The Breakfast of Giants
It’s 8am Saturday morning, the day of Berkshire’s 2010 Annual Meeting. As my wife and I walk up to the entrance at Qwest, shareholders pass us eating Dilly Bars. Remind you, it’s 8 o’clock in the morning and 50 degrees out! How many sixty year olds eat that for breakfast? We thought to ourselves, what a peculiar thing.
Dilly Bars are what’s for order. Just ask Bill Gates. My wife and I got a chance to say hi to him as he was finishing up a Dilly Bar right after the annual meeting.
While I would like to say there was at least one question during the annual meeting that was real estate related, I’m sad to say, none were real estate specific. To my shame, I did dozed off for one “moment” during the annual meeting which ran from 8:30am to 4pm. So there’s a remote chance I might have missed it.
That said, if you’re looking for real estate info, read no further. However, if you’d like to get snippets of the annual meeting, continue on.
Warren and Charlie answered questions that were emailed to Carol Loomis from Fortune, Becky Quick from CNBC, and Andrew Ross Sorkin from The New York Times along with questions from preselected people in the crowd.
On Goldman Sachs. Goldman Sach’s SEC fraud charge was the hot topic and the first question to get answered by Warren. Surprisingly, he had a strong view towards Goldman and even endorsed Goldman Sachs. While there has been some “disappointment” from the press that Buffett seemed biased toward Goldman. Even if he was, who can blame him? Berkshire has $5 billion preferred investment earning 10%. That equates $15 every second or $500 million per year. Tick, tick, tick…
Much controversy exists around the fact that Goldman brokered a transaction where the buyer of insurance was John Paulson who “hand selected” the assets to fail which were insured by ACA. The SEC alleges that ACA was deceived by Goldman, ended up losing nearly $1 billion.
According to Warren, it didn’t matter who was on the other side of the transaction, in his words, “…it could be John Paulson or the Secretary of Treasury…” for all he cared. As an insurer, you get paid to evaluate and take on risk. As an example, he displayed a slide that was given to him to insure public municipals. The municipal notes totaled $8.25 billion and the buyer of insurance was Lehman Brothers for their holdings. In the end, Berkshire insured the notes for 10 years for a premium $160 million. Buffett said that if there were a loss on deal, he would not be crying foul.
He believes there’s lots of misreporting going on about Goldman and when asked who he thought would be a good replacement for the current CEO of Goldman – Lloyd Blankfein – Warren said, “If he (Lloyd) had a twin, I’d pick him.”
Furthermore, the decision to file the fraud charges by the SEC passed by a margin of 3 to 2. According to Charlie Munger, if he were on the SEC board he would’ve voted against filing the charge.
On collateral for derivatives and insurance. The new bill in Congress may require Berkshire to post collateral retrospectively on deals already underwritten. Warren said selling a house that requires collateral deposits for Berkshire is like selling a house with furnishing. While the economics can work, it needs to be priced in. Retrospectively, if Berkshire knew that it needed to post collateral it would have collected $1 billion more in premiums to compensate for collateral requirements.
On Berlington Northern Santa Fe (BNSF). The scorecard on the purchase of BNSF (Berkshire’s largest investment) for $34 billion will not be known for the next 10-20 years.
On the economic recovery. Warren said on what was a nascent economic recovery, picked up strongly from March to April of 2010. This may serve as a good proxy for economic recovery since Berkshire owns more than 70 companies and employs more than 250,000 people. Berkshire’s diverse business ranges from building products (Johns Manville) to retail (Dairy Queen) to equipment cutting tools (ISCAR) which allows them to keep a good pulse on the economy.
On inflation. If the U.S. government isn’t careful, weaning from the medicine (excess liquidity) may be tougher than the crisis itself. According to historical trends, interest may go all the way up to 21%. However, Warren explicitly stated, “The trend is not destiny,” suggesting that America can win the war on inflation. Charlie believes things will ultimately be fine and topped it off saying, “I’m nearly dead and I’m optimistic. Surely you can handle a little inflation.” Ironically, Charlie is the cynic of the two.
On the Greece currency crisis. Greece is in a jam. It’s “sovereign” in almost all practical ways, but it can’t print its own currency (the Euro). This will serve as a test case for the Euro and whether the currency works.
On investment. Warren said that if he were restricted to only domestic investments in the United States Berkshire would be fine. There are plenty of opportunities here (although he prefers additional options like China, India, Brazil, etc.). In particular, if you had less money than him (which is probably the case) you can likely earn a higher return. In his words, “There are always opportunities if you don’t have lots of money.” It’s just harder to turn $40 billion into $80 billion than it is for $1 million into $2 million.
Regarding the general investment climate, you can’t forget the agony investors face with zero percent interest rates. If money cannot find a home in cash or fixed income it diverts to real estate or stocks. When interest rates rise they will draw demand from real estate and stocks and exert downward pressure on prices of those assets.
In the long term however, Warren predicts (just about the only prediction he made) stocks will do better than cash or fixed-income. No surprise with inflation on the horizon – and into the future.
On the choice between debt or equity investments. Shareholders asked Warren why he bought debt instead of equity like the case of Goldman Sachs (GS). He answered, “I know enough to buy the debt, but not enough to buy the equity.” Warren was confident that Goldman will be around, but not confident enough to predict its net present value (NPV) of future cash flows.
On taxes. Everyone knows the government has an enormous budget deficit that currently and will continue to represent a huge percentage of GDP (9.91% for 2009). The only way to right the ship is to lower spending and increase taxation. Warren says taxing the “marginal” income earner from McDonald’s won’t solve the problem. A better solution is a “wealth tax” of some sort. (Regardless of your political views, you can’t say he’s self-serving.)
On Kraft Foods (KFT). Still a good buy.
On who will be Berkshire’s new CEO. If for any unfortunate reason Warren “gets hit by a truck” and cannot serve as Berkshire’s CEO, within 24 hours the new CEO of Operations will be announced. The Chief Investment Officer (CIO) who will manage investment allocation decisions may be chosen at a later date. David Sokol has been the star and CEO of MidAmerican Energy Holdings and was recently promoted to CEO of NetJets as well. For the eleven years that Berkshire owned NetJets, it operated in the red and had an aggregate loss of $157 million. Since Dave took over, it is now solidly profitable.
That said, I believe that Dave may be the successor to the top post. As I shook his hand I whispered that I think he will be the future CEO at Berkshire. He leaned towards me and responded, “Be careful what you wish for, you may get it.” Well, either he has a good sense of humor or he could be next in line. I think the latter. My picture with him below.