Once again I attended the Berkshire Hathaway shareholders meeting in Omaha, NE. And once again, it was a pleasure to hear Warren Buffett and Charlie Munger get grilled with 6 hours of very tough questions. These guys are my personal heroes, and like other meetings, I came away just a little wiser. The funny thing is that their business model is ultra basic; ironically, perhaps far too basic for most people to even comprehend. Here are my takeaways from this year’s meeting (written as the meeting progressed).
- The state of the American economy: Don’t ever bet against the American economic engine. We’ve been through hell and back, with a couple of world wars thrown in. In the long run, America will be doing great.
- What’s their stock or investment pick? They obviously get asked this a lot, and this is the one question they refuse to answer.
- Their key metric for evaluating a business is earnings on net tangible assets. They look for a discrepancy between earnings on net tangible assets and the intrinsic value of a business. They’re probably the only firm that uses intrinsic value, so see their annual reports for intrinsic value definition.
- Also with regards to intrinsic value, they’re not interested in activities that artificially ballon a company’s stock price. Too artificial and short term for their liking.
- Buy great businesses and leave it alone. It’s great for a reason. Why would you want to buy a crappy business at a great price? Price isn’t the same as value. Berkshire buys value. Too much work to buy failing businesses and attempt turnarounds. That’s not their model. Leave that to the private equity folks to figure out.
- When you acquire companies, be careful of the promises you make. Always be fair. Never get a reputation of being unfair, as it affects current and future deals.
- With regard to the Coca-Cola compensation plan vote from which Berkshire abstained, corporate boards are part business and part social organizations. The boards usually don’t want aggressive members. “Compensation committees don’t look for dobermans. They look for cocker spaniels with wagging tails” – Buffett.
- Further on being the aggressive member of a board (and a general rule of life): “People accomplish more if they pick their spots for public disapproval” – Munger. “Don’t constantly complain and shout” – Buffett
- They don’t use cost of capital or other conventional, business school ordained metrics. On another note, I’ve noticed that they tend to really look down on business and finance school teachings in general.
- On the transparency of ever-rising executive salaries, Munger thinks “envy is doing the country a lot of harm”. He prefers that salary disclosure is a private matter, as the transparency encourages keeping up with the Jonses with regard to executive compensation.
- “Create a culture of deserved trust” – Buffett
- Berkshire’s biggest secret to success is ignorance removal. They think there’s still a lot to remove.
- “Remove ignorance and scramble out of your mistakes” – Munger on a general approach to life.
- “Self driving car is a huge threat to auto insurers” – Buffett
- Circle of competence. Be self realistic inside and out of business. Find the perimeter of your competence. Play the game you can win. Mrs B from Nebraska Furniture Mart is a great example.
- “Competency is a relative concept. Here’s a winning strategy: Compete against idiots. Thankfully there’s a large supply.” – Munger
- Entrepreneurship. A young person asked “What non tech industry would you go into at age 23?” Warren would go Into investment business, talk with companies, learn about different businesses. Meet with CEOs of companies. Ask questions. Ask if they had to put money into any company other than their own for 10 years, which would it be and why? Helps with understanding economic characteristics of an industry. You must be interested in the industry. Keep learning. Something will come along that you find useful.
- “You can learn a lot just by asking people who are competent in their domain. Be open. You’ll find your spot.” – Buffett
- On frugality. “Warren and I have everything in life we want. Standard of living does not equate to quality of living after a certain point. You start getting inverse correlation after a while.” – Munger
- Intrinsic value = Private business value. Aesop – birds in a bush parable.
- They don’t see a competitor to Berkshire. Nothing in American business school teaches people to be like Berkshire. Slowness of their progress is the likely cause, as it deters people from competing. Too hard and too slow.
- When making a decision, use opportunity cost as your metric.
- Inflation would hurt everybody. Munger suggests studying the Weimar hyperinflation period for a warning of the evils of inflation. They didn’t come out and say it, but you could tell they were concerned with continued money printing.
- On “too big to jail” and Wall Street’s misbehavior, prosecute individuals, not corporations. More effective, as people see direct consequences when peers are jailed. Nobody cares if the corporation simply writes a check for bad behavior. Jailing individuals will change bad behavior. See Solomon as an example.
As always, you can learn a lot from these two. They are by far the smartest people I’ve had the chance to be in the same room with (Warren actually ran me over that morning! See the link for proof). There aren’t many people like them, but I hope there’s a new breed of people with the same level of common sense and honesty. As for me, here are the personal takeaways I get from my exposure over the years to Buffett and Munger:
- Lifetime learning and growth are absolutely key to success.
- Keep things simple. Be honest and fair.
- Do the hard things. It weeds out most competition over time.
- Buy companies that generate cash flows. Avoid nonsense. This is especially poignant given that I work in the tech industry. I won’t even invest in most tech companies, as I’m unsure how long they’ll be around given tech’s constant creative destruction. Note the difference between investment and speculation, which most tech involves.
- Inaction is one of the best actions.
- Only work with people you trust. I’ve learned this the hard way, but feel like I’m improving.
- I’m 37. These guys are in the mid 80s at their youngest. I have a lot to learn.
- The smart weirdoes run the world. Buffett, Bill Gates, Munger, etc are all a bit abnormal. There’s no way these guys could function at a normal job. Nor should they. They hire the normal people to operate their companies while they focus on the bigger picture and accentuating their personal quirks. Never believe you need to bury your eccentricities to be successful. These guys are living proof against that notion. Be yourself.
- Be unconventional. Buffett and Munger have built their careers by eschewing Wall Street and conventional finance. And their track record speaks for itself.
- Stay away from the noise. There’s a reason Buffett lives in Omaha. He keeps away from the constant bustle and nonsense of Wall Street.