Lessons From Warren: An Analyst Visits Berkshire's Annual General Meeting

Jul.17.13 | About: Berkshire Hathaway (BRK.A)

AROUND THE WORLD, there have been many successful investors. None, however, has achieved the results and chronicled their lives and methods as clearly as Warren Buffett, the man dubbed by his fans as the "Oracle of Omaha".

Libraries are filled with books on this remarkable man and there are countless articles and videos promising to explain how to "invest like Warren Buffett."

Despite this, Warren Buffett and the secrets behind his track record are enigmatic.

Folksy, avuncular, and disarmingly modest, he has hand-built an empire in Berkshire (BRK.A, BRK.B) that makes over US$1 million every ten minutes of the workday while having enough spare time to indulge in regular bridge and ukulele playing sessions. For investors who bought back in 1968, just $11 invested back then would be enough to make them a millionaire today.

Is investing really so easy? Or perhaps, as a wag once quipped: "Warren's record is better because he's smarter. He's just too polite to say so."

Planning the Family Holiday, Investor Style

For me, even after devouring all the major biographies on Buffett, figuring out the real secrets to his investment success is difficult. Attending the Berkshire Annual General Meeting (AGM) for shareholders is the easiest way to see this reclusive and successful investor close and learn more about his methods. However, flying 20 hours from Singapore to Nebraska is a lot of backache to suffer to attend a one-day meeting.

Late one night in March, I hatched a plot to turn the AGM visit into an excuse for a family holiday.

"What do you think about two weeks in the US?" I suggested to my wife over breakfast. "I'm thinking of May, to attend Berkshire's AGM. We can fly through California….it's late spring and San Francisco and Napa are beautiful that time of year."

"Hmm...." she replied "Sounds good!"

And with that we were soon on our way!

Our 9.25am flight on Singapore Airlines from Singapore to San Francisco went through Seoul and was extremely civilized - long haul passengers on morning flights have nowhere to rush. In contrast, our Friday flight on Southwest (NYSE:LUV) (Herb Kelleher's "Love airline") from San Francisco to Omaha was burbling with excitement and every passenger seemed headed for the Berkshire AGM.

The shareholders who go to the AGM are generally well-off (one "A" share last traded for US$171,000), even tempered (buy and hold - it's a really long time!) and older (think the movie "Cocoon", or if you are too young to know what that is, think of your grandparents), and cardigans outnumber business jackets by an eye-popping number.

Ostensible strangers chatted like old friends on the flight. Maximum bragging rights were scored by early investors returning to the AGM.

"I only own ten of the "A", but I've been to the AGM since 1995," a man a few seats ahead says easily to his neighbor. Translation - I'm very relaxed because my Berkshire shares are up $1.5 million, thanks for asking.

The AGM itself was a little surreal, with Buffett acolytes braving a blisteringly cold morning to shuffle into a snaking queue outside Qwest Center, a convention centre sized with this mammoth AGM in mind. The tide of people was overwhelming, and a count later put the number at 35,000 in attendance - equal to three packed houses of Singapore's Indoor Stadium.

It was free seating and having had the temerity to stop for breakfast meant that it was 7am when we got seated and the front row seats were long gone.

Fortunately, the seats we did find were next to an extremely affable Chinese man who turned out to be a corporate law partner at one of Omaha's leading law firms. This was the type of gentleman Ang Lee would cast in the Tom Cruise role if he ever did a remake of "A Few Good Men", and I had a great chat with the former Shanghai and Chicago native about many things, including the swell of PRC money looking to invest in America's Midwest.

Events kicked off at 8.30am with a movie skit featuring Arnold Schwarzenegger spurning a voracious Buffett for 89-year-old Berkshire billionaire Charlie Munger as the next Terminator.

More skits with celebrities like Jon Bon Jovi and Kevin James, and a clever parody with Buffett plotting to corner the peanut brittle market with help from "Breaking Bad" duo Bryan Cranston and Aaron Paul. Finally the movie session finished with a "Dancing with the Stars" skit showing an animated Buffett and Munger winning the finals by bopping "Gangnam Style".

With George Lucas in the audience, one imagines the force was strong within them that day.

At 930am, the stadium's massive floodlights dimmed a moment, kicking off a Village People number which substituted "B-R-K-A!" (Berkshire's stock code on NYSE) for the original "YMCA" refrain.

Amidst a floor awash with dancers dressed as Heinz sauce bottles, financial industry glitterati such as Becky Quick of CNBC, Andrew Ross Sorkin of NYT and Carol Loomis of Fortune file in, flanking the Berkshire directors which included Warren, Charlie and Bill Gates.

The real highlight of the AGM is the famous question-and-answer session, an eclectic five-and-a-half hour marathon split by a lunch break. In a display of staggering virtuosity, the Warren and Charlie double act (combined age 171 years) talked crisply about almost any topic lobbed at them - US housing market, succession planning, corporate governance, monetary policy and the mechanics of insurance, machining and railway companies.

It's the business equivalent of being a two-man orchestra - woodwind, brass, percussion, string, with a little piano thrown in.

Even more astonishing was the self-awareness to keep answers within the limits of their knowledge. In Buffetspeak, this is "operating well within a circle of competence and knowing where the perimeter is". Too often, experts fall into the trap of answering questions they have little knowledge of for fear of appearing less than expert.

There were too many topics to fully cover here, so below is just a sampling of some of their more memorable responses. Interestingly, Charlie is possibly smarter than Warren Buffett and certainly pithier.

