BookMarks #66: University of Berkshire Hathaway

Title: University of Berkshire Hathaway: 30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting 

Authors: Daniel Pecaut & Corey Wrenn 

Genre: Business Management, Compendium 

Published: 2017 

BookMarks 

The best investment is investing in yourself - Buffet 

The book is a collection of notes from the Q&A session of Warren Buffett and Charlie Munger at Berkshire Hathaway’s AGMs. The authors have compiled their takeaways over 30 years and put together this book. This has resulted in a few redundancies over the years e.g. investing in yourself, staying within your circle of competence,  Ajit Jain doing great things, having a float, portfolio theory not being the best et al. However, the book does provide a look into the growth trajectory of the company. 

The event itself grew from a “small” gathering of 500 investors with the Q&A done in a couple of hours to 30,000 attendees and even being live-streamed while taking place over 3 days and having its own mall to boot.

So, inspired by the authors have compiled my (bullet point) takeaways & favorite quotes from each years’ notes. 

1986 

• Value investing - having enough buffer between the value of the business and the price one buys it. Intrinsic value of the business is the key for investing. 

1987 

• Stocks can't outperform businesses indefinitely. 
• "attempt to be fearful when others are greedy and to be greedy when others are fearful" 
• Inflation has significant impact on fixed income investors. 
• “Be vaguely right than precisely wrong”
• Ideal business - “Something that costs a penny, sells for a dollar and is habit forming.” 

1988 

• Printing money is easy - hence inflation is inevitable. 
• Encyclopedias will see little change in 20 years [Well, even Mr. Buffett gets a few things wrong!]
• In case of a business getting obsoleted, move out of it altogether rather than going to a successor business. 
• “A biography is a way to make friends amongst the eminent dead”.

1989 

• Buying established brand names is a good idea. 
• “If investors only had to study the past, the richest people would be librarians.” 

1990 

• Buying wonderful businesses at a fair price. 

1991 

• Good economic characteristics of a business  - (i) Able and trustworthy management. (ii) We like what the company does. 
• Financial disasters happen as stupidity is not accompanied by immediate pain. 

1992 

• Executive compensation must be linked to business performance with no cap. 
• You can't time the market. 
• Airlines industry keeps losing money every year [Still true] 
• Book value determines what goes into a business, but the key is to determine what value one will get out of the business. 

1993 

• Long-term government bond rate is an appropriate discount factor for NPV calculations. 
• Computing power and data can lead to too much misspent effort on analysis. 
• Big brands have an edge in the market. They can operate at low margins due to their sheer volumes. 

1994 

• A company's reputation is a significant competitive advantage. 
• For evaluating the performance of management: 1) How well do they run the business? and 2) How well do they treat the owners? 
• The business of Berkshire Hathaway is to acquire other businesses. 
• What will happen vs when it will happen is a more efficient way to operate. 
• “We go where the probabilities are good.” 

1995 

• Projections are a pointless exercise - “Something with a lousy past record and a bright future… that’s an opportunity we’re going to miss.” 
• Derivatives, instead of transferring or moderating risk, create risk on a huge scale. 
• On knowing when to go away - “A stock does not know you own it, the price you paid, who recommended it, the prices someone else paid, the stock does not give a damn.” And “you do not have to make money back the way you lost it”. 
• When accounting appears confusing, avoid the company. The confusion may well be intentional and reveal the character of the management. 
• “Most men would rather die than think. Many have.” People are resistant to learning. 

1996 

• Berkshire Hathaway don't want to bet on technology, although they like Microsoft. 
• Corporate stock buybacks add to shareholder value only if the purchases are made at prices below intrinsic business value. 
• All kinds of information is available, but you have to read it yourself. Annual Reports are the best information source. 
• Diversification is a protection against ignorance, a confession that you do not know the businesses you own. [Something against modern portfolio theory] 
• Downsizing leads to efficiency and frees up people to do other jobs. 

