At last Saturday's Berkshire Hathaway (BRK.A 1.75%) (BRK.B 2.02%) annual meeting, CEO Warren Buffett and Vice-Chairman Charlie Munger answered questions from shareholders and analysts for five hours. Topics ranged from the health effects of Coca-Cola to the compensation of hedge fund managers. (Spoiler: Of the two, Buffett thinks only one is a genuine problem). Below are 24 of the day's best quotes. (I've identified the person being quoted by their initials, WB and CM.)
On the risks to Berkshire Hathaway if Donald Trump were to become president (WB):
"That won't be the main problem."
But, seriously... (WB):
"We've operated under price controls, we've had 52% federal taxes applied to our earnings... we've had regulations come along... If either Donald Trump or Hillary Clinton becomes president, and one of them is very likely to be, I think Berkshire will continue to do fine."
On Donald Trump's chances of being elected president of the United States (CM):
"[They're] far above zero."
On Berkshire Hathaway's extremely decentralized model (WB):
"We do not have budgets at the parent company level. Most of our subsidiaries have budgets, but they don't submit 'em, or they're not required to submit 'em to headquarters."
On management's long-term goal at Berkshire (WB):
"We just focus day after day, year after year, decade after decade, on trying to add sustainable and growing earning power to Berkshire."
On Berkshire's transition to acquiring capital-intensive businesses (WB & CM):
CM: "If we'd been able to continue doing that [acquiring highly profitable, capital-light businesses], we would have loved to do it, but when we couldn't, we went to plan B. And plan B's working pretty well; in many ways, I've gotten so I sort of prefer it."
WB: "When something's forced on you -- might as well prefer it ... The alternative [to buying capital-intensive businesses] would be to go back to working with very tiny sums of money, and that really hasn't gotten a lot of serious discussion between Charlie and me.
On continual self-improvement (CM):
"I don't regret that I didn't make more money or become better known ... I do regret that I didn't wise up as fast as I could have, but there's a blessing in that, too: Now that I'm 92, I still have a lot of ignorance left to work on."
On the need for a sense of humor (CM):
"If you see the world accurately, it's bound to be humorous, because it's ridiculous."
On avoiding bias in decision-making (CM):
"We try to avoid what is always the worst anchoring effect ... which is our previous conclusions."
On the need to include the benefits in a cost/ benefit analysis (CM):
[Munger was responding a question from a shareholder asking whether Berkshire shareholders can be proud to own shares of Coca-Cola in light of the negative health effects of consuming sugary beverages.]
"People who ask questions like that one always make one ghastly error that's really inexcusable: They measure the detriment without considering the advantage. That's really stupid; that's like saying we should give up air travel because a hundred people die a year in air crashes. That would be crazy: The benefit is worth the risk."
On the risks linked to derivatives (WB):
"If you take the 50 largest banks in the world, we wouldn't even think about [investing in] probably 45 of them."
On investing in investment banks (CM):
[In response to Buffett asking him whether he can remember Berkshire buying the marketable securities of an investment bank:]
"No. Generally we fear the genre more than we love it."
[Note: Buffett struck a deal with Goldman Sachs in the depths of the financial crisis to invest in Goldman preferred shares. As part of the deal, Berkshire received warrants to purchase Goldman common shares. However, Buffett negotiated a modification in the warrant terms such that Berkshire put up no cash when it exercised the warrants in October 2013. Within 24 months, Buffett trimmed Berkshire's Goldman common stock position by 16%.]
On being a bottom-up investor (CM):
"Microeconomics is what we do, and macroeconomics is what we put up with."
On how activist investors actually help Berkshire Hathaway (CM):
"If you're being attacked by people you regard as evil and destructive and you want a strong ally, how many people would you pick in preference to Berkshire?"
[Buffett's response: "I'm Warren Buffett, and I approve this message."]
On investment consultants (WB):
"No [investment] consultant in the world is going to tell you, 'Just buy an S&P index fund and sit for the next 50 years.' You don't get to be a consultant that way. And you certainly don't get an annual fee that way."
On Wall Street's real talent (WB):
"There's been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities. There are a few people out there that are going to have an outstanding investment record, but very few of them. And the people you pay to help identify them don't know how to identify them; they do know how to sell you."
On active fund management (CM):
"There have been a few of these [fund] managers who've actually succeeded. There are a few in the universities who are really good. But it's a tiny group of people; it's like looking for a needle in a haystack."
[One of the "few in the universities" whom Munger is referring to is almost certainly David Swensen, chief investment officer of Yale University's endowment fund.]
On the folly of "sophisticated" investors (WB):
"I've talked to huge pension funds, and I've taken them through the math [demonstrating the superiority of low-cost index funds over active fund management], and when I leave, they go out and hire a bunch of consultants and pay them a lot of money. It's just unbelievable."
On the $1 million bet made by Warren Buffett that an Vanguard S&P 500 index would outperform a portfolio of hedge funds over a 10-year period (WB):
"The result is that after eight years and several hundred hedge fund managers being involved, the totally unmanaged fund by Vanguard with very minimal costs is now 40-something [percentage] points ahead of the group of hedge funds. It may sound like a terrible result for the hedge funds, but it's not a terrible result for the hedge fund managers."
On hedge fund managers' compensation (WB):
"We have two [investment] managers at Berkshire. They each manage $9 billion for us. They both ran hedge funds before. If they had a 2/20 arrangement with Berkshire, which is not uncommon in the hedge fund world, they would be getting $180 million annually each merely for breathing."
[The "2/20 arrangement" to which Buffett refers is a standard compensation structure for hedge fund managers, under which they charge a 2% annual management fee and a performance fee equal to 20% of investment profits.]
On controversial pharmaceutical company Valeant Pharmaceuticals International whose stock has fallen % from its 52-week high (WB & CM):
WB: "In my view, the business model of Valeant was enormously flawed."
CM: "Valeant, of course, was a sewer. Those who created it deserve all the opprobrium that they got."
On inherited wealth (WB):
"One surprise guest: I think my youngest great-grandchild -- [he] will be about seven months old -- is also here today. If he happens to break out crying a lot, don't let it bother you, it's just his mother explaining to him my views on inherited wealth."