Os dejo algunas notas que este fin de semana he tomado de la junta general de accionistas de Berkshire Hathaway. Como sabréis, Warren Buffet y Charlie Munger responden a todo tipo de preguntas que los accionistas y periodistas allí presentes les realizan.
Las notas están en inglés, en las próximas semanas espero poder traducirlas al castellano. Disculpad las faltas ortográficas que haya podido cometer al tomarlas.
“Welcome our visitors form all of the world. Our directors are also here: Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Tom Murphy, Ron Olsen… that is a wonderful group.
First, a slide for the preliminary summary figures of the first quarter after tax earnings:
Geico is actually improving but there were more losses this year. Railroad are down significally. They will continue to be down. In Manufacturing section, we partially included the earnings of PCP. It was incorporated in the middle of the quarter.
When we borrow in EUR, the nature of accounting, is that the change of value it actually shows in interest expense. It’s a technical issue, because we have lot of business that are in EUR, but it doesn’t appear in the same line.
Second slide. I started the next slide in 1999. Since 1999, our outstanding shares only increased 8.2%. Our goal in operations, it to increase the normalized the operating income over time. Earnings will not increase every year. In the insurance business, it’s particular sensitive to catastrophies.
We don’t manage to have any given number on the quarter. we don’t have bugdtes on a hq level, subsidiaries yes. We just focus on have earning power, to substantially increase earning power over time.
Q1. On 1967 in one of your letters, you stated that you wanted to buy companies that don’t consume a lot of capital… but the company has changed, and now you are doing the contrary.
WB. It’s one of the problems of prosperity. The ideal business it’s the one that grows but doesn’t take any money. Sees Candy is a good example. Newspaper business was good too. Buffalo newspaper was like that, they generated a lot of capital that I could took and buy other things with that. They don’t need to reinvest. But now we are doing the contrary with BHE, BNFS, we pledge that we will invest 30 bn in renewable, and we will earn 10-11% rate of return.
CM. We changed our minds. If we will able to continue with the original method we will continue with that, but we couldn’t, so we change to our plan B, which is working fine.
Q2. Precision Castparts. What in particular do like about the business?
WB: We completed the adquisition on January. Mark Donehan is one of a kind manager, and we have seen a lot over time… over time there could a lot of advantages being part of berkshire and not a public company. Mark can dedicate more time to important things in the business and not on q earnings, etc. He will not have to come here to present me a plan to spend 1bn in an adquisition… so he will not waste time on this, and being a public company you waste a lot of time.
CM: In the early days we bought business that even an idiot could run. We would love to find another three of four companies like PCP. Contracts that extend many years, etc… reputation in aircraft manufacturers is very important.
WB: I eat what i like, i work for me in what i like… i don’t think there is anybody happier than me. Only thing i would changed… it’s to start with a textile company.
CM: i am 92 and i still have lot of lessons to learn.
Q4: Why Berkshire has sold/reduced exposure to Munich Re?
WB: The reinsurance business will not be as good in the next 10y as it was in the past 10y. We sold both holdings because of that, it’s less atractive, in part because of interest rates, a significant part comes from what you earn in your float… and they don’t have the earning power that berkshire has, an unrelated and diversified earning power. We have more flexibility in modifying our insurance business models, but their reinsurance doesn’t have this flexibility, they have to continue to play the same game.
The amount of capital that has come to the industry is huge. And the negative interest rate… it’s a problem.
CM: There is a lot of new capacity in reinsurance. We have new competitors there and old guys continue too. It’s a different thing, compared to PCP, where we don’t have this kind of competition.
WB: Supply has increased but demand not. That is also in part generated because of finance guys that are coming to the business. But they are taking what brokers offer, which is not the best. But that increase supply… and if demand not increase, competition becomes hard.
Q4. Geico. Profitability. Competitors.
WB: We past Progressive last year. Both frecuency and severity last year increased. Progressive was the most affected, less Geico and All State. Last year for the first time, there was more driving and there was more distracting driving. Geico adjusted the rates. I think the margins will be better this year than last year because of this.
