Foreclosures, layoffs, plant closings, labor disputes — the difficulties of capitalism came through clearly Saturday alongside the hoopla of celebrating Warren Buffett’s 50 years of leading Berkshire Hathaway Inc.
It was a lesson in economic reality for Berkshire shareholders gathered in Omaha and relayed to anyone else hearing accounts of the meeting.
That includes workers let go at H.J. Heinz Co. plants, people defaulting on their mortgages for Berkshire-built manufactured homes and the 300 pilots at the CenturyLink Center who demonstrated their union’s viewpoint in negotiations with Berkshire’s NetJets division.
Chairman and CEO Buffett and Vice Chairman Charlie Munger were unapologetic about business managers’ need to make tough decisions.
Munger warned that an economy designed simply to supply jobs to everyone would fail like the Soviet Union’s. If the U.S. economy had been run that way, Munger said, most Americans would still be getting up at 4 a.m. to milk their cows.
Buffett defended Berkshire’s Clayton Homes manufactured-housing company from allegations of predatory lending, saying, “I’m proud of the Clayton management.”
Other comments at the meeting:
» Munger said the United States and China will be the two most important nations in the world, so it’s important that they collaborate as much as possible to build up mutual trust.
» Although some auto dealers are trying fixed-price sales methods, most people still like to negotiate major purchases like cars, houses and jewelry, Buffett said. Berkshire Hathaway Automotive, a new division of car dealerships, will adapt its sales practices to whatever customers want, he said.
» Munger and Buffett don’t have a set of criteria for acquiring businesses but can spot problems that exclude many.
» Munger agreed with Buffett’s decision to invest in IBM Inc. in 2011, even though they usually stay away from investments in high-tech businesses.
» A strong corporate culture is “a vital part of Berkshire,” Buffett said, and after they are no longer in charge (Buffett is 84 and Munger is 91) it will become clear that its culture is strong and long-lasting.
During the meeting, the first topics raised during five hours of questions directed at Buffett and Munger were the Clayton Homes allegations and job-cutting steps by 3G Capital, the Brazilian company that partnered with Berkshire to acquire Heinz.
Last month, the Seattle Times and the nonprofit Center for Public Integrity in Washington, D.C., reported that their investigation showed Clayton used deceptive practices to “trap” lower-income customers into high-rate mortgages and “rapidly depreciating manufactured homes.”
During Saturday’s meeting, Buffett said an accounting error in the story showed Clayton making a 20 percent profit on houses, instead of what he said was actually a 3 percent profit. He said Clayton’s lending is not predatory because it loses money when customers default, so its incentive is to make mortgages that people will repay.
He said only 3 percent of Clayton’s buyers default, a small percentage, especially since many of them have poor credit histories. It wouldn’t be fair to deny the remaining 97 percent a chance to buy homes because of those defaults, Buffett said.
He said state government regulators have examined Clayton’s financial practices 91 times, and the largest fine was $5,500 and the largest refund was $110,000.
Clayton Homes sold 30,000 houses that were “a real bargain,” most of them for monthly payments of less than $600, Buffett said, although job losses, deaths and divorces resulted in some defaults.
Munger said manufactured housing is “very constructive” in general because it is an efficient way to build homes.
Authors of the Seattle Times story declined to comment to The World-Herald about Buffett’s statements.
Buffett also said 3G Capital makes the right decisions when it reduces unnecessary jobs at companies it acquires. “I don’t know of any business that has a policy that says we’re going to have more people than we need.”
The questioner said Buffett kept Berkshire Hathaway’s textile mills operating in the 1970s long after they were profitable, but Buffett said those textile mills cut employment, installed automated equipment and made other attempts to stay in business before shutting down.
Some Berkshire companies may have some excess workers, he said. “I tolerate it,” because managers are in charge of their businesses.
But Buffett said Berkshire’s businesses are run with the same eye to efficiency and proper employment levels as those managed by 3G Capital.
