Investment Wisdom

95. Berkshire Annual Meeting 2017 – Part 5 – Wisdom Guide 25 – 30

Excellent Book: Charlie Munger For All Seasons

Ref: Adam Blum’s 2017 Berkshire Hathaway Annual Meeting Notes – May 6, 2017

Guide 25. Artificial intelligence, like in trade, the small invisible benefits to consumers don’t show as prominently as the harm incurred by the displaced local manufacturer.

Q42 – “You’ve only tweeted 4 times” – “it was either going that or going to the monastery.” They made a large investment in IBM which has been a significant laggard and expect to end up being 1-2 vs 0-2, but will find out (Apple). Buffett makes no pretense of being on intellectual level of some 15- year-old into tech. He does have some insight into consumer behavior, though. And he will make some mistakes in marketable securities. “You can’t bat 1.000 no matter what industry you are in. We’ve lost money on insurance. I’ve gained no real knowledge of tech since I was born.”

Munger: “It was a very good sign that Warren bought Apple. Either he’s gone crazy or is learning. I prefer to think he’s learning.”

Q43 – artificial intelligence – They bet a lot will happen in AI but have no insight. This would result in significantly less employment in certain areas, and that’s a good thing. Is the world better off if 1 person can do the job of 143 million people? Of course it is. It would require a great deal of adjustment, but is a good thing. Artificial intelligence is great for society but is disruptive and can have huge problems in terms of democracy. Like in trade, the small invisible benefits to consumers don’t show as prominently as the harm incurred by the displaced local manufacturer.

Munger: “I give you golf lessons while you dye my hair. It’s like the royal family of Kuwait. We can’t have all the work so concentrated to leave so many at leisure. But a few percent per year of gain is a wonderful thing. No one ever complained about the advent of air conditioning. I am worried more about the change not being fast enough.”

Guide 26. Missing Out Is Human But Don’t Miss Out On Them All

Q44 – solar/wind – They don’t look at it in terms of capacity; they just look at what comes along. They have a big appetite for either one. They have done more wind lately but have no bias. They’re well situated, because they pay lots of taxes as a multi-pronged enterprise and can use the tax benefits better than electric utilities who often don’t have enough tax money to offset with tax credits.

Q45 – Amazon – They didn’t buy it, because they were too dumb to realize what was going to happen. They didn’t even think about the Amazon Web Services possibility and didn’t think Bezos would succeed like he has in retail. They underestimated the brilliance of the execution. “You can read Bezos’ annual report in 1997, and he lays it all out. And he has done it and done it in spades. It just always looked expensive.”

Munger: “It was easy. What was done there was very difficult; it was not at all obvious that it was going to work as well as it did. Other things were easier, and we screwed those up. I don’t regret missing it – I do with Google. We’ll miss out on more, but that’s our secret – we don’t miss out on them all.”

Guide 27. We really disagree with like amortization of intangibles – unless it’s material.

Q46 – board buying back stock if the company’s stock drops after Buffett dies – There have been a few times where people aggressively repurchased shares after playing games to depress the shares.

“Encouraging shareholders to sell at lower prices knowing you’re going to buy back shares is reprehensible.” Buffett thinks the stock is likely to go up if he dies on breakup speculation alone. People would say Buffett obstructed breaking up something where the sum of parts might sell for more than the whole.

Munger: “We might suddenly get very stupid very quickly, but I don’t think board will have that problem.”

Q47 – companies benefitting from stock grant accounting – not a factor at Berkshire Hathaway

Munger: “It’s not a big deal”

Buffett: “There are few things in accounting we really disagree with like amortization of intangibles – unless it’s material, we stay away from fighting it.”

Munger: “I certainly agree with that (that stock grant accounting changes are not material to Berkshire Hathaway)”

Buffett: “Is anything less real now that Precision Castparts is now private? Then why do they have to report $400mm less in earnings? Also, for valuation purposes, depreciation accounting is very inadequate for capital-intensive businesses.”

Guide 28. There’s nothing like a personal, painful experience if we want to learn, and we certainly have had our share of it.

Q48 – Ratios and formulas have some degree of meaning, but valuation of a business is not reducible to any formula where you can put in the variables perfectly. Not that it’s unimportant, but it’s not as simple as having one or two formulas. “The most important thing in intrinsic valuation is future interest rates.”