I hope in my 100 birthday Geico people announce to me that they past All State.
Q5. The future of salesmanship in our companies. Direct sales. But now we have Amazon… and also other companies how will affect our companies?
WB: It isn’t just Amazon. They have lot of satisfied customers. It is a powerful trend, we don’t look to beat them in their game, but we are going to think about it… it doesn’t worry us with pcp deals, but it is a huge economic trend, that 20y ago, it was difficult to participate on that. But for example Geico has adjusted and used the trend also. The final effect on many industries is far from been seen.
Amazon has a good advantage because they have several hundred millions of customer that are happy with the quick service of getting what they want in their homes. But we also have the advantage of being outside of the business so we can think about how to deploy the capital we have… it hasn’t have to be in this business. we are not ecommerce, steel, tires guys…. we can move it to what we consider is the best on this period of time.
CM: I think the effect on BRK about internet has being net positive. Our insurance companies benefited a lot.
Q6. Coca Cola. Problems with sugar, etc.
WB: I am about one quarter of Coca Cola. It is what I elected, i get calories from that. I haven’t seen any evidence that it drinking coca cola is worst than any other sources of sugar…
CM: I think people ask questions like that without taking into account that the benefit outsizes the risk. that is dummy. there are huge advantages… it compensates to take some risk.
Q7. Coal plants. Berkshire Energy. Renewable Energies commited by Berkshire Energy. What are the risks?
WB: We cannot make changes that are not approved by the Federal Utilities Commision. They have to agree. We have to follow their instructions. But they have seen the benefits, we have one major competitor, they have not been able to proceed with renewables like we did, you look at their budget, they will need an increase next years, but we will not need one until 2030.
Building those projects are subsidized by the federal government and the returns are assured, so that has encouraged to deploy this capital. The degree of which the renewables will replace coal, nat gas, will depend on government policy, and for the moment has encouraged this to take place. I think we will continue to see change. We are in a particular position to enjoy this huge capital investments, regarding our tax bill consolidated…
CM: I like renewables because of other reason… i want to preserve hidrocarbons in the country, they shouldn’t be expended.
WB: Our electricity in Iowa is cheaper than the electricity here in Omaha. Google servers came to Ioawa, were we are suppliers because of this, because it is cheaper electricity, and other companies will come because of that.
Q7. 2007 shareholder letter, derivatives are very dangerous. How do you analyze and value companies like Bank of America, Merril Lynch and other bank investment companies?
WB: The great danger of derivatives is when the system stops. It stopped on 2008 for three/four days. There can be huge losses that you considered that were full covered with collaterals etc.
I am pleased with Bank of America and Well Fargo positions. Of 50 biggest banks in the world, i will not be pleased with 45 of them.
Q8. Float generated by insurance of companies. It allows the company to increase earnings. But what about negative interest?
WB: Part of our float is in Europe, where we have this issue. We will have to use our float in things where other insurance companies cannot think about. We love the idea of increasing our float, we continue to think that. It is likely to benefit in the future, it shows as a liability, but it is a huge advantage.
Q8. Railroads. Estimates coming down. Headwins.
WB: The decline in coal is very important, it is secular. Other factors affected too. We regard BNSF as a business to hold forever, it will loose coal business but it will increase in other business.
Q9. How should our kids look at stocks?
WB: You don’t have to worry about IPOs, people wins lotteries but you don’t have to be jelous about that. You have to make what it makes sense. You want to look at stocks about businesses, think about what is earning, what you paid… that is the correct view. You don’t have to play a stupid game just because everybody is playing it.
Q10. Kinder Morgan, PCP, Philips 66. Oil issue. Why investing there?
WB: We don’t think we can predict oil prices. Basically we are not predicting that. Anything you have seen in our investment transactions, two of them were bought by Tod and Ted, one by me. But it has to do with other things not about price of oil.
Q11. If Donald Trump becomes the president of USA. what risks do you see?
