7 Questions to Ask Warren Buffett

Berkshire Hathaway Inc. (BRK.A) holds its annual meeting this weekend and, despite the swine flu scare, 30,000 shareholders are expected to attend. Given the holding company’s performance over 2008, the newspapers say CEO and chief investment officer Warren Buffett is in for more of a grilling this year. I’m looking forward to hearing what he will say about:

1. Succession plans (succession risk was a big reason why Fitch reduced triple-A credit rating)
2. Writing $37 billion in puts on equity indexes despite calling derivatives “financial weapons of mass destruction”
3. Penning a Washington Post column in October advising “Buy American” while selling big chunks of positions in Johnson & Johnson (JNJ) and Proctor Gamble (PG)
4. Large exposure to financial sector
5. Purchase of oil firm ConocoPhillips (COP) at the height of the oil bubble
6. Recent investment in water treatment firm Nalco (NLC), which has a negative return on equity, total debt to equity greater than 800% and book value consisting mostly of intangibles and goodwill (where’s the moat?)
7. Why so optimistic about the long-term prospects for the U.S. economy when it’s so reliant on: Foreign lenders, very high levels of indebtedness in consumer/government sectors, and printing money by the central bank.

Comments

[Jasper M:]

Question #3 is easy: He meant "Buy American . . . from me."

As for 6 & 7, remember that he is a turnaround specialist. So he bit on #6 as a challenge. And if he can handle #6, then he can have hope that Someone can handle #7.
We can hope.

May 02 06:45 PM

[Stephen Yu:]

Hmm, I am no Warren. He is far brighter than I am, but I have been following him for a while so let me pretend I'm him and see if I can address these questions.

1. Succession: There is a plan. The board and I are just not making it public. Imagine what would happen if it is public! How is it going to motivate the chosen one and those who are not? And by the way, I'm not dead yet. I plan to live many more years and things may change while I"m alive. If the plan is widely known, then if the plan changes, some people may get upset. So I think I'd like to keep the plan to the board for now. And I reserve the right to change course.

2. Weapons of mass destruction - Nuclear weapons are weapons of mass destruction, too. But the US holds it and no one, except our enemies, seems to complain about it. It makes a big difference whether the US or some rogue terrorists hold the weapons.

3. Buy American - JNJ and PG are fantastic American companies. Yeah, I sold some of them, but Berkshire is still one of the largest holders of those enterprises. Besides, guess what where I spent the proceeds on? I bought some preferred shares of Goldman and GE. These are great American companies, too!

4. Large exposure to financial sector - Well, insurance is a big piece of Berkshire. We do believe that we do a reasonable job at managing our insurance exposure and charging the right price for taking on risks. As for our bank and other financial holdings, not all banks and financials are made the same. We own the cream of the crop. Of course, underwriting discipline and holding the best of breed didn't protect us from market swings in 2008, but we believe in the long term viability of our holdings, financial or otherwise. The truth is that if you want to make money, you have to own some good businesses, and even the best businesses take their lumps every now and then. The only way not to have exposure is to not be in business.

5. Conoco purchase - My timing was horrible. But the world was and still is facing an energy crisis, despite an economic slow down. When the economy recovers, energy shortages will resurface. The fundamentals for much higher energy prices is deferred, but has not disapeared. And we believe that COP has good assets and good management to benefit from an energy revival. If I had know in 2008 that COP would fall 50%, I would have waited. But even at the priced we paid, we believe that we'll ultimately make money.

6. Nalco holding - Shortage of clean water is a major problem in China and many other parts of the world. Nalco's business should grow over time and we believe it was selling at the right price.

7. Bet on US - The US is still the strongest and richest country in the world. Yes, it has many problems, but show me a country that has no problems. Relative to other countries, the US has law and order, political stability, democracy, an educated population, and so on. There are many things going for the US. Yes, our standing in the world may slowly erode over time, but there are still many parts of the country that will thrive and there are many opportunities for Berkshire right here at home.

May 03 12:15 AM

[Igneous:]

Well you seem pretty bright too Stephen. Well said and optimistic.....I like that!

May 03 08:42 AM

[BlueOkie:]

Berkshire has become too big. Break up the company into several smaller corps. Give current stockholders either stock in the new companies or cash. This will allow for growth.

