We attended the Berkshire Hathaway (NYSE:BRK.B) annual meeting held on May 5, 2012 in Omaha along with more than 30,000 other folks from around the globe who gathered once again for the Woodstock for Capitalists. Warren Buffett, Chairman, and Charlie Munger, Vice Chairman, held court for five hours answering questions. Here are our notes on some highlights from the meeting.
FIRST QUARTER RESULTS
Berkshire Hathaway's net worth during the first quarter of 2012 increased 6.8% with book value equal to $106,600 per Class A share as of 3/31/12. In general, all of Berkshire's companies, with the exception of the residential construction companies, have shown good earnings growth. Buffett feels good about the first quarter and the year.
Each of Berkshire's five largest non-insurance companies -- Burlington Northern Santa Fe, Iscar, Lubrizol, Marmon Group and MidAmerican Energy -- delivered record operating earnings in 2011 of more than $9 billion in aggregate. Unless the economy weakens in 2012, Buffett expects each of the "fabulous five" to once again set a record with aggregate earnings comfortably topping $10 billion. Buffett said he would love to buy operating businesses with similar attributes to his existing businesses if he could buy them at 9-10 times pre-tax earnings.
Buffett said there have been four or five times during Berkshire's history that he thought the stock was significantly undervalued. Any business will be overvalued at times and undervalued at times. He noted that this comes right out of Ben Graham's book, "The Intelligent Investor," and referenced chapters 8 and 20. Mr. Market is a "psychotic drunk" who will do weird things over time. You should make sure Mr. Market serves you and not advises you. Mr. Market makes lots of mistakes. It is built into the system that stocks get mispriced.
During 2000-2001, Berkshire's stock was selling at a very low valuation. The beauty of stocks is that they do sell at undervalued prices at times, which is how he and Charlie got rich. Generally speaking, Berkshire has sold on average close to its intrinsic value over the last 47 years. In the next 20 years, the stock will get significantly overvalued and undervalued at times as the price bobs around intrinsic value. This is true of other stocks as well. Investors should make an investment decision based on what they think the business is worth. The stock market is the most obliging way to make money as you don't need to do anything most days. You can't do this with alternative investments like farms. When it comes to stock investing, the rules are stacked in your favor if you don't act like Mr. Market.
In Sept. 2011, Berkshire's board authorized a share repurchase program at prices no higher than a 10% premium over the then-current book value. Buffett said he feels very comfortable buying back shares at 1.1 times book value as he wants the stock to be "significantly undervalued" to do a buyback.
He said Berkshire's capacity for a buyback is in the "tens of billions of dollars" range as long as Berkshire's overall cash position doesn't fall below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. He said Berkshire would make significant money for shareholders if they buy back stock at 1.1 times book value.
(Note: Berkshire's stock currently is trading close to Buffett's buyback level, signaling an attractive valuation level. Is Buffett buying back shares of Berkshire Hathaway? Even if he isn't, we are adding to our long-term position in Berkshire Hathaway! Based on current business fundamentals, we expect Berkshire's A shares to trade between $111,000-$166,000 per share and the B shares to trade between $74-$111 per share. )
Given the recent news of Buffett's prostate cancer, he was asked how he was feeling. He replied, "I feel terrific! I love what I do. I have more fun every day, a good immune system, and a great diet," as he munched on See's peanut brittle and chugged cherry Cokes throughout the meeting. His radiation treatment will not involve hospitalization, and the survival rate is 99.5%. Eighty-eight year old Charlie joked that he resented all the attention and sympathy Buffett was receiving as he believed that he had more prostate cancer than Buffett, but he just doesn't get tested for it. Both see the prostate cancer as a non-event for Berkshire.
In a post-Buffett Berkshire Hathaway, the culture is unlikely to change with a well-thought out succession plan in place. Charlie added that the first $200 billion (in market capitalization) was hard for Berkshire to create, but the second $200 billion will be pretty easy to achieve given the momentum of Berkshire's businesses. Buffett agreed that Berkshire has the businesses in place to take Berkshire's market capitalization to $400 billion in the future.
Sovereign debts have defaulted many times over history. This results in a big reallocation of wealth. Buffett admitted he doesn't know how it plays out in Europe. It might have a bad ending. He prefers a world that keeps its fiscal house in order. When in a recession, sovereign debt feeds on itself. When a government like the U.S. is operating at a deficit of 8%-9% of GDP, this is a huge fiscal stimulus which could have inflationary consequences. Due to inflation risk, investors should avoid medium to long-term government bonds from the U.S. and other countries. Charlie noted that we have lost all fiscal virtue. It is a terrible problem. Charlie added everyone wants fiscal responsibility, but not quite yet. He said it is like St. Augustine, who as a youth prayed to give up sex "but not yet." Charlie said the government should spend sensibly on infrastructure. "We need more sacrifice, more patriotism and more civilized politics."
Among discussions of European banks and sovereign debt levels, Buffett said in 53 years of buying businesses or stocks, he has never considered macro fears when making his investment decisions. It doesn't matter to him what the headlines say or the fears that are in the market. If he likes a business and its valuation, he buys the business.
In October 2008, during the financial panic, Buffett wrote a New York Times editorial discussing why he was buying stocks. It is important to look at value and not the headlines. Charlie added that you want to have liquid reserves at the bottom of panics so you can take advantage of the opportunities. Buffett agreed that the first rule of investing is not to go broke, so that you can always play tomorrow.
BERKSHIRE VS. GOLD
When Buffett took over Berkshire, the stock was trading for $15 a share and gold was trading for $20 an ounce. Today, Berkshire shares are worth $120,000 per share and gold is worth $1,600 per ounce. Over a 50 year period, Berkshire will do much better than gold as will other stocks. After 50 years, 1 oz of gold will still be 1 oz of gold. However, if you invest in 100 acres of farmland, you will have sold crops each year earning income annually and still have 100 acres of farmland. It's hard for an unproductive investment like gold to beat a productive investment like stocks or farmland over the long term. Charlie muttered that he never had the slightest interest in owning gold as he can't imagine a worse situation.
FOLLIES, FADS AND IPOs
When asked what businesses today appear to be follies, fads, unsustainable or dumb, Charlie snorted, "A lot!" Berkshire stays away from businesses they don't understand. Buffett wants to invest in businesses where he has a reasonable idea of what the earnings and competitive position will look like in 10 years. If the price is crazy, that will eliminate many other companies from consideration. In 30 years, Berkshire has not purchased a new issue. Charlie noted that the 7% commission on initial public offerings (IPOs) makes them unattractive. Buffett said he doesn't spend five seconds on IPOs. Buffett added investors don't have to do many things to be successful. That is the beauty of the business. You need to avoid big disasters, as you never want to lose a big percentage of your net worth.
Disclosure: I am long BRK.B. Hendershot Investments holds a long position in each stock presented.
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