Notes From Omaha

2000

·      There is no distinction in our minds between growth and value. We look at every business as a value proposition. The potential for growth and the likelihood of good economics being attached to that growth are part of the valuation process. All intelligent investing is value investing.

·      In the end valuation does count. But it can go on for a long time where you get a large number of participants playing with ever increasing sums and it creates its own truth for what can be a very considerable period of time.

·      We want a mathematical edge in every transaction. And we think we will do enough transactions over our lifetime so that no matter what the result of any single one, the group expectancy gets almost to a certainty.

·      In insurance almost all surprises are negative.

·      There are people who are getting paid very well to separate you from your money. And that’s worked over the years. The good salesmen find out they can make more money selling phony products with big tickets attached to them than they can selling lollipops.

·      The danger of having a wonderful business is the temptation to go into less wonderful businesses.

·      Anytime you can charge ore for a product and maintain or increase market share against well entrenched well known competitors you have something very special in people’s mind.

·      If you see a business take a lot of adversity and still do well that tells you something about the underlying strength of the business.

·      A business with something glorious underneath, disguised by terrible numbers that cause cutoff points in other people’s minds is ideal for us if we can figure it out.

·      The only way we know how to make money is to evaluate businesses. We don’t feel richer or poorer based on what the stock does. We do feel richer or poorer based on what the business does. (Businesses that go after cash flows get both cash flows and MCAP. Those going only after MCAP get neither).

·      Compensation is our way of speaking to employees, generally.  I think promising people free medical care forever between 60 and the grave, regardless of what’s invented and regardless of what it costs, I don’t see how anybody who cared about the shareholders would be make a promise like that. (Berkshire does).

·      The desire of the top person to get an outrageous amount gets pyramided through the organization.

·      The best businesses, the really wonderful businesses, require no book value. We want to buy businesses that will deliver more and more csh and not need to retain cash which is what builds up book value over time.

·      Wild things create their own truth for a while. And the trick is to occasionally take advantage of on of those wilde thigns and not to get carried away when other wild things happen.

·      Its hard to see for us why Microsoft is sinful because they tried to improve the products all the time and make next years business position stronger than the last yaers business position. IF that’s a sin, every subsidiary at Berkshrie is a sinner. I hope.

·      Moody’s is a little like Harvard. It’s a self fulfilling prophecy.

·      Good thing about my economic predictions,  even if I don make them, is that I pay no attention to them myself. So if we ever get an economics department at Berkshire, sell the stock short.

·      The idea of asking investment bankers or somebody else to evaluate the business you are going to buy, that strikes to us as idiocy. If you don’t know enough about a business to decide whether to buy it yourself, you’d better forget it.

·      “I can give you an argument, I cant give you an understanding”.

·      We have scrambled out of many wrong decisions. I would argue that’s a big part of having a reasonable record of life.

Question: Why do you think of EVA valuation methodology?

Munger: I think its an awful lot of twaddle and bullshit.

Buffett: I knew that’s what he was going to say and I thought it deserved it and I dint want to say it myself.

1999

·      Charlie and I don’t think about the market and Ben didn’t very much. I think he made a mistake to occasionally try and place to value on it. We look at individual businesses. And we don’t think of stock as little items that wiggle around on the paper and that have charts attached to them. We think of them as parts of businesses.

·      I know of no one that has been successful at and really made a lot of money predicting the action of the market itself. I know a lot of people who have done well picking businesses and buying them at sensible prices. And that’s what we’re hoping to do.

·      (On hedge funds) It is very enticing to any money manager to run, because if you do well, or even if you don’t do well but the market does well you can make a lot of money running one.

·      (ON LTCM) I don’t think this is the last convulsion we’re going to see in the derivatives game.

·      “You only have to get rich once.” And why do people, very bright people, risk losing something that’s very important to them to gain something that’s totally unimportant? The added money has no utility whatsoever.

·      If you have me a revolved with six chambers and one bullet and you say, “Pull it once for a million dollars”, and I say, “No”. And then you say, “What is your price?” The answer is there is no price

·      Whenever a bright person, a really bright person, goes broke that has a lot of money, it’s because of leverage. You simply – basically can’t – it would be impossible to go broke without borrowed money being in the equation.

·      If you front end profits and you pay people a percentage of the profits, you are going to get some very interesting results.

·      We are having trouble deploying money. But its not trouble really to have a pile of lovely money. I don’t think there should be tears in the house. (How often managers focused on AUM admit that they are having trouble deploying. Deploying cash intelligently is tough! You will not get ideas always or easily. Secondly, sitting on cash is fine. Sometimes it’s great).

