Roundtable: How Buffett Shocked at Berkshire's Annual Meeting

Warren Buffett and Charlie Munger both dole out a number of quotable responses at every Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) annual shareholder meeting -- some funny, and a few deeply surprising.

On the amusing side, Warren Buffett's analysis of Harley Davidson (NYSE: HOG  ) -- "[I like] the kind of business where your customers tattoo your name on their chests" -- caught the 35,000-plus attendees at the Qwest Center off-guard. However, Buffett and Munger are better known for their in-depth responses to questions of all kinds, many going well beyond the broad discussions in the company's fabled annual reports.

Below are four areas of conversation that either provided new understandings of the pair's thought process, or just plain shocked the Fool analysts in attendance:

1. Buffet defends Goldman? -- Philip Durell, Inside Value advisor
I expected Warren Buffett to be on the defensive over the SEC's civil charge and subsequent Manhattan U.S. Attorney's Office criminal investigation, both of which accuse Goldman Sachs (NYSE: GS  )  of fraud. So I was stunned by his response, which I've paraphrased below:

I think the transaction has been somewhat misrepresented by the media. There were four losers in the Abacus deal, including Goldman, who lost about $100 million ... We are often brought business and asked to insure bonds, but we don't care who is on the other side of the trade. It could be Ben Bernanke or John Paulson for all we care. It's up to us to decide whether we want to insure the bonds, and what premium we'll accept. ... No one should care who is on the other side of the deal.

(Those are my notes -- not a direct transcript.)

At the press conference, Buffett and Munger went further, saying they had no problem with Abacus deal as laid out in the SEC's complaint. Charlie Munger stated that Goldman had the greatest ability and morality among investment banks (faint praise!), and that jumping all over Wall Street's best was stupid. Munger laid the blame for the derivatives mess squarely at the feet of the regulators, whose lax rules led to a dysfunctional system. He said it's insane to blame an escaped tiger for its actions, when its poorly made cage and neglectful keeper are the real culprits.

I don't think Goldman is as pure as Munger and Buffett's comments suggest. True, Goldman wasn't acting in a fiduciary capacity in the deal in question. And I agree that government and regulators' constant railing against the banks is just an easy way to deflect public opinion away from their own culpability. Still, Goldman knew it was selling toxic waste. If the bank won't hold itself to a higher standard, we should.

2. Buffett explains why he hated chocolate and loved pizza -- Andy Louis-Charles, Inside Value analyst
During the meeting, Buffett once again railed against a specific portion of the Kraft-Cadbury deal that still appears to irk him: Kraft's (NYSE: KFT  ) sale of its frozen pizza business to Nestle. Buffett pointed out that while Kraft claims to have sold the business for $3.7 billion, the company really only pocketed approximately $2.5 billion after taxes. He further dinged Kraft for not completing a much more efficient sale, citing the company's ability to do so in the past, as when it sold Post Cereal to Ralcorp (NYSE: RAH  ) .

Buffett pointed out that the frozen pizza business had approximately $340 million in pre-tax earnings in 2009. Furthermore, it was growing at a healthier clip than the chocolate business. Given Buffett's lack of enthusiasm about the Cadbury sale in the first place, his cold shoulder about Kraft's decision to toss out its frozen pizzas probably won't thaw anytime soon.

3. Berkshire's new investing future? -- Eric Bleeker, Fool.com editor
Berkshire's stake in rechargeable-battery maker BYD came up several times during the meeting. Given their past aversion to the sector, many investors wondered what caused Buffett and Munger's change in heart regarding investments in advanced technology.

In response, Munger said it's fair to say that he "bragged about avoiding cutting-edge new technology," but that he and Buffett are still learning, and that the BYD buy-in is not the "last unusual thing Berkshire will do." The most important aspect of BYD for Munger is that in the company's leadership, they'd "found their own kind, except better."

An interesting subplot of Munger's answer was the emphasis he placed on David Sokol's involvement in the deal. Sokol runs MidAmerican Energy (the Berkshire company that made the BYD investment), but he's also considered a top candidate to lead Berkshire once Charlie and Warren are gone. Could Sokol's influence lead Berkshire to push the envelope a little more into advanced technologies, especially in the energy sector? Munger expressed approval for solar's long-term prospects; in the years ahead, he said Berkshire could invest in some "unlikely plays" in energy. With more capital to use, and an increasingly need to buy into capital-intensive companies with lower returns, Buffett and Munger might be looking to increase their investing horizons.

4. Recharging the value-investing battery -- Jim Mueller, Fool.com editor
I was most surprised by the gentle ribbing between Buffett and Munger during the question-and-answer period. These two weren't running a dry business meeting; they were having fun! And that's what investing should be: serious, but fun.

