Joseph Lee's Perspectives
My view of the world
May 5, 2009 - Warren Buffet and the Berkshire Hathaway Shareholder Meeting

On May 2nd, the world gathered in Omaha, and listened.  They tried to parse the future from his words.  They wondered if this was the most optimistic that Charlie’s ever been.  Some have hailed that the new format was much more focused and gave the audience a better chance to understand the mind behind Warren Buffet.

 Two days later, the market reacted with the Dow posting a 200+ point advance.   And since Warren doesn’t really care about the market, let’s just say that the reviews have been uniformly—cautiously optimistic.

 This year, I was in Omaha with 7 students and recent graduates from the Peter F. Drucker and Masatoshi Ito Graduate School of Management, the Keck Graduate Institute (both in Claremont) and Pepperdine’s Graziadio School of Management.  I teach as an Adjunct Professor at Drucker and Graziadio and it was a delight to be joined by a group of delightful, energetic, and bright leaders of our future.

 I’ll try to avoid the usual reporting.  You can read from media reports what was said during the meeting.

 These are some of the my takeaways:

·         As always, Warren was tough on the corporate board and arcane regulations.

·         On Corporate Governance Matters:

o   On executive compensation—compensation committees are often useless, simply getting consultants to provide market data and always looking at the top quadrant for comparison.  Does anybody not know that half the population has to fall in the bottom 50%? (I agree—you can buy data to prove any point you want)

o   On indepencence –those whose livelihood depends on their director compensation can never be independent because they don’t want to get fired; how can they rat out their CEO friends? (I don’t buy really buy this, since this will only leave the Buffet’s of the world to be directors)

o   From Charlie Munger, the accounting profession and rule-setters should be ashamed of themselves for creating accounting rules that will incent executives to post sham profits, rather than operate responsibly.  He was referring to the run-up of financial institution profits through bogus transactions involving derivatives.  (I was disappointed that the two of them were not asked more questions about the role of public accountants and the future role of the Big 4 accountants)

·         General Economy

o   On the activity of the Federal Government—I don’t think he was as supportive of the Obama Administration as the media reported.  He basically said that all people make mistakes when there is so much to do, and we cannot expect perfection during these times.  However, he liked the general approach that the administration was taking, but that also includes the previous administration’s bail-out last October which he believes saved the country from a monumental collapse.  He did say that we’ll need to worry about inflation at some point, but not now. (I sense he tried not to sound like a cheerleader, but since most people believe his ideas somehow end up being heard by the Obama administration, he tried to stay in his own non-political world.)

o   On the tax-payer bailout of AIG and automotives – He said that we really aren’t using taxpayer money.  You and I haven’t had a decent tax increase in years, he said.  Instead the money to bailout all these companies is through borrowing, so the only people who really should complain about the auto bailouts and the AIG bonuses are the Chinese.  They’re the ones who are paying for a large share through their acquisition of US Treasury notes.  (Another question about the value of the US$ came up—there’s no getting around it; as long as China keeps exporting to the US and gets paid in dollars, it will see the purchasing power of its dollar holdings diminish over the years)

o   On the housing market – he estimates that there are 1.5 million unsold homes in the market.  Household creation in the US is about 1.3 million per year.  In the past, housing starts exceeded 2 million for the 1.3 million new households, so that will create a glut.  Now, the construction pace is down to 500,000 a year.  So the only way to get rid of the oversupply is either to blow up the houses, make fewer, or increase household generation But with the reduced pace, the current supply will be reduced, and there will be peace in the housing market. (remember my blog on the GBR from a few weeks ago about Why Real Estate Matters?  Maybe he read that).    

·         On Financial Literacy and Education

o   On Financial literacy—one of the first questions was about financial literacy of the future generations.  Warren said that it’s a problem with the current generation.  He also ripped financial engineering programs of the MBA schools for churning out people with Higher Math Skills that couldn’t be used.  He said that if you have 150 IQ, you should sell 30 of that.  The problem with smart people is that they try to use it, and business doesn’t require all that much smarts.  (I agree and disagree—Warren can say whatever he wants because he probably has a 150+ IQ. )

o   On MBA schools—all they need to teach is that a bird in one hand is worth two in a bush, but that’ll only take 5 minutes and MBA programs can’t charge tuition for that, so they teach all sorts of stuff that has nothing to do with business.  (He’s got a point, but he seems to go against his better advice—don’t try to show up other people. )  He and Charlie used the words “false precision” to describe financial models that are used to price derivatives and securities.   “If we need a spread sheet to calculate the value, we won’t invest, because it’s not that complicated to get the value of a business.”  (Buffet is famous for not using accountants or consultants to help him value companies—he needs to see that much margin of error in his valuation to go forward with the deal.)

