{"id":596,"date":"2017-05-12T18:31:16","date_gmt":"2017-05-12T18:31:16","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=596"},"modified":"2017-10-24T22:57:49","modified_gmt":"2017-10-24T22:57:49","slug":"91-berkshire-annual-meeting-2017-part-1-wisdom-guide-1-6","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/05\/12\/91-berkshire-annual-meeting-2017-part-1-wisdom-guide-1-6\/","title":{"rendered":"91. Berkshire Annual Meeting 2017 – Part 1 – Wisdom Guide 1 – 6"},"content":{"rendered":"

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

Ref: Adam Blum\u2019s 2017 Berkshire Hathaway Annual Meeting Notes – May 6, 2017<\/strong><\/p>\n

Introductory Comments<\/strong><\/p>\n

Guide 1: Use Your Senses
\n<\/strong><\/p>\n

Warren on he and Charlie: \u201cYou can tell us apart, because he can hear, and I can see.\u201d<\/p>\n

\u201cThe realized investment gains or losses in any period really mean nothing. We don\u2019t really think about the timing at all, except in relation to our intrinsic value.\u201d Over $90B in unrealized gains is in the company. They have a slight preference for taking losses as opposed to gains for the tax effect, mainly this year as they\u2019re taxed on gains at 35% and also get tax benefit on losses. There\u2019s some chance that their corporate income tax rate will be lower after this year, meaning losses would have a smaller tax benefit in the future.<\/p>\n

It was a wonderful period at GEICO, because competitors have intentionally cut back on new business. New business brings significant acquisition costs in the first year, and there\u2019s a higher loss ratio on new versus renewal business. Out of fear of missing earnings, GEICO\u2019s publicly traded competition didn\u2019t want to pay the penalty on first-year loss and originated fewer policies. \u201cOf course, that\u2019s made to order for us, and we just put our foot to the pedal.\u201d<\/p>\n

Float increased $14B to $105B year-over-year in the first quarter of 2017. It\u2019s nice to have that. And that\u2019s one reason cash is so high. Warren feels very good about the quarter even though operating earnings are lower. \u201cOne quarter means nothing as long as we build value.\u201d<\/p>\n

Guide 2: Index Funds For The Average Investor & Praise for Jack Bogle<\/strong><\/p>\n

Special recognition of Jack Bogle (Vanguard Group): \u201cJack has done more for the American investor than anyone in this country. Index funds wouldn\u2019t have happened without him. It was not in the interest of Wall Street to develop these, because they brought down fees dramatically. They have delivered for shareholders a result better than Wall Street professionals as a whole, in part due to low costs. Jack at a minimum has saved investors tens of billions without hurting them, and those numbers will be hundreds of billions over time – happy birthday, Jack (88 on Monday) – I\u2019ve got good news for you, Jack. In only 2 years you\u2019ll be eligible for an executive position at Berkshire, so hang in there, buddy.\u201d<\/p>\n

Q&A<\/strong><\/p>\n

Guide 3: Finding and Correcting Bad Behavior Are Two Important Components Of The Equation. An ounce of prevention is worth more than a pound of cure.<\/strong><\/p>\n

Q1 – Wells Fargo\u2019s decentralized structure gave too much autonomy to community banks. How is Berkshire Hathaway not exposed to this same risk?<\/p>\n

\u201cWe have a more decentralized plan than any company remotely near our size and count more heavily on principles of behavior than loads of rules.\u201d Warren shows the Salomon Brothers testimony at every meeting and issues very few communiques to managers – once every 2 years \u2013 he tells them that they have all the money they need but don\u2019t have any reputation to lose – better than a thousand-page guidebook. With 367k employees, people are always doing something wrong. The real question is whether managers are worried about finding and correcting bad behavior and whether that gets to Omaha. Wells Fargo had three big mistakes, but one stands out. The incentive system there was built around cross-selling and the number of services per customer. This incentivized bad behavior. Undoubtedly, people were paid and promoted based on this number. \u201cWe have made similar mistakes in designing the system, but at some point the CEO gets wind of it and has to act.\u201d The Salomon CEO (John Gurfreund) found out Paul Mozer was \u201cflimflamming the US Treasury\u201d on April 28th, and right then he had to report Mozer to the Fed Board. Gutfreund didn\u2019t do this, because it wasn\u2019t the pleasant thing to do, and then on May 15, at another US Treasury auction, Mozer the pyromaniac lit another fire, and then it was all over. It had to stop when the CEO learned about it. The last mistake was that that Salomon totally underestimated the impact of what they had done when it came out; the total fine was small, and so management measured the seriousness of problem by the size of the fine. The main problem is the CEO didn\u2019t act when he learned about it. At Berkshire Hathaway, the main source of info for Buffett of anything done wrong at any subsidiary is the internal audit hotline – they get about 4,000 alerts a year – most are frivolous, but anything serious has led to action. It\u2019s a good system but not perfect. Buffett assumes a lot of communications came in like this at Wells Fargo and that it was a huge error if the complaints went ignored or were sent to be addressed back down below.<\/p>\n