The lessons the two were sharing were nothing new. You don't have to travel to Omaha to learn them. Buffett and Munger's own writings and talks, as well as those of many others, contain all you need to know about the techniques and psychology of value investing.

So why did I and 35,000-plus others travel to Omaha? Well, we went partly to see these two famous men, and partly to hobnob with other investors, forming and renewing contacts with others of like mind. But mostly, as my colleague Andy Louis-Charles put it, I think we went to recharge our value-investing batteries.

Get your full Warren Buffett fix with our archive of Berkshire 2010 coverage.

All contributors in this article own shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value recommendation, a Motley Fool Stock Advisor pick, and a Fool holding. Try any of our Foolish newsletter services free for 30 days. The Motley Fool's disclosure policy wonders whether those rechargeable value-investing batteries were made by BYD.


Read/Post Comments (21) | Recommend This Article (56)

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, 2010, at 4:56 PM, Big50Shooter wrote:

    I heard that Berkshire also hinted at getting into the solar energy arena (among their other energy holdings)...

  • Report this Comment On May 04, 2010, at 5:13 PM, mythshakr wrote:

    So let me get this straight, Mr Buffett sees no issue with Goldman, on the one hand, taking advantage of lax regulations, while on the other hand not describing an issue with Goldman's lobbiest groups bribing (and that is what corporate campaign contributions are: period) legislators to keep the regs lax or indirectly threatening to buy their replacements if they don't. I guess that's what you call high business ethics. And,

    "No one should care who is on the other side of the deal"

    I'm sure international organized crime is happy with this lassiez-faire attitude. Or is this the regulators problem too?

  • Report this Comment On May 04, 2010, at 6:21 PM, FinnMcCoolIRA wrote:

    @ mythshakr

    If one has done ones homework and made ONES

    OWN decision on how profitable the deal may be then, indeed:

    "No one should care who is on the other side of the deal"

    It's called INDIVIDUAL RESPONSIBILITY and, oh yes,

    "CAPITALISM"

  • Report this Comment On May 04, 2010, at 7:39 PM, idamoore wrote:

    Heck of a job, Buffy.

    I guess Mr. Buffett has little use for regulators.

    Well, given the trust people put in Moodys et al

    I can see why small investors think Wall Street

    and all its fans are just Crooks.

    One cannot do one's own research and make one's own decision in any intelligent way when the Raters are in the pockets of the issuers and the research is lethally contaminated?

    Boo to Buffett and all his cohorts.

  • Report this Comment On May 04, 2010, at 8:26 PM, Rollerofthedice wrote:

    Why does our author feel the need to editorialize on what Buffet/Munger said about Goldman [...don't think Goldman is as "pure" as... I didn't hear either of them extolling Goldman's "purity"], unless he is trying to enhance the factual basis of his opinionated comments. The players in these deals should have the ability to do their own due diligence, and in fact have specifically represented that they DO have this ability in order to get invited into these deals. If the deal goes sour, then they, and our author, want to pass the responsibility off onto some regulators [generally of questionable competence] and invite the regulators, and Washington in general, to spend more time [i.e. taxpayer money] camping in our pockets. If one cannot live with the dice roll, do not enter the crap game [which is precisely what these deals are].

  • Report this Comment On May 04, 2010, at 9:32 PM, damastr wrote:

    Buffett spoke about how media did not get the ABACUS transaction and mostly misrepresented it. And it looks like the trend continues. I was also there at the meeting and to me it hardly looked like anybody was "stunned". It was more like most were "educated". Not only those who had no idea about the transaction, but even those like myself who read the entire 22 page SEC document and thought they already knew what transpired weren't really able to get a crystal clear picture that Buffett got. Before the meeting, frankly even I thought that something was not right but in one shot it was clear when Buffett said that it shouldn't matter if Bernanke was on the other side. ABN, IDB should have done their due diligence.

    At that time, nobody -- absolutely nobody -- knew for sure the housing would collapse the way it did. Surely Goldman didn’t seem to either. It was solely due to their immense discipline in avoiding any kind of directional bet and just remaining largely a market maker that they were able to avoid big losses.

    And how come nobody is talking about ACA's failure to realize any disclosure issues -- if any. Those guys knew all along about Paulson’s involvement. Then why did they not raise any issue when Paulson’s name was not disclosed in the transaction anywhere. They must have received all the documents that were part of the disclosure. They could have told Goldman – "Wait a minute, how come you guys didn’t mention Paulson’s name anywhere even though he was heavily involved?".

