Professional Documents
Culture Documents
April 30, 2011
Dustin Hunter (dwhunter10@gmail.com)
Swiftcurrent Capital Management
Indianapolis, IN
(These notes are to the best of my recollection and trusty ink pen. Discrepancies are likely due to my
error in understanding & transcribing.)
Opening Comments:
Transcriptions of the Questions pertaining to David Sokol & Lubrizol are posted on the BRK
website.
Earnings (except housing related businesses) have been improving quarter by quarter.
2nd worst quarter for insurance:
o $50B hit to Re‐insurance industry
o BRK is typically 5% of industry
o BRK re‐insurance unlikely to profit in 2011
GS preferred shares were called in
GE preferred shares will likely be called in September
Burlington Northern ‐ good year, and for rail in general
Reinsurance estimated losses:
o Australia 195B
o New Zealand 412B
o Japan 1,066B
o Total 1,673B (20% from arrangements w/ Swiss Re)
o (Based on population comparison, New Zealand situation 10x worse than Katrina)
Geico ‐ April tornados will likely result in 25k auto claims
o Significant policy increase: 2011‐Q1 (318k) vs. 2010‐Q1 (218k)
o Goodwill (14B) significantly understated on balance sheet
o Buffett estimates $1.5k goodwill for each policy holder
Accounting comment regarding Wells Fargo ‐ based on time & original purchase price
o 3,704k shares with gains not marked up
o 337k shares with 'losses' marked down
o Net 'loss' shown, but not an accurate reflection
Warren Buffett (WB) discussion of David Sokol (DS) & Lubrizol (LZ) acquisition:
o Events at Salomon Brothers 20 yrs ago were "Inexplicable & Inexcusable"
o DS failed to say that he contacted Citigroup & had bought LZ shares
o DS did not try to hide his purchases ‐ after a big deal occurs, they are usually required to
submit a list of who knew what and when they knew it ‐ FINRA reviews
o DS has a high net worth & made something like 24M last year
o Mid American Energy ownership:
80% Berkshire
10% Walter Scott
Balance owned by Greg Abel & DS
In the past, WB laid out a bonus plan for Greg Abel & DS based on 5 year
performance factors with $50M to DS & $25M to Greg. DS changed it to be split
50/50, thus forgoing $12.5M (note: DS shares of LZ increased $3M after
acquisition announcement)
Charlie Munger commented that it is a mistake to assume that people will
always make perfectly rational decisions.
Morning Q&A ‐ Warren (WB) unless noted otherwise & Charlie (CM)
1) Q) When you found out about the DS ‐ LZ situation, why were you not "ruthless"? ‐ (in reference to
the statements in the Salomon Brothers video clip played at the meeting each year)
A) (WB ran through the play by play of the events)
Aware of potential deal on Jan. 14th
March 14th ‐ John Freund of Citi called to congratulate & noted Citi's work with deal
This triggered a 'yellow light' & prompted WB to call Mark Hamburg, who then contacted DS
March 18th ‐ LZ submitted a draft proxy statement for WB outlining the history of the
transaction ‐ noted Citi's involvement up front
Ron Tolles traveling with WB at the time receiving/communicating info via Ron's phone ‐
planned BRK board meeting upon return ‐ received DS resignation
Upon return, WB drafted the press release for DS review ‐ DS removed wording about hopes
of succeeding WB dashed, saying never intended to succeed WB (WB commented that he
could have been more careful with the 'not illegal' wording in the press release)
Per the proxy statement, LZ was interested in the deal on Dec. 17th
BRK notified SEC through Munger Tolles Olsen
CM ‐ The press realease could have been better. ‐ It is better to not include anger in one's
decisions ‐ Quoted Tom Murphy "You can always tell someone to go to hell tomorrow."
2) Q) What will be the effect on stock prices of the government ending permanent open market
purchases?
A) Although it is a huge force that will be gone, it is well known & likely factored in.
3) Q) How can you insure that there are no other DS's in line at BRK now?
A) Commented that the likely person is 'straight as an arrow'
CM‐ Comment "The meek shall inherit the Earth, but will they stay meek?"
Safety measures including Howard Buffett as an independent chairman ‐ makes it easier to
change a CEO if needed
CM ‐ noted similarity to Rockefellers & one instance where they had to remove someone
4) Q) If you had an additional 50 years to go with your investment career, what additional area/sector
would you add to your 'Circle of Competence'?
A) Would want it to be a large sector ‐ Tech likely
Large disparity between the winners & losers ‐ ability to pick winners is key ‐ many players
CM ‐ Tech or Energy
5) Q) You mentioned that you were initially unimpressed with LZ, and then quickly warmed to it. What
changed?
