Berkshire Hathaway 2012 Shareholder Meeting Notes (part 3) –

Buffett stated that Berkshire is not even close to running afoul of the Investment Act of 1940.

Google and Apple are great businesses. They will be difficult to dislodge. Buffett does not get to the level of conviction he needs to buy them. He thinks IBM is less likely to stumble.

Buffett would not have selected Apple ten years ago. What makes him think he can now predict what it will do over the next ten years. (My comment: this is a useful filter to counter hindsight and overconfidence bias.)

Buffett likes the very positive long-term economics of BNSF.

Munger: Getting good and bad breaks is in the nature of things.

REITs and MLP’s would not be attractive to Berkshire because it must pay corporate tax.

The $20 billion of cash that Buffett holds is not a magic number. They think about risk all the time and build in a margin of safety. They are not interested in explaining why the lost the business.

They think about what could go wrong, and they put in place a huge margin of safety. 99 out of 100 years will be punished as a result of this conservative approach. 1 in 100 will be the payoff.

Buffett keeps photocopies from the pages of newspapers that chronicled financial collapses, as a reminder. He mentioned the financial collapse surrounding Pacific Northern.

Regarding Combs and Weschler, Buffett is always more concerned with how a record was achieved. He has seen hundreds of great records – very few from people he would hire.

Combs and Weschler make $1 million per year plus a bonus for each point of outperformance of the S&P 500. 80% of the bonus is based on their individual performance and 20% on the other’s performance, so as to foster cooperation. This is the same comp package that Lou Simpson has. It is based on a rolling average of three year performance.

Buffett recently increased each of their allocation of investment capital to $2.75 billion.

They have a much bigger universe of potential investments than Buffett because of their size. They will do a great job running more money.

Combs has already racked up a large gain.

The majority of people would starve with this comp structure. Combs and Weschler could make more with a different job but with a less desirable life style.

When looking at an investment, Buffett looks at every aspect of how the world may develop over the next five to ten years. They look at all aspects of both the business and the industry. They are looking for a high level of certainty.

Managers at Berkshire have an advantage because they do not need to think about investors, lawyers, etc.

It is very hard to imagine Berkshire getting a bad result.

Getting real GDP growth of 2 1/2% over one’s lifetime if remarkable. Given the U.S.’s mature economy and the increased level of global competition, Buffett and Munger think real GDP growth of 1% is all you can expect. Add to that 2-3% of inflation – which will be lumpy. This gives an expected return on equities of 6%: 1% real growth + 2-3% for inflation + 2% dividends.

Buffett thinks superpacs are wrong. There is enough push towards a plutocracy already. You need to make a stand. He will not spend money to mislead people.

Investing in Berkshire is not for those with a short-term outlook. You should actually feel better today than a year ago because the margin of safety has grown.

They don’t pay a dividend because they think they can get more than a $1 of present value by retaining it within the company. Dividends will come out in due course but, hopefully, that day is a long time in the future.

MidAmerican may be able to put $100 billion to work over the next ten years.

Munger: Buffett has continued to learn.

They could do better with $1 million of capital because there would be many more places to look.

How do you minimize mistakes? Think about things that would not allow you to play tomorrow. Buffett does not worry about mistakes because the next mistake may be different.

He has learned more about people over the years. He will recognize the extraordinary ones perhaps more easily going forward.

They have tried  to learn a lot from the mistakes of others.

Buffett loves to read about financial markets. There is plenty of folly in this area.

They don’t build barriers to entry; they by them. You could not knock off Coke with $20 billion.

GEICO should be valued both on the basis of its float and its underwriting profit. They will grow as far as the eye can see because of their cost advantages.

Ajit must be smart on each deal. He cannot look it up in a book.

If you do 100 deals, you will learn if you are doing things right.

Earnings power is affected by current Fed policy.

Munger: the U.S. would be better off not using its natural gas now. Munger prefers to suffer now so better things will be in the future.



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