University of Berkshire Hathaway: 30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting

by Daniel Pecaut

The Money Masters

include Sir John Templeton (of the Templeton Growth Fund),(3) George Michaelis of Source Capital (a top-performing closed-end fund), Jean-Marie Eveillard (who ran what is now the First Eagle Global Fund), Bob Rodriguez (of First Pacific

Advisors), and Marty Whitman (of Third Avenue Value Investors). These experts would all offer tremendous insight and direction.

When the letter came for the offer, however, it was less than the agreed-on amount—but only by pennies. Nevertheless, their dishonesty upset Buffett. They were trying to chisel him out of 12.5 cents per share. So Buffett went the other way and started buying increasingly more shares of Berkshire until he took control. He then booted

out the guy who had tried to chisel him out.

This reserve (the “float”) earns money for Berkshire,

Few investors understand that float is one of the secrets to Berkshire’s success.

Those two pieces—the insurance company as a platform and high-quality brands as cash generators—built the base for the wealth-compounding machine that is Berkshire Hathaway.

The public has long viewed Berkshire as a sort of mutual fund with large stock holdings. This view underestimates or ignores 1) Berkshire’s insurance companies’ impressive generation of low-cost float, 2) Berkshire’s impressive and growing stable of cash-generating operating businesses, and 3) Berkshire’s ability to orchestrate value-enhancing deals.

All told, Berkshire may have put $100 billion to work at double-digit rates of return during the subprime crisis.

Berkshire continues to represent

solid value, lower-than-average risk, and unparalleled quality.

Since Buffett took over Berkshire 52 years ago, its per-share book value has grown from $19 to $172,108. That’s a rate of 19.0% compounded annually.

This is the fruit of Buffett and Munger’s “Don’t lose” philosophy.

Ajit Jain, who is often talked about as being Buffett’s replacement now, invited

Also, one significant personal benefit of value investing is peace of mind. Many investors tough it out in the markets for years, living a life filled with anxiety and stress. They constantly fear that their investments will disappear overnight. On the other hand, great value investors, like Buffett and Munger, sleep like a baby—provided they follow simple timeless principles.

Graham’s books – Security Analysis (1934) and The Intelligent Investor (1949) – have become the bibles of value investing.

Rather, the gap should be dramatic so as to absorb the effects of miscalculation and worse-than-average luck.

As Buffett puts it, “When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it.” Over time, diversified portfolios of such stocks have provided superior returns with below-average risk.

These are powerful words for Buffett, a man much given to understatement and self-depreciation, so do not take them lightly. If Buffett is correct, long–term bonds and other investments vulnerable to inflation should be avoided.

George Michaelis of Source Capital, the top-performing closed-end fund over the last decade, April 28, Santa Monica, CA.

We hope it will make us better investors. At the very least, we will certainly have fewer excuses for our mistakes.

“ … occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

Templeton spoke of being humble as the gateway to understanding.

Munger noted that Tom Murphy, CEO of Capital Cities/ABC and considered by Buffett to be the best business

manager in the country, prays every day to be humble. And we found George Michaelis to be m...

Munger denied being humble (of course) but noted that the key to his and Buffett’s success has been that “we’ve had a very low opinion of our abilities.” He said that he’d rather be with a guy with an IQ of 130 who thinks it is 128 than a guy with an IQ of 190...

Munger added that the worst mistakes are made from the nicest graphs and what is really needed is “enlightened common sense.”

“When incredible rewards go to the casino operators, it is extremely unlikely that civilization has reached nirvana.”

Buffett: “Something that costs a penny, sells for a dollar and is habit forming.”

“Everyone talks about the big money made in real estate, but they forget to talk about the big money lost in real estate.”

“It’s hard enough to understand the culture you’ve been raised in, much less someone else’s.”

To illustrate the point, Buffett suggested that we imagine that the annual meeting was being held on a tour boat that was blown off course and wrecked on a deserted island. We might elect Buffett to be chairman of the island with a mandate to maximize life on the island. He would probably set half of the shareholders to work raising food, some to building shelter and an inventive few to creating tools and new technologies for the future. Now imagine that an IQ test was given so that Buffett could take 30 or 40 of the best and brightest, give them each a Quotron terminal and have them trade futures on the output of the food producers. It’s absurd, of course.

Buffett: “If I live X number of years, I’ll go through X number of recessions. But if I spent all my time guessing cycles, Berkshire Hathaway would be $15/share. You can’t dance in and out of businesses based on forecasts.”(20)

But the answer was not to get into the airline business, which is a terrible business. The answer was to get out of the passenger business altogether.

Buffett noted that the U.S. economic system is strong and can take a lot of abuse. He said that the difference between great economic policy and poor economic policy could be a difference of just 1% annually in the GNP. That is, the GNP might grow at (X-1%) instead of X% due to misguided policies.

Buffett sees the trade deficit as a far more serious problem than the federal budget deficit.

that he is a biography nut and heartily recommended biographies as a way to “make friends among the eminent dead.” Buffett quipped, “And they don’t talk back.”

He noted that Golden Arches and The Big Store offer great lessons on business.

Buffett said to determine the IBV of an asset, simply take the present value of the net cash flows from here to eternity, based on current bond rates.

Buffett noted that if he and Munger get a value of X to 3X for an asset, then they attempt to buy it at 1/2X.(22)

While Buffett prides himself on never adding the unneeded, Berkshire did purchase a corporate jet a few years ago. When asked about the “little bitty jet," Munger replied, “I am unfamiliar with this ridiculous extravagance.” Munger flies coach.

As Buffett summed up, “If investors only had to study the past, the richest people would be librarians.”

“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett

Advice to MBA Graduates Buffett: “Do what you enjoy the most. Work for people you admire. You can’t miss if you do that.”

What he finds objectionable is the large sums being paid for mediocre performance.

Buffett’s idea – one that he has publicly suggested at Salomon Brothers – is a non-executive chairman. Such a person could see to it that the CEO is properly evaluated and monitored.

Munger claimed that it is because professors are so enamored by modern portfolio theory. For the man with a

hammer, every problem looks like a nail.

Even Ben Graham succumbed to the seduction of making a market call, which illustrates just how difficult it is to focus on identifying great swimmers instead of predicting the current.