8:42 a.m. (all times Central): It’s begun! They’re playing the movie. Starts out with a musical montage with scenes from Berkshire subsidiaries. Makes me wonder if “It’s a Beautiful Day” is, in fact, the most-played song at annual meetings. Then goes to a cartoon in which Warren and Bill Gates (Berkshire director and Buffett bridge buddy) talk Charlie Munger (Berkshire vice chairman and Buffett’s Cali-based BFF) into running for President. He wins and quickly gets going on the nation’s problems. If everyone eats a Dairy Queen Blizzard each day we’ll all cool off, taking care of this whole global warming thing. For the nation’s healthcare issues, everyone should switch to See’s Candies: Munger has been eating them his whole life, and he’s healthy at age 84. Experts at the Nebraska Furniture Mart pick the Cabinet. You get the idea.
9:12 a.m.: If I had to sum up this movie in a phrase, it would be “sketch comedy.” Warren and Charlie have a nice little bit: Buffett discovers something called the Internet and calls up Munger to suggest they invest in Web stocks. The answer is no—until Warren phones Jamie Lee Curtis, who answers lying in bed, and then calls up Munger to suggest “maybe we could all buy them together.” Interspersed are commercials for Berkshire products, including a touching story about a man who writes his wife a heartfelt letter. The narrator intones: “If you’re not that guy,” there are some Berkshire-owned jewelery stores that can help out. They’re also showing clips from that fantastic John Bird/John Fortune subprime mortgage market meltdown video.
9:32 a.m. Last video bit was about Warren and Susan Lucci swapping jobs. Now Lucci is on stage with Munger. When he asks where Warren is, she says he got hung up at the studio, shooting All My Children. That’s okay, he says, since she has “some important qualities Warren lacks.” Now she’s saying she wants to make some changes, like paying shareholders a dividend. This is a popular idea with the crowd.
9:36 a.m. Warren is back! He’s sending Lucci off to Borsheim’s.
9:38 a.m. Introduction of the directors, including Warren’s son Howard Buffett, Bill Gates, Yahoo’s Susan Decker, etc.
9:40 a.m. First question from a shareholder, who’s come all the way from Bombay: How can people learn to invest smartly (aside from reading Berkshire’s annual letter to shareholders). Warren’s answer is to read Ben Graham’s The Intelligent Investor. “If you read it, you will not behave like a lemming.”
9:44 a.m. Next question: How is the operational integration of Cologne RE progressing? I’m going to take this as an opportunity for a bathroom break.
9:51 a.m. Where’s the market going to head next? Buffett: “Charlie and I don’t have the faintest idea of where the stock market is going to go next week, next month, next year. We’re not in that business, we don’t know how to be in that business. It’s just not our game.” It’s all about buying good companies on the cheap then hanging on to them for a long, long time, folks.
9:54 a.m. A question about who to hire as managers. Whomever is passionate, says Buffett. Mrs. B worked at the Nebraska Furniture Mart until she was 103 and a year after she retired, she died. “That is a lesson to our managers.” If you listen to Buffett enough, you realize that he tells the same stories in the same ways over and over again… but they’re such good stories.
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10:00 a.m. A question about charitable giving. Buffett says he’s lucky–when he gives away money, it doesn’t change how well he can live his life, like it would a family deciding to give money to their church instead of going out to dinner. Munger: “If you have a strong political ideology, whether on the left or on the right, you’re likely to make a lot of dumb charitable gifts.”
10:06 a.m. Will commodity price increases in things like tungsten effect Iscar? Is that why you built the plant in China? The plant went to China to be closer to the raw materials and to serve the market there. The location didn’t have anything to do with the price of commodities. Buffett moves on to the carpet business, where they’re having trouble because of the increase in cost of materials (plus, of course, the housing market slowdown). I’m going to take a moment to revel at how many things this guy has floating around his head.
10:11 a.m. It’s tough to be an 800-pound gorilla. Takes a whole lot more to move the needle. Buffett echoes something he’s said for years: “There is no question that returns from Berkshire will be less than they have been in the past… Anyone who expects us to come close to replicating our past should sell their stock.” Yeah, I know, it does feel like Bizzaro World. But in a good way.
