Post of the Day
May 22, 1998

From our
Berkshire Hathaway Board

Subject: Annual Meeting Notes
Author: Holtmeier

Here are some of my notes I took while attending this year's annual meeting. The questions are abbreviated and sometimes omitted. I was concentrating on Buffett's and Munger's answers. I tried to only state their responses without adding any of my opinions or analysis of expressions or voice tone.

By reading Berkshire's Annual Report before I attended the meeting, I found that the questions from the audience and Buffett's answers were very predictable. Questions and answers both centered around his well published philosophies.

  • Are stocks overvalued?
    Not if 2 criteria are met. 1, interest rates stay low and 2, corporate profits remain high. These 2 criteria came up several times throughout the meeting. Both must be met for the market to continue to rise.
  • What are your plans for a successor?
    No specifics were given. Said there was a plan and it would be one of their current managers. Said that there is more than one way to succeed in the market and managing Berkshire. Successor may run things differently and even do better.
  • When do you sell a stock?
    Only if you need the money or if you find even a better investment. He doesn't worry about selling at the top because than he would be practicing market timing which can't be done consistently and successfully.
  • Effect on Freddie Mac investment if interest rates rise?
    Said Freddie Mac and Fannie Mae are not that sensitive to interest rates. It could be more painful if they sell a lot of loans when rates are low and than rates rise.
  • When is a stock too high for a company to buy back shares?
    No time for some companies such as Coke, but better if the PE ratio is below 20.
  • What are your plans for Super Cat insurance?
    Will do less business in the future. Current policies run out in a couple of years. Would not consider a 1 billion dollar pay out as Bershire getting clobbered.
  • What do you look for in annual reports?
    Candid language, trustworthy management and understandable companies. Coke reports are one of the best. They bought Coke by reading their annual report and without consulting inside management. Operating or final earnings are not very important in annual report. They only are used for IRS tax calculations. Look-through earnings are most important.
  • When asked about company valuations,
    Buffett said if he was a teacher, he would give an exam and ask all his students to value an internet company. Anyone who answered would flunk. Bashing internet companies was somewhat a theme of the day. However, toward the end of the meeting, Buffett commented that he thinks some of Berkshire's businesses could do well selling their goods over the net do to their name recognition.
  • Would you buy Coke, Gillette and other major Berkshire holdings instead of Berkshire stock?
    Said many people do, but he wouldn't make a recommendation.
  • Would Buffett buy Berkshire at the present price?
    Said he hasn't bought any Berkshire stock in several years! Buffett repeatedly denied throughout the day to place a value on Berkshire.
  • Would it make sense for Berkshire to buy back shares?
    It probably would have in the past, however, they will put capital wherever it makes sense.
  • Why did you invest in silver?
    Munger downplayed the investment and said Buffett watched precious metals for 3-4 decades waiting for the right opportunity and merely deployed 2% of their capital.
  • What effect does baby boomer money have on the market?
    None, market rose because inflation was low and corporate profits were high. Also said bull markets can carry some of their own momentum. Munger said that corporate profits from the last 18 years could not be matched in the next 18 years.
  • What investment models do they use?
    They have several models and don't rely on any particular one. One important parameter is identifying people who love their business. This is a key for good management.
  • When do you report stock holdings?
    Only report holdings of over $750 million. Will raise this value as Berkshire grows. Berkshire needs to make investments of $500 million or more to make a difference. They are rarely involved in companies with less than $10 billion market cap. They eliminated some small holdings last year and converted to bonds.
  • Are drug companies a good investment?
    Berkshire blew not investing in drug companies but these companies are not within their circle of competence.
  • Compare McDonald's and Dairy Queen?
    No comparison since Dairy Queen has a niche market.
  • Do you think Nike is a good investment?
    Phil Knight is good, but they have no opinion on the company.
  • How important is scuttlebutt as referred by Phil Fisher?
    Scuttlebutt is only about 10-20% of all information needed before buying a company.
  • What is the difference between Berkshire stock and a mutual fund?
    A mutual fund owns securities. Berkshire owns securities and businesses.
  • Is McDonald's a good investment?
    They are a good business but may continue in present mode. They are having problems with the amount of real estate associated with owning 23,000 stores.

Other comments:

  • Don't consider book value of a company, only consider future earnings.
  • Berkshire stock ownership turnover is only about 3% per year.
  • Berkshire will not sell stock to cash to wait for a correction and will never be a big investor in real estate.
  • Coke and Gillette get the majority of their revenue from overseas.
  • Volatility measures are nonsense. You must understand the future of a business.
  • They do not invest in the auto industry because they don't know it well enough.

End of notes.

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