Berkshire Hathaway to Exercise Warrants for 700 Million Bank of America Shares

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Jun 302017

Berkshire Hathaway today announced that it will exercise its warrants for 700 million Bank of America shares.

Bank of America, which is the second largest bank in the country by assets, received permission from the Federal Reserve on June 28 to increase its per-share dividend to 48 cents a year.  Warren Buffett is exercising these warrants and swapping its preferred stock into the common stock since Berkshire will receive annual dividends of $336 million from the common stock, which exceeds the $300 million it currently receives on its $5 billion of 6% preferred stock that it purchased in August, 2011.  Berkshire will be purchasing the 700 million shares of Bank of America common stock at $7.14 per share, or $5 billion.  At Bank of America’s closing price yesterday of $24.32, Berkshire’s investment is valued at $17.0 billion, which results in Berkshire being its largest shareholder with a 7% stake.

Upon the exercise of these warrants, Berkshire will be the largest shareholder of both the second and third largest U.S. banks.  Berkshire’s 10% stake in Wells Fargo, which is the third largest bank, is currently valued at $27.9 billion.  (The largest U.S. bank by assets is JPMorgan Chase.)  Bank of America will be one of Berkshire Hathaway’s five largest common stock investments which also include Wells Fargo, Kraft Heinz, Coca-Cola, and Apple.

(Note: This blog post has been published by and ValueWalk.)


 Posted by at 8:25 am

Berkshire Hathaway Invests in Real Estate and Retailing

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Jun 272017

Within the past week, Warren Buffett’s Berkshire Hathaway has made two real estate equity investments of about equal size.  On June 21, it was announced that Berkshire agreed to purchase 38% of Canadian mortgage lender Home Capital Group for $300 million as well as providing a $1.8 billion line of credit at a rate of 9.5% as well as a 1.75% standby fee on undrawn funds.  Berkshire is paying an average price of C$10 a share, which is 33% less than the company’s closing price on June 21.

On June 26, Store Capital Corp, a real estate investment trust, disclosed that Berkshire has purchased a 9.8% stake in the firm for $377 million.  Berkshire’s purchase price of $20.25 per share represents a 2% discount to the stock’s closing price on June 23.  Store Capital focuses on service-sector investments where there is little or no competition on the internet.  The company’s biggest customers include a Midwestern furniture retailer, a large movie theater chain (AMC), and a chain of preschools.  Warren Buffett stated at Berkshire’s annual meeting on May 6, 2017, that its furniture businesses, including Nebraska Furniture Mart, have seen little effect from online shopping.  (“Store” is an acronym for “Single Tenant Operational Real Estate.”)

Both of these investments are relatively small for Warren Buffett, but they represent large stakes in these companies.

(Note: This blog post has been published by and ValueWalk.)

 Posted by at 2:43 am
Jun 142017

The University of Maryland’s Robert H. Smith School of Business is excited to announce some favorite books in the 14th Annual Top-10 Summer Reading List for Business Leaders for 2017, as recommended by faculty members.

The Undoing Project: A Friendship that Changed Our Minds(1) The Undoing Project: A Friendship that Changed Our Minds
By Michael Lewis (2016)

“The author of ‘Moneyball,’ ‘The Blind Side’ and ‘The Big Short’ has written another masterpiece,” says David Kass, clinical professor of finance. “In ‘The Undoing Project,’ Michael Lewis describes how two disparate personalities collaborate on research in psychology that results in a Nobel Prize in economics. As a 10-year-old boy in France, Daniel Kahneman and his family narrowly escape the Nazis during World War II. Years later in Israel, Kahneman, now a psychologist, successfully designs questionnaires to determine which Israelis would become the most effective officers in the military. Amos Tversky, an Israeli war hero, subsequently meets and collaborates with Kahneman to perform seminal research that contradicts the primary assumption of rationality in classical economics and forms the basis of behavioral economics, which seeks to explain frequently observed irrational behavior by consumers. Their research demonstrated how the human mind systematically erred when making judgments in uncertain situations.”

How Innovation Really Works: Using the Trillion Dollar R&D Fix to Drive Growth(2) How Innovation Really Works: Using the Trillion Dollar R&D Fix to Drive Growth
By Anne Marie Knott (2017)

“This year’s recommendation is a no-brainer,” says Brent Goldfarb, associate professor of management and organization. “‘How Innovation Really Works’ is an extremely provocative book that has lessons for investors, business professionals who manage R&D, and those interested in industrial and technological leadership. Knott’s Research Quotient (RQ) identifies when companies are investing appropriately in R&D, and when they are investing too little or too much. Investing in an annually re-weighted index of the top 50 RQ companies outperforms the market by 800 percent (not a typo). She then describes the many mechanisms in which the market’s short-term focus leads to the decline of companies’ capabilities – and how to use RQ to fix the problem. All business leaders, policy wonks and investors should read this book.”

Against the Gods, The Remarkable Story of Risk(3) Against the Gods, The Remarkable Story of Risk
By Peter L. Bernstein (1998)

Clifford Rossi, excecutive in residence and professor of the practice, says, “My favorite book is ‘Against the Gods, The Remarkable Story of Risk,’ by Peter Bernstein. While the title doesn’t sound like a book you would pick up for beach reading, it is a terrific, fast-paced nontechnical read of how human beings have evolved in assessing risk of all types. The book is a wonderful tour through history in terms of each era’s contributions to risk management. Anyone with an interest in what risk management is about should pick up this book.”

