OMAHA, Neb. -- With an audience of over 12,000 shareholders hanging on his every word, the Oracle of Omaha held court today at the Berkshire Hathaway (BRK.A) - Get Berkshire Hathaway Inc. Class A Report annual meeting in this Midwestern city.
Along with Berkshire Vice Chairman Charlie Munger, Warren Buffett accepted accolades and fielded shareholder questions from those who traveled from as far away as India and Austria. The crowd, the largest in at least four years, roamed the Omaha Civic Auditorium not only hoping to get a glimpse, handshake and even a picture with Buffett, but also for the opportunity to purchase a plethora of Berkshire goods, from Justin Boots and Kirby vacuums to See's Candy and World Book Encyclopedia, not to mention a host of insurance products.
The questions -- during the nearly six-hour Q&A session -- ranged from queries about Berkshire operating businesses and Buffett's outlook to more general inquiries regarding the duo's view on derivatives and how investors should define success. And, of course, there were plenty of Munger -- and Buffett -- one-liners to keep the crowd laughing.
Although Buffett is loath to comment on the equity markets, he did hint that current equity prices certainly aren't cheap. More importantly, he thinks returns on equity investments are likely to simply mirror the economy in the coming years. With Buffett expecting gross domestic product and inflation to post only low single-digit growth, stocks are likely to post similar gains, maybe 6-7% including common dividends.
"That math isn't bad, but it is bad for people who expected long-term returns based on looking in the rear-view mirror," Buffett said.
Moreover, Munger doesn't think that double-digit will return anytime soon, perhaps not in his lifetime. "Is it likely there will be periods like 1973-74 or 1982 where equity values are mouthwatering," Munger rhetorically asked and quickly answered. "I think there is a very good chance neither Warren nor I will live to see an opportunity like that again."
Buffett also said that the high-yield, or junk, bond market, which he thought was undervalued in 2002, is no longer a bargain, at the same time warning investors that they shouldn't base current investment decisions on what Berkshire did last year. We're "not finding
value in junk bonds this year because prices have changed dramatically," Buffett said.
Berkshire's purchase of
in March 2000 has quickly become one of the company's most significant assets and a number of shareholders asked questions about the business to Buffett, who responded by noting the magnitude of the business in relation to Berkshire.
"MidAmerican already is a big part of picture and I would say it is likely to become much bigger," Buffett said. "It will be much easier to become bigger if PUHCA
Public Utility Holding Company Act is repealed," referring to the 1935 Act that prohibits the ownership of multiple utility assets by holding companies.
But Buffett isn't content to sit around and wait for Congress. "I would say it is certain we will look at a few big deals this year, whether we get one done I don't know," Buffett said.
And the size of the deals is likely to be very large. "These are not lemonade stands," Buffett said. "We are talking in the billions."
The assets could be in a variety of businesses, with Buffett suggesting there is "no clear preference" whether they expand MidAmerican's pipeline or electric utility holdings. And geography won't be a limiting factor. "It could be a domestic utility or a country we would feel good about," he said.
The rhetoric, at least, suggests that while insurance remains Berkshire's primary business, energy isn't far behind. "We love the idea of pouring money behind
MidAmerican and you will see something happen," Buffett quipped.
Munger seemed to agree. "We will be very disappointed if there aren't more opportunities."
Buffett tried to downplay the recent disclosure that Berkshire has a stake in
, a large oil and natural gas exploration and production company controlled by the Chinese government.
Berkshire owns 13% of the public shares of the company. However, 90% of the company is controlled by the Chinese government. "We think we can understand something like the oil business in China," Buffett said. But, "it's not a big deal. It became reportable because of this peculiarity in the law. The Chinese government is firmly in control of Petro China."
Of course, always the opportunist, Buffett noted the possibilities. "If we vote with the Chinese government we will both control Petro China."
After this year's annual report, Buffett's views on derivatives are well known. However, he extended his comments to provide some context to his admonition. "Charlie and I think there is a low but not insignificant probability that at some time -- maybe three, five, or 20 years
from today -- that derivatives could accentuate a systemic problem that might arise from some other phenomenon," Buffett warned. "We think that is inadequately recognized and the problem grows as derivatives become more complex and are increasingly used. It was a call to the financial world that they could become troublesome."
Supporting his claim, Buffett cited the near-miss with Long Term Capital Management and, more recently, the implosion in the energy trading and marketing business. "We saw in the energy industry that
derivatives almost destroyed or did destroy certain entities that should not have been destroyed," he said.
Munger was even more indignant when it came to derivatives and the related accounting gimmicks. "In the financial world of derivatives it's as though nobody gave a damn about safety," Munger admonished. "They just let it balloon and balloon and balloon. And that ballooning is aided by this false accounting. I regard that as very dangerous. And, I'm more negative than Warren in that I'll be amazed if I live five to 10 years if we don't have some significant blow up."
When Buffet was asked if he was predicting derivatives doom, he quipped, "It's not a prediction, it's a warning."
On Business Partners and Friendship
When asked about his long-time partner and Berkshire Vice Chairman Charlie Munger, Buffet was jovial, yet serious. "He is the best 30-second mind in the world," Buffett quipped. "He hasn't stopped me by saying 'stop.' He has simply stopped me by saying my reasoning is faulty and his is perfect."
The presence of Munger has made Buffett both a better an investor and helped him avoid countless mistakes. "If I call Charlie and describe a business situation I will get a better answer from him in 30 seconds than I could get from anybody in the world and better than any management consultant in a year," he said, also noting the special respect between the two partners. "It's the perfect partnership and we have never had an argument and we have known each other for 40-some years. We have had a disagreement but have never had an argument."
Buffetisms and Mungerquips
As with every Berkshire annual meeting, there were plenty of one-liners to keep the crowd laughing. Here's a sampling:
On analyst reports: "We never read analyst reports," said Buffett. "If I did it's because the funny papers weren't available."
Buffett on building reputation: "The way to get a reputation as a good businessman is to buy a good business."
On buying businesses, management and projections: "We do not spend any real amount of time talking to management when we look at buying a business," Buffett quipped. "We don't give a hoot about anybody's projections about what they are going to do in the future."
On excluding certain items from expenses: "Why not put all the expenses in the footnotes," Buffett said. "Just use sales and list the same number for net profit."
On accounting shenanigans: "If I don't understand it, it's probably because management doesn't want me to understand it," Buffett said. "And, if management doesn't want me to understand it, there is probably something wrong. In that case, it's just best to stay away."
Not to be outdone, Munger had several quips of his own.
On learning and knowledge: "The more basic knowledge you have, the less new knowledge you have to get."
On earnings before interest, taxes, depreciation and amortization (EBITDA): "I think you can make sense of EBITDA if everywhere you see it in a presentation you substitute
the words crazed bull--." (Rhymes with spit.)
And so ends another Berkshire Hathaway annual meeting. But shareholders needn't worry -- the Dairy Queen, World Book, GEICO and Pampered Chef exhibits will remain open until the last shareholder walks through the exit door.
The Berkshire bash continues this evening with a Western Barbeque at the Nebraska Furniture Mart complete with autographs from Warren and opportunities to purchase more Berkshire products. Tomorrow, shareholders will be treated to a brunch buffet at Borsheims and yet another temptation to purchase jewels from Berkshire's gem company. We'll have a complete wrap-up of the weekend's festivities on Monday as well as updates on the Columnist Conversation throughout the weekend.