10:23 a.m. Question: Could you explain how you maintain your good mental and phsyical health? Buffett: “You start with a balanced diet. Some Wrigley, some Mars, some See’s, some Coke.” He’s got a trainer for 45 minutes three times a week. “Otherwise, I’m doing what I love. How could you be sour about life being blessed in so many ways? Charlie’s 84 and I’m 77. We’ve slowed down in a lot of ways, I’m sure, but we pretend we haven’t. There’s just no reason to look at any minuses in life. To focus on that would be crazy. We count our blessings, because there have been many.” Munger: “I wish we were poster boys for the benefits of running marathons, maintaining a very slim bodily state, but as far as I can tell, neither one of us follows any health efforts or dietary rules. Seems to have worked so far. I don’t know if we’d recommend it, but I for one don’t want to change.”
10:32 a.m. How do you recommend people who are introverted get ahead in their careers? Take a public speaking course. Buffett did! Dale Carnegie, because he had trouble talking in front of groups. Right now he’s on a stage in front of 30,000 people–seated all the way up to the top of the cheap seats. Okay, so that worked.
10:36 a.m. A Klamath River gatekeeper asks about the dam situation, especially about the algae back-up. David Sokol, chairman of MidAmerican Energy, fields that one from the audience. (Buffett signed something when Berkshire bought the company saying he wouldn’t personally get involved in utility regulations.) Sokol says that those things are taken into account by regulators, which recently endorsed certain fish passage methods for the dams, but not all-out removal. It’s an on-going process with the regulators, says Sokol, and the company will comply with whatever those folks decide.
10:44 a.m. I find it odd that except for that guy from Germany no one has asked about insurance operations. Insurance makes up about 60% of Berkshire revenue.
10:48 a.m. A question about credit market dislocations. Buffett has brought a prop: A listing for auction-rate securities from a museum in LA (LACMA, I think). In January the yield was 4%; two weeks later, 8%. “That’s crazy,” says Buffett. “And this happened with billions of dollars in securities…Those are great times to make unusual amounts of money.” And Berkshire has made money, but, alas, not a substantial amount relative to its size.
10:54 a.m. A small businessman wants to know how to get big. Munger: “It’s in the nature of things that most small businesses will not be big businesses. It’s also the nature of things that most big businesses will fall into mediocrity or worse. It’s a tough game, and you have to get used to it.” The only business Berkshire has ever created from scratch, he says, is the reinsurance department–and that was largely the doing of Ajit Jain. The best money they’ve ever spent, says Munger, is the fee they paid to an executive recruiter to find Jain.
That prompts Buffett to say he wants to give his shareholders a report on the company’s new bond insurance business. This is not a story he’s told before. In the first quarter of 2008, premium volume was over $400 million, overwhelmingly in the secondary market. So far they’ve done 278 transactions, almost all from people with municipal bonds, and in every case except for two or three, they already had insurance from an insurer rated AAA. That means Berkshire only has to pay out if neither the municipality nor the original bond insurer do. “It tells you something about the meaning of AAA in the municipal bond inurance field in the first quarter of 2008,” says Buffett.
11:15 a.m. A question from a German guy about investing and hedging currencies. Buffett: “We are happy to invest in businesses that earn their money in Euros or Sterling, because we do not have a feeling that those currencies are likely to depreciate in a big way against the dollar. We can offset that by borrowing money in those countries in their currencies.” He sees the U.S. continuing policies that keep the dollar weak–if he had to bet, over the next ten years he thinks the dollar will get weaker. “If I landed from Mars today and I was thinking about where to put my money and went to the bank wherever the UFO landed, I don’t think I’d put the whole billion in U.S. dollars, so it doesn’t bother me to buy business around the world unhedged.”
11:26 p.m. A question about pandering and Washington politics. Buffett and Munger are cordial about all three candidates. Buffett, world-renowned for being a stand-up guy, says: “There’s a lot of situational policy-making that depends on how many voters are in any given category. But I don’t think I’d behave any better. If my ambition were to be President of the United States, I’m sure it would affect my behavior. We’re all human beings.” He points out that he has the luxury of saying things like his company will probably see lower returns in the future since he owns so much Berkshire stock. The chances of the Board booting him are pretty low.
11:32 p.m. Someone finally asks a question about succession. Last year, Buffett said the Board had the names of three people who could immediately take over as CEO. If he were to die tomorrow, Buffett says, the Board knows who it would be, but the name in the No. 1 slot might change over time. In his Letter to Shareholders this year, Buffett said they’d also lined up four people who could step in to take over as chief investment officer. He says that it would be up to the Board to figure out what combination of those four would step in. That, he says, would possibly heavily depend on who the incoming CEO is and how that person wants to set things up. As Buffett has previously said, the four potential CIOs are all already “well-to-do to wealthy” and wouldn’t be in it for the money. They’ve all got jobs right now, but could show up tomorrow if called. “There will be no gap after my death in terms of manging the money,” says Buffett. “They could each have a better record—some of them do have a better recent record than I do.”
