.
• Charlie - China has come up a lot faster than any other.  I don’t think there is anything more important than having a good relationship with China.  Both China and the US would be crazy to not increase our collaboration and trust.

24.  Have expressed investment officer role is likely to be split off from the CEO role post Buffett.  Why?

• It’s not inconceivable, but very unlikely a CIO will have adequate skills to also be CEO.  I think it’s would be a bad idea to have an investor who has operated only as an investor to become the CEO and manager.  If they had dual experience, that would be conceivable.  
• I’ve met people who can’t function properly day after day, but are capable on occasion of brilliance.
• Charlie – I certainly agree with you
• Warren – That’s how Charlie keeps his job
• When you get old, you’ll have the reputation you deserve – Warren

25.  Global warming – Travelers insurance has adjusted their models, BRK hasn’t

• We price our property business one year at a time. I see nothing on a yearly basis that tells me I should change my prices a lot.  That doesn’t mean global warming isn’t important…it’s incredibly important, but we think about global warming in any 1 year period of time and are not adjusting these 1 year models.
• Charlie – I don’t think it’s completely clear what the impacts of global warming will be.

26.  Tax code. Over $2T in corporate cash overseas.  Tax code is a mess.  What is required to fix

• Corporate profits at all-time highs.  40 years ago corporate tax represented 4% of GDP. Today corporate tax is now at 2%
• Difficult to get special provisions out so requires major changes to code.
• Need a president and better than half in senate and house to get changes done
• Charlie – I think California has a stupid tax policy.  The idea of driving the rich people out.  Who the hell doesn’t want rich people spending in their state?
• When you have to run out immediately tell the TV cameras what your position is, it doesn’t help with compromise (in the context of how much modern media has changed politics)

Warren - I will make a prediction that we’ll buy at least 1 more German company in the next 5 years

Charlie – The Germans get more work done while working less…that’s a model warren and I like

Warren - Prices are generally more attractive in Europe than in the US

Warren - I think the Euro has a noble origins, but it’s a flawed system.  They probably created a system that was unwise.  They've lowered the standards a little.

• Charlie - You can’t form a business partnership with your drunken brother-in-law.  
• Warren – Everything is off the record I hope you understand
• Warren – It’s flawed, but that doesn’t mean it can’t be corrected.  The fact it wasn’t perfectly designed initially won’t be amended.
• With Canada, we could have had a North American currency, but we couldn’t have a hemisphere wide currency – Munger chimes in, "like Argentina."  Crowd laughs and Warren says to Charlie, "Praise by name and condemn by category."
•  Warren asks if Charlie has anything else…then says I don’t know why I’m doing this.  Charlie responds with, "I think I’ve offended enough people already."

Charlie – I don’t think this will be reflected upon as a great age in activism.  I can’t think of any activists I’d want to marry into the family.   

• Warren – We better move on before he names names.

In regards to Amex – Charlie – Well, I liked them a little better when there was less competition, but that’s life

27.  Someone asked a question about how to teach financial literacy 

• Chains of habit are too light to be felt until they are too heavy to be broken.  
• Charlie said he failed trying to teach some of his own family so he has no advice for him. "If you can’t save, I can’t help you."
• Warren - You can’t start early enough developing good money habits

In regards to taking on more debt at these low interest rates, Warren said there isn’t really a need to take on more debt at this point.  Probably could have some more, but already have more cash than can wisely be deployed.  

• Charlie followed up that we would love to find a huge acquisition that stretched our capital position…that would be glorious.

Warren – If I had to give up my airplane or the internet I would give up the airplane.  

• "Very informative" says Charlie

The idea of multitasking my way to glory has never occurred to me. – Charlie

Regarding college education – Gives you a certain hesitation about relying on your fellow man – Munger regarding everyone believing that a $60k a year college is worth it

Regarding fixing corruption in China – They actually shot a few people and that gets people’s attention.  

• In 1790 we had 4M people, china had 270M.