This year, the New Low Observer team (including our ten year old daughter) went to Omaha, Nebraska for the 2013 Berkshire Hathaway shareholder meeting. The following are some observations based on the comments of Warren Buffett and Charlie Munger:
According to Buffett, Burlington Northern Santa Fe is running on all cylinders. Carloading of freight for BNSF exceeded that of the top four competitors in the industry combined. It could not be ignored that carloading is a metric for determining the health of the rail industry. In regards to getting oil from remote regions, oil travels faster by rail than by pipeline. Although this point was reiterated in the meeting, there was not enough explanation of why this is the case. Some possible explanations were that pipes require constant maintenance. Upkeep of the pipeline requires stopping the flow in order to repair the system.
A shareholder asked about book value per share growing at less than average as compared to the price of the S&P 500, to which Warren said [paraphrasing]: "…the last ten years have not been very good, 2013 will be the first 5 year period Berkshire has fallen short of the S&P 500 [index]. Berkshire Hathaway is likely to do better in down years rather than up years. Book value is the best 'approximate' value that is closest to intrinsic value." Munger [paraphrasing]: "…of course, annual gain is going to be a little less than before, because of the substantial growth in prior years." On the topic of Berkshire's book value, We found this little tidbit in the 1979 Letter to Shareholders that is of critical concern on the topic:
"If we should continue to achieve a 20% compounded gain - not an easy or certain result by any means - and this gain is translated into a corresponding increase in the market value of Berkshire Hathaway stock as it has been over the last fifteen years, your after-tax purchasing power gain is likely to be very close to zero at a 14% inflation rate. Most of the remaining six percentage points will go for income tax any time you wish to convert your twenty percentage points of nominal annual gain into cash.
"That combination - the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gains tax on retained earnings) - can be thought of as an "investor's misery index". When this index exceeds the rate of return earned on equity by the business, the investor's purchasing power (real capital) shrinks even though he consumes nothing at all. We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity." (source: Buffett, Warren. 1979 Berkshire Hathaway Letter to Shareholders. March 3, 1980. page 3. http://www.berkshirehathaway.com/letters/1979.html.)
It seems that the shareholder's concern about the failure of the book value to keep pace with the price of the S&P 500 in the last 10 years isn't as significant as the threat of a high inflation period. Buffett closes on the topic with the following thought:
Disclosure: I am long BRK.B.