Omaha, Nebraska April 30, 2005
By Sally Sherry and T. Charlie Quinn
The wake up calls shattered the early morning silence at 4:45 a.m. It was a Saturday, but nonetheless nearly two dozen groggy Columbia Business School students sprang from bed. Before sunrise they raced through the quiet streets of Omaha, Nebraska to secure a place in line, only to stand out in the cold for hours. What would possess them? Nothing less than the opportunity to stake out great seats with a clear view of Warren Buffett at the Berkshire Hathaway Annual Meeting. Columbia students were by no means the earliest to arrive. A University of Kansas finance student was first in line at 3:18 a.m. The doors opened at 7:00 a.m. While Net Jet pilots picketed outside of the Qwest Center Omaha, thousands of people opened their pocket books inside. They meandered through a maze of Berkshire Hathaway display booths buying Justin Boots, Dairy Queen Dilly Bars, Berkshire Hathaway Monopoly games, See’s Candy, auto insurance from Geico, and flat screen TVs from Nebraska Furniture Mart. A few shareholders even bought an eighth of a Net Jet to haul all their loot back home. Net Jets were not in the cards however for Columbia students who were content to purchase copies of Charlie Munger’s new book, Poor Charlie’s Almanac.
The Berkshire Hathaway Annual Meeting provides a windfall for the Warren Buffett’s hometown. According to Omaha Convention and Visitors Bureau, visitors spent $15.3 million on hotel rooms, restaurants, transportation and other things during the weekend. While some shopped, the majority were in Omaha, Nebraska for Warren’s words of wisdom. The main auditorium was filled with about 20 thousand Berkshire Hathaway shareholders from all over the world.
The Berkshire Hathaway Annual meeting began with a traditional shareholder movie featuring "The Wizard of Omaha," a cartoon parody starring Warren Buffet as Dorothy, Bill Gates as the Scarecrow, Arnold Schwarzenegger as the Cowardly Lion, Charlie Munger as the Tin Man and Alan Greenspan as the Wizard. Next, Berkshire Hathaway Chairman Warren Buffett and Vice Chairman Charlie Munger sat side by side and fielded questions from shareholders for nearly six hours. Early in the morning Buffett highlighted the fact that investors have done well historically when purchasing Berkshire during times of distress. Although this might seem axiomatic to some, the fact that Buffett felt the need to state the obvious set the room abuzz as investors interpreted Buffett’s remarks to mean Berkshire is currently cheap.
Charlie Munger, although always wonderfully acerbic was unusually talkative. Some attributed this to Munger’s desire to stand up for Buffett’s reputation in light of the AIG investigation. On that subject, the pair said little although Munger did comment, "People will find a lot was done right at AIG... There is a lot of ability in that place."
Munger also gave several pieces of advice that applied directly to the Columbia Business School students in the room. When discussing Berkshire’s strategy and management principles he said, "The interesting thing is how well it has worked and how few people have copied it." In a display of disdain for businesses with a short term focus, Munger referred to executive incentives tied to quarterly earnings as the "blood brother of evil." In addition, Munger stated that too much intellectual capital is currently allocated to finance. He believes there will be long term consequences to the country if the "best and brightest" continue to choose to move around pieces of paper in a zero-sum game. With $40 billion of cash on the balance sheet invested in short-term government securities, Berkshire’s future results will greatly depend on Buffett’s ability to put the money to work. Along these lines, Buffett appeared confident that opportunity was looming on the horizon. According to Buffett, today’s acquisition market is very competitive with far too much money chasing "good, but mundane" businesses.
However, there have been three periods in Buffett’s career when he felt there was too much money chasing too few ideas. For example in 1969, Buffett terminated his limited partnership and gave investors their money back because he was unable to find any worthwhile investments. Four years later, the markets cratered and he took advantage of the greatest investment opportunities of his career.
Not only did Buffett claim he believes distress is inevitable given current valuations, but he even pointed to several possible catalysts. Buffett believes the trade deficit is unsustainable and will likely lead to the weakening of the dollar. In addition, layers of financial intermediaries make it very difficult to ascertain who ultimately holds what risk. According to Buffett and Munger these intermediaries have short-term horizons and frequently employ electronic trading strategies that they likened to an "electronic herd." Munger cautioned, "The only way to leave your seat in a burning theatre in financial markets is to find someone else to take it."
Never too far from the agenda in Omaha, politics entered the discussion when an attendee asked about Social Security. Buffett stated that a country as wealthy as ours has an obligation to provide for the elderly. Although he does not believe benefits should be cut, Buffett does support an increase in the retirement age. To fund the program, he suggested increasing the tax rate on capital gains and assessing social security taxes on earnings above the current $90,000 cap. After joking that we had just heard from the "democratic wing" of the company, Munger agreed that Social Security should continue to exist as created. Munger commented that Social Security is a just reward for work and was in favor of increasing taxes to fund the eventual shortfall. On a side note, Munger expressed his disfavor with national security problems on the horizon including issues with North Korea and Iraq. Munger claimed the Bush administration is wasting its goodwill on social security or as Munger put it, wasting goodwill on "twaddle."
Notable Comments:
Munger: "We are currently at the apex of a great civilization."
Buffett: "The poor state of public education is the second greatest problem facing the country after weapons of mass destruction."