As a devout value investor, I have wanted to travel to Omaha for the Berkshire Hathaway (NYSE:BRK.A) shareholders meeting for several years. As expected, it was an incredible trip where I met many like minded investors and learned from the sage. Buffett and Munger spoke for five hours during the question and answer session in which I was able to take 21 pages of notes, covering a wide variety of topics.
The question on most people's minds was Buffett's response to the recent SEC case against Goldman Sachs (NYSE:GS). Buffett explained the Goldman Sachs transaction very thoroughly, and also explained why he had no issue with it. The deal was called Abacus, with the largest loser being a European bank named ABN Amro. They lost money because they in effect guaranteed the credit of ACA. ABM was in the business of judging credits, what credit risk they would accept themselves, and guarantee. They guaranteed the credit of another party, and lost; Buffett does this all the time at Berkshire. Berkshire has made a lot of money over the years doing this, but has also lost money many times. ABM guaranteed 900 million of the credit and got paid 17 basis points which amounted to 1.6 million. Buffett says that it is hard to get terribly sympathetic that a bank made a dumb credit dealing. The bank got outside of what it understood, and lost money, that is just poor decision making.
Buffett provides a similar insurance example when describing how Lehman Brothers (OTC:LEHMQ) approached him to insure several 8.25 billion for several state bonds. Lehman could own the bonds, could be shorting, could have a customer who wanted protection, it does not matter to him. Buffett does not care which scenario, it is his job to determine whether he should insure the bonds. There could be problems in the state bonds Berkshire insured, the guy who sold them to Berkshire might know more than Berkshire knew, but that is Berkshire's problem if he is wrong. He will not go to the guy on the other side of the transaction and claim he had superior knowledge if he loses money on the deal. The central part of the argument is that Paulson knew more than the bond insurer. Buffett notes that his guess is the bond insurer employed more people than Paulson and they still ended up making a dumb decision. Buffett says "for the life of me I don't know why it makes a difference whether it was John Paulson, Goldman Sachs, or Berkshire on the other side of the deal." Buffett feels that when he trades with Goldman, they can be shorting a stock he's buying. They do not owe him a divulgence of their position any more than Buffett needs to explain to them his reason in the position. He acts with them in a non-fiduciary capacity, and vice versa. In terms of another Goldman CEO, Buffett said if Lloyd had a twin brother he would go for him.
Buffett had an interesting view on the currency markets, he admitted that he did not know "how this movie would end" but that "recent events makes him more bearish to all currencies holding their value in the future." Buffett feels if you could run a budget deficit for 10% every year, the world would have been doing it for a long time. This practice is not sustainable. He stated that currencies are a poorer bet than they have been in a long time.
In terms of the entire market, Buffett feels much better owning stocks in the long term than holding bonds or holding cash. He said over the next 10-20 years, he'd rather own equities than cash or bonds. He would rather own them because he is very unenthusiastic about bonds and cash, and feels that equities will give investors a modest positive real return over time.
When asked about China, Buffett said that China has an amazing economy. He says there were 290 million people in China in 1790 (only 4 million in the US), but for 170 years little progress was made. They were just as smart, just as hard working, had the same resources but the system they lived in limited human potential. Now, the potential of the Chinese is being realized, and it is a sight to behold. Buffett also mentioned part of the reason they have had so little activity in China is because they are only allowed to buy 24.9% of a company there, and Buffett likes buying entire companies. Charlie said "he always knew china could be a huge credit to human civilization. He underrated how fast it could happen. China is setting a new record for the advancement of civilization at rapid rate. China is very fun to watch."
Disclosure: Long BRK.B