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A Fantastic Weekend with the Oracle of Omaha

This past weekend, I flew into Omaha, Nebraska, to attend Berkshire Hathaway’s Annual Shareholders meeting.  What a crowd!

About 30,000 Berkshire Hathaway shareholders attended the meeting, with some waiting in line as early as 4 a.m. to grab a good front-row seat at the CenturyLink Center, so they could listen to Warren Buffett and Charlie Munger, capitalism’s most-famous spokesmen, opine on the state of Berkshire’s portfolio and on the American economy going forward.

Buffett covered many key topics through the meeting and cheerily hosted a follow-up Q&A on wide-ranging topics that lasted for more than five hours. Buffett shared his views on why he abstained from voting Berkshire shares on Coca-Cola’s controversial executive compensation plan, praised former Federal Reserve chairman Ben Bernanke and reflected on what he would do if he were 23 again (the short answer: ask lots of questions).

The event had all its usual folksy charms but some criticism lurked beneath the surface. One sore point this time around was that Berkshire’s stock had underperformed the S&P 500 index for four of the past five years.  As I had outlined in a recent commentary which you can find archived on my website – onthemoneyradio.org – Berkshire held almost $43 billion in cash and this skewed returns because Berkshire’s portfolio companies, as a group, have outperformed the S&P 500 by 6% each year between 2008 and 2012. While there was some criticism, those who looked carefully at core portfolio performance have nothing to complain about, indeed, those with dry powder to invest, likely have been buying up Berkshire shares that have lately been out of favor on Wall Street.  Classic opportunity on a hidden gem with a portfolio that’s performing fantastically.

Some investors also expressed concern about Berkshire’s supposedly antiquated corporate structure which critics see as a vast conglomerate with over 50 subsidiaries across a very wide range of industries and varying degrees of international exposure. Critics question if it’s better to unlock hidden value in a time when activist investors are slicing-and-dicing companies into individual parts through spinoffs, MLP structures, etc.

Then there was Berkshire’s longstanding aversion to technology investments and attacks from Silicon Valley glitterati such as venture capitalist Marc Andreesen who has, in the past, wondered aloud if Buffett was out of touch with technology.

When the newspaper unfurled on Buffett’s annual newspaper toss, someone even said “Has Warren lost his touch?”  Shareholders in attendance were clearly in a less-than-generous mood this time around, which is sad, because Buffett and his team continue to do a fantastic job at building a company that will continue to deliver fantastic returns going forward.

But Buffett and his longtime investing partner, Charlie Munger, took all these questions in stride and addressed them frankly.

On not beating the S&P index, Buffett said that it was normal for the company’s share price performance to wane in some years but that he still expects Berkshire to meet or beat the broader stock market over the long-term.

And Munger chimed in with a reminder that Berkshire’s dramatic rise over the past few decades would be hard to replicate because it’s a much larger company today. As he out it, “It’s not a tragedy to succeed so much that future returns go down. That’s success. That’s winning,” he said.

The shareholder who carped about Berkshire’s antiquated corporate structure got an even sharper response, this time from Buffett, who said “Owning a group of good businesses is not a terrible business plan. Berkshire is worth more as presently constituted than in any other form that I can conceive of. There’s no advantage to breaking Berkshire into pieces.”

And on his lack of technology investments, Buffett reiterated his interest in buying companies or stocks that had been proven winners.

There was a lot said and done, overall, but in the interest of time, here are some of the more interesting moments of the day:

Coke Vote

Buffett said that he chose to abstain from voting on Coca-Cola’s excessive executive compensation plan and adopted instead express his displeasure with the plan in a couple of private conversations with Coke CEO Muhtar Kent.

The compensation plan was first targeted by activist investor David Winters but Buffett said some of Winters’ calculations were wildly inaccurate. Moreover, Buffett decided against joining forces with Winters because it’s just not his style to “go to war” against a portfolio company.

He defended his decision to abstain from voting on the compensation plan and expressed confidence that his private conversations with Coke’s CEO would have the desired effect. As he put it, “I believe the best result was achieved by our abstention.”

