{"id":344,"date":"2017-02-11T08:45:31","date_gmt":"2017-02-11T08:45:31","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=344"},"modified":"2017-10-25T00:28:12","modified_gmt":"2017-10-25T00:28:12","slug":"36-berkshire-annual-meeting-2005-part-i-points-1-8-for-wisdom-fun-of-learning","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/02\/11\/36-berkshire-annual-meeting-2005-part-i-points-1-8-for-wisdom-fun-of-learning\/","title":{"rendered":"36. Berkshire Annual Meeting 2005: Part I: Points 1-8 for Wisdom & Fun (of Learning)"},"content":{"rendered":"

\"\"<\/a>Excellent Book: Charlie Munger For All Seasons<\/a><\/a><\/p>\n

Wisdom & Fun from Notes from 2005 Berkshire Hathaway Annual Meeting – April, 2005<\/p>\n

Ref: http:\/\/www.tilsonfunds.com\/brkmtg05notes.pdf<\/p>\n

Wisdom & Fun 1. Acquisition Criteria – We look for people who have a passion for their business.<\/strong><\/p>\n

We look for people who have a passion for their business. We frequently buy businesses the owners still manage, where they are monetizing a lifetime of work. They often don\u2019t want to sell but need to for estate planning or other reasons.They need to have a passion because we don\u2019t have any employment contracts \u2013 because we don\u2019t think they work \u2013 we don\u2019t stand over them with whips, and they\u2019re already rich. We just try not to kill or dampen their love for their business.<\/p>\n

Wisdom & Fun 2. We also look for three things: intelligence, energy and integrity. Without integrity, You Want Them Dumb.<\/strong><\/p>\n

We also look for three things: intelligence, energy and integrity. If you don\u2019t have the latter, then you should hope they don\u2019t have the first two either. If someone doesn\u2019t have integrity, then you want them to be dumb and lazy. (Laughter)<\/p>\n

We look them in the eyes and ask, \u201cDo they love the business or the money?\u201d If someone wants to cash out, then we have a problem because we only have 16 people at Berkshire\u2019s headquarters and can\u2019t run it ourselves.<\/p>\n

Munger: The interesting thing is how well it [our acquisition strategy\/process] has worked over a great many decades, and how few people copy it. (Laughter)<\/p>\n

Keys to Berkshire\u2019s Success With Acquisitions<\/p>\n

We criticize it [acquisitions], but then we do it. But we have different motivations.<\/p>\n

We\u2019ve been reasonably successful in having people run their businesses with the same passion as before we bought them.<\/p>\n

Gillette, the oil companies, etc. all went out and bought a lot of businesses and tried to run them themselves. We\u2019re under no illusions that we can do that. We think that having lots of Executive Vice Presidents, directives from headquarters, centralized Human Resources etc. can destroy the incentives of the people who\u2019ve already gotten rich, and we\u2019re counting on them making us rich.<\/p>\n

The successor to me will come from Berkshire, knows our system, has seen that it works, and will be surrounded by people who believe in it. So it\u2019s not going to be so hard to keep this train going down the tracks at 90 miles per hour.<\/p>\n

Wisdom & Fun 3. <\/strong>if you\u2019re going to provide minimal oversight, you have to buy carefully.<\/p>\n

Munger: Our success has come from the lack of oversight we\u2019ve provided, and our success will continue to be from a lack of oversight. (Laughter)<\/p>\n

But if you\u2019re going to provide minimal oversight, you have to buy carefully.<\/p>\n

It\u2019s a different model from GE\u2019s. GE\u2019s works \u2013 it\u2019s just very different from ours.<\/p>\n

Buffett: We are a conglomerate \u2013 and we hope to become more of a conglomerate.<\/p>\n

We\u2019re successful because of simplicity itself: We let people who play the game very well keep doing it. Our successor won\u2019t change this. The big worry is that the culture is tampered with and there\u2019s oversteering. But our board and owners won\u2019t allow this.<\/p>\n

Wisdom & Fun 4. <\/strong>We\u2019ve Picked Great Managers By Only Picking Proven Winners<\/p>\n

It would be tough to evaluate a class of MBAs and pick which ones would prove to be the best managers, just like it would be tough to pick the best golfer by watching them hit on the practice range.<\/p>\n

We haven\u2019t tried to evaluate, before they have a record, who will be superstar managers. Instead, we find people who\u2019ve batted .350 for 10-50 years. We just assume we won\u2019t screw it up by hiring them. We take people who play the game very well and allow them to play.<\/p>\n