The Great Convergence: Information Technology and the New Globalization(4) The Great Convergence: Information Technology and the New Globalization
By Richard Baldwin (2016)

“In this tumultuous time of rebellion against globalization it is particularly important to understand the forces driving the ‘new age of globalization,’” says Kislaya Prasad, research professor and executive director of the Center for International Business Education and Research (CIBER). “Baldwin argues that new information and communication technologies enable globally dispersed supply chains where technical know-how and ideas move across borders to low-wage countries. The impact of this new globalization, both in developed and developing nations is ‘more sudden, more selective, more unpredictable, and more uncontrollable.’”

Human Acts(5) Human Acts
By Han Kang (2017)

Translated into English from Korean, “Human Acts” is the latest book from “The Vegetarian” author Han Kang. Michael Fu, Smith Chair of Management Science, says, “It’s a very moving (and tragic) portrait of humanity from various perspectives of different characters portrayed during the 1980 uprising/massacre in Gwangju, South Korea. The writing is quite poetic, even in translation.”


Thank You for Being Late: An Optimist’s Guide to Thriving in the Age of Accelerations(6) Thank You for Being Late: An Optimist’s Guide to Thriving in the Age of Accelerations
By Thomas Friedman (2016)

“In his latest book, ‘Thank You for Being Late,’ Thomas Friedman believes that technology, globalization and climate change are reshaping our institutions in the ‘age of accelerations,’ and all of us need to keep up or be left behind,” says Mark Wellman, clinical professor of management and organization. “What concerns Friedman is that individuals as well as our institutions have not been able to keep up with the rapid technological change. For individuals keeping up in the ‘age of acceleration’ involves adapting, extraordinary self-motivation and a more intense commitment to mastering new skills. ‘Thank You for Being Late’ serves as a rallying cry for people to take charge of their education and focus on critical thinking, communication, collaboration, and creativity. Friedman concludes, ‘everyone is going to have to raise their game in the classroom and for their whole lifetime.’”

Enchantment: The Art of Changing Hearts, Minds, and Actions(7) Enchantment: The Art of Changing Hearts, Minds, and Actions
By Guy Kawasaki (2012)

“This book is a few years old, but I love the message and lessons,” says Wendy Moe, professor of marketing. “Guy Kawasaki is a successful venture capitalist (he was actually an angel investor for my first startup) and entrepreneur, and ‘Enchantment’ is about branding and marketing yourself. It’s a great read.”


The Beautiful Country and the Middle Kingdom: America and China, 1776 to the Present(8) The Beautiful Country and the Middle Kingdom: America and China, 1776 to the Present
By John Pomfret (2016)

“My summer reading recommendation is a detailed description of U.S.-China relations for over 200 years, even more relevant today,” says Michel Wedel, PepsiCo Chaired Professor of Consumer Science. “This book is good summer reading because: (1) It will take you most of the summer (800 or so pages!); (2) It is very relevant given the current political relations between China and the U.S. and will enable to place it in a historical context; and (3) It is relevant for the future of business in the U.S. and U.S. business schools, given their dependence on the relationship of the U.S. with China.”

Tap: Unlocking the Mobile Economy(9) Tap: Unlocking the Mobile Economy
By Anindya Ghose (2017)

Yogesh Joshi, associate professor of marketing, says, “I highly recommend this book for anyone who is interested in getting up to speed on how the mobile economy works, what motivates consumers’ mobile behaviors, and how to make mobile work for your business. The author is a widely recognized IS/marketing expert and a global authority on the mobile economy. He has conducted extensive academic research in this space, which he presents succinctly to the non-academic audience via this book.”

The Age of Responsibility: Luck, Choice, and the Welfare State(10) The Age of Responsibility: Luck, Choice, and the Welfare State
By Yascha Mounk (2017)

“In this book, Yascha Mounk discusses what duties government has toward the destitute, regardless of the reasons for their plight,” says Bill Longbrake, executive in residence. “Prior to the Reagan ‘revolution,’ an accepted role of government was the collective responsibility of society to care for its citizens. During the 1980s, the U.S. conservative viewpoint reshaped this premise to emphasize that each individual is accountable for his/her actions. Mounk observes that most, regardless of political ideology, have come to accept the notion that personal responsibility is now central to our moral vocabulary, to philosophical debates about distributive justice, to our political rhetoric, and to our public policies. ‘Today, … more and more welfare commitments are conditioned on good, or responsible, behavior.’ But, Mounk argues that this is ‘deeply punitive’ because the plight of many is beyond their personal ability to exercise responsible control over their lives. In this book, Mounk describes how we got to the current view of personal responsibility and then discusses why our society needs to move from a punitive to a positive conception of responsibility.”