May 03 09:16 AM

[Stephen Yu:]

I am sorry that I disagree that breaking Berkshire up is a good idea. Management of Berkshire's units is decentralized. The units are free to grow on their own. And better yet, they are backed by Berkshire strong capital base and do not have to tap the capital market. This credit crunch is a good case in point. If I were running a business, I would want to be acquiring some competitors at low prices now. But if the capital market is closed like has been recently, I can't take advantage of it. However, if I have a strong backer such as Berkshire, I would definitely be shopping. Being a part of Berkshire benefits from the financial strength of a great company without losing autonomy, and this ultimately benefits Berkshire and its shareholders. Furthermore, Berkshire files one 10-k a year now. If you break it up, it has to file multiple 10-ks. Who is going to file those extra forms? And who is paying for them?

On May 03 09:16 AM BlueOkie wrote:

> Berkshire has become too big. Break up the company into several smaller
> corps. Give current stockholders either stock in the new companies
> or cash. This will allow for growth.

May 03 10:40 AM

[Northstar10000:]

Buffett is and always has been an over rated lucky fool. He started with millions got lucky in a long term bull market was clueless on how to trade and that served him well up to 2008. He is dangerous to your wealth.

May 03 12:28 PM

[backtoreality:]

NORTHSTAR..
CORRECT...and buffett is aso correct..many times, he has said he doesn',t know anything about the stock market..soooo..if you have to be good..or be lucky.....be lucky


On May 03 12:28 PM Northstar10000 wrote:

> Buffett is and always has been an over rated lucky fool. He started
> with millions got lucky in a long term bull market was clueless on
> how to trade and that served him well up to 2008. He is dangerous
> to your wealth.

May 03 01:11 PM

[kuenstler:]

I am an artist and I would like to paint a portrait of Warren Buffet to get funds for my lung cancer treatment and of course to have enough money to keep going.
Sincerely
E.Darneth


.

May 03 01:44 PM

[Randy Hill:]

2) Fitch was being silly. BRK still has highest ratings in the world.

2) Derivatives - Are you joking? The answer is obvious if you just read what Buffett wrote. How can you get a column on Seeking Alpha if you don't understand the differences between why Buffett called them weapons of mass destruction, and why he's still investing in some. Do you understand that any stock option is technically a derivative? You should do research that goes deeper than reading a headline.

Let me give you a little hint to help you start your journey, it's called "counterparty risk". If you could understand this concept just a little bit, you'd be a much better investor.

3) He was selling some positions to buy other, mostly U.S., positions.

4) I think he answered this pretty clear, he owns the cream of the cream of the financial sector. And he's making mad money on his GS investment already.

5) Purchase of oil firm ConocoPhillips (COP) at the height of the oil bubble - He doesn't get an "Oops" once in a while?

6) Nalco has massive FCF, and why you are obsessing about an investment that is less than 0.2% of the total portfolio.

7)" Why so optimistic about the long-term prospects for the U.S. economy when it’s so reliant on: Foreign lenders, very high levels of indebtedness in consumer/government sectors, and printing money by the central bank" Interesting that you ask a long term question and cite a bunch of short term factors.

May 03 03:33 PM

[Market Sniper:]

Buffett started with millions? I do not think so. He borrowed $1,800 (back when that was some real money!). Cannot argue with success regardless of how it was accomplished either by "luck" or foresightedness. Good points though, could be he needs to retire to the Multi-Billionaire Old Folks Home with Kirk. Seems to be losing the touch.

May 03 03:40 PM

[Randy Hill:]

1 - Fitch was being silly, BRK's book value and operating cash flow is not at risk from Warren's mortality, and it has no need for investment gains to pay it's debts. And he's answered this question over and over satisfactorily, there is a plan, and no, there is no reason to tell shareholders who the next guy is. That would be silly and cause internal turmoil.
2 - The difference is called "counter party risk". The fact you don't understand this begs the question of how you got a column on Seeking Alpha. Obviously you never read what he actually wrote or you would already know this.
3 - He was selling positions to fund new purchases in the U.S. And how american do you really think PG and JNJ are in total?
4 - BRK invests in the cream of the financial sector, and this is a great time to own them. And doing very well, esp. on the GS investment.
5 - You can't give him one "oops" every so often?
6 - You are obsessing about less than .2% of the portfolio? And it does have outstanding FCF, you might know.
7 - You honestly ask him about his long term perspective on the U.S. (spanning decades) while you cite a bunch of short term statistics? You could have been equally bearish in 1975 and he would have been equally bullish.

May 03 03:41 PM

[TCK:]

My question for Buffett.

"When you made your billions through capitalism, why would you impose socialism on everyone else ? "

May 04 06:14 AM

[Andy1234:]

HAHA.

best line of the day!

"When you made your billions through capitalism, why would you impose socialism on everyone else ? "

May 04 08:31 AM