Roundtable: Buffett's Biggest Berkshire Bomb

As you'll see throughout the week, the Fools were out in force at this weekend's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) conference. How can you resist trekking to Omaha to sit at the feet of Berkshire leaders Warren Buffett and Charlie Munger as they pontificate on the biggest financial crisis (hopefully) of our lifetimes? There were insights galore, but let’s start with these three questions. First, the big one:

What was the biggest bomb Buffett dropped?

Morgan Housel, Motley Fool writer: Forget the biggest bomb from this year's shareholder meeting; I think Buffett dropped the biggest bomb ever this weekend when he said he would have been comfortable putting his entire net worth into Wells Fargo (NYSE: WFC  ) when it fell below $9 a share in early March. "If I had to put all of my net worth into stock, that would be the stock," he said. I nearly threw up at first, but he made a convincing argument: Well Fargo's cost of capital is the lowest in the industry (and falling), which essentially fosters the birth of a new alpha-bank when the rest of the industry is slowly dying.

Ilan Moscovitz, Motley Fool editor: At a time when nearly everyone is condemning faulty compensation practices that have come to light at major financial institutions like Merrill Lynch and AIG, Buffett went one step further, remarking that compensation procedures are "way worse than practically anyone recognizes." He said CEOs basically get to pick their own compensation committees, and since no one wants to be paid rationally, you have people being paid to do very irrational things. Boards generally function as a rubber stamp because members know that disturbing the "club-like" atmosphere could endanger their salaries and the prestige their position confers. As a start, he recommended abolishing directors' salaries, and having compensation plans be drawn up at the board level instead of in committees.

Anand Chokkavelu, Motley Fool editor: I was only a few sips into my strawberry smoothie when Buffett said the words that made me smile the rest of the weekend. Basically, he got better terms on some of his much-maligned equity puts, which I think are great. Check this out: With a strike price on the relevant S&P 500 put options in the 1500s, Berkshire incurred huge mark-to-market losses last year. But his counterparties were forced to "manage risk" by buying expensive credit default swaps on Berkshire Hathaway ... so even when they win, they kinda lose. To mitigate this quirk, they allowed Buffett to lower the strike price to the high 900s (the S&P is currently around 900). All he had to do was lower the term to 10 years from 18 years. Um, thanks for the do-over ... looking forward to the resulting mark-to-market gains.

As Morgan said, Buffett was strong on Wells below $9 a share. If you had to put your whole life savings into one company for the next 10 years, which would it be and why?

Morgan Housel, Motley Fool writer: Johnson & Johnson (NYSE: JNJ  ) would be near the top of my list. Acquiring absolutely top-tier businesses and leaving management alone to do its thing is the only way you can make a megaconglomerate work, and it's a skill Johnson & Johnson (and Berkshire) have proven spectacularly capable of. Charlie Munger described J&J's culture of decentralized subsidiaries "very Berkshire-like" over the weekend, which really solidified this point. Take the strongest brand names in the world in an industry where the target demographic (aging baby boomers) is exploding and put them all together under one roof, and good things are bound to happen.

Ilan Moscovitz, Motley Fool editor: Aside from Berkshire (the obvious choice), I tend to invest in small caps, so I don't have many holdings that I would feel comfortable plowing all of my money into. I don't necessarily like the price right now, but if I had to pick one strong-moated company from among my current holdings that I’' want to have all of my money in, it would probably be Google (Nasdaq: GOOG  ) .

Speaking of bombs, during our press conference with Buffett and Munger yesterday, Munger remarked: "Google has a huge new moat. I've probably never seen such a moat." Buffett explained that some keywords fetch $70 per click and their advertising machine generates its own positive feedback and momentum. To try to parse what he's talking about, Google has a few positional advantages that feed off one another: a dominant share of the search market, a strong brand, and targeted ad capabilities that produce a network effect between advertisers and end users. Advertisers get a wider market, while end users aren't pained by sightings for male enhancement products when all they wanted was to buy some flowers for Mother's Day.

Anand Chokkavelu, Motley Fool editor: The fact that we have no idea what the government will do with the banks precludes me from naming a bank. Now, Wells Fargo has tons of upside if things go right, and no one knows Wells better than Buffett, but as I watched Buffett sitting at the podium, I couldn't help noticing Coke can in front of him. Really, Warren, you'd be more comfortable holding Wells Fargo than one of your other huge holdings, Coca-Cola (NYSE: KO  ) ?

All three of us are shareholders. Is your faith in Berkshire Hathaway higher or lower than it was before the meeting? Why?

