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May 6, 1999

The Buffett & Munger Show

by Yi-Hsin Chang (TMF Puck)

On Monday, May 3, Berkshire Hathaway (NYSE: BRK.A) Chairman Warren Buffett and Vice Chairman Charlie Munger spent five solid hours answering questions from shareholders who had come near and far to attend the company's annual meeting in Omaha, Nebraska. The meeting started at 9:30 a.m., and the official business, the re-election of the members of the board of directors, took all of 10 minutes. For the rest of the time, not counting a 45-minute lunch break, Buffett and Munger spent five hours entertaining around 60 questions from the audience. The meeting adjourned at 3:30 p.m.

During the meeting, Buffett and Munger sat on stage eating See's chocolates and other goodies. Warren drank a signature Cherry Coke straight from the can and even managed to have a Dairy Queen Dilly Bar without dripping ice cream on himself. The two gentlemen were witty, relaxed, and comfortable in the spotlight, patiently addressing each question that was asked. It came across that they really enjoyed the opportunity to talk to their shareholders. Even the reticent Munger offered several great quips, some very direct and scathingly funny.

Here's what Buffett and Munger had to say:

On the U.S. Stock Market...

Buffett: "We have no idea if the market will go up today, next week, next month or next year." He said that he and Munger don't look at the market as a whole but instead at individual businesses, though at current valuations they're having trouble finding companies in their universe they both like at cheap prices.

On the Internet's Impact on Retail...

Buffett said the Internet will have a huge impact on the retail industry. He added that anytime they buy a business, they try to look ahead and evaluate the threat of e-commerce. He doesn't think that e-commerce threatens furniture retailing (i.e. Nebraska Furniture Mart) but said that the Internet will benefit Borsheim's, which is relaunching its website for online ordering later this month. Among jewelers, Borsheim's and Tiffany & Co. (NYSE: TIF) stand to benefit from the Internet because they are brands consumers trust and would be willing to buy online. Buffett also pointed out that the Internet affects real estate dedicated to retailing.

On Alice Schroeder's Report on Berkshire...

Paine Webber analyst Alice Schroeder recently wrote a report on Berkshire, which Buffett called the first comprehensive analyst report on the company. While refusing to comment on Schroeder's valuation of Berkshire, Buffett called her a first-class, serious analyst. Buffett added that the new analyst coverage reflects no change in attitude toward the company's stock price. He is still concerned mainly with building intrinsic value.

On Coca-Cola...

Buffett said that it's hard to think of a much more solid business than Coca-Cola (NYSE: KO), adding that the soft-drink maker benefits from increased prosperity around the world. It also has "marvelous share of mind" and ubiquity of good feeling.

Munger said they don't pay much attention to short-term "noise" and instead focus on the big picture, the 10- to 15-year outlook. "We think that Coke is fine."

On Change and Technology...

Buffett said Berkshire views change as more of a threat than an opportunity and will pass on acquiring businesses that are going to change. For example, Coke hasn't really changed in more than 50 years. This philosophy may mean missing out on a lot of very big winners, but then again "we wouldn't know how to pick 'em."

Buffett said he doesn't see the software world as clearly as the soft-drink world, and he doesn't think Microsoft (Nasdaq: MSFT) will have a superior position to Coke. As he began eating his Dairy Queen Dilly Bar right there on stage, Buffett added: "The Dilly Bar is more certain in 10 years than any software."

Munger added that Berkshire businesses are less likely to be made obsolete by technology than many other businesses.

On Berkshire Class A vs. Class B Shares...

Citing a memo he wrote a few months back on Berkshire's two classes of stock, Buffett explained that Class B shares can never trade for anything but a fraction more than 1/30 of a Class A share because then people would buy Class A shares and convert them to 30 Class B shares. But Class B shares can sell for less than 1/30 of a Class A share, since Class B shares can't be converted to Class A shares. In Buffett's opinion, if the discount is more than 2%, then the B shares offer a better value than the A shares. But if B shares aren't at a discount, anyone wanting to buy at least 30 B shares should buy A instead.

On Acquisitions...

Buffett said he prefers to acquire whole businesses or at least chunks of businesses, instead of just "nibbling" at companies. Munger said that Berkshire will continue to do whole acquisitions as well as large, partial investments in businesses.

On Accounting Principles...

Munger: "The accounting in America is corrupt."

Buffett explained that many companies liberally use accounting charges to smooth out or inflate earnings. However, he declined to name specific culprits, saying that he prefers "criticizing by practices and praising by name."

Buffett said that in accounting for options, companies should figure out the average issuance per year and calculate how much could've been made if the options had been sold as warrants. That number then should be shown as a cost to shareholders. By not doing so, companies are hiding compensation expense in the form of options (as discussed in a current Fool on the Hill series by TMF Gump).

As for goodwill, Buffett said he would treat all acquisitions as purchases, not as pooling of interests. He would set up economic goodwill and lay it out on the balance sheet. The amount should not be amortized, he said.

On the Year 2000 Problem...

Buffett said that he has a general feeling that in the part of the world we have to worry about, it won't be a big deal. He said he's less worried about it than he was a year ago.

On the S&P 500...

Munger predicted that Berkshire will be added to the Standard & Poor's 500 "someday." Buffett said such a move would cause an artificial spike in Berkshire's stock price, as index funds add the stock to their holdings. He added that Berkshire is the most significant company currently not in the index. To avoid the artificial spike in share price, a company could sell stock concurrently with the S&P 500 addition. However, this is not something Berkshire wants to do, he said.

On Flight Safety and Executive Jet...

Buffett said Flight Safety, with its flight simulators, is a capital-intensive business, and that return on equity (ROE) is not going to move up or down much. Executive Jet is still early in its development, so the company will be investing more in the business. However, because customers end up owning the planes, this is not a capital-intensive business.

On Foreign Investing...

Buffett said Berkshire rules out emerging markets that simply aren't big enough to have companies that meet Berkshire's requirement of at least $50 million in pre-tax earnings. But as long as they understand the business and the accounting system it uses, and the price represents good value, Berkshire wouldn't hesitate to invest overseas -- though Buffett pointed out that 53% of the value of the world's markets are actually right here in the U.S.

On Pharmaceutical Companies...

Buffett said they "blew it" in 1993, when drug companies were being threatened by proposals to reform the country's healthcare system, and missed opportunities to buy good businesses at cheap prices. While he sees pharmaceutical companies as good businesses as a group, Berkshire is not about to buy any of them at present prices.

On Inheriting Money...

Buffett, who has always said he won't leave money to his children, explained that he believes in meritocracy and not having people start way ahead of other people in life. He would rather see talent be the determinant than the "divine right of the womb."

In contrast, Munger said he was "more willing to let society take future generations down."

On Recommended Books...

Munger, famous for the reading lists he gives shareholders, recommended Robert Hagstrom's The Warren Buffett Portfolio; Ron Chernow's Titan: The Life of John D. Rockefeller, Sr.; and David Landes' The Wealth and Poverty of Nations.

Buffett suggested friend and Washington Post Chairman Katherine Graham's autobiography Personal History and John Bogle's Common Sense on Mutual Funds.

Next -- The Berkshire Scrapbook


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