On May 2nd, the world gathered in Omaha, Nebraska to listen to Warren Buffet at the 2009 Berkshire Hathaway Shareholder Meeting. We tried to parse the future from his words, and wondered if this was the most optimistic that Charlie (Vice Chairman of Berkshire Hathaway Corporation) has ever been. Some hailed the new format as much more focused, giving the audience a better chance to understand the genius of Warren Buffet.
Two days later, the market reacted with the Dow posting a 200+ point advance. And since Warren doesn’t really care about the market, let’s just say that the reviews have been uniformly—cautiously—optimistic.
This year, I attended the meeting with 7 students and recent graduates from the Peter F. Drucker and Masatoshi Ito Graduate School of Management, the Keck Graduate Institute, and Pepperdine’s Graziadio School of Management. I teach as an adjunct professor at Drucker and the Graziadio School and it was a delight to be joined by a group of delightful, energetic, and bright leaders of our future.
On Corporate Governance
As always, Warren was tough on the corporate board and arcane regulations…
- Executive Compensation: Compensation committees are often useless, simply getting consultants to provide market data and always looking at the top quadrant for comparison. Does anybody not know that half the population has to fall in the bottom 50%? (I agree—you can buy data to prove any point you want)
- Independence: Those whose livelihoods depend on their director compensations can never be independent because they don’t want to get fired; how can they rat out their CEO friends? (I don’t buy really buy this, since this will only leave the Buffets of the world to be directors)
- From Charlie Munger (Vice-Chairman of Berkshire Hathaway Corporation): [In reference to the run-up of financial institution profits through bogus transactions involving derivatives] the accounting profession and rule-setters should be ashamed of themselves for creating accounting rules that incentivize executives to post sham profits, rather than operate responsibly. (I was disappointed that the two of them were not asked more questions about the role of public accountants and the future role of the Big 4 accountants)
On the Economy
- The Federal Government: All people make mistakes when there is so much to do, and we cannot expect perfection during these times. However, the general approach that the administration was taking is good, but that also includes the previous administration’s bail-out last October, which saved the country from a monumental collapse. We will need to worry about inflation at some point, but not now. (I don’t think Buffet was as supportive of the Obama Administration as the media reported. I sense he was trying not to sound like a cheerleader, but since most people believe his ideas somehow end up being heard by the Obama administration, he tried to stay in his own non-political world.)
- Tax-Payer Bailout of AIG and Automotive Industry: We really aren’t using taxpayer money. You and I haven’t had a decent tax increase in years. Instead the money to bailout all these companies comes from borrowing, and the only people who really should complain about the auto bailouts and the AIG bonuses are the Chinese. They’re the ones paying for a large share through their acquisition of US Treasury notes. (Another question about the value of the dollar came up. There’s no getting around it; as long as China keeps exporting to the US and getting paid in dollars, the purchasing power of their dollar holdings will diminish over the years)
- Housing Market: There are an estimated 1.5 million unsold homes in the market. Household creation in the US is about 1.3 million per year. In the past, housing starts exceeded 2 million for the 1.3 million new households, so that will create a glut. Now, the construction pace is down to 500,000 a year. So the only way to get rid of the oversupply is either to blow up the houses, make fewer, or increase household generation But with the reduced pace, the current supply will be reduced, and there will be peace in the housing market. (remember my post about Why Real Estate Matters? Maybe he read that).
On Financial Literacy and Education
One of the first questions was about financial literacy of the future generations. Buffet said that it’s a problem with the current generation. He also ripped financial engineering programs of the MBA schools for churning out people with higher math skills that couldn’t be used. He said that if you have 150 IQ, you should sell 30 of that. The problem with smart people is that they try to use it, and business doesn’t require all that much smarts. (I agree and disagree—Warren can say whatever he wants because he probably has a 150+ IQ. )
- MBA schools: All they need to teach is that a bird in one hand is worth two in a bush, but that’ll only take 5 minutes and MBA programs can’t charge tuition for that, so they teach all sorts of stuff that has nothing to do with business. (He’s got a point, but he seems to go against his better advice—don’t try to show up other people. )
- False Precision: If we need a spread sheet to calculate the value, we won’t invest, because it’s not that complicated to get the value of a business. (Buffet and Monger used the term “false precision” to describe financial models that are used to price derivatives and securities. He is famous for not using accountants or consultants to help him value companies—he needs to see that much margin of error in his valuation to go forward with the deal.)
