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On Berkshire's performance
Question: You've stated that if management wasn't capable of delivering a better return than the index, then management wasn't doing the job. Are you changing the yardstick?
Buffett: It's obvious that if the market has five strong years in a row, we will not beat the S&P. Despite things mentioned about President Obama, the stock market seems to have done very well. We will underperform in up years.
Munger: We should remember that Warren's standard talks about the net worth of Berkshire increasing after corporate taxes. The indexes aren't paying any taxes. Warren has set a ridiculously tough standard. If this is failure, I want more of it.
Question: I think of you as running a rational company. But when looking at the comparison of Berkshire value per share compared to S&P 500, what is the rationale of comparing an index against an operating company's book value? Why do you annually make this irrational comparison?
Munger: The answer is you are totally right, and the answer is Warren wants to make things difficult for himself. It makes it hard for Warren to look good. It's insane, you're right.
Question: Berkshire has generated outsized returns, but your size of operations will limit those in the future. How confident are you that future allocators will be able to generate outsized returns?
Buffett: There's no question size is an anchor to performance. ... If we keep putting billions in and those billions are worth more than what we're putting in, we'll keep doing it.
Question: What actions can Berkshire take to narrow the discount between stock prices and intrinsic value? Would you ever consider an initial public offering of Berkshire's independent operating units?
Buffett: No. Charlie and I really devote considerable effort to explaining where there's really a significant discrepancy between book value and the true value or intrinsic value of the business. We've said we are willing and eager to buy stock at 120 percent of book value.
We only believe in repurchasing shares when we can do so at a significant discount. If you buy a dollar bill for 90 cents, you are doing your shareholders a favor. If you buy it for $1.10 you are doing them no favor at all.
Munger: The stock will eventually go over intrinsic value whether we like it or not.
On Obama and the economy
Question: The president's approval rating is at 40 percent. Steve Wynn said Obama is the biggest wet blanket to the economy. You have Obama's ear. The train's going in the wrong direction. Can you conduct Obama to change the train's direction?
Buffett: I don't agree with a number of things you've said there. American business is doing extraordinarily well. Many of the American people are not.
Anybody that thinks American business is not doing well should look at corporate profits. American business earnings on net tangible assets, the way to measure profitability overall, it's basically the envy of the world. Our tax rates now for corporations are far lower (than in the past).
Munger: (Silence. Laughter.) I'm going to avoid this one.
Buffett: And people complain about me abstaining.
On BNSF service problems
Question: BNSF is doing well, but Union Pacific is doing better and operating more smoothly for customers. Can you shed light on the divergent results? Was BNSF too aggressive in signing up new business?
Buffett: There's no question we've had a lot of service problems, particularly on our northern route. We have been spending more money than U.P., and they spend a lot. The boom in the Bakken shale region — we have a lot of trains running there that weren't running five years ago. And cold weather was an issue.
Matt Rose, BNSF's executive chairman: It's the geographic nature of our franchise. The oil came a lot faster than we expected. I have never seen winter weather like that. We had 83 inches of snow in Chicago. Many days below zero in Minnesota. When we get to zero to 10 below, things just don't work. Now the railroad is coming back and we're making significant investments to be able to handle all the business out there.
On H.J. Heinz impact
Question: Berkshire's 50 percent ownership of H.J. Heinz is included in results, which could be meaningful to Berkshire's earnings. What is Heinz's earning power?
Buffett: Heinz will be filing its own 10Qs. The first quarter will be about due now. You will get to see Heinz's figures. Heinz was actually a very reasonably run food company with 15 percent pretax margins for many years. I would invite you to look quarter by quarter. I think the margins for Heinz will be significantly improved from those historical figures. They've just restructured the business model and I think the brands, which are all important, are as strong as ever.
On Berkshire's management style
Question: Berkshire has a track record of buying successful companies and leaving them alone. Could Berkshire use 3G's methods? Would you hire a 3G manager to run a Berkshire subsidiary?
(Berkshire partnered with 3G Capital to buy H.J. Heinz; Berkshire provided the capital and 3G took over operations, naming a new CEO, closing plants and taking other cost-trimming steps.)
Buffett: I don't think the two blend very well. I think 3G does a magnificent job of running a business. There's no question it's a different style from Berkshire, and I don't think it would pay to try and blend the two. I think we will see more opportunities to partner with 3G, and I think we're very likely to jump at those opportunities.