Morgan Housel, Motley Fool writer: My faith is unwavered. People like to hint at Berkshire's impending collapse as soon as Buffett and Munger die, but I've always thought this argument is incredibly short-sighted. Berkshire's long-term potential will be more of a product of what Buffett and Munger have spent the last 40 years creating, not solely the product of what they can create in the future -- sort of like Sam Walton's enduring contribution to Wal-Mart (NYSE: WMT  ) . Buffett has almost no input whatsoever on day-to-day operations of Berkshire's 60 subsidiaries, yet some insinuate they'll shrivel and die without him. The potential for future homerun investments will obviously shrink without Buffett at the helm, but that's already assured given Berkshire's size. As Munger said a few years ago, "If you get Warren Buffett for 40 years and the bastard finally dies on you, you don't really have a right to complain."

Ilan Moscovitz, Motley Fool editor: About the same. The meeting reiterated Berkshire’s moats: A sterling reputation that attracts deals, a strong financial position that gives them the ability to act quickly and boldly when opportunities present themselves, and brilliant and capable leaders with independent thought and the right incentives.

Anand Chokkavelu, Motley Fool editor: The equity put reset (see my answer to the first question) reminded me why I finally bought in a few months ago ... people are just throwing money at Buffett these days.

This roundtable article was compiled by Anand Chokkavelu. Anand owns shares of Berkshire Hathaway. Google is a Motley Fool Rule Breakers pick. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. Berkshire Hathaway, Coca-Cola, and Wal-Mart are Motley Fool Inside Value picks. Johnson & Johnson and Coca-Cola are Motley Fool Income Investor recommendations. The Fool owns shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (112)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 04, 2009, at 5:22 PM, ozzfan1317 wrote:

    I honestly steer clear of the financial sector. If you cant understand the balance sheet then dont risk your money in it. If I had to pick one Company it would probably be BP.

  • Report this Comment On May 04, 2009, at 5:41 PM, alanstrand wrote:

    "As a start, he recommended abolishing directors’ salaries, and having compensation plans be drawn up at the board level instead of in committees."

    Sounds like how nonprofits are supposed to operate. Seems like a good idea.

  • Report this Comment On May 04, 2009, at 5:45 PM, MCMInvest wrote:

    Touching on Morgan's point:

    I like JNJ right now as well.

    1) Wachovia/Wells Fargo's upgrade for JNJ on 4/20 to outperforming the market

    2) Standpoint Research 4/29 "buy" grade

    3) Money Flow Index >80 most of the day today

    4) 11.77 P/E

    wow. up-up-and-away.

  • Report this Comment On May 04, 2009, at 6:16 PM, peckmeier wrote:

    EXXON/MOBIL(XOM) and CHEVRON(CVX). NUF

    SAID!!!

    TEXPIC

  • Report this Comment On May 04, 2009, at 7:02 PM, 7footmoose wrote:

    it is very difficult and risky to disagree with Buffett but I feel as though he went way overboard with his kudos for WFC, it is a fine company but they took a huge bite of the toxic apple with the acquisition of Wachovia, only the future will tell if the management of WFC is up to the task of digesting Wachovia's waste, in the mean time profits will likely suffer and when Wachovia's CDO's start to come home to roost the loan losses may just bee more than they bargained for

  • Report this Comment On May 04, 2009, at 7:05 PM, brettmorry wrote:

    i am speechless! what a waste of time reading comments that don't say anything bye i have better things to do!!!!

  • Report this Comment On May 04, 2009, at 8:23 PM, landman03 wrote:

    If for a second , you don't believe "

    Warren Buffet, et al" this maye the biggest " Ponzi Scheme" ever, keep looking to Berkshire Hatahaway to keep yopu tuned in. You should also believe in Bill Gatyes, without whom none of us would be here now. Follow the Money, but I'll bet on

  • Report this Comment On May 04, 2009, at 8:24 PM, landman03 wrote:

    America, was built on this very principle..."there's a sucker born every minute" Nothing less nothing more.

  • Report this Comment On May 04, 2009, at 9:16 PM, dbuls wrote:

    Buffet isn't afraid to say he's fallible. That's the difference between him and Ponzi and Krueger and Madoff.

    His strategy will always work if you take the long term view.

    I was disturbed by his endorsement of the major banks, because if stress test was real several would fail. Hope he's just saying the government won't let that happen.

  • Report this Comment On May 08, 2009, at 8:46 PM, robertcgray wrote:

    Buffet is way out integrity in demanding all those subsidiaries deliver cash (dividends/yield) back to corporate as their owner, while yielding not one cent in dividends to BH shareholders. Yet another year and no one calls him on it. I have no place for this sort of speculation. For without a dividend, that's all you can do at his feet. Not very interesting and Buffet and BH is part of the problem with business American-style, not the answer.

  • Report this Comment On May 09, 2009, at 1:57 AM, catoismymotor wrote:

    I think living in Omaha can be counted as a big mistake.

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