WB: That will not be the big problem. Goverment it is a big factor. But Berkshire will continue to do fine.
CM: I am afraid to get to this area. But being positive, our system will continue to do fine, and our GDP figures understate huge things that we have reached and given to the citizens because they don’t translate into economic unities…
Q12. Railroads. Combination of Canadian Pacific and Northern Southforlk?
WB: Matt Rose can answer that companies much better than me.
MR: We had a try of merging with Canadian Pacific, but regulators didn’t like it. About these kind of merges in our industry, the only benefit is for shareholders currently.
Q13. Capital requirements for banks, investment banks specifically. Jamie Dimon comments.
WB: Capital requirements for banks have been increased. Returns are lower for banks. If you run a bank with only 1% capital, you will earn great returns, but it will cause problems to the system.
WB: Our ownership of Wells Fargo is not because of their investment banking, it’s because of other things. It is the general banking the important what we like. And it is very well run. That is why it it is our biggest marketable position.
Q15. Leasing business in containers, etc.Expanding to other leasing business…
WB: We have a good business on that. We expanded by 1bn dollars when we bought a business recently. But I think the banks have an advantage above us in these other leasing businesses, because their cost of money is lower than us. We have railcar leasing, and involves more than a financial transaction, aircraft leasing is very dangerous, some people is doing great there financing long term assets with short term money… we don’t like it.
Q16. Which competitor would you take out and why?
CM: I don’t think we have an answer to this.
WB: We have lots of tough competitors. We told our managers to fight with them and increase the moat.
Q17. Secuoya fund. You have supported them. But recently issues with VRX.
WB: I am one of the fathers of the secuoya funds. We helped them when they started. There were two people that we admired in the business, Bill and Cuane, so those two, took some of our customers and they were happy customers. Even now, if you take the returns from inception, i don’t know any other fund in america that has achieved these returns.
They have taken a huge position in Valeant even after the board warned about this. My understanding is that the manager that took the decision is not longer running the business. It is not a pretty picture in Valeant. If you have an intelligent, energetic guy, but without integrity, it will take you to problems.
Charlie and me, see patterns, we recognize them, there are sure things in business, that we have seen over and over. Frequently look good on the short term…but… there are patterns in Valeant that really shouldn’t been, is very painful for the people in secuoya.
CM: I totally agree with you, secuoya has reconstituted itself. I have friends that are invested there. Valeant was a sewer and people involved get what they deserved…
Slide con retornos de la apuesta contra el fondo de hedge funds.
s&p 500 vs hedge funds. Accumulated since 2008: 65.7% vs 21.9%.
Longbets.com, good website, people can make bets and you can see the reason why people is doing these bets. And our bet, become quite famous there. So one hedge fund of hedge funds will win sp500? But take into account, the 2 & 20 commision that hedge funds take. It’s a big chunk. It’s an unbeliable compensation for me. Just to breath this compensation is insane.
BREAK FOR LUNCH
Q18. Succesion. Dividing tasks.
WB: if an issue appears in the business, it’s better to have a non-executive chairman, to correct it. We have a board that should preserve the culture. Our main problem in the future will be the size.
CM: I am even more optimistic than you are. It is going to work very well the culture we have and the power we have in place.
WB: the number of managers that we needed to replace during last 10y is very few. That is because they really like what they are doing. They are not here for the money.
Q20. Repurchases at 1.20x book value. Little repurchases for the moment. repurchases at a higher multiple?
WB: It almost reached the 1.2x multiple, but i can almost guarantee that it didn’t. It was near but it didn’t get below that. We can move the multiple up if we continue to adquire companies and the differential increases.
I have mixed emotions about this. For remaining shareholders is good. I don’t particularly like to buy our partners at a price that is less than the intrisic value. But if we have the opportunity we would like to deploy a huge amount of capital on this, and it will be great for shareholders that remain. But we need to do it in a way that doesn’t make our share price to pop. If we have 100bn -120bn in our cash, we will have to increase the multiple and start repurchasing.