Bonus Picks

#Republic: Divided Democracy in the Age of Social Media #Republic: Divided Democracy in the Age of Social Media
By Cass Sunstein (2017)

In the aftermath of the recent presidential elections, the observation that the country is extremely polarized – with the two sides living in echo chambers interacting only with people with similar views – is perhaps not in itself very profound,” says Kislaya Prasad. “This is a trend that social media, with its algorithms that personalize news feeds, accentuates. Cass Sunstein is able to articulate precisely why this is a danger to democracy, and provides a number of useful suggestions that might lead to a more enlightened public debate on the issues of our times.”

Three Books to Teach Kids about Finance:

Susan White, clinical professor of finance, says, “I have six grandchildren, age six months to 10 years. While my first instinct is to buy my grandchildren everything they tell me they want, I realize this isn’t the way to teach them about finance. It also really annoys my children when they say their children can have one treat and I buy two (or three). So, when it’s time to talk about money with kids, for the preschool set I recommend, ‘The Berenstain Bears: Trouble with Money,’ where Brother and Sister Bear start their own business. For late elementary and middle school, I like ‘The Kids’ Money Book.’ The book talks about money, spending and saving and how to resist materialism. For teenagers, I recommend ‘The Motley Fool Investment Guide for Teens.'”

 Posted by at 12:47 pm

GE’s CEO Jeff Immelt Steps Down

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Jun 132017

I am quoted in this Washington Post article on GE’s CEO Jeff Immelt stepping down:

Welch was known for his singular mission: increasing the stock price. He and a cadre of similar executives during the 1980s and 1990s were devoted to maximizing shareholder value. 

General Electric stock jumped 3.5 percent Monday on the news of Immelt’s departure, signalling Wall Street’s positive reception to the change.

“His managerial decisions resulted in investing in projects that did not maximize shareholder value,” said David Kass, a professor of finance at the University of Maryland. 

This article also mentions Berkshire Hathaway’s investment in GE near the beginning of the financial crisis:

At one point, GE went hat in hand to investor Warren Buffett, who lent the company $3 billion in the depths of the crisis on terms that were very beneficial to Berkshire Hathaway. General Electric paid the money back in 2011, including a $300 million bonus, plus accrued and unpaid dividends.



 Posted by at 2:15 pm

Lunch With Warren Buffett Costs $2,679,001

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Jun 102017

Lunch with Warren Buffett costs $2,679,001 (winning bid on ebay for charity).  There were 6 bidders who made a total of 42 bids during this annual five-day auction to benefit the Glide Foundation (San Francisco, CA).   Last year’s (2016) winning bid of $3,456,789 has been the highest over the 18 year history of this auction, which equaled the winning bid in 2012.  The winner of last year’s auction is anonymous.  So far, the winner of this year’s charity auction has not been revealed.

The results of the previous auctions are:

YearWinnerWinning Bid
2003David Einhorn, Greenlight Capital$250,100
2004Jason Choo, Singapore$202,100
2006Yongping Duan, California$620,100
2007Mohnish Pabrai, Guy Spier, Harina Kapoor$650,100
2008Zhao Danyang, Pure Heart Asset Management$2,110,100
2009Salida Capital, Canada$1,680,300
2010Ted Weschler$2,626,311
2011Ted Weschler$2,626,411
2014Andy Chua, Singapore$2,166,766
2015Zhu Ye, Dalian Zeus Entertainment Co.$2,345,678


 Posted by at 12:04 am
Jun 042017

 Berkshire Hathaway Annual Meeting

 May 6, 2017

(Notes taken by Professor David Kass, Department of Finance, Robert H. Smith School of Business,

University of Maryland)


A humorous film was shown which included some scenes from the January, 2017 HBO Documentary: “Becoming Warren Buffett”, as well as highlights of films shown previously at Berkshire Hathaway annual meetings.

Warren Buffett (age 86) and Charlie Munger (age 93) then walk on to the stage and sit down.  The format for asking questions was similar to the last eight annual meetings.  One-third of the questions were selected by three business journalists: Andrew Ross Sorkin (CNBC and the New York Times), Becky Quick (CNBC) and Carol Loomis (Retired, Fortune).  Shareholders had e-mailed over 2,000 questions to the journalists, who then selected 18 questions relating to Berkshire and its operations.  The journalists who were seated on the stage, alternated with analysts Gregg Warren (Morningstar), Jonathan Brandt (Ruane, Cunniff, and Goldfarb), and Jay Gelb (Barclays) also seated on the stage, and with shareholders in the audience in the asking of questions.

Approximately 40,000 were in attendance.  This compared to 40,000 in 2016, 45,000 – 50,000 in 2015 (celebrating Warren Buffett’s 50 years at Berkshire Hathaway), 40,000 in 2014, 36,000 – 38,000 in 2010-2013, and 35,000 in 2009, 31,000 in 2008, 27,000 in 2007, and 24,000 in 2006.

Warren Buffett mentioned that since Charlie can hear and Warren can see, that is why they work together.  He also mentioned that since corporate taxes are likely to be lower next year, Berkshire is likely to take portfolio losses this year.  They currently have over $90 billion in unrealized capital gains.  Geico added 700,000 new policy holders during the first four months of 2017 (vs. 300,000 in 2016) which lowered earnings from insurance underwriting because of the extra costs associated with new business.  Float increased $14 billion to $105 billion in the first quarter of 2017.  Buffett also pointed out Jack Bogle in the audience as someone who has saved tens of billions for investors.  “He will be 88 on Monday.  In two years he will be eligible for an executive position at Berkshire.”

