Edited from the 2011 Berkshire annual meeting Q&A transcript at Omaha.com. Coincidentally, someone asked about index vs active investing - something I was pndering myself today.
On the U.S. debt ceiling
Congress will raise the debt ceiling, you can take that to the bank. But, Buffett said, not before much politicking and pandering.If the ceiling isn't raised it would be the “most asinine act Congress has ever performed,” Buffett said. “It's extraordinary, that with our deficit running well over $100 billion a month ... having a debt ceiling to start with is a mistake. The U.S. of 2011 has a different debt capacity than the U.S. in 1911.”“The amount and number of silly statements you hear (from Congress) seems like such a waste of time. In my view, there's no chance they don't increase the debt ceiling.”
On too big to fail
Buffett isn't a fan of bailouts but said government intervention with some of the major financial institutions and other companies was necessary.The General Motors bailout, for example, was a good choice: “I was really on the fence about saving the auto companies, but I think the administration did the right thing. They made the right decision.” In a perfect world, Buffett said, executives would face serious consequences for making risky bets and decisions that later backfired and crippled their companies. He said companies need to “reduce the propensity to fail” by making sure there are rules in place so that if the CEO and any directors of a company need to be bailed out by taxpayers, the CEO and his or her spouse should be left “dead broke,” and officers and directors should also face severe consequences.
On the weakness of the U.S. dollar
“We have not been really active in the foreign exchange market, but there's no question that the power of the U.S. dollar is going to decline over time. We do own some businesses — Coca-Cola — where 80 percent of earnings are nondollar. We are unlikely to make another big currency bet, although I do think the U.S. dollar is going to decrease.” Buffett said he has had some unwarranted fears about the rapid decline of the dollar. A dollar from when Buffett was born is worth just 6 cents now. That could be discouraging, projecting a similar decline over the next 50 years or so, he said, but “inflation has not destroyed us. ... Overall we've still done pretty well.” “I hate inflation, but we've adapted to it pretty well over the years. It's something you always have to guard against.”
On the Lubrizol purchase
Buffett said he wasn't wild about the Lubrizol deal at first but warmed to it over time.
“It struck me as a business I didn't know anything about. I never would understand the chemistry of it. What is important is that I understand the economic dynamics of the industry. As a matter of fact, I suggested to Dave (Sokol) to call Charlie because I just don't know anything about that business. Talked to Charlie a few days later and he said, ‘I don't understand it either.'
“What Dave passed along to me after having dinner with Lubrizol CEO James Hambrick was that I thought I got a good understanding of industry dynamics and what the role of oil companies would be compared to additive companies like Lubrizol.
“I had come to the conclusion that the Lubrizol position is the No. 1 company in terms of market share in that business and that it's sustainable over time. They're helping engines run longer and smoother. Lubricants are important and they're always going to be around. I did not have a fix on that, nor did Charlie, prior to Dave relaying what he had learned at that dinner.”
Investing advice for beginners
Question from a man who Buffett said “sounds like he's ready to start a hedge fund”: What advice would Buffett and Munger give from their beginnings in investing?
Buffett said he first invested for his family and did with their money what he did with his own money. He said he stumbled along for almost six years, operating out of his own house, keeping his own books.
Munger said it helps to attract capital to a fund if you conduct your life in a way where people trust you.
Just attracting money can be a huge skill, Buffett said. “The skill may be in the short term a more important quality (compared with actually picking stocks that perform), but neither one of us (Buffett or Munger) charged any fixed fee of any kind.”
Index funds vs. personal portfolio
What factors would you consider when deciding between putting money in an index fund or creating your own diversified portfolio?
Buffett said index funds aren't a bad alternative. Munger however, was much more sour on pouring his money into indexes.
Buffett: “If I personally had a choice between an index fund and Berkshire, I would pick Berkshire. But I wouldn't be unhappy if I had to stick my money in an index fund. I like Berkshire better.”
Munger: “I would be very unhappy (to put all his money in an index fund). I think Berkshire's a pretty good bet.”