CM: You will notice that corporate america is buying back stock at high prices. It is fashionable now. Companies are buying back stock without taking into account prices.
WB: Some companies say that is to prevent dilution… so two negatives, dilution and buying back at high prices.
Q21. Concerns about cyber, biological and nuclear attacks. To fund some organizations that lobby about this?
WB: The goverment has been doing a good job on this. It’s the only real threat to Berkshire. But i think it will happen in some time in the future, i hope it’s minimized. There are lot of people that want to cause us huge damage. And that is one of the huge disadvantages of innovation.
Q22. How has the business of Lubrizol performed?
WB: No growth, but we are leader. It is working as we anticipated. They made one large adquisition, which is a big mistake, that it was in the oil field, specially chemical area. It is a very well run operation but not grwoth one.
Q23. Pshycological biases. Berkshire doesn’t make investments on macroeconomical, how do you avoid thinking about the news on macro, etc.
WB: We don’t know what is going to happen with macro. If you talk about micro, we take a good look. We try to know everything in the micro when we buy businesses, i like to look at those.
CM: Micro and businesses is very similar. We don’t get anchored, we ignore what we don’t know about.
WB: So we like to look at details,sometimes it will be useful, sometimes not, but you never know when it can be useful.
CM: We really like to understand our previous ideas.
WB: If you disagree with somebody you have to understand better than him, otherwise keep quiet.
Q24. how do you decide between making an investment on your personal account and berkshire investments?
WB: Seritage is a real state trust, that has a mkt cap of 2 bn. It something where we cannot buy on berkshire. as a practial matter, i hope my best ideas are on berkshire. We will not be making marketable investments in something like 2bn mkt cap. I own some wells that i bought long time ago. But i tried to stay away from conflicts of interest with berkshire.
CM: I am part in a situation like that. I’ve got some Costco stock, there are two/three overlaps like that, but it’s not a problem, shareholders have other things to worry about.
WB: On balance I am on Berkshire side.
Q25. Cash flow. Awesome characteristic on today. What is the outlook of free cash flow (deferred tax)
WB: About deferred tax, it’s not money we have, it’s money we owe until we sell the securities. Primarly the cash flow of berkshire it’s the net income plus investment income from float. That is the huge element. We are going to spend more than depreciation in our business. So that cash is the new cash we have to put to work, 17bn plus the gains from float.
We want to add every year something to the normalize earning power of the company.
CM: There are very few companies that have this constant problem of putting to work money all time. We don’t have to be smart, but we have to avoid stupidities.
Q26. Getting the best reputation you can. Think outside of the crowd. What did you get to think like that?
WB: I always have to say thanks to Ben Graham and Charlie about all that. And to other people i surrounded myself over time. You don’t need the IQ in investing that you need in other tasks, but you need emotional control.
CM: Simple tricks that work very well. You need temperament. We are really trying to behave well. There are lot of people that earn a lot of money but everybody hates them.
WB: We were very lucky to be born in the place we where and when we were.
Q27. Adquisitions done and analyzed internally vs other companies that externalize.
WB: We have made plenty of mistakes. And mistakes for not doing adquisitions. The mistakes are always related with assessment of the basic economics of the business. If Amazon is going to kill them in a few years. It isnt the things in the checklist what is going to make a difference. There is not checklist that can cover specific things, if a manager is going to continue working in the same way? I see deals that don’t go thorugh because people start to worry about small facts, small issues that doesn’t matter.
CM: The human quality in the management is huge important. You cannot analyze that with due dilligence, checklists, etc. Same with economics of the business.
Q28. Ajit Jain will take all responsability about reinsurance operations.
WB: Jain has done a huge and great job in our insurance operations. It makes sense to have all operations run by Jain. It works on Berkshire basics of operation. I’ve found really capable people, that don’t have limit to accomplish huge things. In terms of my succesion, we will talk about that in the board meeting of monday. And we have a main candidate for CEO, but we will see how it goes in the next years.