Questions were asked in the following order:

Q1. Loomis:  Wells Fargo’s decentralized structure gave too much autonomy to community banks.  Does Berkshire face similar risk?

Buffett:  With 367,000 employees, it is important to be careful with what you incentivize. Wells Fargo had an incentive system built around cross-selling and the number of services per customer.  This incentivized bad behavior.  At Berkshire we have an internal hotline that receives 4,000 alerts each year.  Anything serious has led to an action.

Munger:  You need a compliance department.  But entrusting good managers is a better system.

Q2. Brandt:  Would driverless cars and trucks be a threat to railroads and auto insurance companies?

Buffett:  Yes.  Geico’s income would decline.

Q3. Audience: How do you identify an “investing sweet spot”.

Buffett:  You know it when you see it.  It’s a business that they can look out 5-10-20 years and see a durable competitive advantage that would last over the period with a trusted manager who would fit in with the Berkshire culture.  See’s Candies is an early example.

Q4.  Quick:  Does Buffett spend a lot of time looking at his large investments in American Express, Coca-Cola, Wells Fargo, and United Airlines?

Buffett:  Berkshire is the largest holder of the four major airlines. He looks for a durable competitive advantage.  Coca-Cola was founded in 1886, American Express in 1852, and Wells Fargo around the same time.  Investors need to judge the ability of management to deal with competitors.

Munger:  I have nothing to add.

Buffett: We will have to cut his pay if he doesn’t participate.

Q5. Gelb:  Question about Berkshire’s recent deal with AIG.

Buffett: AIG transferred to Berkshire 80% of claims above $25 billion up to a $20 billion limit.  Berkshire received $10.2 billion for that.

Q6: Audience: What was Berkshire’s favorite deal?

Munger:  See’s Candies. Powerful brand.  “Flow of money without work.” “Fish where the fish are”.  Similar to Coca-Cola.

Q7. Sorkin:  Both IBM and Apple are technology companies.  Do you view them differently?

Buffett:  Wrong on IBM.  Apple is a consumer products business.

Munger:  We knew about Google, but did not invest.

Buffett:  I blew it.

Munger:  Blew Wal-Mart too.

Buffett: Could be making two mistakes on IBM, hard to predict.  Bezos (Amazon) has succeeded in retailing and the Cloud, starting from scratch.  And now the Washington Post.  It is about execution.

Munger:  Bezos is a different species.

Q8. Gregg Warren:  Is investing in airlines similar to investing in railroads?

Buffett: The investment in airlines has no connection with the railroad business.  Berkshire has invested $10 billion in 4 major airlines.  The airlines are at 80% capacity and travel will be higher in the years ahead.  They are earning a high return on invested capital.  There is more labor stability now.  They have large stock buybacks. They will have more revenue passenger miles 5 – 10 years from now.  Berkshire bought the shares at low multiples.  The airlines will have fewer shares outstanding in the years ahead.  But it is no cinch.

Q9. Audience: Protestor – long speech.

Buffett and Munger respond discussing longevity and drinking Coca-Cola.

Q10. Loomis:  Question about intrinsic value.

Buffett: Intrinsic value can only be calculated in retrospect.  In the last 10 years their stock has compounded at about 10%.  It is impossible to achieve this return in the current interest rate environment. Best guess for the future is a 10% return, assuming higher interest rates.

Munger: Berkshire has a collection of better businesses on average that have a better investment return than the S&P 500.  A lot of other people are trying to be brilliant.  We are trying to be rational.

Q11. Brandt: Question about lower tax rate for utilities.

Buffett: Lower tax rates will pass through to customers in the utilities businesses.  Berkshire has $90 billion of unrealized capital gains.

Munger: During bad times Berkshire will do well.

Q12. Audience: Question about Buffett recently selling his used car at a profit.

Buffett:  He sold his used Cadillac for over $100,000 for a charity (Girls, Inc.).  The buyer drove away without license plates on the car.  When he was pulled over, the police were skeptical of his story.  But since Buffett had signed the dashboard, the police then asked him if the driver was given any stock tips.  This is the only time Buffett has sold a used car at a profit.

Q13. Quick: Why did Buffett advise his wife to invest in the S&P 500 Index Fund instead of in Berkshire (upon his death)?

Buffett:  All of Buffett’s shares in Berkshire will be going to charity.  So far, 40% has already been distributed.  The S&P 500 is highly liquid. If she owned only one stock, there will be people who come around with various suggestions on what to do with the money.  But they won’t bother her if she owned an index.  Buffett’s Aunt Katy, whose husband used to employ Charlie and Warren, worked all her life and died at 97 with a few hundred million dollars, because she was in Berkshire Hathaway.  She would write Buffett and say she hated bothering him, but was curious if she would ever run out of money.  Buffett told her she would run out only if she lived another 986 years.

Munger: He is more comfortable with holding Berkshire than the S&P 500 Index fund.

Q14. Gelb: How much would Berkshire have invested if 3G/Kraft Heinz was able to acquire Unilever?

