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What Warren
Buffett wants you to know
How do you learn from a master? Start by listening to
what he has to say.May 3, 2004: 2:58 PM EDT By Jason
Zweig, MONEY magazine
OMAHA (CNN/Money) - Editor's note: The Berkshire
Hathaway annual meeting attracted nearly 20,000
attendees this past weekend. With elements of an
investing seminar, a revival meeting and a carnival,
the event has become a ritual.
MONEY magazine's Jason Zweig covered the meeting for
CNN/Money. He culled the following highlights out of
lengthy Q&A sessions between Berkshire
shareholders and Warren Buffett & Charles Munger,
the firm's top managers.
Because audio and video recording was prohibited, what
follows is not necessarily a verbatim transcript of
their responses. It is, however, a close approximation
based on Zweig's manual transcription of the
multi-hour sessions.
Calpers pressure
The first question from the floor asked whether, under
pressure from institutional investors like the
California Public Employees Retirement System, Buffett
was considering stepping down from the board of
Coca-Cola. "Whoever suggests that," shot
back Buffett, "should do 500 situps."
"I think it was Bertrand Russell who said most
men would rather die than think," he said.
"We have $10 billion [BRK's stake in KO] riding
on that side of the table. I encourage institutional
shareholders to behave like owners, but I also
encourage them to think logically as owners should in
determing what causes they should take on."
Munger, as usual, was more succinct: "The cause
of reform is hurt, not helped, when an activist makes
an idiotic suggestion."
Executive compensation
Buffett and Munger both were scathing on the subject
of executive compensation and the process of how pay
is set at major corporations:
"The typical large company has a compensation
committee," said Buffett. "They don't look
for Dobermans on that committee, they look for
chihuahuas."
He paused amid laughter, then added: "Chihuahuas
that have been sedated."
Munger interjected: "I would rather throw a viper
down my shirtfront than hire a compensation
consultant."
On Bill Gates and succession
From the floor, a shareholder wanted to know if
Buffett would consider asking Bill Gates to succeed
him as Berkshire chairman. With a laugh, Buffett
asked: "Did Bill put you up to this?"
He added: "Bill could do my job very well,
although I couldn't do his! But we've got four people
who could do my job maybe better than I can. We're
well equipped."
After a pause, Buffett added: "I don't think
[Gates] is really looking for my job, although he may
salivate at the pay level." (Buffett's cash
compensation was $100,000 in 2003.)
On stock options
Already up on the soapbox, Buffett and Munger went
straight into a denunciation of everyone who opposes
treating stock options as an expense. To Berkshire's
bosses, it is not just a technical accounting
question, but a matter of fundamental morality.
"Write your congresspeople giving them your views
on whether options should be expensed," said
Buffett. "It was a disgrace 10 years ago when
Congress bludgeoned the SEC and the [Financial]
Accounting Standards Board to override FASB's decision
to expense options. It accelerated the anything-goes
mentality of the 1990s."
Buffett then told the crowd a story about a
19th-century bill in the state of Indiana that sought
to "change" the value of pi.
"It seems there was a fellow who discovered some
new relationship between circumference and diameter
that would help students learn a better kind of
geometry, so he wrote a law to change the value of pi
from 3.14159 etc. to 3.20. It passed the Indiana house
-- until the Indiana senate finally thought better of
it."
After the audience stopped laughing, Buffett came to
his point about options, "The U.S. Senate
concluded that the world was flat, because their their
contributors paid them enough to say the world was
flat."
Then Munger weighed in: "It's worse than that.
Those people who wanted to round pi to 3.2 were
stupid. These people [the opponents of expensing
options] are worse than stupid. They know it's wrong
and want to do it anyway."
Worst mistake
When a shareholder asked for Buffett's worst mistake
in recent years, he answered: Wal-Mart.
"I set out to buy $100 million shares of Wal-Mart
at a [pre-split price of] $23," recalled Buffett.
"We bought a little and it moved up a little and
I thought maybe it will come back a bit. That
thumbsucking has cost us in the current area of $10
billion."
Mutual funds
Buffett and Munger reserved some of their most
withering scorn for the mutual fund industry.
When a shareholder asked how they would recommend
selecting a professional investment manager,
Berkshire's boss opened the bomb bays: "One thing
I can almost guarantee you is that the promotional
types are very unlikely to meet any long-term tests of
ability and sometimes integrity."
Then Munger weighed in: "Mutual funds took bribes
for the proposition of betraying their shareholders.
It was like someone coming to you and saying,
"Why don't I kill your mother and we'll split the
insurance money?"
Dividends
A shareholder asked what it would take for Berkshire
to change its longstanding opposition to paying a
dividend or conducting share repurchases. Buffett used
the question to teach a mini-clinic on corporate
finance, pointing out that the managers of a company
have a fiduciary duty to put the company's cash to
optimal use.