Munger: \u201cPut me down as skeptical when some law firm thinks they know how to fix something like this. If you\u2019re in a business like Wells, you need a huge compliance department, but doesn\u2019t mean everyone should solve problems with compliance – entrusting good managers is a better system.\u201d<\/p>\n

\u201cAn ounce of prevention is worth more than a pound of cure.\u201d<\/p>\n

\u201cGutfreund described his problem at Salomon as a traffic ticket\u201d<\/p>\n

Guide 4. Something Has Got To Give. Driverless Car May Make The World Safer But Insurers Will Suffer<\/strong><\/p>\n

Q2 Driverless trucks are a lot more of a threat to BNSF than an opportunity. Driverless cars being pervasive would mean that they\u2019re safe and would cause harm to the insurance industry. If they make the world safer, it will be a very good thing but not for insurers or railroads.<\/p>\n

Charlie: \u201cI think that\u2019s perfectly clear.\u201d<\/p>\n

Guide 5: There Can Be A Moat In Branded Candy<\/strong><\/p>\n

Q3 \u201cYou know it when you see it.\u201d It\u2019s a business that they can look out 5-10-20 years and see a decided competitive advantage that would last over the period with a trusted manager that would fit in with and was eager to join the Berkshire Hathaway culture. Then it\u2019s a matter of price; they\u2019re willing to lay out a lot of money now based on what they think an asset will deliver over time. The higher the certainty, the more comfortable they are with the price. In 1972, the question was, \u201cwould folks in the future want to buy high end candy?\u201d To date they have taken out $2B pretax from See\u2019s Candy, so that was a \u201cyes.\u201d \u201cIt doesn\u2019t work very well if you go to your wife or girlfriend (I hope they\u2019re the same person) and say \u2018here\u2019s some candy, I bought the cheap one,\u2019 so See\u2019s did have a bit of a moat\u201d<\/p>\n

Charlie: \u201cWe were young and ignorant then; Now we\u2019re old and ignorant.\u201d<\/p>\n

\u201cWe would be very wise to buy at a slightly higher price but wouldn\u2019t have done it then. We looked a lot smarter than we were. Charlie would\u2019ve bought it for more, but I was unwilling.\u201d The founder\u2019s grandson wasn\u2019t interested in the business. He was more interested in girls. But he almost changed his mind and didn\u2019t want to sell. Rick Guerin said Charlie spent an hour talking to the kid about the merits of girls and grapes to convince him.\u201d<\/p>\n

Their early experience of fixing unfixable businesses was a benefit. They couldn\u2019t make a purse out of a sow\u2019s hair and had to rub their noses in bad businesses to learn what they didn\u2019t want to do or couldn\u2019t do.<\/p>\n

Guide 6: A good company is an economic castle with a moat protecting it, and there\u2019s a knight in there warding off marauders. The marauders will never go away.<\/strong><\/p>\n

Q4 – Berkshire Hathaway major stock holdings are businesses Buffett likes. Being the largest holder of the four largest airlines isn\u2019t much more than just industry thought. All businesses have some problems; they didn\u2019t buy them with the idea that would never have competition. The largest holdings are in strong hands, and Buffett likes their financial policies and position. Where do they have durable competitive advantage? A good business will have several new competitors, but investors must judge the ability of management to ward off competitors.<\/p>\n

A good company is an economic castle. The moat around it protecting it, and there\u2019s a knight in there warding off marauders. The marauders will never go away. Coke in 1886 Amex and 1852, were founded and had lots of challenges past, present and future. Insurance has them too. They paid $8mm to purchase National Indemnity in 1962, and now their insurance holdings are tens of billions of dollars. There will always be things to do that really intelligent management and a decent distribution system can do to ward off marauders; Buffett reviews the stock portfolio every single day.<\/p>\n

Charlie: \u201cI don\u2019t think I have anything to add there either.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

Excellent Book: Charlie Munger For All Seasons Ref: Adam Blum\u2019s 2017 Berkshire Hathaway Annual Meeting Notes – May 6, 2017<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"footnotes":""},"categories":[3,4],"tags":[],"class_list":["post-596","post","type-post","status-publish","format-standard","hentry","category-investment","category-wisdom"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/596","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/comments?post=596"}],"version-history":[{"count":2,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/596\/revisions"}],"predecessor-version":[{"id":844,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/596\/revisions\/844"}],"wp:attachment":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/media?parent=596"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/categories?post=596"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/tags?post=596"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}