Investing in black gold
What about investing in oil?
“We actually did take a position in oil a long time ago,” Buffett said. “We really don't know. Obviously, you're dealing with a finite resource. ... New frontiers have been found, but we've stuck a lot of straws into the earth.
“If we could make money sitting in a room trading oil, we would do that. There are few commodities where I could tell what direction they were heading in over the next six months or year.
“I really think an intelligent person can make more money over time thinking about productive assets rather than speculating on commodities or fixed-dollar investments.”
Equity Investing
Equity investments are not an afterthought, Buffett said, but he much prefers large acquisitions to equity. He wants to add significant companies to the portfolio, especially firms that were acquired in recent years that will have higher earnings potential five to 10 years from now.
“We are buying securities where we have to put billions of dollars in them in most cases.”
In short, Buffett isn't a fan of investments that don't “do anything.” That includes gold.
“The classic case of that is gold. If you take all of the gold in the world and put it into a cube, it will be a cube that's about 67 feet on a side and 170,000 metric tons. You could get a ladder and get up on top of it and think you're king of the world. You could fondle it, polish it ... you could do all these things with it ... but it doesn't do anything. You're hoping someone else in a year or five years will pay you for the thing ... that doesn't do anything. You're betting on how much people will be scared two years from now.” (The value of that gold cube, by the way, is worth about $8 trillion, Buffett said.)
Any advice for young people, so they can chart their own course?
Buffett: Read and do anything to improve your own skills.
He said economics courses had limited value to him as a student, but he and Charlie have found reading to be most pleasurable and educational.“I have one diploma hanging in my office. I have a couple others, but the one I have hanging was from a Dale Carnegie course that cost me 100 bucks.” There's nothing like improving your own skills, especially communication skills, said Buffett.
On Jain, Buffett said: “He's as rational a thinker as Charlie (Munger) is. He loves what he does. He's creative. Ajit's mind works like a machine, day after day. I don't know what his best deal was. But I know what mine was, and that was hiring him. “He thinks of Berkshire first. He's just a remarkable human being.”
He guaranteed that when a dividend is announced, the Berkshire stock price will go down.
» Does BYD remain an attractive long-term investment despite product launch delays?
Any company that moves as fast and on as many fronts as BYD does, is going to have delays in some products, Munger said. In fact, Munger is encouraged by BYD. The company tried to double auto sales for the first six years, and it did that successfully for five years, he said.
Buffett, chuckling: “I have nothing to add.”
» Which Berkshire subsidiary will do best and worst because of inflation?
Buffett: The best performers will be the ones that need little money. See's Candy, for example, sells 75 percent more pounds of candy at much higher revenues — even though the dollar is worth much less — than it did when Berkshire bought it. The worst will be utilities, like MidAmerican Energy. They're “not going to do so well because it has certain aspects of a bond-like investment,” Buffett said.
» Aside from Nebraska Furniture Mart, Buffett said, retail entities have been the weakest part of Berkshire's empire. Even though the Furniture Mart is wildly successful, the other retail businesses (not including See's) haven't recorded the kind of earnings Buffett would like to see, even though retailers are just a small percentage of Berkshire's operation.
» Interesting note on See's Candies in response to a question about investments and tangible asset infusions for growth:
When Berkshire bought See's, the company was doing about $25 million in sales on 16 million pounds of candy. Now, the company produces about 30 million pounds and earns nearly $300 million. At first, it took $9 million in tangible assets to run See's, and now it takes $40 million. Not much of an increase for 10 times the sales, Buffett said.
“I think nuclear power is an important part of the world's equation in dealing with its problems,” Buffett said. “I think it's safe and I don't think it's going anyplace in the United States because of the action with Tokyo Electric Power,"
Market conditions and opportunity costs, he said, are different in every single case. And comparing past deals to recent deals doesn't really make any difference. The one big error people make in business is measuring deals against one another, he said.
“The goal is to make a satisfactory deal, and one that is the best deal at the time.”
What would each of you like to be remembered for?
Buffett: “Old age.”