A) Knew nothing about the business initially ‐ Charlie smater about oil
James Hambrick subsequently gave a good explanation of the business through DS
Oil companies are big buyers from LZ ‐ it is hard to break in & compete with them due to existing
customer connections & some patents.
CM ‐ LZ & Iscar are 'sisters under the skin' ‐ in that there are barriers to entry for potential
competitors
6) Q) With $95k book value per share + discounted value of future earnings, it seems that 180k/share
is a fair value. (Basically this questioner was asking Buffett to verify his intrinsic value number)
A) He and Charlie would come up with slightly differing 'ranges' of intrinsic value, not a precise
number.
Commented that they have given signals about attractiveness of BRK price in the past
Currently not overpriced ‐ They have been looking at a large international acquisition. However,
the large price tag would require issuing stock & they are not willing to do so.
BNSF purchase was 30% stock and was painful
CM ‐ questioner was looking at the two right factors & it won't always be as attractive
7) Q) you remain positive about America's economic future despite the current turmoil. Why do you
see gold where others see salt?
A) How can you not be positive... When he was born, there was the market crash, the depression,
and so on... still the standard of living has increased 6 for 1
Doc Thompson (father in law) gave him a talk prior to marriage saying that "You'll fail, but it's
not your fault b/c the Democrats are in office."
In 1951, Ben Graham & his father told him not to get into selling stocks right now believing the
results will be unattractive & people will blame him.
Our potential is not used up ‐ It's just that the rest of the world is catching on
CM ‐ Europe survived the Black Death
8) Q) (The question was about inflationary environments and the best businesses.)
A) A business with a wonderful product that requires little capital reinvestment is better in an
inflationary environment than a business that requires a lot of tangible capital ‐ Assuming that the
business has pricing power
Think Sees Candy vs. BNSF ‐ refer to his old Fortune article 'How Inflation Swindles the Equity
Investor'
CM ‐ They didn't always know this ‐ and they don't do as well with larger amounts of money to
invest
9) Q) At what point can we expect to see BRK pay dividends?
A) When BRK does it, should do 100% ‐ (I took this to mean that all dry powder formerly waiting for
acquisitions should be distributed at once.)
The basic question is whether or not they can turn $1 of earnings into more than $1 ‐ used
comparison of a savings account where you can pull out 5% vs. selling it for 20% over the
amount you put in.
10) Q) What are your thoughts on the revenue outlook for Wells Fargo & U.S. Bancorp?
A) Different than 'Moneycenter' banks
Both banks less attractive ‐ U.S. Bancorp will make less in the future b/c of less leverage use
General rule ‐ keep out of trouble on the asset side & use cheap capital
CM‐ Read the M&T Bank annual report ‐ Bob Wilmers is a smart guy ‐ 'Old Testament Prophet'
Read JPMorgan (Jamie Dimon) letters as well
The market tends to have money flow to the financial sector
11) Q) Commodities have done well and continue to appreciate, while BRK has been flat. (I think the
underlying question was whether commodities are a better investment.)
A) BRK has done well over time compared to gold
He thinks of three categories for investment:
o Currencies
Performance tied to government behavior
Almost all decline over time
o Commodities (gold‐like)
The asset doesn't do anything
Hope that others will be willing to buy for more later (Bigger Fool)
Read Keynes, Chapter 12 ‐ related to having to out‐guess what others are
guessing
Mentioned previous silver investment & rationalized based on industrial use
o Producing Asset
Farm example ‐ Does it production meet your expectations independent of just
its sales price
There are times when commodities move a lot. But over time, producing assets
will do better. ‐ Rising prices create their own excitement
SM ‐ Something silly about an asset that goes up if the world is going to hell
12) Q) When you were starting your first fund, how did you attract your first investors? ‐and subsequent
ones?
A) Initial money came from family and college roommate
Put his own money in the fund
It was a slow process ‐ stumbled along
Spread by word of mouth
CM ‐ Left the family business & was slow to do so
CM ‐ Conduct yourself in a way that others trust you
CM ‐ Current fee structures allow people to get rich without performance
13) Q) BRK is a conglomerate. How is it different than the 60's conglomerates?
A) Conglomerate allows for the tax efficient transfer of excess cash from one business to another
Other conglomerates became stock issuing machines ‐ Using their overpriced stock to purchase
other companies (Gulf & Western, Litton, Teledyne)
Teledyne bought back its own stock when under priced & benefitted shareholders
BRK ‐ not the same game ‐ rationale is for running the business ‐ the efficient transfer of excess
cash for efficient use
14) Q) What do you want your legacy to be? ‐or how do you want to be remembered?
