Piecing Together Berkshire Hathaway's 1988 Annual Shareholders Meeting

"It's too easy to print money," said Warren Buffett. "I'd do it myself if I could get away with it."

On the morning of May 23, 1988, approximately 580 shareholders packed the Joslyn Art Museum in Omaha for Berkshire Hathaway’s annual meeting. It was the largest crowd in company history — with some overflow attendees even spilling over onto the auditorium’s balcony.

Right alongside them were cameras for Adam Smith’s Money World, too. The popular PBS television program was in town to shoot footage of the meeting — and film an extended interview with Warren Buffett himself.

Another very special guest was Buffett’s one-month-old grandson Michael. He warned the crowd that if Michael started crying during the meeting, it was probably because he had just learned about his grandfather’s views on inherited wealth.

(And, yes, young Michael did cry.)

As any Berkshire Hathaway diehard will tell you, CNBC’s archive of the company’s annual meeting videos and transcripts only dates back to 1994. So, over the past year or so, I’ve tried to piece together whatever information can still be found about these “lost” pre-1994 meetings.

The surviving information mostly comes from the Omaha World-Herald newspaper and The University of Berkshire Hathaway (a book full of summaries of Berkshire AGMs). There isn’t a whole lot to work with here — often just fragmentary reports, partial quotes, paraphrased questions and answers, and the like. But, in a situation like this, beggars cannot be choosers. I’ll take whatever I can get.

I’ve already compiled what I could on Berkshire’s 1985, 1986, and 1987 meetings. Today, the 1988 AGM takes its turn in the spotlight.

What follows is certainly not a definitive account of the ‘88 meeting. There are, no doubt, holes big enough to drive a truck through. But, absent a time machine, it’s the best I can do.

I very much hope that this will prove useful to Berkshire followers far and wide.

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As always, Warren Buffett and Charlie Munger made quick work of the formal proceedings — before opening the floor to questions from shareholders for the next several hours.

(1) What’s going to happen with inflation?

The scourge of inflation was, quite understandably, a hot topic at all of the 1980s-era annual meetings. Buffett pulled no punches in telling the crowd that inflation — and higher interest rates to combat it — would continue to plague the financial world for the foreseeable future. “Higher rates are coming,” he said. “I [just] don’t know when.”

“We could have fairly explosive inflation,” admitted Buffett. “It’s too easy to print money. I’d do it myself if I could get away with it.”

Charlie was more circumspect: “We’re not in the business of making macroeconomic forecasts.”

(2) How will Berkshire Hathaway approach inflation?

Since Buffett expected inflation — and interest rates — to rise higher and higher, he recommended that everyone “avoid dollar-denominated instruments of long duration”.

“If we could contract for newsprint for two years,” he said, “we’d be happy.” (I’m guessing this means that he expected newsprint prices to rise and he would be happy to lock in current prices for as long as possible.)

Overall, Buffett’s aim was to avoid “disaster, not profit with it”.

(3) Should investors seek safety in common inflation hedges?

The University of Berkshire Hathaway printed Buffett and Munger’s responses to questions about some of the most common ways to hedge against inflation.

Spoiler: They poured cold water over all of them.

• Real estate: “Everyone talks about the big money in real estate,” said Munger, “but they forget to talk about the big money lost in real estate.”

• Foreign currency: “It’s hard enough to understand the culture you’ve been raised in,” said Munger, “much less someone else’s.”

• Leverage: “You can leverage up to your eyeballs,” said Buffett, “but you may not make it across the river.”

• Hard assets: “Someone figured out the Van Gogh painting that sold for $40 million last year yielded a 13% compounded annualized return,” said Munger. “Berkshire shareholders have done much better.”

(4) What will happen to Berkshire after Buffett’s death?

In the past, Buffett offered up Charlie Munger as a readymade replacement for him if he ever got hit by a truck. In 1988, though, he upped the ante by admitting that they both had a successor in mind “in case Charlie and I die at the same time”.

But neither man would reveal the chosen successor’s name.