1997 

• Key filters for investing - Opportunity Costs, Quality People & Good businesses 
• Stocks can't keep growing faster than the economy. 
• Overall, Berkshire seeks low-risk businesses with sustainable competitive advantages and strong capital structures. 
• Any systems work better when perceived as fair. 
• “Life is a whole series of opportunity costs.” 
• Keep learning. 
• “It’s an honor to die for your country. Make sure the other guys get the honor.”

1998 

• Unrealized capital gains are a potential income tax liability. 
• Giving a value to an internet company is a dangerous exercise. [prophesying the dotcom bust] 

1999 

• Find great businesses – ones with great management and great economics at a reasonable price. 
• Willingness to trade away big pay-offs for certainty. 
• One should stay within one's circle of competence. 
• There is a big difference between identifying a growth industry and minting money. E.g. Airlines, Telecom, automobiles. [Or start-ups in the modern era] 
• After you have enough for daily life, all that matters is your health and those you love. Likewise in work, what really matters is that you enjoy it and the people with which you work. 

2000 

• “if share of mind exists, the market will follow.” specially true for consumer products. 
• the ability to monetize shareholders’ ignorance has never been greater” 
• Internet reduces profit margins and buyers are the winners. 
• For an investor the key is to know what you must avoid. 
• Having an interdisciplinary approach to problem solving. 

2001 

• The value of having a float or cash reserves. 
• Sugar stocks are a safe bet, as average annual consumption + no. Of humans + life span keeps increasing. 
• Impact of internet - lot of money got transferred from the gullible to the promoters with no real wealth created. 
• Extrapolating the past can be a stupid idea. 
• Biggest money made in Wall Street in recent years has not been made by great performance, but by great promotion. 
• Start early and invest in yourself. 
• Understand a company’s costs and why it’s got a sustainable edge against its competitors. 
• With the available float doing large transactions is easier for Berkshire & sellers have more faith in their ability to fund thus getting Berkshire a lower buying price at times. 

2002 

• Reference to 9/11 attacks. Technology has boosted the ability to inflict damage.
• Successful companies do not talk about EBITDA as a measure. Fraud groups do! Because Depreciation & Taxes are real costs! 
• Creative accounting is a curse e.g. the Enron fraud. 
• Most M&A deals turn out to be duds. 
• It is helpful to list the qualities you would want in a friend and then seek to instill those qualities in yourself. This is a matter of choice, not DNA. Anyone can develop good character and quality lifetime habits. 
• Mantra of investing - realism in defining one’s circle of competence and discipline to stay within the circle. 

2003 

• Cash generates cash - the power of compunding or the snowball effect. 
• Keep adding good businesses to the collection of good businesses. 
• Understand accounting. 
• Inequality in society is ok if it's seen to be fair 
• Having the ability to take criticism. 
• Accumulate a database of knowledge over a lifetime. 
• Opportunity Costs - alternative returns available should weigh on whether you make a investment. 
• Derivatives are financial WMDs.

2004 

• Simplest way to beat inflation – by increasing your earning power. Owning businesses that can price through inflation and have low capital expenditures to maintain the business. 
• the intrinsic value of an asset is the cash it will earn from here to eternity, discounted back to the present. However, if your estimated growth rate is greater than your discount rate, you get a value of infinity. 
• Having an investment temperament. Asking And then what? What are the consequences of consequences.

2005 

• Price behaviour gives a good view of the durability of the economics of a business. 
• For any asset, you need to have a buyer. Gold and physical assets are a refuge for a declining currency. 
• Mortgage terms got easier as housing prices got higher - counter to prudent thinking. Easy lending causes more building and higher prices. Eventually, when you have enough new anything, prices will decline. 
• Trying to grow at unrealistic levels and showing it through accounting was the cause of Fannie Mae and Freddie Mac collapses. 

2006 

• Berkshire finds great managers and does not train them 
• The board’s job is to 1) get the right CEO, 2) keep the CEO from overreaching and 3) exercise independent judgment on acquisitions. 
• Media offers a huge variety of sources, many of them free. Meanwhile, there has been no corresponding expansion of time for humans to acquire information and entertainment. Hence media economics will continue to deteriorate! [Truer now]
• Technology enables the unbalanced few to do unprecedented damage. 

