Berkshire AGM transcribed: The one thing Warren Buffett worries most about

When you consume at least three books a day in a lifetime of 85 years, you tend to know a lot. But one thing that’s got Warren Buffett stumped is how to prevent terrorists from triggering a nuclear explosion – a disaster which he believes is not a matter of if, but when. He told shareholders at the 2016 Berkshire AGM that for over half a century he has been contributing to groups that are concerned with the danger. He went into detail why he feels this way during the AGM – other topics covered in this segment include the share buybacks and how the big economic picture should affect investment decisions. – Alec Hogg

Warren Buffett and Charlie Munger have some rather forthright views on corporate governance. We pick up here after the meeting returned from the lunch break when a shareholder asked what the duo expect from directors who serve on the board of Berkshire Hathaway….

WARREN BUFFETT: We want our directors to walk in the shoes of the shareholders. We want them to care a lot about the business and we want to be smart enough so that they know enough about business that they know what they should get involved in and what they shouldn’t get involved in. The people in the office… I’m hoping that when we take the Christmas picture again this year, they’re exactly the same 25 that were there last year, even though we might have added 30 000 employees elsewhere and maybe $10bn in sales or something like that.

It’s a remarkable group of people. Just take this meeting. Virtually every one of the 25 (our CFO, my assistant, and whomever) have been doing job after job, connected with making this meeting a success and a pleasant outing for our shareholders. It’s a cooperative effort. The idea that you would have some department, called ‘annual meeting department’… You’d have a person in charge of it and he or she would have system. They would go to various conferences about holding annual meetings. Then they’d hire consultants to come in and help.

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We just don’t operate that way. It’s a place where everybody helps each other. My job is extraordinarily easy. The people around me really make it easy and part of the reason it’s easy is because we don’t have any committees. Maybe we have some committee I don’t know about, but I’ve never been invited to any committees at Berkshire, let me put it that way. We may have a PowerPoint someplace – I haven’t seen it and I wouldn’t know how to use it anyway. We just don’t have “make work” activities. We might go to a baseball game together or something like that. I’ve seen the other kind of operation and I like ours better. Charlie?

CHARLIE MUNGER: Years ago, I did some work for the Roman Catholic Archbishop of Los Angeles and my senior partner pompously said, “You don’t need to hire us to do this. There are plenty of good Catholic tax lawyers.” The Archbishop looked at him like he was an idiot and said, “Mr Peeler, last year I had some very serious surgery and I did not look around for the leading Catholic surgeon”. That’s the way I feel about board members.

What about share buybacks? Given your belief that Berkshire’s intrinsic value continues to exceed its book value are we at a point where you would consider buying back stock higher than the point Berkshire currently has in place (1.2 times book value)? 

WARREN BUFFETT:  Clearly in my view, Charlie’s view, the board’s, Berkshire stock is worth significantly more than 1.2 times book value but it should be worth significantly more or we wouldn’t have put the repurchase point at that level. On the other hand we did move it up from 1.1 to 1.2 because we had acquired more businesses over time where the differential between our curing value and the intrinsic value really had widened from when we set the 1.1.

I have mixed emotions on the whole thing in that from strictly a financial standpoint and from the standpoint of the continuing shareholders, I love the idea of buying shares at 1.2 which means I probably would love the idea of buying it at a little higher than 1.2. It’s also the surest way of making money per share there is. If you can buy Dollar bills for anything less than a Dollar, there’s no more certain way of making money. On the other hand I don’t particularly enjoy the actual act of buying out people who are my partners (in the business) at a price that is well below what I think the stock is worth.

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We will buy stock almost certainly. We don’t make it a 100 percent pleasure because there would be a lot of ramifications to that. But the odds are extremely high that we would buy a lot of stock at 1.2 times or less, but we would do it in a manner where we were not propping the stock at any given level and if that happens it will be very good for the stockholders to continue. It is kind of an interesting situation though because if it’s true that we will enter – eager even – from a financial standpoint to buy it at that price, it’s really like having a savings account where if you take your money out as a dividend or as an interest payment on a savings account you get a Dollar but if you leave it in you’re almost guaranteed that we’ll pay you a Dollar twenty.

