Berkshire Hathaway's 1994 AGM At-A-Glance
“Charlie and I don’t like difficult problems. We’d rather multiply by three than by pi.”
One of my favorite things to do is to read the transcripts of old Berkshire Hathaway annual shareholders meetings over at CNBC’s Warren Buffett Archive.
(Yes, I realize how sad that sounds.)
The Warren Buffett Archive is an invaluable treasure trove that grants us a peek into the Berkshire AGMs of yesteryear — long before they were streamed online or received much media coverage at all.
Unfortunately, these unedited transcripts can be a bit unwieldy. Expect lots of umm’s, ahh’s, and fragmentary sentences that don’t go anywhere. What sounds perfectly natural spoken aloud often appears awkward and hard-to-read when written down.
Oh, and these transcripts are really, really long.
So, earlier this summer, I set out to do something about that — distilling the many hours of questions and answers at the 1994 AGM into a more readable and condensed format. I did not omit any question or answer, but simply summarized them all so as to get right to the point. If anything, I tried to err on the side of brevity.
I’m planning to release a new AGM At-A-Glance for paid supporters each quarter — so expect the next one in October. Free subscribers will have access to the first 1,500-ish words, which is longer than the typical Kingswell article.
Introductory Remarks
Warren Buffett announced that next year’s meeting would relocate from the Orpheum Theater to a larger venue. “A few years ago, we were holding this meeting at the Joslyn [Art] Museum, which is a temple of culture,” he said. “We’ve now moved to an old vaudeville theater. And the only place in town that can hold us next year is the Ak-Sar-Ben Coliseum, where they have keno and racetracks. We are sliding down the cultural chain — just as Charlie predicted years ago.”
Speaking of Charlie, the vice chairman was the only Berkshire director who “received no negative votes” from shareholders. “When you lose out the title of Miss Congeniality to Charlie,” laughed Buffett, “you know you’re in trouble.”
While introducing the managers of Berkshire’s many subsidiaries, Buffett called Ajit Jain “the big ticket writer in the East” and credited Harry Bottle from K&W with “saving our bacon back in 1962 when, in some mad moment, I went into the windmill business — and Harry got me out of it”.
Buffett then opened the floor to questions — noting that, “If you want an optimistic answer, you’ll of course direct your question to Charlie. If you’d like a little more realism, you’ll come to me.” 🤣
Q1: Would you comment on the use of derivatives?
Buffett recommended Carol Loomis’s recent story in Fortune as “far and away, the best article that has been written” on the subject. “Any time you combine ignorance and borrowed money,” he said, “you can get some pretty interesting consequences.”
And, while he admitted that derivatives can be useful in certain circumstances, he clearly saw storm clouds gathering on the horizon. “I can’t think of anything that we’ve done that … approaches derivatives.”
Q2: Is Cap Cities still a permanent holding after Berkshire sold one million shares?
Buffett reaffirmed the Washington Post, GEICO, Coca-Cola, and Cap Cities/ABC as permanent holdings, but added that Berkshire might still occasionally participate in tender offers from those companies — as it did with Cap Cities in 1993.
“We still are, by far, the largest shareholder of Cap Cities,” he said. “We think it’s a superbly run operation in a business that looks a little tougher than it did 15 years ago — but a little bit better than it did 15 months ago.”
Q3: If you were to buy a business at its intrinsic value, what’s the minimum after-tax free cash flow that you’d need to get?
While unlikely, Buffett admitted that he could envision buying a business with no after-tax cash flow. “But,” he added, “we would have to think it had a tremendous future.” He offered GEICO as an example — which was “losing significant money” when Berkshire first invested. “If we think the present value of the future earning power is attractive enough compared to the purchase price, we would not be overwhelmed by what the first year’s figure would be.”
Charlie put it more bluntly: “We don’t care what we report in the first year or two after buying anything.”
Q4: An inaudible follow-up about Buffett’s preferred discount rate.
“In a world of 7% long-term bond rates, we would certainly want to think we were discounting future after-tax streams of cash at at least a 10% rate.” Buffett added that if he felt particularly certain about the future prospects of a business, he might be willing to move even closer to the risk-free rate. Likewise, a more uncertain outlook should be discounted at a higher rate.
