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May 13

Off to see the Wizard

Berkshire Hathaway is an unusual company. You may never have heard of it, but it is currently the fifth largest company by market capitalization in the world (after Apple, ExxonMobil, Microsoft and Google). Its original class of shares, Class A shares, currently trade for about $160,000 per share on the market (they’ve never been split). If you look up Berkshire on Wikipedia, you’ll see it’s classified as a “diversified conglomerate”. Berkshire owns stakes in a motley crew of companies. It owns numerous household brands – Geico, See’s Candies, Brooks among them – a few highly lucrative insurance and re-insurance businesses, a railroad company, a private jet leasing company, and significant minority interests in large companies such as Coca-Cola, P&G and Amex.

Although you may not have heard of Berkshire Hathaway, you probably would have heard of Warren Buffett – its CEO and largest shareholder. Buffett is of course well known as an investor and not an operator (even though he is a formidable operator as well – he acted as an interim CEO for Salomon Brothers in the 90s), so Berkshire from the top is essentially a fund. But it’s not a private equity fund – once Buffett buys a business, he generally intends to keep it “forever”. He makes sure the business has great management, and then apparently lets them get on with doing their jobs without a lot of interference.

Berkshire’s annual shareholder meeting is globally unique. Shareholder meetings are usually a formality required by law – staid corporate affairs that are run without a lot of public visibility. Berkshire’s annual shareholder meeting is held on the first Saturday of May each year and attracts somewhere in the region of 40,000 shareholders, some of whom have flown from other continents to attend.

You need to be a shareholder to attend (kind of). Up until 2010, to get in the door, you needed to hold at least one share, and the ante was about $3000 for one share of Class B stock. Berkshire split the stock 50:1 in 2010 to facilitate an acquisition, and then suddenly everyone could invest in Berkshire (I picked up a few shares at that time). Each year, when they mail out the annual report, they include a postcard which you can mail in to get 4 free tickets to the meeting (so you don’t strictly need to be a shareholder to get in – you just need to know one).

I flew to Omaha this weekend to check out what’s been referred to as “Woodstock for Capitalists”. I’m not a “Buffettologist” by any means. I’ve never read any books about him or by him. However, I do enjoy reading his annual letter to shareholders which is written in a very accessible and engaging style. And I do know enough about him and his worldview to want to listen to him in person – he is a living legend.

The meeting was held in a convention center. Omaha’s weather had dipped to a few degrees above freezing, so they opened the doors early some time before 7am. Near the entrance, a large expo floor is filled with booths manned by each of Berkshire’s portfolio companies. There were a lot of them, and some of them, such as See’s Candies” were doing swift business (they had about 15 cash registers operating simultaneously and a steady stream of customers throughout the day).

The main event was held in the arena. The meeting kicks off with a traditional hour-long movie. Humorous skits featuring celebrity cameos are interspersed with ads from Berkshire subsidiaries. That morning’s movie featured a cartoon depiction of Buffett and his business partner, Charlie Munger, dancing to Gangnam Style. Arnold Schwarzenegger featured in another skit, as well as a spoof of Breaking Bad (pushing “addictive peanut brittle”). The last skit was a version of YMCA celebrating Berkshire’s managers – with the YMCA initials being replaced by “BRKA” and “BRKB” (Berkshire’s stock ticker symbols). Cheerleaders from the University of Nebraska took to the floor at that stage. It was pretty festive and lighthearted.

And then Buffett and Munger took the stage. After introducing Berkshire’s high profile board of directors (Bill Gates was in attendance), they then proceeded to answer questions for over 5 hours with only a break for lunch. Buffett is 82 years old, but is astonishingly razor sharp and lucid. He has an amazing memory. Munger was very brief and pointed – often to comedic effect – and not afraid to say “I have nothing to add” or make a pointed barb at the expense of Buffett (or some hapless European nation). Munger’s not as charismatic as Buffett, but for a man of 89, still pretty remarkable.

The audience was mostly middle-aged, with scattered representation by MBA and other business students and other miscellaneous Buffett fans (interestingly, I noticed quite a lot of mainland Chinese there).

People took the opportunity to question Buffett and Munger about all manner of things – naturally about Berkshire and its investments, but also about politics, the economy, social media (Buffett just joined Twitter), and even their outlook on life in general. If you follow Buffett, nothing really new was said that hasn’t been written about before by or in relation to Buffett. However, in the words of another attendee, it was like going to church. You know what the message is, but you go anyway – for reinforcement, to be with like-minded people, and because Buffett is an engaging speaker. Another likened it to an annual pilgrimage.

Buffett is well known for being a “value investor” – a buy and hold investor who focuses on business fundamentals. People kept trying to figure out what his secret recipe is (“What are your top 5 financial metrics that you use?” “Are there any magic ratios which you look for?” “What are you top 10 books, aside from anything written by Graham?”) Buffett and Munger consistently explained that there’s no shortcut – you just need to get to know the business. (I thought it was kind of like the approach to investing in startups – you shouldn’t and can’t rely on the financials – you need to make sure you’re investing in a good business, which means knowing its management, its market, its product, and its prospects; and, interestingly, in isolation to the macro environment. The difference with investing in mature companies is that Buffett is also looking for companies whose price is undervalued against his evaluation of its value.) An estate lawyer asked him how much money people should leave to their kids so that they could, in Buffett’s words, have the freedom to do anything, but not the freedom to do nothing. Again, Buffett was quick to point out that there’s no magic number, and the focus rely should be on good parenting rather then how much money a child is left. And then he segued into wills and how he thought parents should ensure that they go over their wills with their (adult children) since “they’re going to see it eventually” and “it’s going to be better if the kids are able to discuss the will and have their say while the parents are still alive”. Other snippets: if you’re currently keeping money in cash, you’re getting killed (by inflation); and given the interest rate environment, now is a pretty good time to take out a 30 year mortgage and buy a house.

If you’re interested in the sorts of things that interest Buffett, the Berkshire meeting is worth a special visit – if only to see the Oracle of Omaha in the flesh.

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