Then, he said, “A teacher. I enjoy teaching a lot. I really enjoy having students come in. I would say that.”
On the U.S. debt ceiling
Congress will raise the debt ceiling, you can take that to the bank. But, Buffett said, not before much politicking and pandering.If the ceiling isn't raised it would be the “most asinine act Congress has ever performed,” Buffett said. “It's extraordinary, that with our deficit running well over $100 billion a month ... having a debt ceiling to start with is a mistake. The U.S. of 2011 has a different debt capacity than the U.S. in 1911.”“The amount and number of silly statements you hear (from Congress) seems like such a waste of time. In my view, there's no chance they don't increase the debt ceiling.”
On too big to fail
Buffett isn't a fan of bailouts but said government intervention with some of the major financial institutions and other companies was necessary.The General Motors bailout, for example, was a good choice: “I was really on the fence about saving the auto companies, but I think the administration did the right thing. They made the right decision.” In a perfect world, Buffett said, executives would face serious consequences for making risky bets and decisions that later backfired and crippled their companies. He said companies need to “reduce the propensity to fail” by making sure there are rules in place so that if the CEO and any directors of a company need to be bailed out by taxpayers, the CEO and his or her spouse should be left “dead broke,” and officers and directors should also face severe consequences.
On the weakness of the U.S. dollar
“We have not been really active in the foreign exchange market, but there's no question that the power of the U.S. dollar is going to decline over time. We do own some businesses — Coca-Cola — where 80 percent of earnings are nondollar. We are unlikely to make another big currency bet, although I do think the U.S. dollar is going to decrease.” Buffett said he has had some unwarranted fears about the rapid decline of the dollar. A dollar from when Buffett was born is worth just 6 cents now. That could be discouraging, projecting a similar decline over the next 50 years or so, he said, but “inflation has not destroyed us. ... Overall we've still done pretty well.” “I hate inflation, but we've adapted to it pretty well over the years. It's something you always have to guard against.”
On the Lubrizol purchase
Buffett said he wasn't wild about the Lubrizol deal at first but warmed to it over time.
“It struck me as a business I didn't know anything about. I never would understand the chemistry of it. What is important is that I understand the economic dynamics of the industry. As a matter of fact, I suggested to Dave (Sokol) to call Charlie because I just don't know anything about that business. Talked to Charlie a few days later and he said, ‘I don't understand it either.'
“What Dave passed along to me after having dinner with Lubrizol CEO James Hambrick was that I thought I got a good understanding of industry dynamics and what the role of oil companies would be compared to additive companies like Lubrizol.
“I had come to the conclusion that the Lubrizol position is the No. 1 company in terms of market share in that business and that it's sustainable over time. They're helping engines run longer and smoother. Lubricants are important and they're always going to be around. I did not have a fix on that, nor did Charlie, prior to Dave relaying what he had learned at that dinner.”
Investing advice for beginners
Question from a man who Buffett said “sounds like he's ready to start a hedge fund”: What advice would Buffett and Munger give from their beginnings in investing?
Buffett said he first invested for his family and did with their money what he did with his own money. He said he stumbled along for almost six years, operating out of his own house, keeping his own books.
Munger said it helps to attract capital to a fund if you conduct your life in a way where people trust you.
Just attracting money can be a huge skill, Buffett said. “The skill may be in the short term a more important quality (compared with actually picking stocks that perform), but neither one of us (Buffett or Munger) charged any fixed fee of any kind.”
Index funds vs. personal portfolio
What factors would you consider when deciding between putting money in an index fund or creating your own diversified portfolio?
Buffett said index funds aren't a bad alternative. Munger however, was much more sour on pouring his money into indexes.
Buffett: “If I personally had a choice between an index fund and Berkshire, I would pick Berkshire. But I wouldn't be unhappy if I had to stick my money in an index fund. I like Berkshire better.”
Munger: “I would be very unhappy (to put all his money in an index fund). I think Berkshire's a pretty good bet.”
Investing in black gold
What about investing in oil?