So, was the trip worthwhile?

Absolutely. For me, a few things about Buffet's investing style and what is replicable became clearer (see "What I Learned" below). For my wife, she came back a few carats heftier, souvenirs from Berkshire-owned fine jeweler Borsheim's which offers shareholder discounts of around 25% during the AGM week.

And as for my 6-year-old son, let's just say that he enjoyed the extra time with mom and dad, and the Omaha french fries were pretty good too.


(These are reproduced from memory and limited notes, and are not a verbatim record. WB = Warren Buffett and CM= Charlie Munger)


When we started, modern psychology hadn't yet discovered how tiring it is to make decisions. Warren and I live on autopilot, we are totally habitual, and waste no energy on little decisions. Caffeine and sugar are great for decision-making and we ingest coke and chocolate all day long.


CM: I'm worried about my old age, it could come on at any time. (Laughter)


CM: Just because Warren thought something twenty years ago doesn't make it a law of nature.

WB: We'll talk about that at lunch. (Laughter)


CM: We try to be sane when others go crazy. We also use the golden rule to treat subsidiaries how we would want to be treated if we were their subsidiaries. We try to be a good partner and that is an advantage. We left behind a competitive place to go to a place more unusual. This was a great idea and I wish we had done it on purpose. (Laughter)


WB: Find what turns you on.

CM: I have never succeeded in something I didn't like. Even at the grocery store, Warren was not going to be promoted even with the family name! (Laughter)

WB: We found things we liked and we pushed hard. We have so much fun running Berkshire, it is like a sin.

CM: And you atoned by giving all the money back. (Laughter) [Warren is donating almost all his fortune to charity, most of it will go to the Bill and Melinda Gates Foundation]

WB: You give it all back whether you want to or not in the end. (Laughter)


CM: Our current problems are quite confusing. If you aren't confused, I think you don't understand what's happening very well. (Laughter)


Buffett is indeed smarter than the rest of us - his ability to synthesize a number of factors into a functional worldview is simply breath-taking. Scarily, it looks like Munger could be even better at this than Buffett.

Buffett's main strength is, however, not his cleverness, but his rationality, ability to recognize and stay within his "circle of competence" and his ability to get great people to work for him.

1. Rationality: While investors usually look for information that backs up their existing views, Buffett seems to be constantly processing to check that his mental models are holding up, and his grasp of the imitations of his mental models appears so complete as to approach instinct. A quote on his investment in Coca Cola is illuminating: "Unless Coke turns out to cause cancer, we'll sell more in the future than now". While this sounds like a joke, my guess is that it's actually Buffett looking for possible flaws in his investment.

2.Circle of Competence: Being smart can be a trap when one believes that being smart is enough to making better decisions in all situations.

While being "smart" certainly helps in memorizing textbooks or playing board games where information and permutations are absolute and finite, in the real world, certain problems may be intractable to cognition and mean that being smart is irrelevant. For example, intelligence can fail due to incomplete or incorrect information or other people making irrational decisions.

The ancient Chinese understood this. In the words of Zhuangzi: "To let understanding stop at what cannot be understood is a high attainment."

When Buffett says "Only buy businesses you understand", he doesn't just mean you should know what a business looks like now. He means you should know what it will look like five or ten years from now. This is an enormously important distinction - in Buffett's view as knowing everything about the number of outlets or the products a company sells does not mean you understand it.

3. Great people: It's said that even with 80 individual companies under Berkshire, no CEO has ever left to work for a competitor. Buffett's ability to pick managers that stay, motivate them and stay out of their way is worthy of a study in itself.

Buffett, however, may be habitual to a fault. While in Omaha, in a minor act of homage, I rented a Lincoln, the same car he drives, and it's a slush bucket that steers like a cow. It's appreciably worse in every respect I can think of (power, noise, handling, finish etc.) than the Toyota Camry we drove for the rest of the trip.

To regard Buffett only as a successful investor is to see only the tip of the iceberg. He seems to have thought through most life subjects in more detail than almost anyone else, and pretty much everything he does seems to have a reason and intent. Notably, even with his shares up just shy of a million percent, Buffett regards his house and wedding rings to be his best investments, showing the importance he places on family.


At 82 years of age, Buffett seems to be in rude good health despite a diet consisting of 6 cokes a day, T-bone steaks, cheese burgers, candy and reputedly premium vanilla ice cream for breakfast. At the AGM, he and Charlie chomped through a two pound bowl of peanut brittle fast enough to make a dentist - let alone a dietician - wince.

Despite living in the same house for over 50 years, Buffett professes not to know the color of his carpets. "My brain doesn't work that way".

Buffett believes in doing what you love so much that he has said "If you gave me the choice of being CEO of General Electric (NYSE:GE), IBM (NYSE:IBM), General Motors (NYSE:GM), you name it, or delivering papers, I would deliver papers. I enjoyed doing that. I can think about what I want to think. I don't have to do anything I don't want to do."

Buffett seems to only call himself an investor for convenience, more often referring to himself as an "asset allocator" and seeing his role as to "hire great people". The distinction is in the control over incoming and outgoing cashflow he has as compared to most investors.

While his fame stems from his investment track record, Buffett believes after he is gone, he will be most remembered as a teacher.

Though he is the world's richest investor, Buffett does not seem to seek maximum monetary returns at all costs. His priorities seem to be doing what he enjoys (building businesses), working with people he likes and minimizing risk. His returns are the maximum achievable after taking these factors into account.

Disclosure: I am long BRK.A. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.