Christopher Edmonds and Robert Hagstrom chatted on Yahoo! on Tuesday, May 2. As with all chats, this transcript is unedited.

laura_the_street:

We are ready to start, we've got

TSC

Contributing Editor

Chris Edmonds

and Buffet Watcher

Robert Hagstrom

.

laura_the_street:

They are here to discuss the latest from this years Berkshire Hathaway meeting

chris_edmonds_tsc:

Welcome to all -- Robert Hagstrom is one of the premier authorities on Buffett. He has written two books,

The Warren Buffett Way

and

The Warren Buffett Portfolio

.

chris_edmonds_tsc:

It's great to have him back for a second year to discuss the happenings at this weekend Capitalist Woodstock, the Berkshire Hathaway annual meeting. Welcome Robert.

rob_hagstrom:

Good afternoon everyone. It's great to be back for another and I look forward to our conversation.

chris_edmonds_tsc:

This weekend was an interesting meeting -- you can read all about it on TheStreeet.com, -- Buffett didn't have a great year in 1999 - his stock down over 45% at one point -- Lets hear your thoughts.

JenniferCleon asks:

What do you think about the Mutual Series Group of Funds?

rob_hagstrom:

I don't have a lot of experience with mutual series funds. Although Michael Price had a good record over time. I know David Winters and I'm impressed by his abilities. My guess is mutual shareholders have a good chance going in.

chris_edmonds_tsc:

As buffett's sidekick, Charlie Munger would say, Nothing to Add! Next. . .

Scarlett_Oharaa asks:

What does he recommend now?

chris_edmonds_tsc:

He is very concerned about the speculative nature of the markets. He says the next ten or fifteen years will be difficult for investors. Berkshire is looking to buy more businesses outright than invest in pieces through the market.

rob_hagstrom:

It has always been Warren's preference to buy whole businesses because he can allocate the capital so we shouldn't be surprised because this has always been his primary strategy.

chris_edmonds_tsc:

You have to remember that Berkshire, over the past ten years, has become more of a group of operating companies than a portfolio of Warren's best stock picks. Many people say Berkshire is really an insurance company first, and Warren portfolio second.

fensterdm asks:

Do you see the heavy downturn today as being from people loading up prior to the meeting, expecting Buffett to be more positive about the market?

rob_hagstrom:

The trading volume in the past 2 days has been light. My guess is that there has been some marginal selling but no new buyers. I think the overall tone of the Berkshire meeting was not to inspire immediate buying.

chris_edmonds_tsc:

It is interesting, however, that the stock is down when it usually moves upward after the meeting. That can't be a real positive for the short-term performance of the stock.

gogoGurrrl asks:

Rob... were you at the meeting? If so, your thoughts, any at all?

chris_edmonds_tsc:

Read our thoughts on TheStreet.com. Bob, what do you think?

rob_hagstrom:

I thought the meeting was very good. But there were no insights as to what the strategies were for Berkshire. So I guess we'll have to wait to see what Warren will do.

chris_edmonds_tsc:

I was most surprised that the questions from shareholders, some of which have possibly lost money in the market, weren't a bit more difficult.

blue_boar asks:

Does he see a correlation between this market and the market back in the 70's?

rob_hagstrom:

I don't see an economic correlation between the 2 markets, but some have said there is a Psychological correlation.

chris_edmonds_tsc:

Both Buffett and Munger say that the speculation in this market is higher than it has ever been - including the early part of this century, let alone the 70s.

chris_edmonds_tsc:

Munger seems especially concerned. However, they don't know when it will come to an end. Lots of liquidity and too many players chasing money!

eggerton_2000 asks:

Mr. Hagstrom, which of Buffett's recent purchases looks better to you: JNY or LIZ?

rob_hagstrom:

We've only taken a passing look at the investments and as yet have no opinion one way or the other.

chris_edmonds_tsc:

Apparel Companies -- how boring! I guess Buffett is right though, everyone wears clothes!

keller_ratte asks:

But when, in Warren's opinion, might that all end? 1990 there was a lot of liquidity in Japan as well. And it disappeared in a day.

rob_hagstrom:

Throughout history there have been cycles that on the surface appear similar in nature. Whether it is war, revolution, depressions, or boom & busts in the market. But in each cycle there is a contingency dilemma that makes each cycle outcome different. It would be narrow minded to assume that even though they look similar that they will end in the same fashion.

chris_edmonds_tsc:

He says he doesn't know when it will end. He just knows the level of speculation is so high that when it does end it could be ugly and painful. The real question here is: is this time different: some of us think it is very different, Buffett and Munger do not. At some point, we will find out who is right. That is what makes this game so interesting.

blue_boar asks:

I recall reading that Warren returned money to investors when he couldn't find any real value. Is he considering more investments in Bonds?

rob_hagstrom:

6% bond investment long-term bond investment is in my opinion is a below avg. return than we could expect to receive in the stock market over the next 5-10 yrs. My guess is a bond investment is a short term move.

chris_edmonds_tsc:

Bonds, REITs, and even Jones New York don't get him anywhere near his 15% bogey. Unless, of course, you think he is changing that tone by saying his goal is now simply to outperform the S&P in a modest way. He's got to look at equities and solid, growing operating companies if he wants to meet his own goals.

rbennema asks:

Any views on statements in the press that Buffett appeals mainly to elderly loyal investments and that his approach is out of touch with the line of thinking of the younger generation?