Buffett: Berkshire and 3G would have each invested $15 billion if there was a friendly acquisition of Unilever.  They thought Unilever would be interested.

Q15. Audience: Question about spreading the value investing philosophy, speculation and investing in China.

Buffett: Keynes wrote about the propensity of people to speculate.  There is nothing more agonizing than seeing a neighbor with an IQ 30 points lower than yours getting richer than you are.  Early on in the development of markets there is a greater tendency to speculate.  China is likely to have an extreme experience with speculation.

Munger:  The Chinese will have more trouble with speculation.

Buffett:  Fear spreads rapidly.  $175 billion flowed out of money market funds in three days in 2008.  But this creates opportunities for investors.

Q16. Sorkin:  Question about the possible changes under the new Administration impacting the investment tax credit and BNSF.

Buffett: Berkshire does not consider tax issues in its portfolio allocation.  Wind and solar energy are dependent on the tax law and subsidies.  But changing depreciation schedules will not impact what we are going to do on the railroad to make it safer and more efficient.

Munger:  I have nothing to add.  I wouldn’t change anything at the railroad over a tax jiggle.

Q17. Gregg Warren: Question about declining coal shipments on the BNSF.

Buffett:  Use of coal is declining over time.

Munger:  Over the long term all hydrocarbons will be used. They are a huge resource for all of humanity and have no good substitute. I am all alone on this one, but I want to save them for the next generation. I expect natural gas to be in short supply eventually.  Storage is a problem even if they can produce a lot of energy from wind or solar.

Q18: Audience: Question about Berkshire recently investing in companies with high capital intensity.

Buffett:  Buffett prefers to invest in capital light companies.  Buying a high return on assets company with low capital intensity is much better than a similarly growing capital intensive business.  The five largest US market cap companies have a total market value of $2.5 trillion which is close to 10% of the whole US market.  One could run them with no capital at all.  It is a very different world from Carnegie’s steel mills and Rockefeller’s tank cars.  Berkshire owns a few companies like this, but they do not grow.

Munger: The world has changed a lot and people who have gotten into these (low capital intensity) businesses have done very well.

Buffett: A lot of people are receiving a lot of money from venture capital.  It’s a wonderful field.  But not everyone is going to win big.

Q19. Loomis:  What is the value of Berkshire Hathaway to the world?

Buffett:  The abdication or delegation of management duties to subsidiaries enable businesses to run better than if they were part of the S&P 500 and were targets of activists looking for short term moves.  This structure frees up at least 20% of the time of a CEO who otherwise would have a lot more responsibilities at a public company such as meeting with analysts.  The CEOs at Berkshire can spend all of their time improving their businesses.

Munger:  We are trying to be a good example in the world.  No one would be here at this meeting if we did not set a proper example and were not honest.

Q20. Brandt: Question about structured settlements.

Buffett:  Insurance companies give people a lump sum against a payment stream from injury settlements. Berkshire has a preferred position because of longer maturity situations.  People trust Berkshire more than others to make the payments. But if interest rates continue at present levels, Berkshire will have some losses.

Q21. Audience: Question about Berkshire’s investment in USG since 2001.

Buffett:  Berkshire has held equity in USG through two bankruptcies: asbestos and too much debt, because it was very cheap. Gypsum is a disappointing business.  Each time the business rebounds, managements get too optimistic and they increase supply so that it exceeds demand. This was not a great idea (Berkshire’s investment in USG).  (Note: Berkshire owns 30% of USG.)

Q22. Quick: What would be the impact on Berkshire’s insurance businesses if Ajit Jain retires?

Buffett:  Ajit may be irreplaceable but Berkshire’s insurance operation has many excellent people under Ajit.  Even without Ajit, Berkshire will still have the world’s best P&C insurance business.  Ajit has made many excellent acquisitions.

Q23. Gelb:  Are there any updates on Berkshire’s succession plan?

Buffett:  It is the same as before.  Berkshire’s managers have the jobs they want in life, which is a lot better than having a lot of people who want to run Berkshire one day.  Buffett manages “by abdication”.

Munger:  There are not a lot of 20 year olds (among the managers).

Q24. Audience:  What stocks or industries are you interested or not interested in?

Buffett:  They do not discuss sectors of interest much nor the macro environment.  They look at all sorts of businesses all of the time.  They have many filters and usually know after 5 minutes or less (when receiving calls) whether they know enough to make a decision.  Return on invested capital is very important.

Munger:  Some subsidiaries do bolt-on acquisitions that make sense.  But the general field of buying companies is competitive with many leveraged buyouts.  Do not call it “private equity” – that’s like a janitor calling himself “chief of engineering”.  We do well because people do not want to sell to those guys.

Buffett:  A 61 year old business owner with all of the money he needs told Buffett that all he is worried about is that he doesn’t want to leave his wife stuck with the business.  He can’t sell to a competitor who will get rid of his employees.  He can’t sell to a leveraged buyout firm that will leverage it to the hilt and then resell it.  It isn’t because you are so special, there just isn’t anyone else who I would want to buy the company.  Buffett then interjects:  “If you are ever proposing to someone, don’t say that!”

Q25.  Sorkin:  How will your successor be compensated?

