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

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A humorous film was shown which included some scenes from the January, 2017 HBO Documentary: “Becoming Warren Buffett”, as well as highlights of films shown previously at Berkshire Hathaway annual meetings.

Warren Buffett

Warren Buffett (age 86) and Charlie Munger (age 93) then walk on to the stage and sit down.  The format for asking questions was similar to the last eight 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 (Retired, 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 Jay Gelb (Barclays) also seated on the stage, and with shareholders in the audience in the asking of questions.

Approximately 40,000 were in attendance.  This compared to 40,000 in 2016, 45,000 – 50,000 in 2015 (celebrating Warren Buffett’s 50 years at Berkshire Hathaway), 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.

Warren Buffett mentioned that since Charlie can hear and Warren can see, that is why they work together.  He also mentioned that since corporate taxes are likely to be lower next year, Berkshire is likely to take portfolio losses this year.  They currently have over $90 billion in unrealized capital gains.  Geico added 700,000 new policy holders during the first four months of 2017 (vs. 300,000 in 2016) which lowered earnings from insurance underwriting because of the extra costs associated with new business.  Float increased $14 billion to $105 billion in the first quarter of 2017.  Buffett also pointed out Jack Bogle in the audience as someone who has saved tens of billions for investors.  “He will be 88 on Monday.  In two years he will be eligible for an executive position at Berkshire.”

Questions were asked in the following order:

Q1. Loomis:  Wells Fargo’s decentralized structure gave too much autonomy to community banks.  Does Berkshire face similar risk?

Buffett:  With 367,000 employees, it is important to be careful with what you incentivize. Wells Fargo had an incentive system built around cross-selling and the number of services per customer.  This incentivized bad behavior.  At Berkshire we have an internal hotline that receives 4,000 alerts each year.  Anything serious has led to an action.

Munger:  You need a compliance department.  But entrusting good managers is a better system.

Q2. Brandt:  Would driverless cars and trucks be a threat to railroads and auto insurance companies?

Buffett:  Yes.  Geico’s income would decline.

Q3. Audience: How do you identify an “investing sweet spot”.

Buffett:  You know it when you see it.  It’s a business that they can look out 5-10-20 years and see a durable competitive advantage that would last over the period with a trusted manager who would fit in with the Berkshire culture.  See’s Candies is an early example.

Q4.  Quick:  Does Buffett spend a lot of time looking at his large investments in American Express, Coca-Cola, Wells Fargo, and United Airlines?

Buffett:  Berkshire is the largest holder of the four major airlines. He looks for a durable competitive advantage.  Coca-Cola was founded in 1886, American Express in 1852, and Wells Fargo around the same time.  Investors need to judge the ability of management to deal with competitors.

Munger:  I have nothing to add.

Buffett: We will have to cut his pay if he doesn’t participate.

Q5. Gelb:  Question about Berkshire’s recent deal with AIG.

Buffett:  AIG transferred to Berkshire 80% of claims above $25 billion up to a $20 billion limit.  Berkshire received $10.2 billion for that.

Q6: Audience: What was Berkshire’s favorite deal?

Munger:  See’s Candies. Powerful brand.  “Flow of money without work.” “Fish where the fish are”.  Similar to Coca-Cola.

Q7. Sorkin:  Both IBM and Apple are technology companies.  Do you view them differently?

Buffett:  Wrong on IBM.  Apple is a consumer products business.

Munger:  We knew about Google, but did not invest.

Buffett:  I blew it.

Munger:  Blew Wal-Mart too.

Buffett:  Could be making two mistakes on IBM, hard to predict.  Bezos (Amazon) has succeeded in retailing and the Cloud, starting from scratch.  And now the Washington Post.  It is about execution.

Munger:  Bezos is a different species.

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Q8. Gregg Warren:  Is investing in airlines similar to investing in railroads?

Buffett: The investment in airlines has no connection with the railroad business.  Berkshire has invested $10 billion in 4 major airlines.  The airlines are at 80% capacity and travel will be higher in the years ahead.  They are earning a high return on invested capital.  There is more labor stability now.  They have large stock buybacks. They will have more revenue passenger miles 5 – 10 years from now.  Berkshire bought the shares at low multiples.  The airlines will have fewer shares outstanding in the years ahead.  But it is no cinch.

Q9. Audience: Protestor – long speech.

Buffett and Munger respond discussing longevity and drinking Coca-Cola.

Q10. Loomis:  Question about intrinsic value.

Buffett:  Intrinsic value can only be calculated in retrospect.  In the last 10 years their stock has compounded at about 10%.  It is impossible to achieve this return in the current interest rate environment. Best guess for the future is a 10% return, assuming higher interest rates.

Munger: Berkshire has a collection of better businesses on average that have a better investment return than the S&P 500.  A lot of other people are trying to be brilliant.  We are trying to be rational.

Q11. Brandt: Question about lower tax rate for utilities.

Buffett:  Lower tax rates will pass through to customers in the utilities businesses.  Berkshire has $90 billion of unrealized capital gains.

Munger: During bad times Berkshire will do well.

Q12. Audience: Question about Buffett recently selling his used car at a profit.

Buffett:  He sold his used Cadillac for over $100,000 for a charity (Girls, Inc.).  The buyer drove away without license plates on the car.  When he was pulled over, the police were skeptical of his story.  But since Buffett had signed the dashboard, the police then asked him if the driver was given any stock tips.  This is the only time Buffett has sold a used car at a profit.

Q13. Quick: Why did Buffett advise his wife to invest in the S&P 500 Index Fund instead of in Berkshire (upon his death)?

Buffett:  All of Buffett’s shares in Berkshire will be going to charity.  So far, 40% has already been distributed.  The S&P 500 is highly liquid. If she owned only one stock, there will be people who come around with various suggestions on what to do with the money.  But they won’t bother her if she owned an index.  Buffett’s Aunt Katy, whose husband used to employ Charlie and Warren, worked all her life and died at 97 with a few hundred million dollars, because she was in Berkshire Hathaway.  She would write Buffett and say she hated bothering him, but was curious if she would ever run out of money.  Buffett told her she would run out only if she lived another 986 years.

Munger: He is more comfortable with holding Berkshire than the S&P

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