This column originally appeared on Real Money Pro at 11:26 a.m. EDT on May 7.NEW YORK ( Real Money) -- This morning's opening missive reviews the six questions that I presented to Charlie Munger and Warren Buffett at Berkshire Hathaway's ( BRK.A)/ ( BRK.B) annual shareholders meeting. I also have included their responses to my questions as well as six alternate questions that I was prepared to ask in the event that someone asked one of my primary questions ahead of me. Going into the meeting, there were a number of subjects that I thought warranted discussion. (I have a bunch of additional questions not mentioned today, so I hope Warren invites me back next year!) It was important for me to balance my hard-hitting and pointed questions with a courteous and respectful delivery, considering the extraordinary accomplishments of the men that I was addressing and the unique invitation to a short seller who was negative on their company. Initially, each of my original six questions was far too lengthy (500-1,000 words). Given the setting and Warren's crafty ways of answering questions, my mission was to condense each into a tightly worded question. That process took a surprisingly long time. Let's start with the six questions I asked on Saturday. (I have marked with an asterisk the six primary questions that I had planned to ask. Three of my top six questions were previously asked so I used three of the alternate questions.) 1. Size matters: Berkshire's growth strategy -- chasing elephants instead of gazelles?* 2. The Buffett factor: What happens when Warren has left us? 3. Does a Berkshire breakup make sense?* 4. Has Warren's investment process become less intense over time? 5. A short-selling challenge* 6. Is Howard Buffett qualified to be nonexecutive chairman? I started by thanking Charlie and Warren for the invitation and told them that I was honored. Then I said that I looked forward to playing the role of " Daniel in the lion's den" in front of over 30,000 of his closest friends and greatest admirers. (That got a cheer!
Question No. 1 -- Size MattersQ: As it is said, Warren, "Size matters!" In the past, Berkshire bought cheap or wholesale -- for instance, Geico, MidAmerican Energy, the initial Coca-Cola ( KO) purchase and Benjamin Moore. Arguably, your company has shifted to becoming a buyer of pricier and more mature businesses -- for instance, IBM ( IBM), Burlington Northern Santa Fe, Heinz ( HNZ) and Lubrizol, which were done at prices to sales, earnings and book value multiples well above the prior acquisitions and after the stock prices rose.
Question No. 2 -- The Buffett Factor"Warren," I said. "Doug," he responded. "Warren," I remarked again. "Doug," he repeated. And I felt that this exchange set the stage for a more relaxing repartee between us over the balance of the day. Q: Much of Berkshire's returns over the past decade have been based on your reputation and your ability to extract remarkable deals from companies in duress as compared to the past when you conducted yourself more as a value investor, digging and conducting extensive analysis. What gives you confidence that your successors' imprimatur will be as valuable to Berkshire as yours has been? A: Warren responded by saying that when he is gone, Berkshire will remain the investor of last resort -- the company will remain the refuge for distressed companies, as Berkshire will possess large amounts of capital and will be positioned to react quickly. "They will call Berkshire. And Berkshire's reputation will become only more solidified for providing capital in sound deals, when other people are frozen. When it happens when I'm not around, it will become more tied to the Berkshire brand." Charlie agreed.
Question No. 3 -- Does a Berkshire Breakup Make Sense?I started by saying, "When you are gone, and we hope that's not for a long time." To which Warren quipped, "No one more than I!" I then prefaced the question by saying that in response to a previous question, Buffett suggested that, in time, Berkshire might be more centralized in terms of management strategy. Q: Warren, in the past, you have demonstrated a great respect for Dr. Henry Singleton, the founder and long-time CEO of the diversified conglomerate Teledyne ( TDY). You have written about Singleton: "Henry is a manager that all investors, CEOs, would-be CEOs and MBA students should study. In the end, he was 100% rational, and there are very few CEOs about whom I can make that statement." You have publicly stated that Singleton had the best operating and capital deployment record in American business. Prior to his death, he broke up Teledyne into three companies. Dr. Singleton told our mutual friend Lee Cooperman that he did it for a couple of reasons. There is one reason in particular I want to ask you about. According to Singleton, Teledyne was hard to manage for one CEO. What would you say about the Berkshire situation, given your company's greater complexity and the recent management issues over the past several years? And what is the advisability of restructuring Berkshire into separately traded companies organized along business lines? A: Both Charlie and Warren spent some time responding to both the history of Teledyne, Singleton's role and Berkshire's structure. Buffett underscored his confidence in his current management team at the divisional levels. "Breaking Berkshire into several companies," he said, "I am convinced would produce poorer results."
Question No. 4 -- Has Your Investment Process Become Less Intense?Q: Mae West once said, "The score never interested me, only the game." Are you at that point now where the game interests you more than the score? But before you answer, let me explain why I asked. In the past, your research has been all-encompassing, whether measured in time devoted to selecting investments and acquisitions or in the intensity of analysis.
Question No. 5 -- A Short-Selling ChallengeQ: Warren, I am asking this next question because in the past you have been open to inviting your audience to apply for jobs. In 2002, you suggested that shareholders (who thought they were eligible) send in their qualifications if they were interested in seeking a seat on your Board, and, again, in your 2006 letter, you advertised for a successor to Lou Simpson (former portfolio manager for Geico who retired in 2010). "Send me your resume," you said at the time. In the past, you have discussed your views of short selling. You have cited that stocks tend to rise over time, and you have expressed concerns regarding the asymmetry of reward vs. risk. By contrast, the last 15 years has demonstrated that short selling can be value-additive when done by professionals -- for example, I believe Todd Combs had success as a short-seller before you hired him.
Question No. 6 -- Is Howard Buffett Qualified to be Berkshire's Nonexecutive ChairmanQ: Warren, like you, I have two sons that I love. Like you, I have a son in the audience. This question is not meant to be disrespectful, but it is a question that I believe should be asked. Someday your son will be Berkshire's nonexecutive chairman. Berkshire is a complex business, growing more complex as the years pass. Howard has never run a diversified business nor is he an expert in enterprise risk management.
Below is a list of the six unasked questions. (Again, I have marked with an asterisk the six primary questions that I had planned to ask. Three of my top six questions were previously asked, so I used three of the alternate questions.) 1. Is Berkshire too big to outperform?* 2. Are some of Berkshire's bank moats damaged or disappearing?* 3. Is the stock market overvalued by your metrics?* 4. Missed deals? 5. Regrets? 6. Is your optimism justified?