Munger’s Successor

Buffett turned 83 this year and Charlie Munger turned 90, so the old succession question came up.

Buffett said his eventual replacement would need to pick the person who would best complement his or her skills,  just as Munger complements Buffett, and that they had no successor in mind for the Vice Chairman slot that Munger holds.

“Frankly, I have trouble thinking of anyone who could be a successor to Charlie,” Buffett said. But Munger chimed in with, “I don’t think the world has much to worry about. Most 90-year-old men are gone soon enough.”

Omaha Hotel Gouging During the Event

The one piece of advice I’d like to give you if you’re planning a trip to Berkshire’s next annual meeting; book your tickets well in advance because with 30,000 shareholders, the town’s hotels fill up rather quickly with prices touching $1,000 a night or with restrictions such as three-night minimums.

Buffett doesn’t like his shareholders being gouged and called on home rental service Airbnb to help pick up the slack with more affordable priced options.

When a questioner asked, “Isn’t Buffett’s interference playing with simple supply-demand economics, a principle he’s long espoused?” “Well, no,” said Buffett because he believes Omaha can’t reasonably support more hotels for this once-a-year event and that this supply-demand dynamic is unnaturally “out of whack” and needs to be temporarily corrected with resources such as Airbnb.

What Would Warren Buffett Do If He Were 23 Again

One shareholder stepped up to the microphone and told Buffett that he hoped to be an entrepreneur but didn’t have any interest in technology. And his question was, if Buffett were to start over, what would he do?

Buffett’s advice: Ask a lot of questions. “You can really learn a lot just by asking — that sounds like a Yogi Berra quote or something — but it is literally true.”

Buffett spoke about his young days as an investor where he’d ask managers at different coal companies the same question: “If you had to invest in any coal company but your own, and couldn’t touch the money for 10 years, what company would you pick?”

If multiple managers picked the same company, Buffett knew he was on to something. It’s pretty simple and it sure as hell has worked for Buffett.

Praise for Ben Bernanke

Many were keen, and always are, on Buffett’s views on the economy.  Partly because of his legendary status and partly because he carefully tracks what happens at his portfolio companies and has a real pulse on orders, raw material prices and demand.

Buffett’s assessment: the U.S. is doing great. (“Anybody who thinks American business is not doing well should just look at corporate profits.”)

But he also reflected on the 2008 financial meltdown and complimented Bernanke for his handling of the economy.

Interestingly, perhaps scarily, Buffett found the minutes of the Fed meetings showed that many Fed officials simply did not understand the severity of the situation.

He also hinted at some uncertainty ahead because while low interest rates have had a positive effect of the economy, he wonders what will happen next as the Federal Reserve gradually tapers its bond purchases to nudge rates up. As he puts it, “This is really an interesting movie because we haven’t seen it before, and we don’t know how it ends.”

On Being Thrifty

Buffett and Munger peppered their answers with plenty of life lessons throughout the event, including their approach to living cheaply.

Both billionaires have lived in the same house for decades.  Buffett built his in 1958, Munger in 1960 and they’re known for living cheaply. Buffett said money could buy access to better housing, food and healthcare, but only to a point. Excessive spending could actually lower the good-living equation.

“My life would not be happier, in fact, it would be worse, if I had six or eight houses, or a whole bunch of things I could have,” Buffett said,

Munger looked into the audience and said he saw lots of other rich folks who had also chosen to live frugally.

But that did not stop them from encouraging shareholders to spend liberally at Berkshire-owned retail stores such as Borsheim’s Jewelers. “The more you buy, the more you save at these prices, folks!” quipped Buffett.

The Los Angeles Clippers

Finally, someone asked them why Berkshire did not invest in a sports team?

Buffett and Munger didn’t bite. “If you read that either one of us is buying a sports team, it might be time to talk about successors,” Buffett said.

Buffett then asked Munger if he’d be up for buying the Los Angeles Clippers as a personal investment.  That’s the team that could be on the block if the NBA’s board of governors forces a sale from embattled owner Donald Sterling. Munger did not respond, so Buffett laughed and said, “Now I’m worried that he is thinking about it!”  Munger just shook his head.