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During more than five hours of fielding questions from shareholders, journalists and financial experts, Berkshire Hathaway Chairman and CEO Warren Buffett and Vice Chairman Charlie Munger were asked why they do what they do, what changes they would consider and what the secrets of their success are.
Some of the paraphrased exchanges:
On a Buffett successor
Buffett: The next CEO is someone everyone at the company already knows.
Berkshire has a self-selecting culture, and a bad fit by the next leaders would be rejected like foreign tissue. Journalists say it won't be the same after me, but it will be the same.
Munger: Don't sell any shares.
Question: Could Buffett's successor as CEO struggle with the far-flung nature of Berkshire's businesses — newspapers, lollipops, furniture?
Buffett: Division heads will always make their own decisions. It's easier for him because he grew up with the far-flung empire. But a new person will probably want to reorganize some of the small ones. The real money is made by big business and insurance.
Question: What about spinning off Berkshire divisions into separate publicly traded companies?
Buffett: The company is easy to manage as is, and there is no need for such moves to streamline administration or management. Breaking into smaller companies, I am convinced, would produce a worse result.
Question: When you analyze stock, what are the top five metrics and what are your preferred numbers?
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Buffett: Whether we are buying ... 100 shares or an entire company, we think of them as businesses. Different numbers are different depending on the business.
We see certain things that shout out to us to look further or think further. We have accumulated a background of knowledge. Some fact will slip into view that causes us to rethink something.
We don't necessarily calculate a P/E ratio, but we know somewhat what it will look like, and that it is trading at a discount. It's important to know if the whole business is worth owning.
Munger: We don't use a computer to screen anything. Berkshire wants to get inside a company and really understand how it works.
Question: How about buying the 20 best U.S. stocks as an individual investment strategy?
Buffett: The 20 you would pick would match an index fund. The real distinction is between those who spend time becoming an expert on businesses or a person who is busy with another profession. The problem they have is they get excited about stocks at the wrong time. The key is to avoid buying at the wrong time. Don't try to behave as a professional when you are an amateur. There is nothing wrong with being an amateur. You have a profitable avenue open and that is index funds.
Question: With current mergers controlling 90 percent of traffic and increasing recent airline profits, does Berkshire want an airline?
Buffett: The answer is no. The airline industry has enormous fixed costs and the temptation is to sell that last seat at a very low price. It's a labor-intensive, capital-intensive, commodity-type business. It's been a death trap for investors since Orville took off.
Munger: The last time we were presented with a similar opportunity, the railroads got costs down and became a wonderful business. What did we do? We missed it, late to the party. Still, airlines are a hard business and there are things Berkshire likes better than airlines.
On Berkshire stock's future
Question: Do you share the view that market returns in the next few decades will be lower and that Berkshire returns will be lower?
Buffett: I generally don't pay any attention to macro forecasts. I cannot think of a decision on a stock where a macro discussion took place. Why spend time talking about something you don't know anything about? We talk about the businesses. It doesn't make any difference to me what any economist thinks. I have a general feeling about America. What you do know is that BNSF will be carrying more carloads, there will be no substitute for the service, there will be an asset with incredible replacement value. It is not very complicated.
Trying to time the market will make a lot of money for your broker.
Munger: The "new normal" is less than we've enjoyed in our lifetime.
Question: What about a stock split? Will the price go to a million dollars a share?
Buffett: We have a pretty good arrangement now. We created the B shares. I see no reason to change.
Munger: I would not hold your breath.
On getting started
Buffett: Some people probably thought I was running a Ponzi scheme in the early days investing other people's money.
Munger: Didn't you manage to scrape together $100,000 from your loving family?
They might not have loved me immediately after. Young people wishing to make a living as investment managers should develop an audited track record and start slowly.
Munger: Do as Buffett did and start with family money.
Buffett: Ben Graham's book gave me a bedrock philosophy. As a boy, I read every book on investing in the Omaha Public Library.
On the deficit
Buffett: This is not our country's toughest hour, by a large margin. GDP increases will take care of Social Security and other spending problems.
Munger agreed, saying a growing economy erases most economic troubles.
Question: How do you not ruin your children?
Buffett: More kids are ruined by parental behavior than inheritance. Your children learn through your actions. It is an important and serious job. The amount of money left by a rich person is not the determining factor in how children turn out. Children should read a will before the parent dies, to understand the obligations and inheritances.
Munger: I am sure you don't want to discuss your will with your children if you are going to treat them unequally.
On social media
Question: How does social media affect Berkshire?
Buffett: It has mattered at Geico, with direct sales. We have to listen to our customers. I have been amazed at how fast the world has changed. I thought the Internet would affect young people with buying habits, but it affected everybody. You have to respond to that.
Munger: I don't understand it very well. I hate the idea of teenagers in my family immortalizing the dumb things they say at 13. There is a case for your ignorance and folly being hidden.
On Howard Buffett
Question: Son Howard Buffett is tapped to become Berkshire's non-executive chairman when Warren Buffett no longer holds the post. "Berkshire is complex, and Howard has never run a diversified business and has not made material stock investments nor made acquisitions. Besides accident of birth, how is he qualified?"
Buffett: Howard is not assuming the role described. A non-executive chairman does not run the business. His role will be to preserve the culture and protect the CEO office from a mistake, a mistake that might install a person not fit for the job. Howard will not run the business. He has no illusions.
Munger: It helps to have an objective person sitting in the position Howard shall be in.
On low interest rates
Question: Do low interest rates challenge insurance company capital management?
Buffett: Short-term and cash investments have been debilitated by low interest rates, huge victims of the low-interest policy. I feel sorry for people with fixed-dollar investments, particularly short-term ones, I do not know what I would do. A quarter percent on a million dollars is $2,500 a year. I don't think people expected that. I get a lot of letters from people saying I saved $100,000, what should I do. The low interest rates hit millions of people in a harsh way.
Munger: They had to hurt someone and the savers were convenient.
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— Russell Hubbard