OMAHA, Neb. -- Speaking to more than 14,000 adoring fans who packed the Omaha Civic Auditorium to capacity Saturday morning, Warren Buffett was upbeat about this year's Berkshire Hathaway (BRK.A) annual meeting. "I feel great," Buffett said as he entered the civic center shortly after 7 a.m. to a spontaneous round of applause and cheers. "I can't recall having any more fun than I'm having now."Behind that grin is a track record that put a lid on critics who had questioned his ability to keep pace with the New Economy: Berkshire stock is up nearly 35% for the past two years, while the S&P 500 is down nearly 25% for the same period.
A Slight Change in TuneGiven Buffett's preferred stock-holding period of "forever," one shareholder wanted to know why Berkshire liquidated its McDonald's and Disney positions during recent years. "It is not our inclination to sell," Buffett said, noting he has never sold a share of Berkshire stock and has held steady positions of The Washington Post (WPO), Gillette (G - Get Report)and Coca-Cola (KO - Get Report) for more than a decade. "We would sell if we need money to buy something else. That hasn't been a problem in the last 15 years. I used to have more ideas than money. Now I have more money than ideas," he said, suggesting he still believes equity valuations are stretched. However, Buffett did acknowledge changing his sell discipline in recent years. "Now we sell when we are re-evaluating the economic characteristics of the business." Although not directly, Buffett hinted McDonald's and Disney lost their edge. "We had one view of the competitive characteristics of the company and that changed," he said. "It may mean we were wrong when we made the initial decision or it could mean we are wrong now. [But], we think the strengths have been eroded to some degree." As for equity valuations, Munger was more to the point: "A second worry is that common stocks could become so high-priced that if you bought index funds that you might not do so well," he quipped in response to a question about mutual funds. "I didn't think I would live long enough to see that happen, but I think that could happen now."
"People Have Misbehaved"As he did in his annual letter to shareholders this year, Buffett railed against corporate malfeasance. "It is history repeating itself, but I would say that Enron is a big scandal," Buffett said. "It is a big scandal and it has certain aspects to it that are a canary in a coal mine in terms of things that go on in accounting and things that have gone on in management. It's nothing good. People have misbehaved." Buffett has been outspoken about a wide range of corporate misdeeds but is focused on accounting manipulation as the root of the problem. "It isn't the norm but there were more [companies] that felt like fudging numbers in 1999 than in 1979." Buffett told the audience. "It became more acceptable. People you saw at the country club did it and institutional investors winked at it." He blames pressure to post ever-better earnings. "There are all kinds of ways to manipulate earnings just to paint a pretty picture," he quipped. The solution, he says, requires a wholesale change in attitude. "There has to be a change in the dynamic. Shareholders need to make themselves felt a little more," he said. "Wall Street is no filtering system. Wall Street loves [any company, problems or no] as long as they are pushing out securities."
Unusual RecessionStocks remain pricey and businesses weak, but Buffett said consumers are resilient. "The [American consumer] has been amazing too," Buffett said. "You've seen it in autos, you've seen it in homes. But the weakness in the business sector is very real too. It's an unusual recession." He said he is especially impressed with the strength in homebuilding. "There is no question [homebuilding] has been strong," he said. Several of Berkshire's acquisitions in recent years have been in the sector, from Shaw Industries, a carpet and flooring manufacturer, to Acme Bricks and Benjamin Moore paints. Berkshire has also acquired home furnishing companies to expand its long-time Nebraska Furniture Mart holding. Buffett said Berkshire's acquisitions were fortunate. "I don't make macro decisions about [businesses] and, anyway, we buy these businesses for 30 years so it isn't really important what they did in the first year. It's been nice to have, [but] it wasn't planned." Asked if he was nervous about the economy or housing, his response was direct. "Nothing makes me nervous. I feel very good about the American economy [and Berkshire] in the decades to come." And the source of his peace of mind? "$36 billion does calm the nerves," he quipped, referring to his personal net worth. Buffett, 71, also got a lift from the global cheerleaders attending this year's meeting. "We have shareholders here from China, from Australia, from Singapore, from all over the world. If somebody comes from that distance they are probably biased in our favor. But that's fine, I like it that way."
Coming next: The afternoon Q&A session plus more from Omaha in a dispatch later this afternoon. And, for RealMoney.com subscribers, real-time comments from Omaha as the meeting continues on the Columnist Conversation. (For Chris Edmonds' earlier missive from Omaha, click