A) 'Old age' ...... Teacher
CM ‐ His fortune was fairly won & wisely used
15) Q) Regarding the decline of the dollar, BRK has previously had a short position. What are you doing
now?
A) Not active in that currently & not likely to do
The dollar will decline over time ‐ but all currencies will decline ‐ shorting has to predict which
ones will decline
The 1930 dollar is worth 6 cents ‐ yet inflation did not destroy us
CM ‐ Greece is extremely dysfunctional, but surviving
16) Q) (This question effectively asks to compare BRK to a no load fund, presumably an index fund)
A) Agrees that for the non‐active investor, an index fund is good
CM ‐ For managed funds, the next 50 years will be harder than the last 50 years
17) Q) Why are outside investments by BRK employees not screened?
A) BRK is not an advisor or a fund
Rules are in place for BRK managers
Past V.P. of BRK subsidiary ‐ BRK provided the evidence that sent him to jail
Johns Manville recently issued its own internal letter about the DS‐LZ issue & guidance for
internal behavior
CM ‐ Wall street entities with big compliance departments still have big scandals
18) Q) What are your thoughts on helpful changes concerning the Fed, the economy, and economic
policy?
A) Huge stimulus ‐ taking in 15% GDP and spending 25% ‐ not sustainable
Natural capitalism is the biggest factor
When residential construction picks up, there will be much more employment ‐ there is an
indirect reservoir of jobs associated with housing industry
We have come back well based on the hit we took
TTI (electric components) and Iscar, consistent increases
CM ‐ Not enough financial industry remediation
CM ‐ Need a tax system that discourages 'trading' ‐ high frequency trading is basically legalized
'front running'
CM ‐ 25% of engineers going to the financial sector
CM ‐ Other things that go on make DS look like a hero
Note: S&P futures contract that is held for ‐ say 10 seconds ‐ gains taxed as 60% long term/40%
short term (Wow)
Update on Protege Fund of Funds vs. S&P 500 Index Fund contest (3 year mark):
Fund of Funds (‐4.24%)
S&P Index Fund (‐8.18%)
Afternoon Q&A ‐ Warren (WB) unless noted otherwise & Charlie (CM)
19) Q) You've been positive on BYD. Is it still attractive today? Where is your confidence level?
A) CM ‐ The investment has still made money
Delays & glitches are to be expected in a company growing at that rate ‐ goal was to double
sales each year & did it for 5 years
20) Q) What are your thoughts on commodities & commodity equities? Is there an oil bubble ‐ peak?
A) BRK had a position a long time ago when oil was $10/barrel
It is a finite resource with 88M barrels being produced each day
It will sell for more... someday...
Exploration deals are more expensive now than in the past ‐ players are more sophisticated
The dollar will decline over time ‐ Inflation will increase costs
CM ‐ Over time, BRK would have done worse in commodities
CM ‐ It works best for those who bribe Nigeria...
21) Q) What is the most important thing you've learned this year?
A) CM ‐ Reading Google's Book ‐ referring to their engineering culture
Have Charlie do the press releases...
22) Q) What are your thoughts on the path ahead ‐ Is there more 'Too Big to Fail' in the future?
A) Freddie/Fannie have not re‐constituted
Was on the fence regarding the auto manufacturers ‐ ends up thing it was right to do
Problem will stay with us
Regarding 'Too Big to Fail' Companies ‐ CEO & spouse should lose everything if bailouts are
required ‐ Board should have to at least repay prior 5 years compensation
Leverage limits should be reduced
CM ‐ Context of past failures & excesses ‐ Current situation should have seen change like the
30's
Finance & Economics in academia ‐ Teaching the wrong things adds to the problem
23) Q) WB & Melinda Gates resigned from Washington Post Board. Will there be future share sales?
A) No Post shares will be sold ‐ related to being 80 and most effective use of time ‐ still happy to
advise anytime he is needed
CM ‐ On the Costco Board & really likes what they've done ‐ in general, being on lots of boards is
for the birds
24) Q) Will a weak dollar erode BRK ‐ discuss BRK's pricing power? (The questioner had an Australian
accent, so the answers relate to US/Australia.)
A) Australia/US could move ‐ no specific knowledge
CM ‐ Australia's open pit mines ‐ alluded to being a powerful positive ‐ but can't compare
25) Q) Relative importance of BRK equity portfolio (Compared to purchasing whole companies)‐ Where
will it go in the next 5‐10 years?