·      We recognize that the internet, in many forms of retailing, is likely to pose such a threat that we simply wouldn’t want to get into the business, not that we can measure it precisely. We could go wrong, but so far in my judgment, furniture retailing will not be hurt. If I were buying any retailing business, I would think very hard about people who are going to be trying to do that through the Internet. (Thinking 20 years ahead!)

·      If you go down to 16^th and Farnam, where the streetcar tracks used to cross that was the best real estate in town. And people signed 100-50 years leases on it. And looked like there was nothing more safe, because they weren’t going to move streetcar lines. The only thing was they moved the streetcars. (That’s why it’s important to buy cheap. Margin of safety!)

·      I would expect automobile retailing to change in some important ways in part influenced by Internet. (This hasn’t changed really. Although Tesla is trying)

·      It is interesting that we got to a $ 100 BN market cap before anybody published a report about Berkshire.

·      (On Insurance). Best form of financing is cheap float. (A very underrated source of leverage for Berkshire)

·      (Munger) What we did 40 years ago, in some respects was simpler than what you are going to have to do.  (Investing has got more competitive)

·      The real question in a capitalist society is whether if long term interest at 5.5% the return on equity can, across the board, be some number like 18% to 20%.

·      It’s very important to not let little corruptions start, because they become big corruptions and then you have vested interests that fight to perpetuate them.

·      I think there are some similarities between 1969-70 and the present time. But I don’t think that means that 1974-4 lies right ahead of us. (It did. Tech bust)

·      Spotting great industry doesn’t mean you will make money. So you don’t want to equate the prospects of growth for an industry with the prospects of growth in your own net wroth by participating in it.

·      (Munger) I think very few people would change their skin for somebody else. I think we all want to play our own games.

·      We are very good at saying – no!

·      We don’t want to nibble, but take big gulps in the market from time to time.

·      I couldn’t have bought entire Washington Post for $80 MN in 1974. But I could buy 10% of it from a bunch of people who were just operating you know based on calculating betas or doing something of that sort.

·      If you are going to spend eight hours a day working the most important thing isn’t how much money you make, its how you feel during those eight hours, people you are working with and how interesting what you are doing is.

·      If we could buy a group of leading pharmaceutical companies at a below-market multiple, I think we would do it in a second.

·      Those who get very critical of the world, find the world gets very critical of them, promptly.

·      The PE ratio of Coca Cola like virtually every other leading company in the world strikes us as being full. That doesn’t mean they are going down. (It was the best time to sell Coca Cola stock and not look at it for two decade

1998

·      (On executive compensation) What bothers me is when companies pay a lot of money for mediocrity, and that happens too often.

·      At Berkshire we have not followed the standard procedure, which is to load it on the directors and the directors shall load it on you.

·      (On missing Pharmaceuticals rally) Pharmaceuticals we missed. We would not have known how to pick out any single business but we should have recognized that the industry as a whole represented a group that would achieve good returns on equity and where some sort of a group purchase might have made sense.

·      (On Micromanaging)  What we want to have is good managers and there is more than one way to get to business heaven and we have a number that have found different ways to get there. Talent is scarce commodity and when you find talent and they have got their own way of doing things – we are delighted to have them do it. More than letting them do it – we want them to do it their way.

·      The best business is one that gives you more and more money every year without putting up anything to get it. The second best business is a business that also gives your more and more money. It takes more money but the rate at which you reinvest, is a very satisfactory rate.

·      The worst businesses of all is one that grows a lot and where you are forced to grow to stay in the game at all and where you are reinvesting capital at a very low rate of return. And sometimes people are in those businesses without knowing about it.

·      What would you pay for a Frozen Corporation – a company whose charter prohibits it from ever paying anything to its owners, or every being liquidated or ever being sold?

·      If finance were properly taught – it should be taught from cases where investment decisions are easy

·      Investments are simply business decisions in terms of capital allocation.

·      (On Saving) Time to save is young. I was able to save everything I made in my teens and those dollars got magnified quite a bit. Start saving early. A lot of it is habit anyway and it’s a great habit to have.

·      I would worry if I sold a bunch of thing right at the top, because that would indicate that in effect I was practicing the bigger fool type approach to investing and I don’t think that can be practiced successfully over time.  I think the most successful investors if they sell at all will be selling things that end up going lot higher, because it means that they have been buying into good businesses as they have gone along.

·      Think of how refreshing a board of directors meeting would be if they sat down, “And now we will spend three hours examining all our stupid blunders and how much we have blow.” And after that the compensation committee will meet.

·      In a capitalist system, there should be an inheritance tax.