  • Report this Comment On May 04, 2010, at 9:36 PM, damastr wrote:

    At the meeting, Buffett spoke about how media did not get the ABACUS transaction and mostly misrepresented it. And it looks like the trend continues. I was also there at the meeting and to me it hardly looked like anybody was "stunned". It was more like most were "educated". Not only those who had no idea about the transaction, but even those like myself who read the entire 22 page SEC document and thought they already knew what transpired weren't really able to get a crystal clear picture that Buffett seemed to have. Before the meeting, frankly even I thought that something was not right but in one shot it was clear when Buffett said that it shouldn't matter if Bernanke was on the other side -- ABN, IKB should have done their due diligence, period.

    At that time, nobody -- absolutely nobody -- knew for sure the housing would collapse the way it did. Surely Goldman didn’t seem to be an exception either. It was solely due to their immense discipline in avoiding any kind of directional bet and just remaining largely a market maker that they were able to avoid big losses.

    And how come nobody is talking about ACA? Those guys knew all along about Paulson’s involvement. Then why did they not raise any issue when Paulson’s name was not disclosed in the transaction anywhere. They must have received all the documents that were part of the disclosure. They could have told Goldman – "Wait a minute, how come you guys didn’t mention Paulson’s name anywhere even though he was heavily involved?"

  • Report this Comment On May 04, 2010, at 10:55 PM, Darwood11 wrote:

    When it is all said and done, Mr. Buffett is, I believe, simply looking after his own interests. He is a capitalist and "sage" or no, he also knows that certain regulations would impact his business and its profitability. The problems we have recently faced are, it is my humble opinion, due entirely to greed facilitated by government policy. Mr. Buffett is human and is as susceptible to certain vices as we all are.

    Welcome back to earth, investors!

  • Report this Comment On May 05, 2010, at 12:32 AM, burrowsx wrote:

    It is not only the regulators who were at fault with maintaining sanity on derivatives. It is the de-regulators, who removed authority and scope from the regulators. It is also the so-called "Decider" (Bush) who appointed inappropriately prepared and experienced people to powerful regulatory positions, who selected people to regulate who did not believe that regulation was a proper role of government, and who continued to cut budgets for investigators throughout his tragic and misguided administration.

    Munger's complaint is a red herring.. Cox never believed that the SEC should get in the way of the market bubbles he presided over. Someone with more integrity might have resigned in the face of budget cuts in the midst of a bubble.

  • Report this Comment On May 05, 2010, at 5:23 AM, ArizonaLoon wrote:

    Here's a couple of things to think about:

    1. Warren Buffett is all about earning money. If regulators come down too hard on GS then it will cost him money. He will use whatever influence he has to prevent that, including making any statements reasonably possible that might help to minimize the impact on BRK.

    2. BRK is changing. When Buffett leaves (and it's only a matter of time now) it will change even more. More importantly, investor sentiment will change DRASTICALLY and with that the perceived value of BRK. Is it wise to still have BRK as one of our major investments???

    Have fun...

  • Report this Comment On May 05, 2010, at 12:46 PM, BMFPitt wrote:

    I completely agree with the, "I don't care who's on the other side of the trade" statement up to the point when there is fraud involved in getting that person to be on the other side of the trade. Whether by the letter of the law or not, there was certainly willful deception on Goldman's part, and they should not be let off the hook for it.

  • Report this Comment On May 05, 2010, at 12:56 PM, ChrisFs wrote:

    @ FinnMcCoolIRA

    If the other party has chosen both the investments and the side they are betting on before hand, and not told you that before touting it as a good deal, then that's not capitalism, that's a swindle.

  • Report this Comment On May 05, 2010, at 1:53 PM, kstrick62 wrote:

    burrowsx wrote

    "It is also the so-called "Decider" (Bush) who appointed inappropriately prepared and experienced people to powerful regulatory positions, who selected people to regulate who did not believe that regulation was a proper role of government, and who continued to cut budgets for investigators throughout his tragic and misguided administration."

    Not sure I disagree with this statement. I am curious to know your thoughts on the current administration appointments. . .

  • Report this Comment On May 05, 2010, at 3:01 PM, vlodko wrote:

    I've never paid terrifically close attention to Warren Buffet (and, yes, I feel like I may be the only one who can say that) - partly because of his folk-hero status.

    So I'm surprised to hear people bemoaning the fact that he is "simply looking out for his own interests," or that "he's all about earning money." How does this make him "as susceptible to certain vices as we all are?"

    Isn't it the whole point of investing to make money? Why is anyone surprised or dismayed that Buffet's number one goal is to do so? What else is he supposed to be doing?