Why would anybody want to take money out of a savings account if they could cash it in what they left at 120 percent? Let’s say it acts as a backstop for ensuring that a no-dividend policy results in greater returns than it would be if we paid out a Dollar and people got the Dollar. If they leave a Dollar in they’re going to get at least a Dollar twenty in my view, at least it’s not a total guarantee but it’s a pretty strong probability. Would we increase that number? Perhaps if we run out of ideas and I don’t mean day by day but if it really becomes apparent that we can’t use capital effectively within the company in the quantities with which it’s been generated then at some point the threshold might be moved up a little because it could still be attractive to buy. You don’t want to keep accumulating so much money that it burns a hole in your pocket.

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It’s said that a full wallet is a little like a full bladder, that you may get the urge very quickly to pee it away. We don’t want that to happen. So far that hasn’t happened and if it ever gets to where we have a $100bn or a $120bn or something like that around we might have to increase the price (from 1.2 times book). Any time you can buy stock in for less than what it’s worth, it’s advantageous to the continuing shareholders. But it should be by a demonstrable margin. Intrinsic value can’t be that finely calculated that you can figure it out to four decimal places or anything of the sort. Charlie?

CHARLIE MUNGER: You’ll notice that elsewhere in corporate America these buyback plans get a life of their own and it’s gotten quite common to buy back stock at very high prices that really don’t do the shareholders any good at all. I don’t know why people exactly are doing it. I think it gets to be fashionable.

WARREN BUFFETT: It’s fashionable and they get sold on it by advisors; and that’s true.

CHARLIE MUNGER: That’s true too.

WARREN BUFFETT: Yes, can you imagine somebody going out and saying we’re going to buy a business and we don’t care what the price is. We’re going to spend $5bn buying a business, we don’t care what the price is. But that’s what companies do and they don’t attach some kind of a metric to what they’re doing on their buybacks. Maybe they don’t want to publicise a metric but certainly they should say we’re going to buy back $5bn of stock if it’s advantageous to buy it back, but they don’t. If they say we’re going to buy the XYZ company, they’ll say we’ll buy it at this price but we won’t buy it at 120 percent of that price.

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Jamie Dimon (CEO of JPMorganChase) is very explicit about saying he’s going to buy back the stock when he’s buying it below what he considers intrinsic value. But I have seen hundreds of buyback notices and I’ve sat on boards and directors, one after another, where they voted buybacks and basically they said they were doing it to prevent dilution or something like that. It’s nothing to do with preventing dilution. Dilution by itself is a negative and buying back your stock at too high a price is another negative. It has to be related to valuation and as I say you will not find a lot of press releases about buybacks that say a word about valuation.

CHARLIE MUNGER: We’re always behaving a lot like what some call the Episcopal Prayer. We prayerfully thank the lord that we’re not like these other religions who are inferior. I’m afraid there’s probably too much of that in Berkshire but we can’t help it.

The Nebraska Furniture Mart’s been open for about a year in Dallas. How have sales been, how they compare to your other stores and what you think they’ll be in the future?

WARREN BUFFETT: Yes, it’s our largest  store in volume but we had a problem there that we had in Kansas City and we probably have that every time we have opened a store and we generate so much initial volume. We had a delivery problem, like I say it was worse in Kansas City. That was the first one we opened, therefore we really had to take our foot off the gas pedal because the last thing in the world we want to do is make first impressions of delivery problems.

The deliveries have gotten far better. They actually are meeting our company standards that we have in Omaha, but that wasn’t the case for some months and it’s hard to open up – we opened up the largest home furnishing store in the United States and we did it in an area where we naturally thought we trained the drivers as well as we could, but delivery with 100 plus units out there in a new operation taking in carpet and people getting lost and routing being bad – there was plenty of work to be done and it’s been done.

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I expect that store, which already is the largest store we have, but I think it will be a $1bn annual store before very long. We’re getting ready to step on the gas. It’s a terrific area. We have 20 plus-auto dealerships there in the Dallas/Fort Worth area. We probably have three or four of them in the area where our Furniture Mart is. They can’t go fast enough down there, Toyota’s moving there. It already is a great store but it’s going to be something even far beyond that.