- Modern Finance: How stupid a logic is it that the price of a security is always correct, that it always incorporates all the information (this is the foundation of modern finance)? As a big value investing proponent, students really only need to know 2 things—how to value a business and a good understanding of the market. (I wasn’t sure if he meant the capital market or the market in which the business competes. In general, this is a further attack on the financial theorists from the Efficient Market Hypothesis school (University of Chicago—my alma mater). It’s a bit harder to take for people who’ve studied finance all their lives. I’m waiting for University of Chicago—or Booth, as it likes to call itself these days—to craft a response. )
- In reference to a comment that Berkshire Hathaway can’t possibly have the simple business model that Buffet so ardently advocates: The model is simple—we’re a collection of private businesses. CEOs need to make decisions as if they own 100% of the company. Operate the business like you own it. (I have a feeling that Warren may be a better investor than a manager. He’s a great leader, but not in the sense that people can emulate his management style. His style may work because he’s one of the richest guys in the world, and because he’s a genius. He is such a great teacher, though. His ability to take complex issues and make the average Joe understand them is pretty amazing. He’s the Bill Clinton of business.)
- Executive Compensation: Everyone else doing it is not an acceptable business strategy. (He may have been referring to how executive compensation is based on benchmark studies of other firms. This reminds me of some of the stuff we do in consulting. Benchmarking and Best Practices end up being exercises in justifying to yourself and your boss that you can copy others, but better. This is another indictment of the consulting industry and managers who follow, and not lead. It is the “I chose IBM for the IT project, so even if they screw up, don’t fire me” argument.)
On Berkshire Hathaway
- Succession: I don’t think watching me read the NY Times is a good way to train my successor. ( He offered the same story about 3 inside candidates for the CEO job and 4 inside and outside candidates for the Chief Investment Officer Job. I’m not sure he shed new light on the topic. He and Charlie are still enjoying their duties, so unless the swine flu turns deadly and toward Omaha, we should figure they’ll be around for a bit. No matter what assurance he gives, Berkshire Hathaway is always going to be deemed Warren Buffet & Co—much more so than GE was Jack Welch & Co. And as talented as GE successor Jeff Immelt was and is, look what kind of challenges he faced. He did not want to announce the new CEO and go through a transition because he thought the best way to prepare was to run a business, like all the current internal candidates are currently doing—running successful BRK businesses.)
- BYD: Although the investment in BYD, a Chinese manufacturer of rechargeable batteries, mobile handset components, and cars surprised some as speculative,this was Charlie [Munger’s] deal, and he is very excited about this company. In fact, Charlie is in love with not only the company, but also the Chinese. (Munger is known to run the business like an engineer—always having a margin of safety. Thus, it’s not surprising that he loves BYD, which hires 17,000 of the brightest engineers in China.) Never bet against the best 17,000 engineers in China.
- Derivatives and Insurance: Don’t worry, we’re covered, and we’re in better shape than we are a few months ago. ( Somehow, I believe him.)
After the event, I met up with my students at the Nebraska Furniture Mart for the Western Cookout. It was a gorgeous day, the food and Coke (in a metal bottle!) were cheap, and we stayed for a few hours. It was the first time many of the Pepperdine and Drucker students had met and they immediately connected. They were all uniformly impressed with Warren and Charlie. A few mentioned this was the best event they’d ever attended in terms of the learning and the people that they’d met. It was a celebration of American capitalism, good old fashioned fun, and unparalleled business knowledge and wisdom. It was a gathering of people from around the world who would take away unforgettable memories of friends, old and new, and of the man they all love to call “The Oracle of Omaha.”
Related in the GBR
Recognize the True Cost of Compensation by Steven R. Ferraro, PhD, CFA
Insights from Keith McFarland, author of The Breakthrough Company by Wayne Strom, PhD
Interview with ICE Chairman and Founder Jeff Sprecher by Danielle L. Scott