Q5: Why do you believe that Berkshire’s insurance business possesses an intrinsic value that exceeds book value by a larger amount than your other businesses?
“It’s very hard to quantify,” Buffett replied — and referred the questioner to a table in the annual report than showed how Berkshire’s float had grown from $20 million to $3 billion over time. “Unless you thought that table had no validity for the future, I think that would tend to point you in the direction of saying the insurance business does have a very significant excess of intrinsic value over carrying value.”
Q6: Is there any point at which your stock would rise to the point where you might split the stock?
Buffett laughed and said, “I’ll let Charlie answer that this year. He’s so popular with the shareholders that I can afford to let him take the tough questions.”
“I think the answer is no,” Charlie answered dryly. “The idea of carving ownership in an enterprise into little, tiny $20 pieces is almost insane.”
Buffett then gave his usual spiel: Berkshire already has the kind of shareholders that he wants — and the current group could not be improved upon. “We followed certain policies that we think attracted certain types of shareholders and actually pushed away others,” he said. “That is part of our eugenics program here.”
Q7: Given the recent announcement of Midwest Express running more non-stop flights to Omaha, will this cut down on your use of “The Indefensible”?
“This is a question planted by Charlie,” grumbled Buffett. He joked that he currently takes the corporate jet on trips to the drugstore, but countered that at least he isn’t sleeping in the hangar. Yet. “Nothing will cut back on ‘The Indefensible’,” he declared.
Q8: What is your next goal in life now that you’re the richest man in the country?
“That’s easy,” said Buffett. “It’s to be the oldest man in the country.”
Q9: How can an average investor — someone without your connections — determine the quality of a company’s management?
Buffett explained that he judges management by two yardsticks:
How well do they play the hand they were dealt? Read about what present management has accomplished and how it has allocated capital — and also how the competition has performed.
How well do they treat their owners? While many companies fall into the meaty part of the curve, the true exemplars stand out. “It’s not that hard to figure out that Bill Gates or Tom Murphy or Don Keough are really outstanding managers.”
He also brushed off the importance of connections. “[My conclusions] come from reading reports rather than any intimate personal knowledge — or knowing them personally at all.”
Q10: How do you keep someone like Ajit Jain, who has such fine skills, within the Berkshire fold?
Buffett said that he and Charlie only have two jobs. One of which is to keep good managers engaged after they’ve become financially independent. He does this by Golden Ruling it. Buffett doesn’t like to be micromanaged, so he doesn’t do that to his managers. Instead, he finds .400 hitters and then gets out of their way.
Managers receive a bespoke compensation plan based on metrics they personally control. One size does not fit all at Berkshire. “We have no company-wide compensation plan,” said Buffett. “We wouldn’t dream of having some compensation consultant come in and screw it up.”
What’s their second job? “Allocate capital,” said Buffett. “And, aside from that, we play bridge.”
Charlie shared that Warren and Ajit speak by phone almost every night — and that their friendship transcends business.
“We get to work with people we like,” said Buffett. “It makes life a lot simpler — and it probably helps with that goal of being the oldest American, too.”
Q11: How do you perceive Guinness’s long-term economic growth?
Guinness’s scotch is “where most of the money is made” — but distilling trends in the United States do not look promising. “Worldwide scotch consumption has not been anything to write home about [either],” said Buffett.
“Distilling will govern the outcome of Guinness,” he said. “I think Guinness is well run and it’s a very important company in that business. But I wouldn’t count on a lot of physical growth.”
Q12: What happens to Berkshire if something happens to Buffett?
“Berkshire will do just fine,” Buffett reassured the crowd. “In terms of the managers we have, you [would] have to come in and really want to mess it up.” In terms of capital allocation, he said that “you could do worse than just adding it to some of the [stock] positions that we already have”.
“Incidentally,” he said, “I think I’m in pretty good health. This stuff (Coca-Cola) will do wonders for you if you’ll just try it.”
Charlie admitted that Berkshire would, of course, be diminished without Buffett — “but it would still be one hell of a company”.