o   On a further attack on the financial theorists from the Efficient Market Hypothesis school (University of Chicago—that’s my alma mater), he claims how stupid a logic it is that the price of a security is always correct, that it always incorporates all the information (this is the foundation of modern finance).  He’s a big value investing proponent.  He thinks that students really only need to know 2 things—how to value a business and a good understanding of the market.  I wasn’t sure if he meant the capital market or the market in which the business competes.  (This one’s a bit harder to take for people who’ve studied finance all their lives.  I’m waiting for University of Chicago—or Booth, as it likes to call itself these days—respond to Warren Buffet. )

·         On Management

o   On investing in simple business models—someone asked that Berkshire Hathaway itself is a conglomerate of so many different companies that it can’t possibly have the simple business model that Buffet so ardently advocates.  He responds by saying that he model is simple—we’re a collection of private businesses.  He wants CEO’s to make decisions as if they own 100% of the company.  Operate the business like you own it.  (I do have a sense that Warren may be a better investor than a manager.  He’s a great leader, but not in the sense that people can emulate his management style.  His style may work because he’s one of the richest guys in the world, and because he’s a genius.  He is such a great teacher, though.  His ability to take complex issues and make average Joe understand them is pretty amazing.  I think he’s the Bill Clinton of business.)

o   Related the executive compensation question, I heard him use the phrase “everyone else doing it is not an acceptable business strategy”.  He may have been referring to how executive compensation is based on benchmark studies of other firms.   This reminds me of some of the stuff we do in consulting.   Benchmarking and Best Practices are exactly exercises in justifying to yourself and your boss that you can copy others, but better.  (this is another indictment of the consulting industry and managers who follow, and not lead.  It is the “I chose IBM for the IT project, so even if they screw up, don’t fire me” argument.)

·         On Berkshire

o   Succession—the same story about 3 inside candidates for the CEO job and 4 inside and outside candidates for the Chief Investment Officer Job.   I’m not sure he shed new light on the topic.  He and Charlie are still enjoying their duties, so unless the Swine Flu turns deadly and toward Omaha, we should figure they’ll be around for a bit.  No matter what assurance he gives, Berkshire Hathaway is always going to be deemed Warren Buffet & Co—much more than GE was Jack Welch & Co.   And as talented as Jeff Immelt was and is, look what kind of challenges he faced.  He did not want to announce the new CEO and go through a transition because he thought the best way to prepare was to run a business, like all the current internal candidates are currently doing—running successful BRK businesses.  “I don’t think watching me read the NY Times is a good way to train my successor.”

o   BYD –The Chinese investment surprised some as speculative, but he first said this was Charlie’s deal, since Munger was very excited about this company.  In fact, Charlie was in love with not only the company, but also the Chinese.  CM was known to have compared running the business like an engineer would run it—have a margin of safety.  Thus, it’s not surprising that he loves BYD which hires 17,000 of the brightest engineers in China.  “Never bet against the best 17,000 engineers in China.”

o   On derivatives and insurance—this was complicated.  Read someone else’s article.  He basically said, “Don’t worry, we’re covered, and we’re in better shape than we are a few months ago.”  Somehow, I believe him.

 After the event, I met up with the 7 students at the Nebraska Furniture Mart for the Western Cookout.  It was a gorgeous day, the food and Coke (in a metal bottle!) were cheap, and we stayed for a few hours.  It was the first time many of the Pepperdine and Drucker students had met, and they immediately connected.   They were all uniformly impressed with Warren and Charlie.   A few mentioned this was the best event they’d ever attended in terms of the learning and the people that they’d met.

 The following morning, we gathered at Borsheim’s Jewelry store, another BRK company.  Some were tempted to spend their life time savings at the store, while others just wandered around.  Warren Buffet and Bill Gates were featured players in the bridge game at the small mall housing Borsheim’s.   A crowd formed, and it was quite an experience, standing so close to the two wealthiest men in the world, under the same roof, watching them play bridge with “average” folks (although BRK shareholders may not represent average folks.)

It was a celebration of American capitalism, good old fashioned fun, and unparalleled business knowledge and wisdom.  It was a gathering of people from around the world who would take away unforgettable memories of friends, old and new, and of the man they all love to call “The Oracle of Omaha.”

2009-05-05 08:37:28 GMT
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