Munger: I don't think we've ever had a policy that loved overstaffing.
Buffett: We do not wish to enforce on every subsidiary as to whether they have too many people or not. Overwhelmingly, they're managed on a lean basis. We encourage by example, but we do not encourage by edict.
For complete coverage of the 2014 Berkshire Hathaway shareholders meeting, including stories, video, photo galleries and a chat with World-Herald Buffett guru Steve Jordon, visit Dataomaha.com/Berkshire.
Question: Why don't Berkshire's proxies list compensation for more of its managers/executives?
Buffett: Berkshire is following SEC rules on proxy requirements. (He said he will write in next year's annual report about this issue.) Listing salaries could have a negative effect on negotiating salaries, and shareholders would be hurt by publishing salaries. There's no CEO that looks at proxy statements and comes away thinking, “I should get paid less.”
Munger: Companies are better off without adding to the culture of envy in America.
Question: What is Forest River (RV manufacturing firm) doing differently from Thor (a competitor)?
Buffett: The Forest River owner bought it out of bankruptcy, rebuilt it, then approached (Buffett) about selling. We've lived happily ever after. It's now a $4 billion business. I've never been to Forest River. It's based in Indiana. I hope it's there. I've had only three or four phone calls with the owner.
Question: What are your weak points?
Buffett: We are very disciplined in some ways, and by ordinary business standards we're sloppy in other ways. A clear weak point of mine would be, I'm slow to make personnel changes. I like the managers we have. Charlie and I had a wonderful friend, couldn't have been a better guy. ... How long would you say we went beyond where somebody else would have acted in that case? We've waited too long on managers.
Munger: Sure, you and I participated in taking one manager directly from the office into an Alzheimer's home.
Buffett: We think giving our managers the degree of freedom we do works well for us. There may be downsides to their style, but what we won't be able to measure is how much on the positive side we have achieved with dozens and dozens of people because we gave them that same sort of leeway. Berkshire has no human resources or general counsel office, almost unthinkable at other companies.
Munger: By the standards of the rest of the world, we over-trust. But it — a culture of deserved trust — is working.
On Berkshire's size and diversity
Question: Will successors be able to manage the diverse businesses so well?
Buffett: The model has worked well for America if you consider the Dow Jones industrials as one company. Owning a group of good businesses is not a terrible business plan. I think our business plan makes nothing but sense, to own a great group of businesses, outstanding managers, conservatively capitalized, with one enormous advantage most people don't understand: Capitalism is about the allocation of capital. We have a system at Berkshire where we can allocate capital without tax consequences. There's nobody else really better situated to do that than Berkshire. But it has to be applied with businesslike principles rather than with stock promotion principles.
Munger: There are differences between Berkshire and other conglomerates. Some are hell-bent to buy something or other quite regularly and we don't feel any compulsion to buy. I don't think we're a standard conglomerate.
Question: Every year I see some of the old shareholders and they are waiting to get a dividend. I do not feel it's entirely fair for them to sell their shares. ... Is there a practical way for you to break up the company into four large groups and unlock some of the values and still allow you to allocate the capital freely?
Buffett: We would lose significant value if we were to break it into four companies. We would lose advantages in taxes, cash flow. Berkshire is worth more as presently constituted than in any other form that I can conceive of. ... It would be a terrible mistake. (He notes a lopsided shareholder vote against dividends.) There is not a way to deliver a dividend to a few shareholders and not to others.
Question: Do you plan to keep buying businesses?
Buffett: What we really want to do at our present size and scope and the objective we've got for our shareholders, we want to buy good businesses with good management and try to build them over time. As we start 2014, we've got a really good group of businesses. What we're trying to do is add on to them. I feel the game is still a very viable one. It's still got some juice left in it.
Munger: The private businesses have gotten to be a bigger portion of the company, compared to stocks. I would guess that will continue, wouldn't you, Warren?
Buffett: Sure. Being right about businesses, versus stocks, doesn't show up as quickly. It's a different sort of buildup of value. One is easier to see than the other. But the other is more enduring and does not require going from flower to flower. We've moved into Phase Two.
Munger: We are forced by our own past success into these bigger positions. I think we've adapted pretty well to changes in our circumstances. Since change is inevitable, how well you adapt to it is terribly important.