(5) How do you handle a fluctuating market — and even the occasional crash?

As Buffett has said many times before, he actually gets excited when the stock market drops in price — because it will offer up better deals to the intelligent investor.

Here, he went even further and said that a one-day 50% crash would be to Berkshire’s ultimate advantage. If such a scenario occurred, Buffett wouldn’t have to panic sell any of his holdings and could sift through the wreckage for potential gems.

Market crashes only hurt investors when it forces them to cash out of their positions at artificially low prices — or if they bought stock on margin. Neither of which describes Berkshire at all.

In terms of the market’s normal fluctuations, Buffett warned against investors getting overstimulated by all of the ups and downs. “What happens in Tokyo or New York doesn’t affect us,” he said. “I wouldn’t care if the New York Stock Exchange closed for a year. It’s closed on Saturdays and Sundays and we don’t miss it.”

(6) Speaking of the NYSE, will Berkshire ever join the Big Board?

At that time, Berkshire still traded on the over-the-counter market — which led to a bigger spread than Buffett desired. “I want Berkshire stock to sell at its intrinsic value and a spread of 1.5%,” he said.

Joining the New York Stock Exchange would probably alleviate that problem, but the sticking point was Berkshire’s immense share price. This would limit the NYSE’s mandated 100-share round lots to only the wealthiest of investors. And relegate the rest of us mere mortals to the odd-lot ghetto with its higher fees.

“We talked to the New York Stock Exchange a year ago,” said Buffett, “and [again] recently. We’ll do whatever we think is best for our shareholders.”

• A resolution came quickly. Berkshire joined the New York Stock Exchange on November 29 of that year — after it received special permission to sell 10-share round lots instead of the customary 100. “We’ve heard from our shareholders,” said Buffett, “and they prefer to be here.”

(7) Will Berkshire ever split its stock?

“Our present policy attracts the best group of shareholders,” said Buffett. “If we split, we would not have as good quality shareholders.”

Charlie echoed the sentiment: “The intelligence in this room is remarkable.”

(8) Can you tell us more about the investment in Salomon Brothers?

In 1987, Buffett purchased $700 million of Salomon Brothers preferred stock that paid out 9% annual dividends ($63 million per year) with a senior debt position. For those reasons, he considered it a good deal — even though he admitted that investment banking was an uncertain business.

Charlie, reputedly never a big fan of the Salomon investment, backed his partner up. “Salomon is deep in talent — the ultimate meritocracy — and, with that talent, may do very well over time,” he said.

(9) What is your outlook for the U.S. economy?

“The American system can take a lot of abuse,” said Buffett. “And it’s a good thing it can.” Because, presumably, he’s saying that it has taken said abuse.

But, he added, government policies don’t have nearly as much impact on the economy as people might assume. From The University of Berkshire Hathaway: “[Buffett] said that the difference between great economic policy and poor economic policy could be a difference of just 1% annually in the GNP. That is, the GNP might grow at (X-1)% instead of X% due to misguided policies.”

(10) What do you think about program trading?

Investopedia defines program trading as “the use of computer-generated algorithms to trade a basket of stocks in large volumes and sometimes with great frequency”.

In 1988, program trading was Public Enemy #1 for its role in the Black Monday crash the year before. Specifically, the attempt to arbitrage the price discrepancy between stock index futures and an underlying group of stocks was blamed for creating a domino effect of automated selling that sent the market spiraling on that fateful day.

Buffett did not pile on the program traders — “When two commodities eventually come together,” he said, “you’re going to have arbitrage” — but he hardly endorsed the system, either.

He told a story to illustrate his point. “Let’s say, next year, we have our annual meeting on a ship — which I’m sure some of you would like — and we get wildly blown off course.” They all land on a deserted island and have to build a society from scratch. Buffett noted that he would win a close vote over Charlie to be chairman of the island and would then have to allocate their human resources in the best way possible. He might assign half of the group to grow food, some others to build shelter, and a few to work on new ideas and survival techniques. “What if I took the 30 or 40 brightest people and taught them to trade future options on stocks?” he asked drolly. “Wouldn’t that strike you as absurd?”

