Rediscovering Berkshire Hathaway's 1985 Annual Meeting
Some highlights from this (very) early episode of the Warren & Charlie Show...
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I don’t know about you, but I spend way too much time clicking around on CNBC’s Warren Buffett Archive. And, in particular, its incomparable collection of videos and transcripts from old Berkshire Hathaway annual meetings.
There’s just one drawback: CNBC’s archive of these Berkshire Q&A sessions only dates back to 1994. The University of Berkshire Hathaway, written by Daniel Pecaut and Corey Wrenn, fills in some of the gaps — but only back to 1986.
As such, I feared that any comprehensive accounts of earlier annual meetings had been irrevocably lost in the mists of time.
But, happily, I was wrong.
I recently stumbled upon an Omaha World-Herald story written about Berkshire’s 1985 annual meeting. It’s certainly not perfect — some of Warren Buffett’s answers are paraphrased by the author rather than quoting him directly — but it’s the most information about this “lost” annual meeting that I’ve ever seen gathered together in one place. Written by someone who was actually there.
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In the mid-1980s, Berkshire Hathaway’s annual meeting was an entirely different beast than today’s weekend-long “Woodstock for Capitalists”. Attendees didn’t have to book their hotel rooms months in advance or wake up before dawn just to get in line outside of an arena. There was no mad rush for seats once the doors opened.
It was a quieter, simpler chapter in Berkshire’s history.
So quiet, in fact, that 1985’s annual meeting was held on a Tuesday. And, instead of a cavernous arena, Warren Buffett and Charlie Munger opted for the Red Lion Inn in downtown Omaha. Approximately 250 shareholders attended the meeting and the ensuing Q&A session lasted only — only? — two hours.
While 250 attendees might sound laughably tiny by current standards, the growing crowd spurred Berkshire to move future meetings to a more spacious auditorium in Omaha’s Joslyn Art Museum. Just five years earlier, in 1980, the headcount was thirty.
The most shocking difference, though, had nothing to do with location or attendance. As Warren Buffett fielded questions from shareholders that day, he sipped on a Pepsi (which, back then, was still his beverage of choice).
Some things, though, never change:
Buffett drew laughter with his quick wit. When Berkshire secretary Verne McKenzie tested his microphone with “one, two, three”, Buffett quickly spoke into his microphone: “One million, two million, three million.”
Here are some of the highlights from this (very) early episode of the Warren & Charlie Show…
HOW TO VALUE A BUSINESS: “Do a lot of reading,” replied Buffett.
Generally speaking, he recommended the writings of Benjamin Graham and Philip Fisher for those trying to sharpen their investment mindset — and annual reports and trade magazines for evaluating particular businesses and industries.
Reading, he insisted, is more important than speaking with company executives or other investors. In fact, Buffett admitted that he had recently purchased a substantial amount of Exxon stock before talking to any of that company’s executives. “You’re not going to get any brilliant insights walking into the [Exxon] building,” he said.
And, at least in the money game, size matters.
It’s easier to determine the value of a large business than a small one, Buffett said. If someone buys a gas station, for example, another station opening across the street could have a major effect on the value of the first station.
DIVIDEND DILEMMA: In 1985, it had been nearly twenty years since Berkshire Hathaway last paid a dividend. The company (wisely) reasoned that Warren Buffett could reinvest this excess capital at higher rates of return than shareholders could themselves, so any dividend would ultimately prove counterproductive.
Berkshire actually polled its shareholders on this subject and Buffett announced the results at the annual meeting.
The company, which has 3,100 shareholders, received 2,022 responses.
88% of those responding said they favored the company’s current policy of reinvesting earnings rather than paying dividends to shareholders.
A similar percentage also approved of Berkshire’s policy towards charitable contributions — in which individual shareholders designate which charity receives their share of the overall contribution.
WHAT ABOUT INFLATION? Being the mid-1980s, the scourge of inflation was understandably a hot topic — leading one shareholder to ask Warren Buffett for his prediction on where inflation would go in the future.
Buffett conceded that there was a small chance — maybe 5% — of runaway inflation occurring at some point in the years ahead. “That shouldn’t happen,” he said, “but we can’t rule it out.”
Instead, Buffett predicted “moderate inflation” of about 7% as the most likely possibility. But, of course, he “stressed [that] he is reluctant to predict a precise inflation percentage”.
THE POST-BUFFETT ERA: If you listen to Berkshire Hathaway shareholders (or BPL partners before them), Warren Buffett has had one foot in the grave for decades. Almost no annual meeting goes by without a question (or two) about what will happen to Berkshire after Buffett shuffles off this mortal coil.
“If something happened to me tomorrow,” Buffett patiently replied in 1985, “Berkshire will not be sold and parts of it will not be sold.”
And, although he didn’t explicitly outline his succession plan, he reassured shareholders that Charlie Munger would step into the breach in his absence. “Charlie and I think alike,” said Buffett.
Other than that, it would be business as usual for Berkshire.
Buffett said he doesn’t want to anticipate his departure by having unnecessary people in his corporate office. “With lots of help, we’d do worse,” he said.
CAPITAL ALLOCATION: Does Warren Buffett prefer to buy whole businesses (like See’s Candies or Nebraska Furniture Mart) or blocks of common stock that represent partial ownership (like the Washington Post or Capital Cities/ABC)?
Buffett: “We would really like a collection of whole businesses that meet our [investment] standards.”
However, he said, there have been more investment opportunities in marketable securities in recent months. “[But] there are not many opportunities in either area right now.”
CAN BERKSHIRE KEEP UP THE PACE? In 1984, Berkshire Hathaway’s growth in net worth slowed to 13.6% — far below the 20+% annual growth that shareholders had grown accustomed to over the previous two decades.
This led Warren Buffett to remind everyone of a fact that he had been repeating over and over since his partnership days: Berkshire will not grow as fast in the future as it has in the past.
(Of course, shareholders can be forgiven for treating Buffett a bit like The Boy Who Cried Wolf on this subject. He continually warned them about slowing returns dating all the way back to the 1960s, but then just kept on posting eye-popping gains year in and year out.)
Nevertheless, he once again cautioned the crowd to keep their expectations in check.
“I can guarantee [that] we will not do as well as in the past,” said Buffett.
There have been fewer undervalued companies and stocks to buy recently, Buffett said. He added that as his company has become larger, it has been harder to achieve the same percentage investment returns.
“I still think we may be able to do better than American industry as a whole.”
And, on that last point, Buffett was right.
Since May 21, 1985, Berkshire Hathaway has racked up a 15.9% annual return as compared to the S&P 500’s 11.1% mark. Not bad for a company that’s slowing down.
A COUPLE OF LAUGHS & A ROUND OF APPLAUSE: No annual meeting is ever complete without some of that trademark Warren Buffett wit.
Will the federal deficit be substantially reduced? “I’ll believe it when I see it.”
What about so-called “junk” bonds? “I think they’ll live up to their name,” Buffett quipped.
At the end of the 1985 annual meeting, one shareholder stood up with a word of thanks for Messrs. Buffett and Munger: “On behalf of my children [who presumably will benefit from the increasing value of Berkshire Hathaway stock], I thank you two for working so hard.”
The rest of the crowd then joined in with a round of applause for the two men at the front of the room who had created such generational wealth for so many of them.