Buffett: He hopes for someone who is already very rich who has been working for a long time and is not motivated by 10x or 100x the money that they think they need. They would pay a very modest amount with an option that is increasing in strike price annually .  They may make options exercisable only a few years into retirement.

Munger:  I have avoided compensation consultants all my life. I can hardly find the words to express my contempt.

Buffett: If the board hires one after I go, I will come back.

Munger: There’s a lot of mumbo jumbo in this field, and I don’t see it going away.  What consultant will ever get another assignment if he recommends the CEO payment be in the 4th quartile?

Buffett: No Berkshire director is in it for the money.  They have bought all their stock in the public market.  How can a director who has not paid one dollar for stock (in the open market) be counted on to do what’s best for the owners?

Q26. Gregg Warren:  What is the outlook for trucking and rail?

Buffett:  Car loadings peaked in 2006.  Trains have big advantages over trucking in many respects.  It’s not a volume growth business, but still a good business.  He likes the West (US) better than the East for rail.  They cannot expect aggregate car loadings to increase.

Q27. Audience:  What qualities are you looking for in a successor?

Buffett: Any potential successor with proven capital allocation abilities will be at the top of the board’s mind.  Capital allocation is incredibly important.  Berkshire has $280 billion of shareholders equity.  In the next seven or eight years we will have to allocate $400 billion.  Capital allocation needs to be very close to the successor’s main talent.  If the successor hasn’t done it but has other talents that caused his career to rise, it’s like getting to Carnegie Hall by playing violin and then walking on the main stage and being given a piano to play.

Munger:  The successor also has the option to buy in stock (stock buybacks).

Q28. Loomis:  What is the value of money managers?  How much should they be paid?

Buffett:  There are about 12 people he has known who he would have predicted or did predict that the person would beat the stock market averages over time.  Charlie is one of them.  In all of the professions, there is value added by professionals. But in the investment world, it is not true. They cannot do better in the aggregate than the person who just sits tight.   Some active guys here and there will outperform, but how do you find them?  When you pay someone a 1% fee to manage your money, then they must outperform the S&P 500 by 1% for you to break even vs. what you can do yourself by investing in the S&P 500.  We pay Combs and Weschler $1 million per year (they each manage $10 billion) plus an additional amount if they can outperform the S&P 500.  This doesn’t happen with other money managers.  When Buffett asked a money manager why he charges 2 and 20, the response was “because I cannot get 3 and 30”.

Q29. Brandt: Can you discuss your acquisition of Precision Castparts and any accounting adjustments?

Buffett: Precision Castparts has made two bolt-on acquisitions already because they have an extraordinary manager and are in a terrific positon in the aircraft field.  They will make more bolt-on acquisitions over time.  The only big purchase adjustment is the amortization of intangibles of $400 million.  Buffett doesn’t regard the asset as actually being diminished at that amount over the period.  He is also not worried about the 3-D printing of aircraft parts.  He feels very good about the acquisition.  The company has long term contracts and is viewed as a high quality and trusted supplier.  Reliability in that space (aircraft engines) is incredibly important.

Munger; It is a very good business purchased at a fair price but no bargain like we used to see in the old days – but that’s ok.  We pay up for good companies.

Buffett: On the topic of adjustments, starting in 2018, there will be an accounting nightmare, because we will have to mark publicly held equities to market through the income statement.  This will confuse GAAP earnings. Berkshire is not a Wall Street securities firm, so this is just a big distortion.  Accounting is not supposed to describe value, but can be useful in specific situations for estimating value.

Q30. Audience:  Question about investing in China.

Munger:  The stock market there is cheap and has a bright future, but there will be growing pains.

Q31. Quick:  Question about 3G Capital eliminating jobs.

Buffett:  A company should be as productive as possible.  Productivity gains have been occurring in all industries.  Berkshire prefers to own efficient companies.  Kraft Heinz is working on product improvement and innovation.

Munger:  There’s nothing wrong with increasing productivity.  But just because it is right does not mean one should always do it.  It can be counterproductive from the bad publicity.

Q32. Gelb:  Question about the $100 billion of cash on Berkshire’s balance sheet.

Buffett:  Berkshire may do stock repurchases and pay dividends in the future.

Q33. Sorkin:  Question about Todd Combs and Ted Weschler.

Buffett:  Todd and Ted each manage $10 billion vs. $2 billion when they started.  It is tougher to run $10 billion than $2 billion.  The hiring decision has been terrific.  Each has made more money than Buffett would have made and they have been of great help beyond just money management.  They are smart, have money minds, are good at investment management and are first class human beings.  Charlie gets credit for Todd.  Warren gets credit for Ted.

Munger: Shareholders are very lucky to have Ted and Todd, because both think like shareholders.

Buffett: They put Berkshire first.

Q34. Gregg Warren:  Question about Berkshire stock being donated to charity.

Buffett:  He has given away about $2.8 billion of A shares each year.

Q35: Audience: An attractive woman in her 20’s asks if Buffett knows any eligible bachelors in the NYC area.  She also asks a question about Berkshire’s Bank of America warrants.

