FOOL ON THE HILL
Berkshire Hathaway's annual meeting is a great place to go for investing wit and wisdom from Warren Buffett and Charlie Munger. Whitney Tilson was there this year, and in this column he shares some of the duo's choice comments on Berkshire, investing expectations, the importance of business "moats," and more.
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I recently returned from Berkshire Hathaway's (NYSE: BRK.A) annual meeting in Omaha, and -- forgive me if I sound like a broken record here -- continue to be impressed with both the extraordinary intelligence, rationality, and capital allocation abilities of Warren Buffett and Charlie Munger, who are Berkshire's chairman and vice chairman, respectively, as well as the fabulous collection of businesses they've assembled over the past 30-plus years. In this column, I will try to distill 24 pages of notes taken over five hours down to the most important things I heard (my notes can be seen in their entirety at my website). I've added a little commentary, but will generally let Buffett and Munger speak for themselves. Though Munger was positively loquacious -- relative to his usual self -- Buffett did most of the talking, so all quotes are his unless otherwise noted. Recording devices are not allowed in the meeting, so in many cases I am paraphrasing because I couldn't write quickly enough. Future returns from U.S. equities Munger was blunt: "I think generally that American investors should reduce their expectations. People aren't being a little stupid, but massively stupid. No one has an interest in saying this though." Added Buffett: "Stocks are a decent way to make 6% to 7% annually over the next 15 years, but anyone who expects to make 15% from the market or by having a broker pick stocks is living in a dream world." Growth vs. value stocks "Anyone who tells you to put your money in growth or value stocks doesn't know what they're talking about.... I cringe when I hear people say something like 'it's time to move out of growth stocks and into value' because it doesn't make any sense." Moats and sustainable competitive advantage Buffett: "Regardless of how hard moats are to find and defend, that's what it's all about. We tell our managers to focus on enlarging their moats. If you do this, everything else follows." For more on this topic, see the two columns Sustainable Competitive Advantage and Strategy Creates Sustainable Advantage. The teaching of investment and efficient management theory The source of Berkshire Hathaway's profitability Berkshire Hathaway's acquisition strategy "I've been allocating capital since I was 11 and plan to just keep doing it. The bigger we are, however, the fewer opportunities we get." Munger: "Our game is to recognize a big idea when it comes along, when one doesn't come along very often. Opportunity comes to the prepared mind." Berkshire Hathaway's advantages in buying companies Future stock returns Buffett: "Our chance of compounding at 15% over an extended period is so remote as to be zero." Buffett's health Suggestions for small investors today Munger: "I'd work with very small stocks, searching for unusual mispriced opportunities, but it's such a small world." For my thoughts on this, see Think Small Companies. Funniest comment During a discussion on the American political system and the corrupting influence of big money, he said: "When I first moved to California, there was a part-time legislature that was controlled by gambling interests, racetrack owners, and liquor distributors, who wined and dined the legislators, supplied them with prostitutes, etc. I think I prefer that to today's full-time legislature." A little perspective Conclusion -- Whitney Tilson Guest columnist Whitney Tilson is Managing Partner of Tilson Capital Partners, LLC, a New York City-based money management firm. He owned shares of Berkshire Hathaway at the time of publication. Mr. Tilson appreciates your feedback at Tilson@Tilsonfunds.com. To read his previous columns for The Motley Fool and other writings, visit http://www.tilsonfunds.com/.
A survey done at the end of March and reported in today's edition of The Wall Street Journal showed that 41% of investors expect their stocks to deliver returns of 10% to 20% annually over the next 10 years. Another 20% of investors expect returns in excess of 20% annually. Buffett and Munger think these expectations are wildly optimistic.
"There is no such thing as growth and value stocks. Growth is usually a positive for value, if you can generate a good return. For example, growth is wonderful at See's Candies [which is owned by Berkshire Hathaway]."
Munger: "Old moats are getting filled in and new moats are harder to predict, so it's getting harder."
"What you'd really want in a course is how to value a business, because if you don't know how to value a business, you don't know how to value a stock. But very few professors know how to value a business, so they teach that nobody knows anything. The teaching of investing is pretty pathetic."
Munger: "We're like the hedgehog that only knows one big thing. If you can generate float [cash from insurance premiums that Berkshire can invest before claims must be paid] at 3% and invest it in businesses that generate 13%, that's a pretty good business."
"We have no more master plan now than we did when we bought a textile mill [Berkshire Hathaway] in 1965. Charlie and I don't sit around and talk about the future of industries. We have no reports or staff. We just review what comes in and look for companies with a durable competitive advantage at an attractive price."
"We have significant advantages in buying businesses over time. We are the preferred buyer for a substantial number of public and private businesses. Our checks clear. People know that when we make a deal it gets done as fast as it possibly can be done. We allow people to run their businesses as they always have. We have a stable management structure."
Munger: "Berkshire Hathaway's value will be higher in 20 years, but it is certain that the annual rate of percentage growth will be much lower."
The most worrisome thing I heard at the meeting was Buffett's confession that until last year, he hadn't seen a doctor in five years. That said, Buffett noted: "My doctor would say that I have a much longer life expectancy than the average 70-year-old. My mother lived to be 92. I love what I do, am surrounded by great people, and have no stress." Munger added a tongue-in-cheek comment that a study discussed in the book Genome shows that longevity is highly correlated with people who cause stress to others rather than with those who suffer from it.
"With a small amount of money and our background, you can make a lot of money, but returns drop dramatically as the base of capital grows."
Every year, Munger can be counted on to come up with a good zinger -- last year, it was his "raisins and turds" analogy: The column on last year's meeting has the context -- and he didn't disappoint this time.
In response to a young shareholder's question about how to invest successfully, Buffett gave some tips and then Munger added: "If all you succeed in doing in life is getting rich by buying little pieces of paper, it's a failed life. Life is more than being shrewd in wealth accumulation." Hear, hear!
Buffett and Munger are, without a doubt, two of the greatest investors and capital allocators of all time, so investors would be well-served to study their thinking carefully. There will be much more out about the annual meeting this week. But one place to start anytime is the compilation of annual letters to shareholders that Buffett writes for Berkshire's annual reports. They're located on the company website. My complete notes from the meeting are also available.
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