Charlie was much more blunt. (No surprise there.) “I like [program traders] less than you do,” he said. “We needed more index options like we needed more AIDs. This is a gambling activity unrelated to business.” He went on to call this kind of trading “a totally asinine idea”.

(11) Is there any value in market predictions or forecasts?

“If I live X number of years,” said Buffett, “I’ll go through X number of recessions. But if I spent all my time guessing cycles, Berkshire Hathaway would be $15 per share. You can’t dance in and out of businesses based on forecasts.”

(12) Are you worried about the U.S budget deficit and trade deficit?

“The trade deficit bothers me more than the budget deficit,” said Buffett.

(In 1987, the U.S. trade deficit hit a then-record high of $171.2 billion.)

Buffett used the example of Peter Minuit buying Manhattan Island from the Indians for $24 in trinkets — but, now, America was the one trading valuable assets for junk. “We’re trading our island for trinkets, VCRs, and cars,” he said. “We are sending IOUs overseas. We can trade pieces of the farm with these IOUs — and [eventually] they can be exchanged for the farm.”

He also waved off the counterargument that it didn’t matter because the U.S. GNP kept going up anyways. Buffett warned that the other shoe would drop in the future. “The stock of [Minuit’s] company did not rise on the Dutch Stock Exchange” on the same day that he traded for Manhattan. These things take time to fully unfold.

Charlie agreed: “It’s not a good idea to trade away our productive capacity.”

(13) What do you look for in managers?

Berkshire only wants top-shelf managers and leaders who will stay on the job — with no loss of enthusiasm and drive — after being acquired.

“Our approach is to have the best management [already in place when we buy],” said Buffett. “It’s like buying the Red Sox when Ted Williams hit .400 plus. We offer our managers immortality. [But], to some, that doesn’t mean much.”

Continuing his baseball metaphor, Buffett said that he seeks out managers who “like to hit tape-measure home runs”.

(14) Can you tell us more about World Book Encyclopedia’s performance?

Berkshire acquired World Book as part of the Scott Fetzer Company in 1986. Buffett beamed that “half of our [World Book] salespeople are teachers or former teachers. We have [scheduled] appointments. It isn’t people knocking on doors trying to make sales.” He pointed out that this can be a lucrative sideline — with one World Book saleswoman clearing $100,000 a year from encyclopedia sales.

Still, the encyclopedia business was already feeling pressure from electronic competitors. When asked about putting World Book on CD-ROM, Buffett said the Berkshire-owned encyclopedia would “look the way it does today 20 years from now”.

But, despite the confidence in World Book’s physical format, Buffett acknowledged that obsolescence posed certain problems. “The fact that you are being obsoleted does not mean you should go into the successor business,” he said.

From The University of Berkshire Hathaway: “He explained that if you were a person of vision in the passenger train business in 1930, you might have seen the coming of the airplane. But the answer was not to get into the airline business, which is a terrible business. The answer was to get out of the passenger business altogether.”

(15) Do you have any book recommendations this year?

Charlie said that he much prefers to read biographies in order to “make friends among the eminent dead”. Buffett joked, “And they don’t talk back!”

The Berkshire vice chairman offered up two recommendations for anyone hoping to learn more about business — McDonald’s: Behind the Arches and The Big Store: Inside the Crisis and Revolution at Sears.

And a few more odds and ends…

• A shareholder asked about Berkshire’s recent sale of 50,000 shares of Handy & Harman. Buffett admitted that he had indeed trimmed his position in the precious metals company, but he would not be drawn on why he made the sale or what he planned to do with the proceeds.

• Buffett reiterated that his idea of the best kind of business is “one that costs a penny to buy, a dollar to sell, and is habit-forming”.

• When asked about the performances of Berkshire’s individual subsidiaries, Buffett said that they were all doing well — and would not be sold. “Our holdings are permanent,” he declared.