Q29. Berkshire Hathaway so well managed. Why don’t rating agencies give you the AAA?
CM: The rating agencies are wrong. We don’t look like they want… we are very different.
WB: Let’s give us a quadraple AAAA… i start the ratings negotiation with that.
Q30. With interest rates go from zero to negative. How do you value companies?
WB: Going from zero to minus a half is very different from 3-4%. It is dramatic to be in this environment of zero interest rates. The nature is that you pay more for a business when interest rates are zero than when they were 15%. We have a rule for 26 hundred years, that a bird on the bush is valued higher than 100 on the air. If interest rates continue here over time, it will have a huge effect on valuation. It already has some effect.
CM: None of the great economists studied this. We do the best we can.
WB: It does modestly affected what we pay for businesses.
Q31. American Express. Company that is shrinking? Should you reassess the business?
WB: We continue reassess if we should continue to be invested in the business, rapid change, etc. I am happy to own Amex, they have been attacked since several decades, and it will continue to be attacked by competitors, but they will overcome it.
CM: A lot of great businesses are a lot of weaker than they were in the past. For example General Motors, it was very very powerful when i was young. Lots of cash. But the world changes.
WB: We will be late, wrong sometimes, but we will be right sometimes too.
Q32. Expanding global population. Investing in cattle is wise?
CM: I think is one of the worst business i can think about. We like eat stake, but not owning cattle.
WB: I know some people that owns cattle that have done well, but they also own other businesses.
WB: In geico we have some people with two variables of incentives, regarding the bonus compensation. Significant compensation. Two variables are about: 1-grow business and 2-grow profitable business. Simple system since 1995. Everybody understands it. So it makes to allign the owner and the organization.
WB: If we bought a compensation consultant, he will start to create a master plan, sub plan, etc. and try to convince us that this is the best. We try to design simpler plans that make sense.
Q34. Lot of people losing jobs in Texas because of the crude of oil. Evolution of demand influences the price of oil?
WB: the decline of oil is good for consumers and some other to a degree, net, is good news for USA, because we are a net importer of oil. The capital value contraction is huge if you project lower oil for some time.
Q36. Operating earnings. Have you done any analysis excluding special expenses, like severance pays, restructuring, amortization, etc.
CM: Why don’t you kill your mother to get the insurance money? You simply don’t do it. We don’t do that because that are not the good numbers.
WB: I don’t want to get a report of adjusted earnings. We don’t need to inflate the figures.
Q37. Question about fixed income. Position and CDS.
WB: The counterparts have to buy protection against that security. So they are forced to buy these things. But in my opinion they are throwing the money with these protection… but they are forced. We don’t play with CDS and these things short term. Only time I would have love to trade them was in 2008 when people was paying 5% for protection to Berkshire bonds to go bankrupt. Crazy.
Q38. Ajit Jain. There is not another Ajit in the house:
WB: If we lost Ajit, there would be a huge disadvantage. Having a fantastic manager that has a large potential business available, is huge over time. Think about Jeff Bezos or Thom Burke, it wasn’t their invention, but is that they operate very efficiently and well run.
Q39. How do you feel about the housing market today?
WB: We are not good predicting housing market, but it’s not so atractive compared to 2012. But again, if you can borrow money at low rates, and you buy good asset… I don’t see a bubble in residential market now, you are not paying huge prices, but it’s different to 2012. If we have another bubble, it will be different than the one in 2008.
Q40. Financing of PCP adquisition.
WB: We were funelling money to the parent company. That money was dedicated to the PCP adquisition, 22bn, and we borrowed 10-12bn.
Q41. IBM’s moat.
WB: It has certain strenghts and certain weaknesses.
CM: It’s obviously cooping with the changes that the industry is suffering. We don’t know how it will finish.
Q42. What is your sense of humor come from?
WB: I actually think Charlie has better sense of humor than me.
CM: I think if you see the world accuaretely is fine to be humoristic, because it is ridiculous.