rob_hagstrom:

I have stated earlier that it is critically important that Buffet's methods meet a new generation of investors, who must be in place be buyers of the stock that will ultimately come available as estate-settle and charitable foundation sell to meet income needs.

rob_hagstrom:

However, in reading Janet Lowe's book on Ben Graham I am reminded that Graham's popularity rose and fell based upon how easy it was to make money in the market. When making money was easy nobody needed Graham. When investing was difficult they need his advice. Perhaps the same will happen with Buffet.

chris_edmonds_tsc:

Buffett says he wants shareholders that will own his stock until they die. That kind of loyalty is hard to find in today's day-trading generation, especially when you don't provide the returns that many of the core mutual funds provide.

chris_edmonds_tsc:

Buffett's principles are timeless, his implementation of those principles needs to be updated and restated for the next generation of investors.

laura_the_street:

Does Buffet think that the Net stocks are overvalued? Is that why he won't invest in them?

chris_edmonds_tsc:

He says (a) he doesn't understand them, e.g. where they will be in ten years and (b) they are way, way too expensive. That is his discipline and he is sticking to it. That is something you can admire. However, it is also something you have to understand. While the risk profile is lowered, the return profile is significantly lowered as well.

chris_edmonds_tsc:

He said Saturday his unwavering litmus test for a company is whether he and Charlie have a reasonably good idea of where a company will be in ten years from a biz perspective and a financial perspective. If they don't, they won't invest.

chris_edmonds_tsc:

That's not to say Buffett doesn't understand the impact of the internet and tech on his companies, it's just to say he doesn't understand - enough to give him a competitive advantage - which of these companies will be survivors.

antoniomelo asks:

What is Mr. Buffett's objectives with furniture companies?

rob_hagstrom:

To generate cash.

chris_edmonds_tsc:

Good discounts on Lazy Boys!

blue_boar asks:

Mr. Hagstrom, are you still with Lloyd, Leith & Sawin?

rob_hagstrom:

No. I'm the portfolio manager for Lagg Mason Focus Trust.

chris_edmonds_tsc:

Which holds a position Berkshire Hathaway, as well as AOL.

gogoGurrrl asks:

Rob, what do you think he needs to do to appeal to new investors???

rob_hagstrom:

I think to appeal to new shareholders will occur if he demonstrated a willingness to think hard about the ways Berkshire can generate above avg. returns despite slightly higher economic risk.eggerton_2000 asks: Mr. Hagstrom, are you still excited about the future of Speedway Motorsports? How does this stock tie into your knowledge of Buffett?

rob_hagstrom:

We own 5% of our fund in International Speedway Corp. And we are very bullish on the future of N.A.S.C.A.R. The tenants outlined in the Buffett way fit perfectly over the business and management of International Speedway.

chris_edmonds_tsc:

Speaking of which, time for a commercial. If you want to read two books to understand Buffett check out both of Robert's Books, "The Warren Buffett Way" and, more recently, "The Warren Buffett Portfolio." Absolutely great reads -- it's how I built my knowledge of Buffett.

gogoGurrrl asks:

What about a stock split....wouldn't that bring an audience to the stock that can't participate at the 50 or 60 thousand level???

rob_hagstrom:

I think a stock split on the B shares would greatly increase the interest on other shareholders, especially institutional shareholders. Whether you think it's practical to buy 10 shares in a $2000 stock or 1000 of a $20 stock, the lower price might attract new shareholders.

chris_edmonds_tsc:

Couldn't say it any better. However, that won't happen. Not Buffett's way of operating. He thinks the price as it is brings out the type of shareholders he wants.

rob_hagstrom:

If Berkshire is ever going to trade in S&P 500, it will certainly help to sell more shares at lower which will increase the liquidity.

cdr129 asks:

Has Berkshire allocated enough reserves to cover the potential workman's comp. reinsurance exposure at General Re? Forbes suggested there was some possible ugly downside there.

rob_hagstrom:

Berkshire has overcapitalized and appropriately reserved for the losses.

chris_edmonds_tsc:

Other than the performance of Coke and Gillette last year -- that is what killed the stock.

william_the_mind asks:

How about the automotive parts sector like Federal-Mogul? A lot of these companies' stocks have tanked.

rob_hagstrom:

My guess is that these companies do not meet the economic task of high return on capital and cash generating ability that interest Buffett.

gogoGurrrl asks:

Do you think he'll take some of his companies public again in the future?

rob_hagstrom:

No, because he much prefers to control them all rather than share them. It would, also, break the covenant he has with the companies he's sold to Berkshire.

chris_edmonds_tsc:

Agreed - he is likely to take more companies under his wing rather than letting some fly free again.

rob_hagstrom:

¿ never to sell them again.

rob_hagstrom:

Thanks everybody, I had a great time answering your questions and look forward to more in the future.

chris_edmonds_tsc:

Thanks Robert -- you have been great.

chris_edmonds_tsc:

For all of you out there, thank you for being here. Warren Buffett is the greatest investor of the last half of the last century. Will he keep that title going forward -- time will tell. But TSC will be with you all the way to let you know his every move and look inside of what he does and doesn't do -- to help you understand the Oracle of Omaha.

chris_edmonds_tsc:

Thanks for being here and I'll see you at TheStreet.com.

chris_edmonds_tsc:

Thanks to Laura and Stephen for all their help. We'll see you here again soon.

chris_edmonds_tsc:

Happy investing!