Buffett:  If the price of Bank of America (BAC) is greater than $7 they will exercise the warrants before they expire in 2021.  If the income from BAC common stock they receive exceeds that from the preferred, they will convert and hold the common stock.  If BAC pays a quarterly dividend of $0.11, then the 700 million shares Berkshire would receive would pay an annual dividend exceeding the $300 million it receives from its $5 billion of BAC 6% preferred. (Note:  BAC’s current quarterly dividend equals $0.075.)

Munger:  It is very wise for a woman who owns Berkshire Hathaway stock and is good looking to put her picture up like that.

Buffett: We might actually start selling ads in the annual report.  The idea of the BAC purchase came to him when he was in a bathtub.  He has spent a lot of time in his bathtub since then, but nothing has come to him. So he may need a new bathtub.

Q36. Loomis:  Question on 3G Capital and Berkshire.

Buffett:  A large percentage of the US population worked on farms 100 years ago.  Any industry tries to become more productive.

Q37. Brandt: Question about almost $100 billion cash on Berkshire’s balance sheet.

Buffett:  Would consider doing a large deal that made sense.

Q38. Audience:  Question about Berkshire’s board of directors and succession.

Buffett:  The board may not change in the next few years.  His successor is likely to have been with Berkshire.

Munger: The shareholders probably have seven good years to get out of Warren.  (Note:  Munger is seven years older than Buffett.)

Q39. Quick:  Has Fruit of the Loom been hurt by online sales (Amazon)?

Buffett:  Fruit of the Loom has not been hurt by online so far, but anyone who thinks they are insulated from it is incorrect. The furniture business is also setting a record this year.  It is hard to see the effect of online sales.  Nebraska Furniture Mart’s online sales account for 10% of its sales, but a large number of online buyers pick out their furniture at the store.  Retailing has shifted from department stores, to shopping centers, to discount stores, and now to the Internet.

Munger: It would be unpleasant to be in the department store business today.  We are fortunate our failed so badly (Baltimore) that Sandy Gottesman (Berkshire director) talked us out of it.  We got lucky.

Q40. Gelb: Question about intrinsic value and book value.

Buffett: Book value has a lot less relevance than it used to for Berkshire because of many private holdings.  The best method is to calculate intrinsic value, but they cannot be precise.  The probability is very high that 120% of book value understates intrinsic value.  If Berkshire were all public securities, 120% would be too high.  But there are many private holdings with unrealized value.

Q41: Audience: Question about Berkshire’s investments in technology stocks.

Buffett:  They made a large investment in IBM which has been a significant laggard and expect to end up being 1 for 2 (Apple), not 0 for 2. He considers Apple to be a consumer goods company and he has some insight into consumer behavior. He will make some mistakes in marketable securities. You cannot bat 1.000 no matter what industry you are in.  We have lost some money in insurance.  He has gained no real knowledge of technology since he was born.

Munger: It was a very good sign that Warren bought Apple.  Either he’s gone crazy or is learning.  I prefer to think he is learning.

Q42. Sorkin:  What are the implications of artificial intelligence on Berkshire’s operations?

Buffett:  He expects a lot will happen. This would result in significantly less employment in certain areas, and that is a good thing.  Increasing productivity is pro-social.  Artificial intelligence is great for society but is disruptive politically.

Munger: I am worried more about change not being fast enough.

Q43. Gregg Warren: Question about solar and wind generated energy.

Buffett: They are well situated because they pay lots of taxes as a multi-industry enterprise and can use the tax benefits better than electric utilities that often do not have enough tax payments to offset with tax credits.

Q44. Audience:  Why didn’t Berkshire buy shares in Amazon?

Buffett: They were too dumb to realize what was going to happen. They did not think about Amazon Web Services and did not think Jeff Bezos would succeed there as he has in retail.  They underestimated the brilliance of his execution.  Bezos lays it out in his 1997 annual report.  The stock has always looked expensive.

Munger: What was done there was very difficult. It was not at all obvious that it was going to work as well as it did.  Other things were easier (more obvious), and we screwed those up.  I do not regret missing Amazon, but I do with missing Google.  We will miss out on more, but we do not miss out on them all.

Q45. Loomis: If Berkshire’s stock drops after Buffett dies, would the Board of Directors buy back stock?

Buffett: The stock is likely to go up when he dies on breakup speculation alone.  People will say the sum of the parts might sell for more than the whole.  If the stock goes down enough, the board will buy back stock.

Q46. Brandt: Question about companies benefitting from stock grant accounting.

Buffett: Not a factor at Berkshire.  But, is anything less real now that Precision Castparts is now private (vs. remaining public)?  Then why do they have to report $400 million less in earnings?  Also, for valuation purposes, depreciation accounting is very inadequate for capital-intensive businesses.

Q47. Audience: Question about P/E and CAPE ratios.

Buffett:  Ratios and formulas have some degree of meaning, but valuation of a business is not reducible to any formula where you can put in the variables perfectly.  The most important thing in intrinsic valuation is future interest rates.

Munger:  Fish where the fish are.  A good fisherman can find more fish in China.  It is a happier hunting ground.

Q48: Quick:  What can cause problems for Berkshire?

Buffett:  He cannot think of anything that can harm Berkshire in a material, permanent way, except weapons of mass destruction.  Berkshire has a variety of earnings streams and asset positions.

Munger: It would take something extreme. Berkshire subsidiaries are all independent.  We are better protected in every way than most companies.

