No I unfortunately did not attend the 2011 Berkshire Hathaway yearly meeting but a good friend did.

Even thought have read quite a few reports on the meeting this one is a good summary catching the main points.

What I found really interesting was Buffett’s thoughts on investing for inflation and my friends ideas on what will be good investments.

Berkshire 2011 meeting notes

by Jan-Hendrik Mohr

My dad handed me a book on Warren Buffett when I was 11 years old.

Since then, ?The Oracle of Omaha? has had my interest and I have been reading the annual letter of Berkshire Hathaway each year with great enthusiasm. Buffett does not only impress with his wit and wisdom on investment topics but also with his entertaining writing style.

The big dream of every Buffett aficionado is to attend the annual meeting of Berkshire Hathaway
in Omaha, Nebraska and to see Buffett live in action.

April 30 this year, I did attend the annual meeting for the first time and spend four exciting days in the US.

Friends have asked me to report my experiences and to sum up the most relevant things Buffett talked about. While there are plenty of meeting transcripts available, most of them are quite long and consist of page-long Buffett-monologues on questions like ?What advice would you give to
people who want to read faster??. Therefore, I would like to provide you with a concise summary of what I regard as the seven most relevant issues Warren Buffet talked about on April 30.

1. Buffet on Lubrizol

One of the possible Buffett proteges, David Sokol, was involved in an insider trading conflict. The matter caught a great deal of media attention and much has been said and discussed. In case you are interested, I recommend reading Buffett’s transcribed statement from this years annual meeting- it can be found on the Berkshire corporate webpage.

Nevertheless, I would like to share with you a video that was shown at the meeting. It shows Buffett in front of the US Congress in 1991. In the video, he explains the Salomon Brothers case (he became CEO of Salomon after a compliance scandal had emerged at the broker in the early 1990s) and presents a very relevant thought-concept for finance professionals:

“If you lose money for the firm, I?ll be understanding- if you lose only a shred of reputation, I?ll be ruthless.?

You can find the video clip here:

2. Buffett on Sectors for the Long Run

Some of you might have heard about Buffett’s mind-model he calls ?Circle of Competence?. It’s a picture that illustrates Buffett’s desire to only invest in businesses he understands well enough as to have an edge over competing investors. In the past banking, consumer goods and retail were the sectors in Buffett’s focus. In fact, he was the target of harsh criticism in the late 1990s when he did not invest in the so-called New Economy.

One of the questioners asked him an interesting question: ?if you were to live 50 more years, what sector would you add to your circle of competence??

Both Buffett and his partner Charly Munger agreed, that they see the biggest return potential in the technology field.

Indeed, they referred to the huge discrepancies that they anticipate in the technology field going forward.

?There will be great winners and great losers with dramatic disparity in the outcomes; picking the winners will reap great rewards?, so they said.

According to both Munger and Buffett, Berkshire is looking for somebody who has an analytic edge in the technology field.

Their comments made me think about institutions that have structural advantages in evaluating technology concepts.

What came to my mind were the top-tier VC-firms. It is just astonishing to look at the StartUps a VC like KleinerPerkins funded: Google, Amazon, Sun, Genentech, Verisign? does anybody perhaps have access to their track record on a fund level?

3. Buffett on the US Economy

This was probably the most upbeat comments we have heard from a global leader over the last months. He gave the example that after his birth in 1930, the USA (and the world, for that matter) has encountered so many challenges and obstacles and still people increased their standard of living by 6-to-1.

He was also very optimistic about the future of the world economy in the long run. While numerous questioners complained about the great uncertainty we face today, Buffett responded with a very convincing sense of optimism.

His thinking is best summed up in a quote from the Berkshire Hathaway 2010 annual report: ?Commentators today often talk of great uncertainty. But think back, for example, to December 6, 1941, October 18, 1987 or September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.?

This is a pretty good quote to remember, the next time we hear somebody talk about the current economic outlook or the stock market.

There is just no certainty.


4. Buffett on Inflation

He left no doubt that he assumes significant inflation to be present in the next decades to come.