A) Still spend more time thinking about the portfolio & stocks ‐ acquisitions just don't occur that
often
CM ‐ Will always have portfolio with securities because of insurance operations
26) Q) With $17B profit/8 yrs isn't it fair to place some intrinsic value on the underwriting operations?
Are break even assumptions too conservative?
A) Hard to give guidance, but yes, there is likely to be underwriting profit over time
CM ‐ Asked another way, would Warren trade BRK insurance operation for any other in the
world? ‐ No
Gen Re had to have some things 'shaken out', but pleased with operation now
First purchase was National Indemnity for $7M. Now has more net worth than any other.
27) Q) In high inflation, what are the best and worst businesses for BRK?
A) Pricing power & market position are key
See's is better ‐ Utilities are worse, making a bond‐like return
CM ‐ In California, proposed high speed rail project with 800 miles of track has a budget of $43B
‐ For same price, BNSF has 22,000 miles of track + engines & bridges ‐ so based on replacement
cost, is a good deal
28) Q) Will BRK split the 'A' shares ‐ Effects ‐ Pros& Cons?
A) No ‐ Already have with the former 'B' shares and then the subsequent 'B' split related to the BNSF
acquisition
CM ‐ Warren used to tell people "May you live till the 'A' shares split."
29) Q) Can you give us a policy example of Ajit in the reinsurance business ‐ to help understand his
thinking?
A) Willing to discuss big transactions ‐ always thinkg & being creative ‐ willing to look at new areas
CM ‐ Secret of success ‐ being very interested in what you do
Ajit thinks of BRK first ‐ could get more money elsewhere
CM ‐ prompted WB to follow up on worst businesses ‐ retailing
30) Q) (The question had to do with goodwill amortization & return on capital)
A) Do not include in return on capital calcs ‐ Use return on tangible assets
Goodwill should either be kept (has a durable competitive advantage)or written off (no
advantage) ‐ but not amortized
CM ‐ Much cheaper to purchase businesses with insurance float ‐ helps when thinking through
return on capital (i.e. LZ)
31) Q) In the book 'Damn Right', Cm mentions that he would teach finance through case studies of 100
good & bad businesses. What are some examples of those?
A) CM ‐ Costco is an example of 'right' ‐ Has fostered a culture of extreme meritocracy and honesty ‐
This is rare
GM is an example of 'wrong' ‐ Very successful at one time ‐ focus on short term and continual
eroding & obligations by unions ended up wiping out shareholders
32) Q) In a rich society, how can you incentivize kids to work hard & be successful?
A) WB was rich as kids were in high school ‐ tried to not live so differently from others
Don't push to out‐do parents in exact same thing
CM ‐ "Lose the fight as gracefully as you can." (meaning try, but it's tough)
CM ‐ Get them interested in something...
33) Q) (This question related to the BRK succession plan and compensation of future managers.)
A) Likely see a base salary supplemented by options (base price at time of issuance and increase
annually)
CM ‐ Not unthinkable that someone could continue in the current scenario
34) Q) How does renewable energy (clean water & food) affect BRK decisions? (related to investments)
A) Likely see a base salary supplemented by options (base price at time of issuance and increase
annually)
CM ‐ With enough energy available, the clean water problem goes away
CM ‐ Smart to buy other's hydrocarbons and save what we've got
35) Q) Did LZ violate its duty to shareholders in negotiating a transaction with BRK & not shopping for
the best price?
A) CM ‐ No, BRK would not have participated otherwise
With BRK, you have significant size & certain amount of money
36) Q) How do you determine if BRK is allocating capital well going forward?
A) Compare price to amount spent on businesses over time
37) Q) Explain why there were different terms for GS, GE, Dow, Wrigley/Mars, Swiss Re deals.
A) Each one occurred at different times ‐ Thus, there are different opportunity costs given the
environment at the time
BRK was early on the GS & GE deals
The deals mentioned are not related ‐ Cannot measure each decision against the best past deal
CM ‐ No other way to do it
38) Q) What is your advice regarding being able read faster ‐ speed reading?
A) WB does not read fast & is slower now than he used to be
May help if you can do it ‐ but may not get details & insights out of the material
CM ‐ it's over rated
39) Q) What are your thoughts on Congress and politics related to the debt ceiling?