Munger’s take is slightly different: “We still have a rising young man here named Warren Buffett, and I think we want to encourage this rising young man to reach his full potential.” Buffett then explains that he and Charlie have an average age of 80, which means they are aging at 1 ¼% a year. “That’s the lowest rate of aging in corporate America that I know of. Some of these corporations have 50-year-olds who are aging at 2% a year. Just think how much riskier that is.”
11:54 a.m. A guy from Arizona asks a question about worldwide food shortages. Munger fields that one: “The policy of turning American corn into motor fuel is one of the dumbest ideas in the history of the world.” The crowd–remember we’re in Nebraska–erupts in applause. “This idea is so dumb.” says Munger, “I think it’s probably on its way out.”
11:56 a.m. If you’re a small-time investor, how should you invest? The wisdom from the dais: Low-cost index funds. Buffett: “You get a perfectly decent return over a 30- to 40- year period, and why should you expect more than that if you don’t bring anything more to the party?” In an answer to an earlier question, Munger said: “Diversification is for the no-nothing investor.” Then Buffett chimed in: “And there’s nothing wrong with that for the no-nothing investor. That’s what they should practice. But it’s not for the professional manager.”
12 noon Lunch break!
12:51 p.m. Over lunch I had a conversation with two great financial reporters, Richard Teitelbaum of Bloomberg Markets and Jason Zweig of Money magazine. Got me to thinking about how journalists treat direct quotes and made me want to say that this whole liveblogging thing goes pretty quick. I don’t exactly have time to go back and check the tape, but I do think there’s a lot to be had in hearing Buffett and Munger’s voices, which is why I’m quoting away.
1:00 p.m. We’re back! With a question about investment banks having taken on too much risk via exposure to mortgage securities. Buffett: “I regard myself as the chief risk officer of Berkshire. There’s no way I can assign that to a risk committee. I think the big investment banks and big commercial banks, they’re almost too big to manage effectively from a risk standpoint in the way they’ve elected to conduct their business.” He says when he gets asked about regulation he uses the example of OFHEO, which has the job of regulating Fannie Mae and Freddie Mac. Just two companies to regulate, and “two of the biggest accounting misrepresentations in the history of the world.” He’s afraid that it’d go similarly with the largest commercial and investment banks. What you really need, he says, is leadership from the top of the companies to pay attention and set the tone, like he feels he does at Berkshire. Easy solution: Just find some good guys to run Wall Street.
1:13 p.m. Buffett says the investment in Petro China, which went very well for Berkshire, came about after he read the annual report. He didn’t talk to management or ask anyone’s else’s opinion. He crunched the numbers, figured out that the business was worth $100 billion, saw it was selling at $30 billion, and started buying. He says when Berkshire got approached about the Wrigley deal, he pretty much already knew everything he needed to. No looking into details like the terms of factory leases. Buffett says people come to them partly because they know Berkshire buys simply and quickly. About the Mars deal: “We got a call, it made sense, we said yes. And when we say yes we don’t say yes with a material adverse change clause.”
1:17 p.m. Someone asks about Buffett and Munger’s religions. Pressing shareholder concern. Buffett: “I’m an agnostic. I’m not a theist or an atheist. I truly don’t know.” Munger: “I don’t want to talk about my religion.” And then Buffett again: “Obviously I have no opinion on anyone else’s religion because that’s the nature of being an agnostic. I wish everyone well.”
1:21 p.m. Why is Kraft a good business? Buffett says he doesn’t want to talk specifically about Kraft but does say: “If you own specific branded products in this country–Mars, Wrigley, See’s– you have good assets. It’s not easy to take on those products. Coca-Cola will sell a billion and a half 8-ounce servings around the world each day. There’s something in people’s minds about Coca-Cola. It’s just about impossible to take on a product like that.” He talks about Richard Branson coming over to the U.S. with Virgin Cola, and asks who is going to buy a substitute cola for a penny or two less. With Virgin Cola, of course, they didn’t.
1:28 p.m. Back to the widespread mismanagement of risk at the largest investment and commercial banks. Buffett reads from the 2006 Letter to Shareholders, where he outlines what he’s looking for in a CIO to replace him: “Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.” Munger’s spin: The chief risk officer is often “the guy who makes you feel good while you’re doing dumb things.” It comes back to CEOs taking responsibility, they say.