2007 

• Electronic trading increases volatility and risk. 
• Subprime crisis will not have a major impact on the economy [Even the best can't predict everything]
• For buying stocks - ability to generate cash and reinvest is critical. Important to understand the competitive position and dynamics of the business and look into the future.

2008 

• Business schools should teach (1) How to Value a Business, and (2) How to Think about Market Fluctuations – that the market is there to serve you, not influence you.” 
• Act fast when the opportunity comes. 
• Companies need aging management and succession planning to keep growing. 
• Big advocacy for non-diversification and concentration. 
• Need to look for alternates to oil. 
• Risk management can't be farmed out 
• Financial innovations add to the market complexity. 
• Less information, when it’s the right information, is a key to good decision-making. 

2009 

• Focus on financial literacy. 
• Government should keep building the infrastructure. 
• Average investor will not be able to copy Berkshire 
• Newspapers are a dying business while Batteries and clean energy are on the upward trend 
• Berkshire owned 20% of Moody's yet saw their stocks downgraded. 

2010 

• How to handle crisis: “Get it right. Get it fast. Get it out. Get it over.” 
• Every system needs good referees to work 
• Learn about money basics early 
• Each business has a different KPI & different measure of building value. 
• Financial crisis was formed by a lack of integrity in management. 
• The main problems of civilization are technical and solvable, all with energy, with huge benefits for civilization. 
• REPEAT WHAT WORKS. 

2011 

• Chairman and CEO should be separate positions 
• The economy continues to grow albeit not always in a linear manner. 
• A company with a product which requires little capital to grow is the best bet against inflation. 
• Any currency investment is a bet on how government will behave. 
• Invest in assets that produce something. 
• Having cash reserves is always a good idea. 
• Develop yourself. Find your passion and improve your skills. 

2012 

• Risk cannot be delegated - a role Buffett does himself at Berkshire 
• If you buy businesses for less than they’re worth, you’re going to make money. 
• Investors should stay away from businesses they don’t understand well 
• Berkshire does not give dividend and suggests selling shares as a more tax efficient method of earning money. 
• All it takes is one competitor to ruin a business. 

2013 

• To ignore what you know to listen to someone else who doesn’t know, doesn’t make sense. 
• It is in nature sooner or later the leader is no longer the leader. 
• It’s a lot easier to buy things sometimes than to sell them. 
• Having lots of cash makes Berkshire the port of call for many distressed companies. 

2014 

• Allocation of capital is the key to future returns in the business world. 
• What public corporations can do with a dollar earned: (i) reinvest in the business, (ii) acquire other businesses or assets, (iii) pay down debt, (iv) pay dividends, and/or (v) buy in shares. Deciding how much to allocate to each of these five areas ideally is driven by “opportunity cost.” 
• Being able to think and invest very long term and not worry about current earnings can be a major competitive advantage in certain businesses. 

2015 

• “Efficiency is required over time in capitalism.” 
• Culture gets reinforced and becomes self-selecting over time. 

2016 

• Buffett’s formula for happiness: “Do what I like with people I like.” 
• To buy a stock is to buy part ownership of a business. Think about business performance and what you would pay for the business, just as you would a farm. 
• To a significant degree, size is the enemy of performance. 
• The surest way to make money is to buy dollar bills for less than a dollar. 
• CNBC - Cyber, nuclear, biochemical, and chemical attacks, 

2017 

• Unique aspects of a business need to be factored in calculating the intrinsic value. 
• Driverless cars are a threat to the transportation and insurance business 
• The biggest companies, all tech, require no equity capital to run them 
• Berkshire had a chance to acquire Google in its infancy but turned it down 
• There’s nothing like personal painful experiences to help you learn. 
• Artificial intelligence, Buffett observed that more change will be coming. Almost certainly it will cause less employment in certain areas while being good for society overall. 

Quite a few lessons in here. However applying them in real life holds the key for success. 

Previously on BookMarks: Why I Stopped Wearing My Socks