Berkshire Annual Meeting Notes

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By Zamboni
May 6, 2002

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A lot of this has already been covered quite accurately, but here is a different form of presentation. As stated earlier there were 40 questions asked. I'll do 10 now and if any interest, the balance in increments of 10. So let's start at Station 1 with the young man from Lincolnshire, IL with a two-parter:

You've said your holding time for a stock is forever, but you sold DIS and MCD. How do you decide when to sell?
We formerly sold when we needed money. Then we had more ideas than $. Today we have more $ than ideas. Now we sell when economics change -- outlook is not as bright and/or competitive advantage has eroded. This is true of the newspaper industry today.

Do you wear Fruit of the Loom underwear?
Yes, but I don't know about Charlie. He may not wear underwear.

Charlie: Not wearing FOL because I haven't bought underwear in a long time.

2. Bailey, Boston, MA: How do you grow and replace float at the same time?
Insurance is like the oil business. You have to eat into your reserves and discover new resources at the same time. National Indemnity provided our first insurance float. It was $12M. Today that has grown to over $37B. Our float has less natural runoff. Most of ours is in P&C with a very tiny amount in Life and Health. He really doesn't know how, but float is most likely to grow but NOT at historic rates. The most important is to grow at low cost. This did not happen in 2001.

3. Hugh Stevenson, Atlanta: How is this whole asbestos liability mess going to be settled?
This is what most of our retro policies cover, but they are capped. Asbestos situation is very bad and getting worse. Too many are being dragged into it, but it may provide buying opportunities if companies emerge from Ch 11 with liability behind them - a la Johns Manville.

(Zamboni comment: Do I hear USG rumbling around in the background?)

Charlie: This whole mess is an enormous fraud with the wrong people getting the dollars. Many people with legitimate claims are not getting settlements. This is due to Congress' inactivity although the Supreme Court has practically mandated them to find a solution. Charlie sees no solution in the next five years. (Only downer in the whole meeting in my estimation.)

WEB: BRK will be very careful in insuring risks and acquisitions. He has no fear in current policies.

4. Ted Friedman, Cincinnati: How do I find an index fund with minimal fees? The S&P P/E seems extremely high.
Look at broad indices with low fees such as Vanguard. Be careful of cost. Read John Bogle's books. They have all you need to know about funds. Spread out your investment over time. I can't pick a time or assess individual funds. P/E, P/S and the like will not tell you when to buy or sell. Buying an index fund over time solves this problem.

Charlie: I never though we'd see a time when stocks were at such a high price you couldn't make money. It happened in Japan and it could happen here.

5. 12-yr old from CA: How did 9/11 change your life and investing strategy?
(Most of this answer can be found in this year's letter.) Risk was thrown into our policies for free before. We are writing lots of new terrorism policies, but the exclude NCB (nuclear, chemical and biological). Workers Comp loss from 9/11 was biggest ever. Realism and discipline are most important characteristics needed for investing and writing insurance. Math is not all that important in either.

6. Everet, Atlanta: Bank P/Es seem quite low compared to S&P. Would they be good investments today?Important multiples for banks are ROE and return on incremental equity.(I'm not sure what he means by the last term).

Don't look at a whole industry. DCF on future cash is the answer - not ratios, etc. Best banks are low on risk and high on yield. Don't look for a single metric to make an investment decision.

Charlie: You asked the wrong people about banks. We worry too much about management screwing up good banks.

WEB: 20%+ return on tangible equity on a consistent basis can be achieved.

7. Man from NYC: (2 parts) How can you detect cash flow fraud? What books are you recommending this year?
Charlie: Wisdom in life helps. This is a good Q but very difficult to answer. Watch out for industries. Many frauds are committed by people who talk about EBITDA! They use it to con themselves as well as investors. Watch out for telecoms. Depreciation is one of the worst expenses. CAPEX and depreciation are exact opposite of float. With float cash comes in and dribbles out, but with CAPEX cash goes out in one lump and never dribbles back.

8. A 10-yr. (not 10-yr old) shareholder from Germany (I needed Fregel to help me with the accent) You buy companies after talking to the owner(s) for 90 minutes. How can you assess character in this short time?
Fisher's book is a good start at finding the answer to this. I talked to Ponzio (Albecca) for 20 minutes, and I felt I knew all about the picture frame business. I could tell he really cared about his employees and the business. I couldn't understand where the auto industry will be in 10 years no matter how much research I did.

Charlie: When one major corporation acquires another, the acquirer almost always loses value. We have patience and wait for no-brainers.

Charlie made some crack about the definition of hell and due diligence, but I was having a hand cramp at the time and missed it.

WEB: Big company mergers estimates of future results are often more than 4 times overstated.

(Zamboni aside: I had dinner with Luci and Ralph Schay last night, and we had some discussion about this item among others. Specifically I brought up Hewlett Packard/Compaq and Northrop/TRW. Ralph's take on this is that the synergies of big company mergers defy all mathematics because 1+1 equals 1.5 in most instances!)

9. Lou from Palo Alto: Have you looked into cryogenics, so we can have you around for a very long time?
There's not much downside in this.

10. Pamela from Omaha: How does FOL fit into your philosophy of avoiding turnarounds?
FOL took on too much debt and had large operating problems. We did not inherit the debt or the management that brought about these problems, but we did acquire the former management in which we have a lot of confidence and has proven its success. FOL has 40-45% of market. We need a bigger share of the women's and boys market. FOL was like GEICO in the mid 70's.

CTM - I forgot to give you the book recommendations a couple of questions back. Ice Age (a history of glaciation) and How Scots Influence the Current World were his 2 recommendations. Not sure of title of last book.

WEB gave Simple's book another big boost.

End of round 1. Hope you enjoyed it. Please feel free to add, subtract and make corrections. I've had a long day in my buddy's single engine putt-putt (they hid it behind the hangar while the Net Jets display was open), so I have not proof read this and apologize for errors.

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