1:39 p.m. Question: Would you consider asking Coca-Cola to withdraw sponsorship from the Olympics because of human right violations in China? [Scattered applause.] Buffett: “Personally, I think it’s a mistake to start deciding what this country should be allowed to do, or not allowed to do. We didn’t let women vote in the United States until 1920. I would say that was a great human rights violation, but I would have hated to see the U.S. banned from the Olympics in the years prior to that.” [Much more applause.] Munger: “Warren understates my position. I think it’s wrong to pick the thing you most disklike and obsess about it.” [The most applause.]
1:56 p.m. A 9-year-old baseball fan asks: “My favorite team is the Chicago Cubs. Would you buy the Chicago Cubs from Sam Zell? And is a baseball team a good investment?” Buffett says earnings have gone up over time–“television has expanded the stadium.” When he went to his first Major League game in Chicago in 1939, the stadium had 40,000 seats and that was it for a source of earnings. But Buffett doubts the Cubs would be for sale at a price he’d be willing to pay. He does say the kid isn’t the first to ask him to buy the Cubs. But Zell hasn’t.
2:03 p.m. A question about Americans’ paltry savings rate. Buffett says: “This country may not save very much because it may not need to save as much.” There’s a whole lot of GDP out there, though whether or not it’s particularly well-distributed is another question. He has confidence that over time the standard of living for Americans will increase.
2:06p.m. Why are you coming to visit Germany? Berkshire wants to be on the radar screen of families who own German companies they care very much about and which they want to monetize. The Pritzkers knew about Berkshire when they went to sell Marmon last year. Berkshire wants to get those calls from European families, too, so Buffett (and Munger? It wasn’t clear to me) are off to Europe for a four-country tour.
2:11 p.m. Munger compares the recent and now-infamous trading in mortgage-related securities to the defunct online grocery delivery company Webvan, using the word “asinine.”
2:14 p.m. Buffett is explaining how CDOs work…
2:18 p.m. Munger says Greenpan got a lot of things right, but he “overdosed on Ayn Rand. If it happened in the free market, it had to be all right.” He continues: “I think some things should be forbidden,” and that if no one had been allowed to use the phrase “this is a financial innovation that diversifies risk,” we all would have been a lot better off.
2:24 p.m. A man named Frank asks if corporate bond defaults rise to the levels we had in 2002 or the early 1990s if credit-default swaps could implode worse than subprime mortgages. Buffett says Berkshire has written insurance that pays off in the event of an index-listed company defaulting. He thinks they’ll make significant money. He’s taken a rise in defaults into his calculations. He thinks the chances of CDS chaos has been reduced significantly by the Fed stepping in on Bear Stearns–and, ostensibly, investment banks in the future. Munger says we could have a big-time mess, but not as bad as subprime.
2:32 p.m. A 12-year-old girl asks why Buffett doesn’t believe in dividends since his mentor Ben Graham did. “I had to show a little individuality in some respect,” he says. The real answer is that Berkshire can take money from businesses that toss off cash–See’s, for example–and reinvest it elsewhere in the empire at a higher return. If See’s were stand-alone, Buffett says, it would probably be smart to pay a dividend.
2:40 p.m. A Minnesotan asks who most influenced the panelists. Buffet says he imagines both he and Charlie would say their fathers and the people they married. Also Ben Graham, Dave Dodd, various authors–that Charlie would probably say Ben Franklin, or maybe that Ben Franklin learned from him. Also, Buffett’s grandfather, whose grocery store was an early place of employment for both Buffett and Munger. Munger says books. He likes how they move at his own pace.
2:46 p.m. What can shareholders do about outrageous executive compensation in corporate America? Buffett says individual investors probably can’t do much, but the half dozen largest institutional investors could. Companies, he says, don’t like being embarrassed. He says if the largest institutions got together and issued press releases when they thought comp was out of hand, it might have an effect. “But they’re not going to respond to you, to be candid,” he says to the shareholder. Munger agrees that it’s a difficult problem to tackle, but “I think the people taking the compensation have a moral duty not to take it, if people who are going to be generals and archibishops are going to have low pay.”
2:53 p.m. Buffett says Munger “gets cranky later in the day.”
2:58 p.m. Charlie tells a question-asker from China that he appreciates the Confucian emphasis on respect for elderly males. This is getting a little punchy…
2:59 p.m. Last question: What are your hopes for Berkshire going forward? Warren: “I hope for decent performance, and that the culture we have is maintained. I hope what we’ve tried to build into Berkshire will live long beyond my tenure… I hope that 20 years from now people with a fine business, a couple generations going, when they have to sell it for some reason, think of Berkshire.” Munger: That Berkshire becomes even more deserving of how people hold it up as an example of governance and how to do business, and that the model becomes more influential in corporate America. Good note to end on, fellas!