·      If anything we are less likely to look at something that sells at a low relationship to book than something that sell at a high relationship to book because the chances are we are looking at a poor business in the first case and a good business in the second case.

·      I think it’s hard to judge corporate culture in the foreign countries as well as we can judge it in our own.

·      By and large the depreciation charge is not in appropriate in most companies to use as a proxy for required capital expenditures. Which is why we think that reported earning plus amortization of intangibles usually gives a pretty good indication of earning power.

·      The difference between a good business and a bad business if usually the good business just throws up one easy decision after another whereas a bad business gives you a horrible choice where the decision if hard to make and is this really going to work? And is it worth the money?

·      (On waiting to buy good businesses at fair prices) The question of how long we wait, we wait indefinitely. We are not going to buy anything just to buy something. You don’t get paid for activity you get paid only for being right.

·      Democracy without a good public education system available to entire population is sort of a mockery.

·      You talk about quality verses price. The investment game always involves considering both quality and price. And the trick is to get more quality that you are paying for in the price. It’s just that simple.

1997

·      In the food business, you would never get the total certainty of dominance that you would get in the “Inevitables” (Coca Cola & Gillette).

·      It’s more important to be certain about the business being wonderful than it is to be certain that the price is not 10% too high or 5% too high or something of that sort.

·      I originally was incredibly price conscious. We used to have prayer meetings before we would raise our bid an eight you know around office. (I don’t consider this to be a bad thing; I would be willing to miss a few.)

·      You don’t always get a chance to buy things cheap.

·      You can get in more trouble in investment with a good premise than with a bad one because the bad premise will shout out to you immediately as being fallacious whereas with a good premise, it will work for a while.

·      Eventually market action themselves create their own rationale for a whole large crop of buyers and people forget about the reasons and the mathematical limitations that were implied in what got them excited in the first place.

·      People forget about the importance of price they pay as bull market just sort of dulls the senses generally.

·      It would be a bad sign (if Buffett starts writing a book) because it might mean that I really think what I was writing about was more important than what was going to happen next.

·      If Charlie & I could make a deal to increase the intrinsic value of Berkshire at 1% a year over the next 10 years we would sign up now. (Actual return in the next 10: 8.5%)

·      15% per annum is not modest. It’s arrogant.

·      We would make a lot of money if volatility were higher because it would create more mistakes in the market. As an investor you love volatility. Not if you are on margin. But if you are an investor you aren’t on margin.

·      (On why advertising should not be capitalized for Coca Cola) If you capitalized those expenditures in the past you would be amortizing them now. (So it should not matter a lot).

·      We don’t believe in carrying things out to four decimal places where we don’t know what the first digit if very well.

·      TV network business if intrinsically a pretty tough business.

·      (It doesn’t bother me that I don’t understand a lot of businesses). What would bother me is if I think I understand a business and I don’t.

·      They say in this world you can’t get something for nothing. But money managers, in aggregate, have gotten something for nothing. They have got a lot, for nothing.

·      An amateur, as long as he recognizes he is an amateur, will do better than the professional (in money management).

·      A few simple, big ideas really work.

·      We love working with people who are just plain nuts about their businesses. And you can usually spot that.

·      I read a lot. I read annual reports. I read business publications. I could do it in way less time, but I enjoy doing it so I make it last, you know like some other activities in life.

·      In terms of compensations the real sin is having a mediocre manager. That is what costs owners a significant amount of money over time. If a mediocre manager is being paid a small sum it’s still a great mistake. And if they are paid huge sums, it’s a travesty.

·      The only reason for putting cash into any kind of an investment now is because you expect to take cash out. Not be selling it to somebody else, because that’s just a game of who beats whom, but in a sense by what the asset itself produces.

·      Investment is putting out money to get more money back later from an asset. If you are a speculator you’re primarily focusing on what the price of the object is going to do independent of the business. That is not our game.

·      If we are right about a business we are going to make a lot of money (because he has praying meeting before upping the bid, and never overpays). But if are wrong about the business, we don’t have any hopes – we don’t expect to make money.

·      People who have very good opportunities, using concept of opportunity cost can make better decisions about what to buy. With this attitude, you get concentrated portfolios, which we don’t mind.

·      Surprises in insurance business are never symmetrical. They are all bad.

·      Name of the game is continuing to learn. And even if you are very well trained and have some natural attitude, you still need to keep learning.

·      (Advice for entrepreneurs) I would do something I enjoyed. I wouldn’t do something because I thought it was going to get me to life I was going to enjoy later on, because if I made a lot of money I was going to be happier or anything like that.

·      We don’t pay any attention to capital flows. You can say there are $20 bn going into equity funds but it doesn’t make any difference to us. All we are interested in what the business is worth. (Extremely relevant for Indian investors currently).