“We actually did take a position in oil a long time ago,” Buffett said. “We really don't know. Obviously, you're dealing with a finite resource. ... New frontiers have been found, but we've stuck a lot of straws into the earth.
“If we could make money sitting in a room trading oil, we would do that. There are few commodities where I could tell what direction they were heading in over the next six months or year.
“I really think an intelligent person can make more money over time thinking about productive assets rather than speculating on commodities or fixed-dollar investments.”
Equity Investing
Equity investments are not an afterthought, Buffett said, but he much prefers large acquisitions to equity. He wants to add significant companies to the portfolio, especially firms that were acquired in recent years that will have higher earnings potential five to 10 years from now.
“We are buying securities where we have to put billions of dollars in them in most cases.”
In short, Buffett isn't a fan of investments that don't “do anything.” That includes gold.
“The classic case of that is gold. If you take all of the gold in the world and put it into a cube, it will be a cube that's about 67 feet on a side and 170,000 metric tons. You could get a ladder and get up on top of it and think you're king of the world. You could fondle it, polish it ... you could do all these things with it ... but it doesn't do anything. You're hoping someone else in a year or five years will pay you for the thing ... that doesn't do anything. You're betting on how much people will be scared two years from now.” (The value of that gold cube, by the way, is worth about $8 trillion, Buffett said.)
Any advice for young people, so they can chart their own course?
Buffett: Read and do anything to improve your own skills.
He said economics courses had limited value to him as a student, but he and Charlie have found reading to be most pleasurable and educational.“I have one diploma hanging in my office. I have a couple others, but the one I have hanging was from a Dale Carnegie course that cost me 100 bucks.” There's nothing like improving your own skills, especially communication skills, said Buffett.
On Jain, Buffett said: “He's as rational a thinker as Charlie (Munger) is. He loves what he does. He's creative. Ajit's mind works like a machine, day after day. I don't know what his best deal was. But I know what mine was, and that was hiring him. “He thinks of Berkshire first. He's just a remarkable human being.”
He guaranteed that when a dividend is announced, the Berkshire stock price will go down.
» Does BYD remain an attractive long-term investment despite product launch delays?
Any company that moves as fast and on as many fronts as BYD does, is going to have delays in some products, Munger said. In fact, Munger is encouraged by BYD. The company tried to double auto sales for the first six years, and it did that successfully for five years, he said.
Buffett, chuckling: “I have nothing to add.”
» Which Berkshire subsidiary will do best and worst because of inflation?
Buffett: The best performers will be the ones that need little money. See's Candy, for example, sells 75 percent more pounds of candy at much higher revenues — even though the dollar is worth much less — than it did when Berkshire bought it. The worst will be utilities, like MidAmerican Energy. They're “not going to do so well because it has certain aspects of a bond-like investment,” Buffett said.
» Aside from Nebraska Furniture Mart, Buffett said, retail entities have been the weakest part of Berkshire's empire. Even though the Furniture Mart is wildly successful, the other retail businesses (not including See's) haven't recorded the kind of earnings Buffett would like to see, even though retailers are just a small percentage of Berkshire's operation.
» Interesting note on See's Candies in response to a question about investments and tangible asset infusions for growth:
When Berkshire bought See's, the company was doing about $25 million in sales on 16 million pounds of candy. Now, the company produces about 30 million pounds and earns nearly $300 million. At first, it took $9 million in tangible assets to run See's, and now it takes $40 million. Not much of an increase for 10 times the sales, Buffett said.
“I think nuclear power is an important part of the world's equation in dealing with its problems,” Buffett said. “I think it's safe and I don't think it's going anyplace in the United States because of the action with Tokyo Electric Power,"
Market conditions and opportunity costs, he said, are different in every single case. And comparing past deals to recent deals doesn't really make any difference. The one big error people make in business is measuring deals against one another, he said.
“The goal is to make a satisfactory deal, and one that is the best deal at the time.”
What would each of you like to be remembered for?
Buffett: “Old age.”
Then, he said, “A teacher. I enjoy teaching a lot. I really enjoy having students come in. I would say that.”