Munger: “Fish where the fish are. A good fisherman can find more fish in China; it’s a happier hunting ground.”

Buffett: “If you want to be a good evaluator of businesses, you really ought to figure out a way to run a lousy business for a while. You learn more than running a business so good you can’t mess it up – seeing how awful it is, and how little you can do about it, and how IQ means nothing.”

Munger: “There’s nothing like a personal, painful experience if we want to learn, and we certainly have had our share of it.”

Guide 29. In certain cases, one can learn a lot by asking a lot of questions.

Q49 – He can’t think of anything that can harm Berkshire Hathaway in a material, permanent way, except weapons of mass destruction. They have a variety of earnings streams and asset positions and a great philosophy. They’re in a strong place.

Munger: “It would take something really extreme. BP took huge loss with one well. Berkshire Hathaway subs are all independent. We would pay, but we are not one accident away from disaster. We are better protected in every way than most companies.”

Q50 – Berkshire Hathaway Specialty Insurance – Its growth depends on the market. They’re not interested in being a price cutter in a market where prices aren’t attractive. The business is built to scale and grow a lot. It’s destined to be one of the leading P&C firms in the world just as they were in reinsurance when Ajit came in at a time when they had nothing. They have people, capital and reputation. There’s no stronger company in insurance. Specialty is a very important addition.

Q51 – most interesting learnings of last few years – “I am a specialized one, and Charlie does as well as I do and has a much higher general absorption rate. A lot of fun can occur when learn you were really wrong on something – what’s going on in America is terribly interesting, politically and all.”

Munger: “Buying the Apple stock is a good sign in Warren – now he did run around and take his ,grandchildren’s tablets away for market research. Don’t unlearn the new tricks. We can’t solve problems by printing money and lying. Take Puerto Rico. Who would’ve ever guessed that a US territory would be bankrupt? I would have, because they behaved like idiots; everywhere you look in Berkshire Hathaway someone is being sensible. Combine that with being very opportunistic so when some panic or something comes along it’s like playing a one-hand sport with two hands.”

Phil Fisher’s Common Stocks and Uncommon Profits describes the usefulness of scuttlebutt method. In certain cases, one can learn a lot by asking a lot of questions. They did it with Apple. If they talked to heads of ten companies in an industry and asked which competitor they’d bet on or against and why, they’d have a better fix on the industry’s economics than any one executive in the industry. The problem is not in getting the new but in shedding the old.

Munger added that they would never have bought Iscar or Precision Castparts if these businesses had come along ten years ago. They’re learning and still are.

Guide 30. No one comes through heart surgery better than a man who doesn’t need it.

Q52 – healthcare – Going back to 1960, taxes were 4% of GDP (now 2%) and healthcare was 5% of GDP (now 18%); “medical costs are the tapeworm of American economic competitiveness.” The tax system isn’t crippling Berkshire Hathaway. Health costs have gone up and will go up more. The rest of the world has gained an advantage in healthcare costs with socialized medicine. It will be a problem regardless of which party is in power. The new act is interesting. The net effect on one person is a 17% drop in taxes for someone like Buffett – either the deficit will go up, or the lost taxes will get collected from someone else. Munger doesn’t like it that too much medicine gets prescribed for people who all but dead. There are all kinds of crazy things going on in Medicare. With so much vested interest it’s hard to change. No rational person wouldn’t think the system is crazy, and it puts manufacturers at big disadvantage with other manufacturers abroad. “Huge vested interests naturally give a terrible result, and costs will keep going up. Both parties hate each other so much that neither one can think rationally on this issue.”

Regarding the competitiveness of American industry, the biggest single variable is healthcare costs, where it keeps getting more and more out of whack.

Munger: “It’s deeply immoral. Doctors are feasting like a bunch of jackals on a carcass. A bunch of cardiologists in Redding got the idea that heart was a widow-maker and recommended heart surgery to everyone and got great results, because no one comes through heart surgery better than a man who doesn’t need it. This department at Redding became a model for the whole system, and then a priest didn’t believe it and blew the whistle (of course he didn’t – a dead priest wouldn’t have a widow). The doctors thought what they were doing was good for people. The delusion that comes into people as they make money and do god-awful things should never be underestimated. You’d think hospital CEO would notice heart surgery rates were twenty times higher than normal, and did they ever notice – they wanted the rest of the branches to perform more surgeries too – disgusting!”