    If the value of Berkshire Hathaway is based on a popular perception that Buffet is somehow a savior or a saint (the folk-hero image), then it may well be true that investor sentiment will change once he's gone (or perhaps sooner, when people remember that he's an investor, and not Santa Claus).

    That being said, all it takes is a quick read of "The Big Short" (or any one of a number of books, articles, etc. on the financial crisis) to know that regulators and ratings agencies can't be trusted.

    You do have to do your own research, but information from Moody's or Standard & Poor's should be stamped "caveat emptor" - buyer beware.

  • Report this Comment On May 05, 2010, at 3:31 PM, jmt587 wrote:

    ArizonaLoon, I have to disagree with your belief that regulators coming down hard on GS will cost Buffett money. As he said at the meeting (paraphrasing), "Ironically, very ironically, this situation is probably benefiting Berkshire Hathaway. Someone calculated that the 10% interest Goldman is paying us on the $5 Billion we gave them comes out to $15 per second. Tick, tick, tick. The added scrutiny this charge brings makes it unlikely that the government will let Goldman pay us back before the situation is resolved. They don't want their to be the appearance of Goldman getting rid of any of their cash before any fines or settlements are agreed upon. So, ironically, the longer this drags out, the longer that $5 Billion will be outstanding, and the longer those $15 seconds will keep adding to Berkshires cash hoard. If Goldman paid us back today we would probably put the money into intermediate term bonds paying about $20 Million a year, but this investment is paying $500 Million a year."

    $15.85 a second, by my calculation. That makes me happy, as a BRK shareholder. Tick. Tick. Tick.

  • Report this Comment On May 06, 2010, at 11:59 AM, Celtics17 wrote:

    Goldman is just a scapegoat for our incompetent government. FNMA / FMAC / HUD are the real culprits and won't be reformed as long as ObaMarx and his Comrade Dumbocrats are in control.

  • Report this Comment On May 06, 2010, at 1:01 PM, mtf00l wrote:

    Frankly, Republicans/Democrats no longer matters. Politicians used to be public servants. Now they're commodities for sale to the highest bidder.

    Full Disclosure: I own no politicians.

  • Report this Comment On May 07, 2010, at 3:14 AM, mullaroundman wrote:

    To all those putting their foot on the neck of Goldman, "you have got to be kidding"! Why don't you go after the guy on the other side of the trade for selling those securitities and hedges to those poor fools that were so sure that housing prices were so solid? (Now you owe me.)

  • Report this Comment On May 07, 2010, at 12:07 PM, FoolishTide wrote:

    @ FinnMcCoolIRA

    It seem disingenuous to beat the "individual responsibility" drum when companies like Goldman (and many many others) had to get their a$$e$ bailed out. Maybe they should have taken their own 'dose' of capitalism and made to sink or swim on their own.

  • Report this Comment On May 07, 2010, at 9:05 PM, delange001 wrote:

    I think the Goldman issue can be summarized as follows: If I tell you I am selling you 100%gold and it turns out to be only 80% gold then I have lied to you and it is fraud. If I tell you I am selling you 100% gold and it turns out to be 100% gold but at the same time I am betting that the price of gold is going to drop. Did I lie to you about the quality of the gold? Or did I have an obligation to tell you that I think the price of gold is going to drop? Is if fraud for not telling you what I thought the gold price was going to do?

    I think not.

  • Report this Comment On May 08, 2010, at 5:47 PM, gnorton100 wrote:

    I'm surprised at the tone of the paraphrased Buffett comment.

    Buffett normally wants people held accountable for their actions in financial dealings.

    So, I have to wonder if BRK is deeply invested either in Goldman stock ownership or had a hand in the making of the ABACUS deal.

    The 1933 Glass-Seagall act was put in place to prevent the runaway lunacy in the finance industry that dragged us into the Great Depression, but it was REPEALED in 1999.

    If life were fair, the senior management of the finance industry, their lobbyists and the politicians that were involved in the repeal would be paying for the bailouts from their own personal finances.

    If the law hadn't been repealed, none of the huge over-leveraging and unconscionable acts of the financial industries that brought about this latest Recession would have been possible.

    Anyone close to the business world knows that the senior management doesn't allow anything to happen until their lawyers confirm that either:

    -1 they definitely can get away with it or

    -2 it's in a gray area and they probably can get away with it.

    No junior partner or single trader started doing anything until they got the OK from the head office.

    No major company, such as Goldman, would ever permit any low level junior partner or trader take any actions that could cost them tens of millions without blessing the action first.

    Why do you think these big business have an internal law firm ?

    It certainly isn't to protect the interest of the investors.

    It's to protect the business and the senior management.

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