Berkshire Hathaway's 1997 AGM At-A-Glance
“Our ideas are so simple," said Charlie Munger. “People keep asking us for mysteries when all we have is the most elementary idea.”
Welcome to the next entry in my AGM At-A-Glance series — in which I attempt to distill the many hours of questions and answers at a particular year’s annual meeting into a more readable and condensed format.
Brevity is the watchword. I have not omitted any question or answer, but instead tried my best to summarize Warren Buffett and Charlie Munger’s remarks in as few words as possible.
Warren Buffett opened Berkshire Hathaway’s annual shareholders meeting in 1997 with an apology — for his hoarse voice. “I think I’ll do alright,” he laughed, “but we’ve always got Charlie here. He’s always done the talking. I just move my lips.”
He then sped through the official proceedings — joking that his script must have been written by Saddam Hussein’s speechwriter. “It has all the warmth and charm and participatory elements you’d expect.”
Before opening the floor up to questions from shareholders, Buffett introduced Berkshire’s board of directors. “Give them lots of applause,” he said, “because they don’t get much else for it. It’s a rather low-paying board.”
Q1: Do you feel that McDonald’s has the same ability to dominate like Coca-Cola and Gillette? And, if yes, should I wait until the price comes down or get in now?
“Would you like [my intrinsic value estimate for McDonald’s] to the eighth of a point?” joked Buffett. No, the popular fast food chain was not “inevitable” in the same way as Coca-Cola and Gillette. People frequent different restaurants for different occasions, moods, tastes, etc. — unlike a Gillette user who never switches blades.
Q2: Recently, Alan Greenspan made his comments about exuberance — and it wasn’t long after that you came out in the annual report and said that you felt the market was fully valued or something of that nature. Did you have — or have you had — any communication with Greenspan regarding the valuation of the stock market?
Nope. Buffett said that he last saw Greenspan “a long time ago” — with one conversation on the day of the Salomon crisis. He did know Greenspan, though. The two men served together on the Capital Cities board. “It’s very hard to understand what Alan says sometimes,” said Buffett, “so there’s not much sense talking to him. He’s very careful about what he says.”
Buffett reiterated his warning from the annual report that you can indeed pay too high a price for wonderful businesses like Coca-Cola and Gillette. But, at the same time, you must be willing to pay up for the cream of the crop. “Generally speaking,” he said, “it’s more important to be certain about the business being wonderful than it is to be certain that the price is not 10% too high.”
Q3: Why can’t Berkshire stockholders whose shares are held in street form participate in the charitable donation program?
Class B shareholders cannot participate either, noted Buffett. Back in 1981, Berkshire obtained a tax ruling that these contributions would not be taxed as a constructive dividend — but that only applies to shares held by the beneficial owners themselves. Expanding the program to street name shareholders might violate that tax ruling. Plus, with 30,000+ street name holders, it would be “sort of a nightmare” to administer.
Q4: When are you planning to write your book?
The questioner also mentioned Charlie Munger’s “Worldly Wisdom” speech at USC in 1994 — which Buffett hailed as a “classic” and recommended that “every investor in the world ought to read that talk before they invest”.
He deflected the original question by pointing to the plethora of Buffett-related books already on shelves. “There doesn’t seem to be any need for me to write a book,” he laughed. “Everybody else is doing it.” In all seriousness, though, he said that his annual letters must suffice for now. “I really feel that the annual reports are sort of a book on the installment system.”
Q5: Throughout your life, you have repeatedly underpromised and overdelivered. In recent years, you’ve targeted Berkshire’s long-term book value growth at 15%, yet you’ve come through at about 24%. Why is there such a big gap between your modesty and the outcome?
It’s not so much modesty, said Buffett, but a market that reappraised all businesses upwards over the past decade. But don’t expect that to last forever. “If Charlie and I could make a deal to increase the intrinsic value of Berkshire at 15% a year over the next ten years, we would sign up now,” he said. If nothing else, Berkshire’s size would preclude compounding at previous rates. “The numbers just get too big.”
Q6: How many shareholders have owned Berkshire longer than you and Charlie? Have you ever gotten together with them?
Berkshire director Kim Chace’s family had owned Berkshire stock since the 1920s. Buffett guessed there must be about 50-100 shareholders still around that preceded his first purchase in 1962.
Q7: In light of recent stock market volatility, could you give us your definition of stock market risk? How does your definition differ from the standard definition?
First things first: A stock should be viewed as a piece of an actual business. And some businesses are just more inherently risky than others — based on capital intensity, commodity status, etc. Buffett noted that Berkshire’s old textile operations had a lot going for it (good management and agreeable labor), but could not compete on cost. And, as a result, it could not survive against overseas competition.
An investor’s reaction to market fluctuations can also introduce risk. “The stock market is there to serve you,” reminded Buffett, “not to instruct you.” Volatility is actually a “huge plus” to an intelligent investor — because more stuff will be mispriced. Volatility does not equal risk. No matter what business schools might say.
Q8: Due to Charlie’s recent counter-revelation about jets, are you going to rename “The Indefensible”?
Charlie’s feelings about jets took an abrupt u-turn when Berkshire acquired FlightSafety International. “Prompted by Al Ueltschi,” he said, “we are changing the name of the company plane from The Indefensible to The Indispensable.” Charlie also mentioned that one of his friends — a pilot for United — did 100% of his flight training in a simulator. “They’re that good,” said Charlie.
“They better be good,” Buffett shot back. “They cost us $19 million.”
Q9: What guidance can you give us as to the calculation of maintenance capital spending and working capital requirements?
“We regard the reported earnings [of our companies] to be a pretty good representation of the real earnings of the business,” said Buffett. And those reported earnings — plus amortization of intangibles — gives a pretty good representation of owner earnings.
Charlie added that they try to “avoid places where a lot of compulsory reinvestment [is needed] just in order to stand still”.
GEICO’s intrinsic value grows faster than its reported earnings — mostly because float boosts intrinsic value in a way that’s not captured by earnings. “Whether you want to call that extra amount owner earnings or not is another question,” said Buffett.
Q10: Is Tom Murphy keeping busy now that Disney owns ABC? Does it matter to Disney’s bottom line that less people are watching ABC?
“There is no one in this world that is a better manager than Tom Murphy,” said Buffett, “or a better human being as far as that’s concerned.” He added that Murphy kept himself busy these days as chairman of NYU Hospital.
On the viewership front, Buffett acknowledged that “ratings translate into money” and determine how much the network receives for its product. Any programming tweaks, though, will take a while to show up in the ratings — and such ups and downs are par for the course in network television. “I think the TV network business is intrinsically a pretty tough business,” said Charlie.