"When a stock can be bought well below its
business value, that is probably the best use of
cash," he said. "Stock repurchases have
become very popular now, but I think it's often done
by people who are hoping it will cause their stock
price not to go down."
The implication: Companies that buy back their stock
merely to counteract the dilution caused by the
exercise of stock options by insiders are misusing the
shareholders' assets.
Later, Buffett made a striking observation. Imagine
that Berkshire decided that it could no longer wisely
invest its $30 billion-plus worth of cash and decided
to distribute all that cash to shareholders in a
special dividend. Buffett himself, as the largest
shareholder, would get more than $7 billion.
Then, he pointed out, he would have to try to find
good investment opportunities to put all that money to
work for his own account. "I would be in
competition with Berkshire's shareholders, and I don't
think that would be good for them," Buffett said.
On Google
Buffett and Munger had high praise for Google. Not
only is Buffett an enthusiastic user of the search
engine, but he and Munger admire the style of Google
bosses Larry Page and Sergey Brin.
"I'm very pleased that the Google fellas decided
that it's a good idea to talk to their prospective
owners in a very straightforward manner"
"I think you'll know what they will do and won't
do," said Buffett, in discussing Google's
prospectus. "More companies ought to do
that."
As Munger put it, "Those two guys are two of the
smartest young men in the country, and it's much
better to be copied by people that smart."
Later, Buffett indicated that Page and Brin -- through
a mutual friend -- had e-mailed an advance copy of the
document to Buffett to make sure it was "OK with
me."
Buffett's reply: "I said it was fine, although I
thought a royalty was appropriate."
Whole foods
Don't look for Berkshire to buy a stake in Whole Foods
any time soon.
When a Berkshire shareholder from the Bay Area asked
if Buffett and Munger had ever considered investing in
Whole Foods, Munger barked: "My idea of a good
place to shop is Costco [where Munger is a director].
Costco has these heavily marbled steaks and the idea
of eating some whole-grain whatever and washing it
down with some carrot juice has never appealed to
me."
Troubled times
When a shareholder asked whether Buffett and Munger
were worried by the big picture -- the war in Iraq,
higher interest rates and such -- Buffett had a ready
answer:
"At any given point in history, including when
stocks were at their cheapest, you could find an
equally impressive number of negative factors. In 1974
you could have written down all sorts of things that
could have led you to think the future would be
terrible," he said.
"We really don't pay any attention to that sort
of thing," he added. "Our underlying premise
is that this country will do very well, and it will do
very well for businesses."
In euphoric times like 1999, Buffett explained, people
invest as if they are "living in a fool's
paradise" and end up losing money on stocks even
though business as a whole remains profitable.
"American business really has never let investors
down," he said. "But investors have done
themselves in quite frequently."
On life
As always, many of the questions from shareholders had
little to do with investing. A 14-year-old from
California, Justin Fong, asked what advice Buffett and
Munger would give a young person on how to be
successful.
"It's better to hang out with people better than
you," said Buffett. "Pick out associates
whose behavior is better than yours and you'll drift
in that direction."
Added Munger drily, "If this gives you a little
temporary unpopularity with your peer group, the hell
with 'em."
Press conference
At a Sunday press conference, Buffett and Munger held
forth for another two-and-a-half hours in front of
roughly 50 journalists from as far away as Australia
and South Korea.
After talking almost non-stop for two entire days,
Buffett's voice was beginning to wear thin, but he and
Munger had lost none of their Abbott and Costello
routine. Buffett played the clever smoothie who speaks
in paragraphs and Munger assumed the role of a
taciturn cynic whose favorite words are
"stupid," "crazy,"
"bonkers" and "nuts."
When a TV reporter asked if Buffett and Munger had a
favorite -- or least favorite -- industry sector,
Buffett expatiated patiently on their method of
picking securities: "We don't say, 'We like this
industry and therefore we'll try to buy a stock in
it.'"
When Buffett paused for breath, Munger drawled:
"Warren, isn't it fair to say that if we did have
an opinion, we wouldn't tell him?"
"Yes," said Buffett, "but we don't have
an opinion." Turning the reporter, Buffett
delivered the coup de grace: "So you lose
twice."
A roomful of journalists could not resist asking about
the prospects for newspaper stocks. Buffett and Munger
were surprisingly bearish on newspapers, a major
investment for Berkshire through its large stake in
the Washington Post Co. and its outright ownership of
the Buffalo News.
After saying that he and Munger are "newspaper
addicts" and that "it's still an unusually
good business," Buffett struck a somber note.
"The economics of newspapers are very, very close
to certain to deteriorate over the next 10-20
years," he warned. "I see nothing that will
turn around the erosion from both the circulation and
advertising standpoints."
As a personal aside, Buffett reported that "if I
couldn't have done what I do now, I would have enjoyed
being a financial journalist."
The thought was simultaneously flattering and humbling
to every reporter in the room.
By money.cnn.com
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