Question: Berkshire is known for buying full companies, but earlier in your careers that was not known. Acquisitions are disruptive to employees, so what have you done to gain the trust of founders or owners of the companies you have bought out in the past?
Buffett: We've kept our word to them. We have to be very careful what we promise. We can't promise there will be no layoffs, but we can promise not to sell the business unless serious problems arise. We keep some businesses that you would not get a passing grade in business school for keeping them, but we have had to get rid of only a few businesses. We promise the managers that they are going to continue to run their businesses. A private equity firm is going to be totally unimpressed with what's in the back of our annual report. But, for a family business, some of those people care about where their business goes. We do have a unique asset in Berkshire. As long as we behave properly we will maintain that.
Question: Would you ever be interested in buying a professional sports team or sports equipment manufacturing company?
Buffett: In fact, if you read that either one of us is buying a sports team, it might be time to talk about successors. Sporting equipment has not been a particularly profitable business. And Berkshire should not own a helmet company. We would be the ultimate target for lawsuits.
Question: How large of an acquisition is Berkshire comfortable targeting? Can the big holdings be a source of funds?
Buffett: Our goal is to buy really good businesses and big businesses and businesses where we like the managers and businesses we think we can grow over time. I want to add earning power to Berkshire. If the opportunities were large enough and we needed to raise some money, we can dip into a huge reservoir of securities and still have huge investments thereafter. It hasn't come to that. Berkshire has $40 billion plus of capital, and is willing to take that to $20 billion. Charlie and I concentrate on buying companies and let the portfolio managers concentrate on buying stock.
Munger: Acquisitions have been and will be irregular.
Buffett: People think we get turned on by stock buying. What really turns us on is finding a business we want to buy that fits well with Berkshire and that will be earning money for Berkshire years from now.
On Nebraska Furniture Mart
Question: Can you comment on how you were able to purchase the Nebraska Furniture Mart for such a good price?
Buffett: We paid 11 or 12 times annual earnings. It was not a bargain purchase. It was a great business. It was a wonderful opportunity to join as fine a family as I've ever met. I never asked (owner, the late Rose Blumkin) for an audit.
Now if you want to talk about bargain purchases, we should talk about going out to the Nebraska Furniture Mart. Sales are up 7 percent this week so far over last year's record sales, $7.8 million in sales Tuesday alone.
I visited the Dallas location of the new store under construction last week. It's a plot of land like you wouldn't believe. Once open, it will double the volume of any other furniture store in the world.
On the Vanguard 500
Question: (About Buffett's instructions to put 90 percent of his wife's cash in an S&P 500 index fund.) Why not into Berkshire shares? This might imply that you expect the index fund to outperform Berkshire in the future.
Buffett: (He joked:) That letter didn't come from Vanguard by any chance? (Then he reminded people that his Berkshire shares will go to foundations in the 12 years after his estate is closed.) My views on Berkshire at least until 12 years after my death are as bullish as ever. But in my wife's situation, the goal is not maximizing capital. It's just a question of total, 100 percent peace of mind on something that can't get a bad result.
Munger: Warren is “peculiar” on how he distributes money. I think he's entitled to do what he damn pleases.
On the Munger partnership
Question: Any discussion on replacing Munger? Will the company continue to be led by a dynamic duo?
Buffett: Charlie, he's my canary in the coal mine. Charlie is now 90. I find it very encouraging how he's handling middle age. I do think it's very likely that whoever replaces me as CEO probably has or will develop somebody that they work with very closely. It's a great way to operate. Berkshire is better off because the two of us have worked together. I would be very surprised that if a few years after my successor takes over, there isn't some relationship or partnership that enhances the CEO's not only achievements, but the fun they have. But so far, nobody's brought up in the meetings any successor to Charlie. I have a hard time thinking of anybody that could be a successor to Charlie.
Munger: Most 90-year-old men are gone soon enough.
Question: Do you and Charlie ever fight or argue over how you manage your partnership of two?
Buffett: We've disagreed on a lot of things, and it's never led, and never will, lead to an argument. We argue with other people, but it hasn't occurred with us. When I called Charlie about the Coke vote, we felt alike.
Munger: That's one of the problems: When one of us misses it, the other is likely to, too.
Buffett: I'm probably a little more inclined to action, wouldn't you say, Charlie?
Munger: Well, you once called me the abominable no-man.
— Barbara Soderlin