Berkshire Hathaway 2018 Annual Meeting – In-Depth Notes

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Berkshire Hathaway annual meeting meeting notes via Adam Blum – see below for an excerpt followed by the full PDF of text

Adam Blum’s notes from 2018 Berkshire Hathaway annual meeting

May 5, 2018


Friends, Here are my notes from this year’s Berkshire Hathaway annual meeting held in Omaha on May 5th, 2018. Thanks, Adam [email protected]


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Q7 –Wells Fargo scandal and analogy of when it’s better to change vessels than to patch leaks

“Wells Fargo proved the efficacy of incentives and had the wrong incentives, but the much greater error was ignoring the fact that they had a faulty incentive system. The cardinal sin at Berkshire is not doing something about it once you know. We can’t have 387,000 employees and think everyone is behaving like Ben Franklin. Clearly, we don’t want to incent anything bad, and when we find what’s going on, we have to do something about it, and that’s the key. Wells Fargo and Salomon didn’t do it. It happened with Amex in 1964 and the same with half of Geico for $40 million, because someone didn’t have enough reserves in the 1970s. The motive was to please Wall Street. Both companies emerged and came out incredibly stronger. So many investments have come from this. All the big banks have had troubles, and I see no reason why Wells Fargo, from an investment or moral standpoint, is inferior. They made a big mistake, and it cost them. I like it as investment, and I like [CEO] Tim Sloan. Charlie always says, ‘an ounce of prevention is not worth pound of cure, it is worth a ton of cure.’ We attack problems especially when everything is going fine. Charlie: “Wells Fargo will be better going forward. Harvey Weinstein has done a lot for improving behavior too. It was clearly an error, and they’re acutely aware and embarrassed and don’t want to have it happen again. They’re likely to behave the best of all the banks in the future.” Warren: “Look at that 1942 newspaper’s classifieds with the help wanted separated between male female sections. People make mistakes. They do a lot of dumb things in this world. Geico was a lot more stupid than Wells Fargo and had the world by the tail, and now Geico has 13% market share. With Amex they asked the auditor at the annual meeting, ‘how much did we pay you, and how much extra would it have been to go over to Bayonne to check how much oil was in the tanks?’ There was a tiny operations guy calling in saying something was going on, and they didn’t want to hear of it, but what emerged was a great company. You will get bad news, and what’s important is to do something about it. Charlie has performed a lot of services for us related to this that you don’t know about.”

Q8 – On bailout deals in 2008 and possibility of doing more in the future

“We did get from Goldman, GE and BofA high rates on preferred shares. We could be extracted better terms, but that might’ve been counterproductive. If we really waited until panic developed further a few months later, maybe. We didn’t want to do something that looked so high it'd be disadvantageous to Goldman or GE. They were going to take the terms offered, as no one else was around. We’re actually working on something like this right now that probably won’t happen that’s a little smaller that came from Todd, and the other party doesn’t care that they’re talking to Todd and not Warren. Ted and Todd think just as well as I do. There’ll be times when phone will ring a lot, and people won’t hang up because I don’t answer. It’ll be harder to do deals like this in future, because our sums are larger, and some of these are once in fifty years events. But there’s no difference that it comes through Todd or Ted and not me. I like to think I will be missed a little bit though.”

Q9 - Still involved in pricing decisions at See’s and Buffalo News?

“I was at one time. It’s been a long time since then, and I can’t tell you the per pound price of candy, because people in this group send me lots of free candy. The only thing is Ajit and I talk frequently on very big risk coverages. We each decide on a price in our heads and compare notes. You can’t look up the risk in a book and see actuarially the what parameters will be in big, oddball situations, so Ajit and I do this and have been for three decades, and that is part of the fun. So you gotta go to Charlie if you want to complain about candy prices. Charlie: “That’s because Ajit likes it that way. It largely depends on what they [managers] want and not what Warren wants. It’s very peculiar for a company.” Warren: “There’s a CEO of one of our businesses – I’ve talked to him three times in the last the years, and he does remarkably well and may be better off having not talked to me. But on the other hand, I talk to Ajit frequently. Some stuff we talk about you can’t look up in book. Actuarial talent is less important than judgment in these cases.”

Q10 – An accountant asks about why they’re upset with new mark-to-market rules for income statement

“The market value of our securities is now being reflected each period on our income statement. This is inconsistent. This $170 billion of partly owned companies we intend to own for decades and expect to grow and mark its value changes already on our balance sheet. Is it fair to change to force the value changes to flow through on the income statement when all our private company holdings aren’t accounted for this way? That would become an appraisal process. To run through an income account and mark our 60 private businesses to market would not show meaning in terms of net income being a real indicator of what was produced in that period and would be a great disservice. It’s fine for marketable securities on the balance sheet, but the income statement creates major issues. If we were to sell half of BNSF, we’d receive more than what we carry the entire investment at. If we had to appraise it every three months, it would lead to manipulation.” Charlie: “A change in valuation always goes into net worth figures on the balance sheet already, and the questioner doesn’t understand his own profession.” Warren: “He’s not supposed to talk that way, but sometimes it comes out.”

Q11 – Grocery margins

“They’re squeezed and very narrow (1% pretax and now less). And payment terms are also squeezed. The declines are greater than we thought. There’s great temptation when employing so many and when you have so many distribution facilities already in the ground to meet irrational competition challenges, and that’s capitalism. We will do our best to get margins up at McLane, but your guess is as good or better than mine in five years. They do $40-some billion, and it’s a very essential service.” Charlie: “I think you’ve described it very well.”

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Adam Blum notes from 2018 Berkshire Hathaway annual meeting - May 5, 2018

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