David Kass Notes From Berkshire Hathaway Annual Meeting – May 2, 2015

Berkshire Hathaway Annual Meeting

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May 2, 2015

(Notes taken by David Kass, Department of Finance, Robert H. Smith School of Business, University of Maryland)

A one hour humorous film was shown in which the highlight was Warren Buffett (“The Berkshire Bomber”) challenging World Welterweight champion Floyd Mayweather to a boxing match to be held at the MGM Grand Hotel in Las Vegas. Charlie Rose on CBS News breaks in with a bulletin announcing this challenge. Warren Buffett shows up at Floyd Mayweather's training facility and is being held back by his daughter and others while he yells at Mayweather (apparently curse words that are bleeped out). While Mayweather is hitting a punching bag in his gym, Buffett is working out at home on an exercise bicycle while reading the Wall Street Journal. Steve Wynn announces that he is betting $10,000 on Buffett. On the night of the championship fight, the MGM Grand is sold out, with Jack Nicholson seated in the first row. Seated in his corner, Mayweather has his handlers give him a mouth guard and a sip of water. Buffett, in his corner, is dressed with a T-shirt and still wearing his glasses. He drinks Coca-Cola and is given See's Candies as his mouth guard. Both fighters then stand in the middle of the ring glaring at each other and separated by a referee. (The movie ends at this point.) (Note: Several hours after the Berkshire annual meeting, Floyd Mayweather defeated Manny Pacquiao for the World Welterweight title at the MGM Grand Hotel in Las Vegas.)

Warren Buffett (age 84) and Charlie Munger (age 91) then walk on the stage and sit down. The format for asking questions was similar to the last six annual meetings. One-third of the questions were selected by three business journalists: Andrew Ross Sorkin (CNBC and the New York Times), Becky Quick (CNBC), and Carol Loomis (Fortune). Shareholders had e-mailed over 2,000 questions to the journalists, who then selected 18 questions relating to Berkshire and its operations. The journalists who were seated on the stage, alternated with analysts Gregg Warren (Morningstar), Jonathan Brandt (Ruane, Cunniff, and Goldfarb), and Gary Ransom (Dowling & Partners), and with shareholders in the audience in the asking of questions.

Approximately 45,000 – 50,000 were in attendance (celebrating Warren Buffett's 50 years at Berkshire Hathaway). This compared to previous records of 40,000 in 2014, 36,000 – 38,000 in 2010-2013, and 35,000 in 2009, 31,000 in 2008, 27,000 in 2007, and 24,000 in 2006.) The CenturyLink Center (18,000 capacity) and all of the overflow rooms were filled for the first time.

Buffett initially commented on Berkshire's 2015 first quarter earnings and mentioned that Burlington Northern's results were improving.

Questions were asked in the following order:

(1) Loomis: The Seattle Times recently published an article alleging predatory lending practices by Clayton Homes. Also, Berkshire's partnership with 3G Capital has led to massive layoffs. Is Berkshire being ethical?

Buffett: There were many errors in the Seattle Times article. We have no interest in selling a mortgage and having a default. Clayton keeps 100% of the mortgages. Only 3% of Clayton mortgages default. The customers are mostly people with low monthly incomes. Our money is at risk. The average cost of a manufactured home plus land is $95,000. The Seattle Times article alleged that Clayton was making a 20% profit. They don't know the difference between gross margin and net profit. Our gross margin equals 20%, but our net margin is only 2%. I have not received any complaints about Clayton's lending practices and we are regulated.

Munger: Clayton has a 50% market share of manufactured housing.

Buffett: With respect to 3G Capital, we have never said that there should be more people running the business than needed. After 3G reduced the number of employees, they have done extremely well. There were more than 1.6 million people working for railroads in 1945. Now there are less than 200,000. Trains now carry more freight, over longer distances and with very high safety standards. Capitalism requires efficiency over time.

(2) Brandt: Will Van Tuyl (car dealerships) need to adapt to new modes of selling such as one price and no negotiations?

Buffett: I do not know the answer. People say they do not like negotiations, but then they do it. Van Tuyl will adapt to whatever the customer wants. I wouldn't be surprised that in 5 – 10 years the buying system will still be the same. Van Tuyl will be very profitable in relation to the capital we invest in it.

(3) Audience: What five characteristics do you use to predict earnings of companies 5 – 10 years from now?

Munger: There is no one size fits all system. We keep learning. We can't give you a formula.

Buffett: There are a lot of things that we look at such as what the business will look like. We evaluate if we want to be in partnership with this person or management and count on them to behave well into the future. That stops a fair number of deals.

(4) Quick: Charlie, did you try to talk Warren out of IBM?

Munger: I did not. IBM is very adaptable. They were undergoing a temporary reversal and we bought at a reasonable price.

Buffett: It was a 2 – 0 vote on IBM. The company will be buying back its stock in the future and we would like the price to be lower.

Munger: If people weren't so often wrong, we wouldn't be rich.

(5) Ransom: Do you agree with Charlie in his annual letter that Berkshire could not repeat its success if entering the insurance business today?

Buffett: There were three historical pieces of good luck that were involved in our entry into the insurance business: (1)My meeting with Lorimar Davidson at Geico in 1950 and the education he provided about the insurance business, (2) Buying National Indemnity in 1967, and (3) The arrival of Ajit Jain in the mid-80's. The odds of repeating this today would be very low.

(6) Audience: Can Berkshire's culture endure after you leave?

Buffett: Berkshire's culture runs deep and is clearly defined. I expect it to continue and become even stronger. An example is 97% of shareholders voting that they do not want a dividend.

(7) Sorkin: With the negative impact that sugar is having on consumers' health, have we reached an inflection point? Is Coke's moat narrowing?

Buffett: Twenty years from now more Coke will be consumed than today. I estimate that a quarter of all calories I consume come from Coke. I am not sure which quarter. If I ate broccoli and Brussels sprouts I would not have lived as long.

Munger: Sugar is enormously helpful. It prevents the premature softening of the arteries.

Buffett: I don't see smiles on people's faces at Whole Foods.

(8)Gregg Warren: A question about buying more auto dealerships.

Buffett: There are no large economies of scale, but running them well is important. Berkshire will not be financing the auto loans. Banks such as Wells Fargo are the lenders with a low cost of capital. We will keep the dealerships local.

(9) Audience: Question about Berkshire's culture.

Buffett: Culture comes from the top and has to be consistent and part of written communications. It should be rewarded when followed and punished when not.

(10) Loomis:

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