We’ve opened up about four food places so far, we have four or five more in the works and they’re doing terrific by and I’m starting to sound like Donald Trump there, “tremendous, terrific, fantastic, never seen anything like it”. Just wait till next year, I’ll come back, I’ll really be in shape then. It’s doing well. We couldn’t have picked a better area. We have over 400 acres that we are very fortunate in grappling a whole bunch of land and we’re bringing prices and variety like nobody has seen and now we’ve just got to deliver like nobody has ever seen.

Mr Buffett, you have expressed concern about cyber, biological, nuclear, and chemical attacks but preventing catastrophe is not getting enough attention. Wouldn’t it be a good idea for you to consider funding a lobbying and educational campaign and counteract industry lobbyists who are often more interested in short-term profits?

WARREN BUFFETT: In my view there is no problem remotely like the problem of what I call CNBC – cyber, nuclear, chemical and biological attacks – that either by role of organisations, even possibly individuals, rogue  states, you can think about many things, it will happen. I think that we’ve been both lucky and frankly that people have done a very good job in government because government is the real protection on this and not having anything since 1945. We came very, very close during the Cuban missile crisis and I don’t know what the odds were, but I do think that if there had been – I can think of many people that they’ve been in place of either Kennedy or Khrushchev we would have a very different result. It’s the ultimate problem.

As I put in the annual report, it’s the only real external threat to Berkshire’s economic wellbeing over time and then I just hope when it happens that it’s minimised. But the desire of psychotics and megalomaniacs and religious fanatics and whatever, to do harm on others is a lot more when you have seven billion on earth than when you had three billion or so, which was case when I was born. Unfortunately, their means of doing it have grown. If you were a psychotic back far enough you’d throw a stone at the guy in the next cave and it would sort of limit a relationship with damage due to psychosis and that went along through bows and arrows and spears and cannons and various things and in 1945 we unleashed something like the world had never seen and that is a popgun compared to what can be done now. There are plenty of people that would like to cause us huge damage and I came to that view when I was in my 20s and in terms of my philanthropic efforts I decided that, that was one of two issues that I thought should be the main issue and I had gotten involved with all kinds of things like…..

CHARLIE MUNGER: You supported the Pugwash Conference year after year greatly all by yourself.

WARREN BUFFETT: Yes, the Union of the Concerned Scientist and I’d given some money to the Nuclear Threat Initiative that is going to create a sort of a federal reserve system or bank room to uranium that will take away some of the excuse for countries to develop their own highly enriched uranium. But it’s overwhelmingly a governmental problem and when you’re dealing, and it should be and I think it actually has been the top priority for president after president. It’s not the thing they can go out and talk about every day. They don’t want to scare the hell out of everybody and they also don’t want us to tip people’s hands as to what they’re doing. But you don’t have to be in the insurance business to know that someday somebody will pull off something on a very, very, very big scale that will be harmful. United States is probably the most likely place it happens or it could happen in a lot of other places and that’s the one huge disadvantage to innovation and to people.

CHARLIE MUNGER: Warren, I think he also asked why don’t we, Berkshire spend a lot more time telling the government what it should be doing and thinking?

WARREN BUFFETT: Well I’ve tried telling people. Nobody disagrees with you on it. It seems sort of hopeless to. They don’t know what to do beyond what they’re doing and they’ve done a lot of things. Not all gets publicised and I think Kennedy and Khrushchev, I mean Khrushchev shouldn’t have been sending it over into Cuba but at least he had enough sense when he knew Kennedy meant business to turn the ships around. But you can’t count on there being Kennedy’s and Khrushchev’s all the time in charge of things al the time. I’ve seen the mistakes that are made in business where people act so contrary to their own long-range self-interest that humans have a lot of frailties. You can argue that if Hitler hadn’t been so anti-Semitic he could have kept a lot of scientists that might have gotten him to the atomic bomb before we did but he wasn’t, he drive out the best of his scientific minds.