At one point during the meeting he drew a one dollar bill from his pocket and said there is a false statement on it. It should read ?In Government We Trust? rather than ?In God We Trust?. God will not help you when the government continuous to make mistakes.

What I found interesting is Buffett’s assessment, that inflation is most likely not a bad thing from an investor’s perspective. In fact, he sees great businesses with pricing power as the best investment you could make in an inflationary environment.

Generally, the less capital you need to operate your business with the better. Buffett at some point referred to ?royalty-stream companies? that would do very well when inflation hits hard.

This makes sense, because high incremental RoIC (Return on Invested Capital) lets you reap the benefits of nominally higher cash-flows without having to invest much capital to seize these cash-flows.

On the flight back, I drafted a list of ?royalty-stream? companies and short-listed it when I got back to Frankfurt. Mail me and I am happy to discuss the names on the list with you.

Just to give you an idea I think that franchise concepts (McDonalds etc.), credit-card companies, exchanges, money-managers that keep fixed hurdle-rates for their performance fees, trading platforms (such as eBay) and the like might be attractive assets to own.

5. Buffett on Gold (and other commodities)

Buffett separates investments into three categories:

  1. currency denominated,
  2. speculative and
  3. producing assets.

He dislikes investing in a security that is capped at a nominal currency amount (unless he is paid really well). He reported that all currencies have lost value over time and that the political incentives are directed to prevent deflation.

He is also no big fan of speculative assets, i.e. assets were you depend on somebody to pay more for the asset at some later point. Buffett:

?If you were to melt all the gold in the world into one large cube, it would be 165.000 tons heavy and be around 67 feet on all sides. You could sit on top of it and think you are the king of the world. But this block doesn?t do anything for you. You could polish it and fondle it but it still wouldn?t do anything for you.

However, the current market value of this gold block could buy you all the farm land in the United States plus 10x Exxon Mobil and you?d still have one trillion dollar left. What would you rather own??

His partner Munger added that gold makes sense as an investment if you think your country is going under and you want to escape. Since both Munger and Buffett do not expect apocalypses to hit anytime soon though, they?d rather own producing assets. I should add that Buffett does not avoid commodity investments per se. In fact, he owned oil majors in the past and his purchase of Burlington Northern Santa Fe (BNSF) seems to be an indirect bet on rising diesel prices.

Nevertheless, he sees no great utility in holding the physical commodities.

6. Buffett on the Banking Industry

He said to adjust Return on Equity (RoE) expectations downward. Due to the decrease of leverage, Buffett sees no possibility that banks earn the >25% RoEs they made in the early 2000s.

Nevertheless, banking has an important place in society and capital intermediation does create wealth.

Berkshire holds three large positions in Wells Fargo, in M&T Bank and in US Bancorp. He said that all three banks operate vastly different from other large money-center banks in terms of the asset quality they have on their books and therefore make good investments.

Both Munger and Buffett recommended reading the annual letters of great bank CEOs and especially pointed out Jamie Dimon’s letter to JPM shareholders and the annual letter of M&T Bank CEO Bob Wilmers.

7. Buffett on Cash Investments

Berkshire Hathaway has had a huge cash load on the balance sheet for the last years. It stands at USD 38bn as of March 31, 2011.

One questioner asked Buffett whether it would be sensible to invest some of that cash into slightly higher-returning assets that are ?like cash? (commercial paper, money market funds etc.).

Although these investments could earn Berkshire millions and millions of extra profits, Buffett prefers cash on the bank and short-term treasury bonds.

Both Buffett and Munger named some deals that they could only make because they had so much cash-liquidity available at very short notice. For example, he funded the Mars/Wrigley deal during the financial crisis and ?just could not show up at the table with a money market fund.?

To quote Warren Buffett: ?Even if Ben Bernanke runs off to South America with Paris Hilton, Berkshire checks will clear.?

I hope to give you a quick overview about the key topics that were discussed in Omaha.

If you feel like discussing matters more in-depth or if you have any comments, feel free to mail me:

Jan-Hendrik Mohr
[email protected]