Eight Key Insights from Berkshire Hathaway Meeting

By Neil Jain, WalletPop Canada

On Saturday, April 30, 2011, Berkshire Hathaway Inc. held its Annual General Meeting in Omaha, Nebraska. An estimated 40,000 people gathered here to listen to Warren Buffett, 80, Berkshire's Chairman and CEO, often referred to as the "Oracle of Omaha" for his investing prowess. Also on stage was Charlie Munger, 87, Berkshire's Vice-Chairman. I was in the Press Box on behalf of WalletPop and live blogged from the Q&A session.

Questions alternated between shareholders directly via 13 different microphone stations and those selected by three financial journalists from the New York Times, CNBC and Fortune Magazine. By our count, there were 49 questions asked in total.

Here is a synopsis of eight key insights assembled from the answers to these questions.

1. Sokol / Lubrizol Matter: "Sad for Berkshire"

This was a hot topic and created somewhat of a sombre atmosphere to start the meeting.

Berkshire Hathaway recently acquired Lubrizol, an Ohio-based chemical company for $9.7 billion.

David Sokol, a former top Berkshire executive who recently resigned, was regarded in the media as a potential successor to Buffett. Sokol had recommended Lubrizol as a potential purchase for Berkshire. Sokol is accused of trading in Lubrizol shares and profiting from Berkshire's acquisition of the company.

Although Buffett initially defended Sokol in a March 30 press release, Berkshire's audit committee later released a report stating that Sokol violated company policy. Buffett said Sokol's actions were "inexplicable and inexcusable" and that the events were "sad for Berkshire and sad for David."

Berkshire Hathaway is considering suing Sokol to recover his profits and for damage to Berkshire's reputation.

2. Potential successor and the next CEO's pay: "[He] should make a lot of money"

Another very popular topic is figuring out who will be Buffett's successor at Berkshire.

Buffett has said in the past that if he were unable to report to work tomorrow, the Board of Directors knows exactly what to do. He has not disclosed who his successor will be.

Buffett has also disclosed in the past that the Chief Executive role will be separate from the Chief Investment role. He is currently responsible for both these roles at Berkshire.

In response to a specific question about Ajit Jain (no relation to the author), the head of Berkshire's reinsurance business, Buffett lavished heaps of praise. Buffett has much respect for Jain believing that he is a "rational thinker, creative and loves what he does."

In response to a question about CEO pay, Buffett affirms that the next CEO "should make a lot of money" for managing Berkshire's large collection of businesses. He explained that the Board of Directors would decide on an appropriate salary and performance incentives.

Buffett's salary has been fixed at $100,000 per year and he joked that if you took out an advertisement for a CEO job at that wage, you would get no applications.

3. Investing for the average person: "Consistently set aside money in index funds"

Buffett has advocated for many years, as he reiterated at this year's meeting, that the average investor should choose equity index funds. An index fund is a type of mutual fund that typically tracks well-known benchmark indexes such as the S&P 500 and Dow Jones Industrial Average in the US and S&P TSX in Canada.

Buffett advises that if you "have a day job" and aren't going to be actively engaged in investing, then "consistently set aside money in index funds." He asserts that this is the best long-term strategy.

Although his personal net worth is nearly fully invested in Berkshire, he hypothesizes that if he had another job, index funds would be the choice for him too.

4. Optimism about the United States economy: "I wouldn't bet against America"

A shareholder concerned about a potential long-term slowdown in the U.S. economy asked how Buffett continues to be so optimistic.

Buffett has always been sanguine about the prospects of economic growth in the U.S. He included some statistics to back up his optimism.

"We've had some 15 recessions" since the founding of the country and the net worth of Americans has "increased six-fold since my birth." In keeping with the nickname for the Berkshire AGM, "Woodstock for Capitalists," he boldly confirms that "the power of capitalism is incredible ... it works marvellously over time."

Munger, always blunt and often in contrast to Buffett, says "the world might be going to hell." Munger follows up with a comforting suggestion however that being cheerful when conditions are deteriorating is a good quality to have.

5. Commodity investments: "You're simply betting"

Buffett has for many years considered gold to be an unwise investment. He believes that when trading commodities, because of their finite nature, "you're simply betting on the fact that someone else will value that commodity at a higher price in a few years."

He animatedly repeated a quip that we dig up gold from South Africa, ship it to the U.S. and put it back in to the ground in the Federal Reserve. "Aliens from Mars would think we're crazy!"

Although gold has no utility in his opinion, he has traded silver because of its industrial usage and he believes oil may be near a peak value.

6. Currency, inflation and purchasing power: "The U.S. dollar will decline"

Buffett commented that he believes "the U.S. dollar will decline" in relation to other currencies but he doesn't know how rapidly.

He believes all currencies will lose purchasing power over time. This is common when a higher inflationary environment is anticipated.

Although he revealed that Berkshire is not really active in foreign exchange, he does believe we won't have runaway inflation anywhere near that of the hyperinflation experienced in Zimbabwe.

7. Advice for students, young people: "Value of Dale Carnegie is incalculable"

Buffett has been asked many times about advice for younger people.

He has stressed the importance of "reading as much as you can." He spent much time at the Omaha Public Library.

He once again acclaimed a $100 Dale Carnegie course that he took at age 21 on how to communicate effectively. He regards its value as "incalculable" compared to his undergraduate and graduate degrees.

Munger also lambasted Harvard Business School in particular for not teaching students in a way that prepares them for the real business world.

Buffett also spoke in a matter-of-fact manner on parenting in response to a question on how not to spoil rich kids. He says that they should be raised in such a way that they don't feel a sense of "entitlement" regardless of their wealth. It's a "mistake" for kids to grow up with the idea that others should do their work for them in his opinion and that they can just "sit around and fan themselves."

8. Future acquisitions and foreign investment: "There aren't any 'elephants' left"

Buffett has utilized the metaphor of an elephant to describe the size of a business that Berkshire would need to acquire to meaningfully contribute to its bottom line over the long term. He doesn't believe there are any acquisition targets at this time.

In addition, he spoke about assessing investments in other countries, in particular, China. Although tax laws, regulations and culture are different compared to the U.S., he believes that the basic principle of finding an undervalued business with a "margin of safety" still applies.

In relation to investment bankers presenting him with potential acquisition targets, he "doesn't listen to them." They always show future earnings going up in his experience. He provides a classic analogy: "It's like asking a barber if you need a haircut!"