CHARLIE MUNGER: Imagine a guy stupid enough to think the way to improve science, kick out all the Jews.

WARREN BUFFETT: It was. The hero of the Twentieth Century may have been Leo Szilard, the guy that got Einstein to co-sign a letter to Roosevelt and say, one side or the other’s going to get this and we had better get it first basically. He said it much more elegantly than I do. You can go to the internet and look up the letter but we’ve both been good and we’ve been lucky. But if you remember post 9/11 people started getting a few envelopes with anthrax and they went to like the National Enquirer and Tom Brokaw and Tom Daschle, I can’t remember.

Who knows what, when you’ve had a mind that’s going to send anthrax to people, how that decision making is made is just totally beyond comprehension. That person did not end up doing a lot of damage but the capability for damage is absolutely incredible. I don’t know how Berkshire does anything about that. I don’t know how to do it properly. If I knew how to reduce the probabilities of the CNBC-type mass attack, if I knew how to reduce the probability by five percent, all my money would go to that, no question about that.

CHARLIE MUNGER: Hasn’t it been true, we haven’t been very good at getting the government to follow any of our advice?

WARREN BUFFETT: Yes, but this one’s important. Nobody argues with you about it. They just sort of throw up their hands and some people work for a while on it and just get discouraged and quit. I was involved, I forget the exact name of it but it was a bunch of nuclear scientists and long ago. But their idea was to affect elections in small states, the theory being that government was the main instrument and you would have the maximum impact, and one after another, you know people took it up and got discouraged.

I don’t think it’s because we’ve had the wrong leaders. I think our leaders have been good on this. I do not worry about the fact that either Clinton or Trump would regard that as the paramount problem of their presidency but I just don’t know, the offence can be ahead of the defence and that’s it. You can win the game 99.99 percent of the time, but eventually anything that has any probability of happening, will happen. I wish I could give you a better answer? Charlie?

CHARLIE MUNGER: I have no hope of giving a better answer.

WARREN BUFFETT:  That’s what they all say to me.

The Lubrizol Lubricant Additives business is one of your six largest non-insurance units – please update us on how the core business has done and how the competitive landscape and markets have evolved since it was acquired? 

WARREN BUFFETT: Yes, the additive business, there’s four companies in it basically, and it’s a no-growth but very good business and we’re the leader. It has performed almost exactly as you would anticipate since purchase and other specialty companies have, some of which have grown faster possibility, but they’re small. Lubrizol overall on an operational basis has been very much as you would have anticipated if you looked at the prospectus at the time we bought it.

They made one large acquisition which was a big mistake and that was in the oil field especially chemical area and was made just about the time that oil took a nosedive. We’ve had some decent acquisitions there, but the biggest acquisition should not have been made. We still got the fundamental earning power of the additives business, that has not disappointed us in any way, it’s a very well run operation that way but it’s not a growth operation. Charlie?

CHARLIE MUNGER: Nothing to add.

Through Berkshire’s operations you get a very good read on macroeconomic factors. How does that influence your rational decision-making?

WARREN BUFFETT: Charlie and I read a lot and we’re interested in economic matters and political matters for that matter and so we’re familiar with almost all of that macroeconomic factors. That doesn’t mean we know where they’re going to lead….where zero interest rates are going to lead…

CHARLIE MUNGER: Warren, there’s a confusion here. It says microeconomic factors. We pay a lot of attention to those. If you’re talking about macro we don’t know anything more than anybody else.

WARREN BUFFETT: Yes, he summed it up. In terms of the businesses we buy – and when we buy stocks we look at it as buying businesses, so they’re very similar decisions – we try to know all or as many as we can know of the microeconomic factors. I like looking at the details of a business whether we buy it or not. I just find it interesting to study the species and that’s the way you do study. I don’t think there’s any lack of interest in those factors or denying the importance of them, am I’m getting this question Charlie?

CHARLIE MUNGER: Well there hardly could be anything more important that the microeconomics, that is business. Business and microeconomics are sort of the same term. Microeconomics is what we do and macroeconomics is what we put up with.