A) Past example of Indiana voting to change PI to an even 3.0 to make it easier for kids is
comparable to this debate
The country has a different debt capacity at different times ‐ The ceiling just allows for periodic
fights
It is important to be able to borrow in your own currency vs. another ‐ night & day difference
Example of wanting to buy a Chicago bank in the 1950's, but could only get financing from
Kuwait ‐ Did not do it b/c no idea of what that currency might do
40) Q) Discuss BRK exposure limits regarding Mid American Energy and its proposed nuclear plant. Is the
risk/reward safe/acceptable?
A) The U.S. is 20% nuclear
Nuclear is safe ‐ The reaction to the incident in Tokyo makes it unpopular, but that does not
change his view
CM ‐ You cannot be completely risk averse ‐ also newer plants will be safer than the current
ones operating right now
This does not pose a risk that threatens BRK's existence
41) Q) Will you ever consider reinstating BRK's shareholder direct giving program?
A) It was tax efficient to donate to 501c3's
No other business copied it ‐ some dissention about it
After Pampered Chef acquisition, there was a campaign to boycott the independent people who
sold Pampered Chef products b/c other, unrelated BRK shareholders chose to direct their giving
to organizations like Planned Parenthood. Since it had an effect on the livelihood of the
independent contractors, it was discontinued.
42) Q) Discuss long term cash flows and how you weigh future projections vs. past reliability.
A) Some products travel better ‐ Sees Candy has a strong position out west, but travels to other
areas less well.
LZ ‐ can expect some growth but not big
CM ‐ Business schools emphasize projections ‐ effect is more harm than good ‐ Think about false
projections & the significance of that on decisions
CM ‐ Example of Scott Fetzer being shopped by First Boston & could not get a deal ‐ BRK did the
deal w/o First Boston & Charlie's comment was that he'd 'pay them to keep their report'.
(meaning he was better off not even seeing & being influenced by it)
CM ‐ mentioned not ever seeing WB do a formal 'model' but they both have mental models that
they run through (A good reference is Alice Schroeder's lecture video at the Darden School in '08)
43) Q) In recent 13‐F filings, there are (3) stocks that are listed under Warren E. Buffett with no other
reference. What do these relate to?
A) Defer to Mark Hamburg ‐ Likely related to pension benefit plans inside of BRK
44) Q) When looking at China, what do you do different ‐ What else do you look for?
A) Generally the same investment process ‐ Less sure ‐ Less clear information
CM ‐ So few that it's hard to glean a pattern
45) Q) Discuss BRK's cash and where its held.
A) Does not play the short term game in paper & money markets
Mostly in treasuries, even though unattractive
CM ‐ Stupid to maximize short term money ‐ Example buying pipelines in '08 happened in less
than a week ‐ Have to be sure the money is ready
46) Q) Mid American Energy has invested $1B in wind power. Can you explain how to look at that?
A) Cannot count on the wind ‐ only blows 35% of the time
Only makes sense with government credits
It is an asset to BRK b/c they pay a lot of taxes, thus the tax benefit can be used
47) Q) How close to bankruptcy was Netjets when Santuli left?
A) Would have failed if independent from BRK, but not inside BRK
48) Q) What is your advice for young people ‐ startups/entrepreneurs?
A) WB's Dale Carnegie diploma hangs on his wall ‐ Communication skills are the first area to improve
to increase value
CM ‐ Economy is tough‐ Micro is easy ‐ Macro is hard & even the experts disagree on it
49) Q) How do the Munich Re & Swiss Re relationships affect BRK?
A) Not of a magnitude that would affect BRK's own insurance business
CM ‐ Re‐insurance is not easy. First 15 yrs, BRK did not succeed (Looks easy, but it's not)
Derivatives at investment banks led to horrendous losses for business owners
50) Q) How did your relationship with Todd Combs begin?
A) He sent a letter to Charlie, and subsequently met for dinner. Charlie then talked to WB
51) Q) Thoughts on the recent J&J acquisition of Sythes?
A) No Specific knowledge
being done with 2/3 stock ‐ better if all cash deal (still feels pain from Kraft deal last year)
52) Q) Regarding BRK's European acquisition being too big for a cash deal, What can be done to help?
A) LZ is $9B ‐ Couple of others currently looking at ‐ no elephants right now
Comment about overpriced dot‐com businesses being able issue 'confetti' for real assets
(meaning trade overpriced pieces of paper for good business producing real things)
53) Insight into housing & Real Estate Market in the next 10 years? ?
A) Bought Alabama brick business b/c Alabama uses more brick than any other state ‐ Over time,
houses will be built in keeping with household growth
No movement since annual report
CM ‐ Lumpy earning are ok ‐ WB noted that Sees Candy has losses 8 mos. of the year.
End