I recall a study that correlated business success with the age at which a manager started. It turns out that those who started young did best. Of course, if you work with what you have, you can develop over time, but a lot of it is wiring \u2013 I\u2019ve come to believe more so than I did 4-5 years ago. I\u2019ve never heard Charlie say anything dumb about business \u2013 except when he disagrees with me. (Laughter) And I\u2019ve never heard [GEICO CEO] Tony Nicely say anything dumb about business, ever.<\/p>\n

Munger: Part of it is intelligence, partly temperament. Rick Guerin, for example, wanted to be rich, he was smart and had the right approach [so I knew he would be very successful]. [Guerin was one of the Superinvestors of Graham and Doddsville that Buffett profiled is this speech.]<\/p>\n

Buffett: It\u2019s interesting to think about the odds that the NCAA basketball Final Four will be cancelled [referring to his comment elsewhere that Berkshire had written a $75 million policy on the Final Four being cancelled]. Some people like thinking about this. My dad wouldn\u2019t let me be a bookie, so I went into investing.<\/p>\n

Selling Businesses<\/p>\n

We won\u2019t sell a business just because it\u2019s underperforming.<\/p>\n

It\u2019s Hard to Buy Businesses in the Current Environment<\/p>\n

We are positioned very badly in terms of buying businesses. Berkshire will not do as well as long as this persists.<\/p>\n

Munger: A lot of buying is fee motivated. Managers want to earn the extra fees on the extra assets. I have a friend who buys warehouses, but he stopped bidding recently because he\u2019s always being outbid. Howard Marks sent a lot of money back to investors, which is the right way to behave [I assume he\u2019s referring to one of the Principals of Oaktree Capital Management]<\/p>\n

Buffett: Five or six years ago, I got a call from a well-known investor who asked me a lot of questions about reinsurance. He didn\u2019t know much about the business, but he was considering buying a reinsurance company because, as he explained to me, he would have to send his investors\u2019 money back to them if he didn\u2019t invest it in the next few months, and he was earning 2% [annually] on it.<\/p>\n

We [unlike this gentleman] have all of our net worth on the downside as well. If we have 2 and 20 [2% management fee and a 20% performance allocation] on the upside and nothing but a goodbye kiss on the downside\u2026<\/p>\n

The competition right now is tough, so our efforts to buy businesses are likely to be futile. But there are 1-2 deals we might get done\u2026<\/p>\n

Munger: I don\u2019t think there\u2019s any business that we\u2019ve bought that would have sold itself to a hedge fund. There\u2019s a class of businesses that doesn\u2019t want to deal with private-equity and hedge funds\u2026thank God. (Laughter)<\/p>\n

Buffett: We don\u2019t see any deals [recently] that we wish we\u2019d made \u2013 this wasn\u2019t true in the past \u2013 even if the price had been 10% lower. We\u2019re in a different world right now\u2026<\/p>\n

Berkshire\u2019s Asset Allocation<\/p>\n

Munger: Berkshire doesn\u2019t do much conventional asset allocation. We just search for good opportunities and don\u2019t want to put up artificial barriers. In this sense, we\u2019re totally out of step with modern portfolio management, but we think they\u2019re wrong.<\/p>\n

Buffett: Well over 80% of our assets are in the U.S.<\/p>\n

Munger: When have you ever done a big asset allocation?<\/p>\n

Buffett: Never. But if junk bonds had stayed low for longer, we could have invested $30 billion instead of $7 billion.<\/p>\n

Wisdom & Fun 5. Our test has been whether, if we retain a dollar, will it be worth more than a dollar in present value. So far we\u2019ve always passed this test.<\/strong><\/p>\n

Paying a Dividend<\/p>\n

One reason not to pay a dividend is taxes, but we\u2019ve always said that even if we could have paid a tax-free dividend, we would not have done so. Our test has been whether, if we retain a dollar, will it be worth more than a dollar in present value. So far we\u2019ve always passed this test.<\/p>\n

 <\/p>\n

Wisdom & Fun 6. Something Will Go Wrong. Have The Right Incentives In Place. Don\u2019t Spped Up The Pilot.<\/strong><\/p>\n

But it\u2019s no fun sitting on $40 billion, which earned less than 1% last year after tax. The burden of proof will shift in the next few years. We always ask, \u201cCan we use the money effectively within our business?\u201d So far, the answer has been yes. This will be discussed at our board meeting on Monday.<\/p>\n