He said U.S. railroads today employ about 200,000 people and are much more efficient and profitable than decades ago when they had 1.6 million workers. “Efficiency is rewarded ... in capitalism.”
The Berkshire meeting was expected to attract between 42,000 and 44,000 attendees. Besides the 20,000-seat CenturyLink arena, overflow rooms at the adjacent convention hall and the Omaha Hilton across the street were filled. An initial sound glitch in the convention hall ballroom was corrected shortly after the company movie began, which was shown before the meeting.
An official attendance estimate wasn’t available, but it appeared there were more people than last year, when Berkshire said a record 39,000 attended.
Three journalists, three financial analysts and shareholders took turns asking questions.
Buffett said he would be surprised if Berkshire didn’t acquire at least one business in Germany over the next five years. The company recently purchased a chain of motorcycle supply stores in Germany. “We’re eager, we have the money and we do fit the family situation occasionally,” Buffett said.
Munger said the company has had a hard time buying things in Europe, in part because of different traditions.
“Germany, of course, has a long tradition of being very good at technology and capitalism ... and we admire the Germans,” he said. “They actually work a lot fewer hours than Americans and they produce a lot more. Warren and I are very good at that.”
Buffett said he hadn’t read the newly proposed rules for railroad cars that haul crude oil but said Berkshire’s BNSF Railway is an industry leader in safety.
Munger said the company’s pipelines, including Omaha-based Northern Natural Gas, improved their safety records after becoming part of Berkshire.
Shareholders applauded when Greg Abel, CEO of Berkshire Hathaway Energy, said 58 percent of the company’s electricity in Iowa comes from wind generators.
Buffett said Berkshire has become a leader in electricity from wind, the sun and flowing water because it has strong profits that can benefit from federal government tax subsidies for renewable energy.
If more homes and businesses begin generating and storing electricity — so-called distributed generation — Berkshire’s energy business would still be a leader in renewable energy, Buffett said.
“It’s not a threat,” Munger said. “It’s a huge benefit for humanity,” as well as an opportunity for Berkshire.
He said Berkshire’s next CEO could be someone with both management and investing experience, since understanding both duties would be important. Buffett praised Ted Weschler and Todd Combs, who share his job of managing Berkshire’s investments, and said both men have been gaining management experience as well.
He said it is “conceivable” that someone with investment management experience could be CEO, although investments have become less important to Berkshire compared with the businesses that it owns entirely.
He did not discuss whom his successor might be, a perennial question among Berkshire shareholders because he has not publicly named the successor that Berkshire’s directors have in mind.
In hiring someone, Buffett said, “the trustworthiness is more important than the brains.”
In a lighter moment, both men defended Berkshire companies’ sale of food with high sugar content, such as Coca-Cola.
Buffett said Berkshire’s food companies adjust to consumers’ changing tastes. but people enjoy sugary foods because they make mealtimes “happy,” adding that he gets one-fourth of his calories from Coke.
Apparently as a joke, he said, “I never see smiles on the faces of people at Whole Foods,” a supermarket chain whose core values include “healthy eating.”
“If I die a little sooner,” Munger responded, “I’d avoid some months of drooling in a nursing home.”
Buffett said “Berkshire” is being used as a brand for its real estate franchises, auto dealer companies and its energy division, but if the name is “misused” it would be pulled back. There’s no plan to make Berkshire a well-known consumer name, he said, although many Berkshire-owned companies use a tag line in their communications that shows them as “A Berkshire Hathaway Company.”
Buffett said he and Munger aren’t good at predicting where the economy is going in the next few years but have confidence in the future because the U.S. economic system works well in the long run.
“We’re just swimming all the time and letting the tide take care of itself,” Munger said.
Munger said Berkshire has benefited from its strong reputation, which wasn’t necessarily the end goal.
“Hardly anything is more important than behaving well as you go through life,” he said. “We actually have tried to behave better as we’ve grown more prosperous. You’d be crazy if you didn’t.”
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.