Q49: Gelb:  Question on Berkshire Hathaway Specialty Insurance.

Buffett: Its growth depends on the market.  They are not interested in being a price cutter in a market where prices are unattractive.  The business is built to scale and has grown a lot.  It will be one of the leading P&C firms in the world similar to reinsurance.  When Ajit came in they had nothing in reinsurance.  They have the people, capital, and reputation.  There is no stronger company in insurance.  Specialty is a very important addition.

Q50. Audience: What have you learned in the last few years?

Buffett: I am specialized.  Charlie has a much higher absorption rate.

Munger: Buying the Apple stock is a good sign for Warren. We can’t solve problems by printing money and lying.  Take Puerto Rico. Who would have guessed that a US territory would be bankrupt?  I would have because they behaved like idiots.  Everywhere you look in Berkshire someone is sensible.  Combine that with being opportunistic so when some panic or something comes along, it is like playing a one-hand sport with two hands.

Buffett: Phil Fisher’s Common Stocks and Uncommon Profits describes the usefulness of the scuttlebutt method. In certain cases, one can learn a lot by asking a lot of questions.  They did it with Apple. If they talked to heads of ten companies in an industry and asked which competitor they would bet on or against and why, they would have a better understanding of the industry’s economics than from any one executive in the industry.

Munger:  They never would have bought Iscar and Precision Castparts ten years ago. They are learning and still are.

Q51: Sorkin:  Question about Healthcare.

Buffett:  In 1960, corporate taxes were 4% of GDP, now they are 2%. Healthcare was 5% of GDP, now it is 18%. Medical costs are the tapeworm of American competitiveness. The rest of the world has gained an advantage in healthcare costs with socialized medicine. New proposed legislation repealing and replacing Obamacare would result in a 17% decline in taxes for someone like Buffett if implemented.

Munger: Too much medicine gets prescribed for people who are all but dead.  Cardiologists in one town recommended heart surgery to healthy men and got great results. No one comes out of heart surgery better than a man who doesn’t need it.

Q52. Gregg Warren:  Question on Berkshire’s utility business.

Buffett:  The utility business is okay.  Electricity demand isn’t increasing like it was.  He would be surprised if 10 years from now they did not have significantly more money in wind/solar utilities.  Berkshire is the buyer of choice with many utility commissions.

Munger: Our utilities are not normal.  They are better regarded by customers and rate-payers.  It is better to be associated with assets of that quality. If someone asked us to build a nuclear plant, we would not do it.

Buffett: We are selling electricity in Iowa cheaper privately than in Nebraska’s public wind environment with government tax benefits. But if we were putting together a portfolio of stocks, we would not own any utilities.

Q53. Audience: Question about McLane (truck distributor to retailers).

Buffett: McLane has a huge sales volume. Wal-Mart is its biggest customer. The business has a 1% pre-tax margin. It is interesting that Wal-Mart wanted to sell McLane to Berkshire.  Wal-Mart said they have never had a deal close so quickly.

Munger:  That reputation of being quick and simple and doing what we say has helped time and time again.  We bought Northern Natural Gas and funded it before the regulators approved because the sellers needed the money.  Others could not have done this.

Q54. Audience: Question about Warren’s and Charlie’s legacies.

Buffett: At my funeral, I want them to say “that’s the oldest looking corpse I have ever seen”.  He really enjoys teaching.  His best legacy is someone thinking he did a decent job at teaching.

Q55: Audience: What is your dream?

Munger;  Oh, to be 90 again.  If you have got anything you really want to do, do not wait until you are 93 to do it.

Buffett: Look for the job you would take if you did not need a job.  Life must be evaluated backwards but moved forward.  Charlie says he wants to know where he will die, so he won’t ever go there. What will make you feel good and what will keep you moving in that direction?  We don’t want to be like the man who died, where the minister said at the funeral “is there anyone here who can say something  nice about the deceased?” The only person who stepped forward said “his brother was worse”.

Q56. Audience:  What is your opinion of using EBITDA in valuations of companies?

Buffett:  Depreciation is an expense and the worst kind.  You spend the money first but then have the expense (“reverse float”).  It makes no sense to remove depreciation. EBITDA is a very misleading statistic used in very pernicious ways.  It results in higher valuations.

Munger: Nobody in his right mind would think depreciation is not an expense.  Now they are teaching it in the business schools – that is horror squared.

Q57. Audience (Whitney Tilson): Question about businesses moving jobs overseas.

Buffett:  Trade should be and is enormously beneficial.  Greater productivity will benefit the world. Prosperity is enhanced by trade.  Government can take care of people who lose their jobs through unemployment insurance.  This is the capitalist system.

Munger: Unemployment insurance exists for that exact reason. The capitalist system always hurts some people.  There is no way to avoid it.

Buffett: A rich society can take care of those people. The new tax bill instead reduces my taxes by 17%.

Munger;  Do not start spending the money yet.  Otto van Bismarck said there are two things that no one should have to watch: the making of sausage and the making of legislation


Meeting Adjourned


David I. Kass, Ph.D.
Clinical Professor of Finance
Robert H. Smith School of Business
University of Maryland 20742


 Posted by at 10:19 pm