·      (On why he doesn’t force all his businesses to accept Amex) As soon as I start telling the managers that they ought to say, take Amex or not, or whatever, at that point they have lost some of the responsibility for the operations and perhaps some of the pride that comes from running the.

·      The reason I am so financially conservative is I don’t want to find out how badly I might behave if I were stretched.

·      If you have X and you think you are going to happy if you have 2X, it’s probably not true.

·      Picking some extreme example and asking what the hell is going on here – that is the way to wisdom in this world.

·      Our job is to focus on things that we can know and that make a difference.

·      We don’t want to disappoint anybody in this world. We don’t even want to worry about disappointing anybody. (Why Berkshire is not leveraged).

·      It’s hard to do intelligent things with money.

1996

·      (On issuing class B shares): If you look at the prospectus, you will see that what we said was we do not think it’s undervalued.  Can you imagine a management that goes out and says to the world, “we are selling you something, in new stock – and its way undervalued.”  What do you say to your present shareholders? That would leave me very unhappy.

·      The inflow of money and outflow of money should not be, in our view, attempted to be matched too carefully in this world, because you get investments and business opportunities at times that differ from the time that funds come in.

·      Most management feel that higher their share price the better. But the trouble is the game isn’t over at any time.  We really feel fairer the better.

Whenever somebody tells you something, the first question to ask yourself is, “And then what?” So the stock price is not an end in itself because the next question is, “And then what?”

(He was stressing that overvalued stock prices are unfair to new shareholders coming in and that is not in best interest of the business over long term.)

·      One thing to remember: in the end, the owners of businesses, in aggregate, cannot come out anyway better than the businesses come out.

·      Our (insurance) float has not cost us anything over the years ($7 bn of float at that time with market capitalization of $40 bn - essentially zero cost borrowing because of great underwriting and low cost of operations. This is probably the most understated reason of Berkshire’s success.)

·      (On purchasing GEICO shares): We didn’t think we could buy it any cheaper than the price. And we gulped a few times and paid it.

·      I am less interested if annual report of a company is a sales document.

·      If I own a stock in a company in an industry and there are eight other companies in that same industry, I want to own or be on the mailing list for the reports for the other eight because I can’t understand how my company is doing unless I understand what the other eight are doing.

·      It’s amazing how well you can do in investing with what I would call outside information. I am not sure how useful inside information is.

·      The way you learn about a business is by absorbing information about them thinking, deciding what counts and what doesn’t count, relating one thing to another. That’s the job.

·      We have promised people at all our insurance operations that we will never have layoffs because of drop in volume. (It’s ok to sit around all day and do nothing rather than doing something stupid. Its difficult for most managers, especially ones sitting on cash.)

·      If you feel you have to invest every day, you are going to make a lot of mistakes. You have wait until you get a fat pitch.

·      In the insurance business, people that misprice their policies will pay the price for it. And the world will still need insurance. And we will still be there. (Would love to buy any company that has that mindset)

·      People’s investment would be more intelligent if stocks were quoted about once a year.

·      We don’t think we have great ability to predict where change is going to lead. We think we have some ability to find businesses where we don’t think change is going to be very important.

·      Why go around and bet on things we don’t we don’t know when we can bet on simple things?

·      Throughout our careers there have been thousands of cases of things that are ridiculously priced and phony stock promotions and the gullible being led in to believe things that just can’t come true. So that has always gone on. It will always go on. And it doesn’t make any difference to us.

·      (On shorting tech stocks): We tried shorting some of those things in our innocence of youth. And it’s very tough to make money shorting even the obvious frauds. And there are some obvious frauds.

·      We are not trying to predict markets. We never will try to predict markets. We are trying to find wonderful businesses.

·      One situation at Berkshire that really is somewhat different than many companies: we assume and unfortunately, it’s in error, but we assume we’ll be around forever.

There would be no sense playing a game of accounting because it would catch up with us later on. We really run it as if in the year 2050 or something, somebody is going to look back and ask, “How did it work out?”

·      Book recommendations by Munger: The Selfish Gene, The Blind Watchmaker

·      What you don’t want is an inequality of opportunity. There will always be a lot of inequality in ability.

·      Market system (sadly) pays better for people that will entertain than educate.

·      I hate with passion, rewarding anything that can be easily faked. Because I think then people lie and lying works, and the lying spreads. And I think your whole civilization deteriorates.

·      No magic to running a bank. Just don’t do something foolish.

·      In investing you don’t have to do anything very smart. You just have to avoid doing things that are ungodly dumb when looked at about a year later.