What Can Go Wrong at Berkshire and the Importance of the Right Incentives<\/p>\n

We don\u2019t worry about our businesses. We have a diverse group of good businesses with great managers. What we worry about is something going wrong. We have 180,000 employees, so it\u2019s guaranteed that something will go wrong. We know it will happen. We just try to have \u2013 we do have \u2013 the right incentives in place.<\/p>\n

For example, when I get on a NetJets flight, even if I\u2019m in a hurry, I don\u2019t say to the pilot, \u201cHey, I\u2019m in a hurry. Can you speed it up.\u201d The last thing I want is a pilot rushing through his pre-flight checklist, etc.<\/p>\n

But companies do this all the time in the way they incent people. They should not have a system that encourages a focus on quarterly earnings. Our managers have no quarterly budgets \u2013 I don\u2019t know what our numbers are going to be next quarter. I\u2019m also careful not to communicate anything to the contrary via body language.<\/p>\n

Wisdom & Fun 7. Quarterly Expectations in Mpdern Capitlidm: It\u2019s not the kissing cousin of evil; it\u2019s the blood brother.<\/strong><\/p>\n

Insurance companies in particular can report pretty much any numbers that they want. With $44 billion of reserves, it would be easy to adjust the reserves to show whatever profit was desired.<\/p>\n

Even if quarterly numbers weren\u2019t tied to our managers\u2019 compensation, if I went to Wall Street and promised X, the managers, who wouldn\u2019t want to let me down, might play some games to achieve X.<\/p>\n

Munger: What we don\u2019t like in modern capitalism is the expectations game. It\u2019s not the kissing cousin of evil; it\u2019s the blood brother.<\/p>\n

Buffett: People who predict precisely are either kidding themselves or others. We\u2019ve seen people get their egos involved. And everyone in the organization knows what the CEO has promised in public. It\u2019s setting up a system that sets up financial or psychological pressure for people to do things they probably don\u2019t want to do. It\u2019s a terrible mistake.<\/p>\n

Berkshire\u2019s Board and Corporate Governance<\/p>\n

Munger: We\u2019re out of step. We don\u2019t feel the need to have directors from every diversity category and pay everyone $100,000-$200,000 per year.<\/p>\n

Our directors are all rich, own Berkshire stock, and don\u2019t have any company-provided Directors and Officers insurance coverage.<\/p>\n

We\u2019ve been waiting for our system to spread and we\u2019ve been losing. (Laughter)<\/p>\n

Buffett: The real issue is mediocrity \u2013 there are too many .240 hitters on boards. Businesses often settle for a notch or two above mediocrity \u2013 there are strong human instincts at work.<\/p>\n

For many directors, the director\u2019s fees are an important part of their [total annual] compensation, and they want to be recommended for other boards, so this makes it difficult to arrange a rump meeting to say, \u201cThe guy at the end of the table [the CEO] is no good.\u201d This is mediocrity that is tough to combat.<\/p>\n

We\u2019ve been on boards and they can only tolerate a certain amount of obnoxiousness, so we have to ration it out. (Laughter) It\u2019s hard to overrule someone [the CEO] and we\u2019re likely to lose anyway. Occasionally we fire a bullet, but it often does no good.<\/p>\n

We have real owners on our board \u2013 they bought it just like you. [In contrast,] the boards I\u2019ve been on just hand me stock and stock options.<\/p>\n

Independence is a state of mind. We think we have the best board in the country, but people who evaluate boards by a checklist disagree.<\/p>\n

Wisdom & Fun 8. A director who gets $150,000 per year from a company and needs the money is not independent.<\/strong><\/p>\n

Munger: A director who gets $150,000 per year from a company and needs the money is not independent.<\/p>\n

[The new law requiring a majority of independent directors] is typical government intervention.<\/p>\n

Buffett: I\u2019ve been on 19 boards and I\u2019ve never seen a director who needs the money oppose an acquisition or executive compensation. They just don\u2019t behave as if they own it.<\/p>\n

Munger: Someone once said that no man who needs the salary that a politician receives should be allowed to hold office.<\/p>\n

Buffett: One of our directors was asked to leave two compensation committees for having the temerity to question pay packages. They\u2019re looking for Chihuahuas not Great Danes or Dobermans. (Laughter) I hope I\u2019m not insulting any of my friends on compensation committees. (Laughter)<\/p>\n

Munger: You\u2019re insulting the dogs. [The biggest laugh of the day.]<\/p>\n","protected":false},"excerpt":{"rendered":"

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