Berkshire Hathaway Annual Shareholder Meeting Q&A

Warren Buffett opens the annual shareholder meeting, explains the Q&A format, and welcomes shareholders from around the world. He notes attendance from all 50 states and countries including South Africa, Australia, Brazil, England, France, Germany, Hong Kong, Israel, and many others. The meeting will run from morning until 3:30 PM with a break at noon.

Buffett discusses the concept of 'inevitable' businesses like Coca-Cola and Gillette that have durable competitive advantages. He explains why McDonald's, while a good business, doesn't have the same certainty of dominance as Coca-Cola. The food business has more variability than soft drinks, and once someone starts shaving with Gillette, they're unlikely to switch.

Buffett addresses whether he coordinated with Fed Chairman Alan Greenspan regarding market valuations. He explains how falling interest rates increase the value of all financial assets, but warns about good premises leading to trouble when market action creates its own rationale. He references Ben Graham's warning about how rising prices themselves can keep people excited and cause them to forget about valuation.

Buffett and Munger critique the academic notion that volatility equals risk. They explain that volatility is actually advantageous to real investors because it creates more mispricings. Buffett uses Ben Graham's Mr. Market analogy - having a manic depressive partner who offers daily buy/sell prices is a huge advantage. The crazier Mr. Market is, the more money you can make.

Discussion of Berkshire's insurance operations, particularly GEICO's growth prospects and the concept of float. Buffett explains Berkshire's three major advantages in insurance: capital strength, willingness to take on risk, and speed of action with certainty of payment. He notes that in aggregate, no one matches these advantages, though demand depends on market circumstances.

Buffett reaffirms that money managers in aggregate have not outperformed market indices, attributing this largely to frictional costs. He discusses whether this underperformance will continue and what advice he would give to equity mutual fund managers to improve their performance.

Buffett discusses the balance between rewarding exceptional talent and maintaining social equity. He uses Bill Gates and Andy Grove as examples of people whose talents should be maximized in a market society. He argues that the current capital gains tax rate of 28% doesn't discourage talented people from contributing, and praises the American economy's ability to encourage adaptation and innovation.

Buffett delivers a strong critique of stock option accounting, calling it 'weak corrupt and contemptible accounting.' He argues that stock options are a form of compensation and should be counted as such. The discussion covers corporate accounting practices and the overuse of stock options as executive compensation.

Discussion of See's Candy as an example of a business with strong pricing power and brand loyalty. Buffett explains how See's Candy was purchased in 1972 and has demonstrated the characteristics of a wonderful business through its ability to raise prices while maintaining customer loyalty.

Charlie Munger explains the concept of opportunity cost in investing - if you already have a great opportunity available in large quantity, you can screen out 98% of other options. This approach leads to concentrated portfolios. Buffett adds that they always compare new opportunities to buying more Coca-Cola or Gillette stock, asking whether a new investment is better than their best existing holdings.

Charlie Munger reflects on how calculating intrinsic value used to be easier when stocks traded at 50% or less of liquidation value. In Berkshire's history, they bought things at 20% of liquidating value. Ben Graham followers could run their 'Geiger counters' over Corporate America and easily find bargains. No matter how bad the management, buying at 50% of asset value provided a margin of safety.

Buffett discusses his biggest category of mistakes: being reluctant to pay up for outstanding businesses or to continue buying at higher prices. He estimates these mistakes have cost 'many many billions.' Most of Berkshire's mistakes have been mistakes of omission (not acting on understandable opportunities) rather than commission. The key is having the courage to take a really big bite when rare no-brainer opportunities appear.

Detailed explanation of how money moves from the insurance pool to the investment pool, and why Berkshire is able to generate so much more float than typical insurance companies. Discussion of Fortune Magazine article about inflation's effect on equity values and the relationship between stocks and bonds with their implicit 'par' of 12% average return on equity.

Buffett strongly advises doing something you enjoy rather than just pursuing money. He believes there's a ton of opportunity out there and people should do what they enjoy rather than enduring work they don't like just to get to a life they'll enjoy later. He notes that he and Munger have never worked only for the money - if they were in it only for the money, they would have quit long ago. You should have fun while doing it, not jam tomorrow.

Discussion of Coca-Cola's intelligent use of capital, particularly share repurchases and strengthening their global bottler network. Buffett tells the fascinating history of how Asa Candler bought Coca-Cola for $2,000 in the 1880s (perhaps the smartest purchase in history), then in 1899 sold perpetual bottling rights for almost all of the United States for just $1 with a fixed syrup price forever - one of the dumbest contracts in history.